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25-Year-Old Investor: How to Invest 1000 Monthly with a Housing Loan?

Ramalingam Kalirajan |7634 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 21, 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 Vignesh on Jun 15, 2024Hindi

Hi Sir I'm planning to invest ?1000 monthly with step up of ?500 on each 6 months. Having a housing loan of 39L . Any suggestions on my investment and how or which SIP should I use for safe and secure investment to close my loan as earlier as possible.....

Ans: You are already planning wisely with your monthly investment and a step-up strategy. Your focus on closing your housing loan early is commendable. Let’s take a closer look at your situation and see how you can optimize your investments to achieve your goal.

Understanding Your Investment Plan
You plan to start with an investment of Rs 1000 per month and increase it by Rs 500 every six months. This step-up strategy is an excellent way to gradually increase your savings without feeling a significant impact on your monthly budget.

Managing Your Housing Loan
1. Impact of Early Loan Repayment
Paying off your housing loan early can save you a significant amount of interest. The faster you reduce your loan principal, the less interest you will pay over time.

However, it's important to balance this with your investment goals. You don’t want to divert all your resources towards loan repayment if it means missing out on potential investment growth.

2. Using SIPs for Loan Prepayment
A Systematic Investment Plan (SIP) can be an effective tool for accumulating funds to prepay your loan.

SIPs in equity mutual funds offer the potential for higher returns compared to traditional savings options. Over time, the compounding effect can help you build a corpus that you can use to make lump-sum payments towards your loan.

This approach allows you to benefit from both market growth and loan repayment.

Choosing the Right SIP for Your Goal
1. Avoiding Index Funds
Index funds might seem attractive due to their low cost, but they usually follow the market’s ups and downs.

In India, actively managed funds often outperform index funds because fund managers can make strategic decisions based on market conditions.

For your goal of building a corpus to prepay your loan, actively managed funds are a better choice.

2. Benefits of Regular Funds
Direct funds might appear to have lower expense ratios, but they come with their own challenges.

Without guidance, you might find it difficult to choose the right fund or time your investments correctly.

Investing through a Certified Financial Planner (CFP) ensures you have professional advice, which can help you stay on track with your financial goals.

3. Balancing Risk and Returns
Since you want a “safe and secure” investment, it’s important to balance risk and returns.

Equity funds generally offer higher returns but come with higher volatility. If you can handle some risk, a balanced or hybrid fund might be suitable for you.

These funds invest in a mix of equities and debt, offering a more stable return profile compared to pure equity funds.

Step-Up SIP Strategy
1. Gradually Increasing Investments
Your step-up strategy, increasing your SIP by Rs 500 every six months, is a smart approach.

This gradual increase will help you build a larger corpus over time without straining your finances. It also allows you to take advantage of rupee cost averaging, where you buy more units when prices are low.

Over time, this strategy can significantly increase your investment’s value, helping you accumulate the funds needed for your loan repayment.

Tax Implications and Withdrawal Strategy
1. Tax Efficiency
Tax efficiency is crucial when planning your investments. Long-term capital gains from equity funds are taxed at 10% for gains exceeding Rs 1 lakh.

To minimise tax liability, you should consider spreading out your withdrawals to stay within the tax-free limit.

If you opt for a balanced fund, remember that the debt component of the fund will have different tax implications. Long-term gains from debt funds are taxed at 20% after indexation.

2. Strategic Withdrawals for Loan Repayment
Once your investment has grown sufficiently, you can start making lump-sum payments towards your housing loan.

Aim to make these payments strategically, focusing on times when your investments have appreciated significantly. This will allow you to maximise your returns while reducing your loan principal.

As your investment corpus grows, you can also consider using part of it to prepay your loan in stages, rather than waiting to accumulate a large sum. This will reduce your loan tenure and save you more in interest.

Final Insights
Your step-up SIP strategy, combined with a focus on early loan repayment, is a sound approach. By carefully selecting the right funds and balancing your risk, you can achieve both investment growth and loan repayment efficiently. Avoid index funds and direct funds, as they may not align with your goal of secure and effective investment growth. Instead, opt for actively managed funds that can offer higher returns with professional guidance.

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.