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Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 10, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Rock on Jun 24, 2024Hindi

I'm 29 yrs working professional earning net monthly salary of 1.6L. I have monthly expenses : living around 40k, parents medical 15k, investment in MF 20k, emergency fund 25k. Now I want to pursue my MBA dreams in top institutes and I achieved the admission. The college fee is 32L. Course duration 18 months Total 4 terms, each term 8L fee. I went to education loan 32L @8.15% roi with moratorium of 18 months 15yrs tenure. No prepayment charges. My emi starts after 18 months. How should I invest my left over monthly income to repay entire loan in 5yrs or How should I invest the money for 15yrs and earn more than 8.15% (target is to earn 16% so I will be atleast 8% profit)?

Ans: Congrats on securing admission to a top MBA institute! It's a big achievement and a great investment in your future. Balancing your education loan and investments can be a bit challenging but totally doable. Let’s break it down.

Current Financial Snapshot
First, let's look at your financial situation.

You have a net monthly salary of Rs. 1.6 lakh. Your current expenses are as follows:

Living expenses: Rs. 40,000
Parents' medical expenses: Rs. 15,000
Investment in mutual funds: Rs. 20,000
Emergency fund: Rs. 25,000
This totals Rs. 1 lakh, leaving you with Rs. 60,000 monthly to manage.

Investment Strategy for Loan Repayment
Given your education loan of Rs. 32 lakh at 8.15% interest, with a 15-year tenure and an 18-month moratorium, you have some flexibility. Your goal is to either repay the loan in 5 years or invest the money to earn more than 8.15%, targeting a 16% return for an effective profit of 8%.

Option 1: Aggressive Loan Repayment in 5 Years
Repaying the loan in 5 years requires an aggressive approach. Let’s outline a strategy:

1. Extra Savings for Loan Repayment:

With Rs. 60,000 left after expenses, you can allocate a significant portion towards loan repayment. If you can commit Rs. 40,000 per month towards the loan after the moratorium ends, it will substantially reduce the principal.

2. Boosting Your Income:

Consider part-time work, freelancing, or side gigs to increase your income. This extra money can directly go towards your loan repayment.

3. Windfall Gains:

Any bonuses, tax refunds, or unexpected income should be directed towards the loan. This can significantly reduce your debt faster.

4. Investment in Low-Risk Mutual Funds:

While aggressively paying off the loan, invest a small portion in low-risk mutual funds to keep your money working. Liquid funds or short-term debt funds can be good choices. They offer better returns than savings accounts and are relatively low-risk.

Option 2: Investing for Long-Term Growth
If you prefer investing the money to earn higher returns over the loan period, let’s explore this route.

1. Diversified Mutual Fund Portfolio:

Investing Rs. 40,000 per month in a diversified portfolio of mutual funds can be a good strategy. Focus on a mix of large-cap, mid-cap, and small-cap funds. This diversification reduces risk and enhances potential returns.

2. Benefits of Actively Managed Funds:

Actively managed funds have the potential to outperform index funds. Skilled fund managers can adjust the portfolio based on market conditions, potentially delivering higher returns. Look for funds with a consistent track record and experienced fund managers.

3. Power of Compounding:

The power of compounding can work wonders. By investing regularly and reinvesting the returns, your wealth can grow significantly over time. Compounding helps in generating returns on the returns already earned, creating a snowball effect.

4. Monitor and Adjust:

Keep a close eye on your investments. Regularly review the performance of your funds and make adjustments if necessary. If a fund is consistently underperforming, consider switching to a better-performing fund.

Risk and Return Analysis
1. Understanding Risks:

All investments carry some risk. Higher returns often come with higher risks. It’s important to assess your risk tolerance and invest accordingly. Diversifying your portfolio helps in mitigating risks.

2. Expected Returns:

While targeting a 16% return is ambitious, it’s achievable with a well-diversified portfolio. Historically, equity mutual funds have delivered such returns over the long term. However, past performance is not indicative of future results, and market conditions can vary.

3. Managing Volatility:

Equity investments can be volatile. During market downturns, it’s important to stay invested and not panic. Regular investments through SIPs (Systematic Investment Plans) can average out the costs and reduce the impact of market volatility.

Tax Efficiency
1. Tax-Saving Investments:

Some mutual funds offer tax benefits under Section 80C of the Income Tax Act. ELSS (Equity Linked Savings Scheme) funds not only provide tax deductions but also have the potential for high returns.

2. Long-Term Capital Gains Tax:

Long-term capital gains (LTCG) from equity mutual funds are tax-free up to Rs. 1 lakh per year. Gains above this limit are taxed at 10%. Holding investments for the long term can be tax-efficient.

Final Insights
Balancing loan repayment and investments is a strategic decision. Whether you choose aggressive loan repayment or long-term investing, both approaches have their merits.

1. Review and Adjust:

Regularly review your financial plan and adjust based on your progress and market conditions. Flexibility is key to achieving your financial goals.

2. Stay Disciplined:

Financial discipline is crucial. Stick to your investment plan, avoid unnecessary expenses, and prioritize your financial goals.

3. Seek Professional Advice:

While this guide provides a comprehensive strategy, consulting a Certified Financial Planner can provide personalized advice based on your specific situation. Professional guidance can help optimize your financial plan.

4. Celebrate Milestones:

Celebrate small milestones along the way. It keeps you motivated and reinforces positive financial behavior.

Your determination to pursue an MBA and effectively manage your finances is commendable. With a strategic approach, you can achieve your goals and build a secure financial future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.