Hi , I am 26 year old and contemplating to acquire a personal loan of 15 Lakhs at 10.45% interest with a tenure 5 years. And invest lumpsum it in Equity Mutual Funds giving a Return of about 25-30% on average Example: Quant Mutual Funds (...

Hi , I am 26 year old and contemplating to acquire a personal loan of 15 Lakhs at 10.45% interest with a tenure 5 years. And invest lumpsum it in Equity Mutual Funds giving a Return of about 25-30% on average Example: Quant Mutual Funds ( Midcap, Smallcap, Flexicap ) , Nippon India ( Midcap, smallcap) and Momentum Type Mutual Funds. I am intending to keep this Money invested for a Minimum of 5 years. Please suggest if I should go for it. Also I'm open to hear some better ways to go about investing aggressively using Loan. And also making the most out of my loan eligibility for acquiring gains.

Ans: Taking a personal loan to invest in equity mutual funds is a high-risk strategy and not advisable for several reasons:

Leverage: You'll be borrowing money to invest, which magnifies both gains and losses. If the market performs poorly, you could end up with significant losses and still have to repay the loan.

Interest Costs: The interest rate on personal loans is typically higher than the returns you can expect from mutual funds. Even with an average return of 25-30%, there's no guarantee you'll earn enough to cover the interest costs.

Market Volatility: Equity markets can be volatile over short periods. While they tend to provide good returns over the long term, there's no guarantee of positive returns in any given year.

Financial Security: Taking on debt to invest adds financial risk. If you face unexpected expenses or a loss of income, you could struggle to repay the loan, leading to financial stress.

Instead of borrowing to invest, consider the following alternatives:

Systematic Investment Plan (SIP): Invest a portion of your monthly income in mutual funds through SIPs. This approach allows you to invest regularly without taking on debt.

Emergency Fund: Build an emergency fund to cover unexpected expenses. This will provide financial security and prevent you from having to rely on loans in case of emergencies.

Financial Planning: Consult with a financial advisor to create a long-term investment plan based on your goals, risk tolerance, and financial situation.

Gradual Increase: Start with a smaller investment amount and gradually increase it over time as you become more comfortable with investing.

Remember, investing should be done prudently, considering your financial goals, risk tolerance, and current financial situation. Avoid taking on unnecessary debt to invest in the market, as it can lead to financial instability and stress.

Ans: You have shared your financial position with great honesty. At your age, such clarity and self-awareness are rare and admirable. You already have a steady income, a clear view of your liabilities, and the willingness to take the right action. That itself puts you far ahead of many people in your age group.

Let’s assess your situation carefully from all angles and design a balanced strategy that covers your debt, liquidity, savings, and investment goals.

» Current Financial Position Assessment

– You earn around Rs 1.4 lakh per month in Gurgaon. That’s a strong foundation for long-term wealth building.
– Your monthly loan obligations add up to Rs 54,000 (Rs 48,000 personal loan + Rs 6,000 consumer loan).
– Rent and living expenses are about Rs 30,000–35,000.
– This leaves you with about Rs 50,000–55,000 surplus each month.
– You have Rs 2 lakh in mutual funds and no other savings or emergency cash.

Your overall income and expense structure show that you are disciplined and aware of your spending pattern. But you are currently facing a high EMI-to-income ratio, which needs some fine-tuning before moving heavily into investments.

» Importance of Creating a Strong Financial Base

– Your first step must be building safety, not chasing returns.
– Without a proper foundation, any financial plan can easily get derailed.
– A Certified Financial Planner always ensures protection and liquidity before investments.

So, before we look at investing or prepaying your loan, you must create a cushion that protects you from emergencies or job uncertainty.

» Emergency Fund Creation

– You should keep at least 4 to 6 months of expenses as an emergency fund.
– Considering your total expenses (including EMIs), you should aim for Rs 3 to 3.5 lakh as emergency savings.
– This fund should be kept in a high-interest savings account or liquid mutual fund.
– This step gives you mental peace and financial flexibility.

Once this is built, you can then focus on loan reduction and wealth creation.

» Evaluating Your Loans

Let’s understand your two loans more closely.

– Your personal loan carries 10.5% interest, with 35 months left.
– The consumer loan is smaller and short-term, ending by March 2026.

A 10.5% loan rate is quite high, and interest continues to eat away your savings. But, because you also lack liquidity, full prepayment right now is not the smartest move.

A balanced approach is better than emotional decision-making here.

» Should You Overpay Your Personal Loan?

– Paying off debt early saves interest. That’s true.
– But it can leave you with no liquid funds and create stress during emergencies.
– You are just starting your wealth-building journey. Liquidity matters more right now.

So, instead of paying an extra Rs 40,000 per month towards your loan, consider a more balanced split.

– Keep building your emergency fund first (Rs 3–3.5 lakh).
– Once you reach that, start partial prepayment of your personal loan every 6 months with any surplus or bonus.
– Avoid locking up all your free cash into loan repayment.

This way, you slowly reduce your interest burden while still staying financially flexible.

» Importance of Insurance Protection

– You haven’t mentioned life or health insurance, which is a key missing link.
– Before investing or prepaying loans, protect yourself and your family.
– Take a term insurance cover of at least 15–20 times your annual income.
– A good health insurance plan (beyond employer cover) is also essential.

Insurance protection ensures your financial plan remains secure even during uncertainty.

» How to Prioritise Between Loan Prepayment and Investment

A Certified Financial Planner would suggest this sequence for your case:

Build your emergency fund.

Get life and health insurance.

Begin moderate investing while slowly prepaying your loan.

You can start investing Rs 5,000–10,000 per month in mutual funds while keeping Rs 20,000–25,000 aside for your emergency fund monthly.

This approach builds balance between risk reduction and wealth creation.

» Investment Planning for the Next 3–5 Years

Since you may need funds in 3–5 years, short- and medium-term goals are your focus.

– Avoid taking high market risk.
– Go for a mix of equity and debt mutual funds for moderate growth.
– Keep equity exposure limited to around 40–50% of your total investments for now.

Your Rs 2 lakh existing mutual fund investment can stay invested. But ensure it’s in suitable funds based on your time horizon and comfort.

» Understanding the Role of Actively Managed Funds

You already have mutual fund exposure. It’s important to know the difference between actively managed funds and index funds.

Many investors assume index funds are always better because of lower costs. But that’s not the full truth.

– Index funds only mimic the market. They don’t protect you when markets fall.
– They cannot outperform benchmarks as they have no active strategy.
– In volatile times, actively managed funds give better downside protection.

A skilled fund manager in an actively managed fund studies market cycles, company fundamentals, and macro factors. This helps in better capital preservation and long-term growth.

So, for your goals, stick with actively managed funds guided by a Certified Financial Planner.

» Regular Funds vs Direct Funds

You might also wonder about direct mutual funds. Many investors think direct funds are always superior because of lower expense ratios. However, that’s a narrow view.

– Direct funds offer no personalised guidance.
– You must manage reviews, rebalancing, tax planning, and fund switching on your own.
– Wrong choices or delayed actions can cost far more than the small saving in expense ratio.

When you invest through a regular plan with a Certified Financial Planner, you get professional support.

– Your portfolio is monitored.
– Rebalancing is done when required.
– Emotional decisions are avoided.

In the long term, this disciplined support adds more value than the small cost difference between direct and regular plans.

So, choose regular mutual funds through a Certified Financial Planner.

» Setting Investment Goals and Time Horizons

Every investment must have a clear goal. It helps you decide how much risk to take and where to invest.

Your short- to medium-term goals could be:
– Building an emergency fund
– Paying off the personal loan early
– Creating savings for future needs (marriage, home setup, or career change)

If your goal is within 3 years, keep it in safer funds with limited volatility. If it’s around 5 years, add a small portion in equity funds for better growth potential.

This goal-based approach keeps you disciplined and helps avoid impulsive withdrawals.

» Role of Tax Planning

Tax efficiency adds to your net returns. Mutual funds offer better tax treatment compared to fixed deposits.

For equity mutual funds:
– Long-term capital gains (above Rs 1.25 lakh) are taxed at 12.5%.
– Short-term capital gains are taxed at 20%.

For debt funds, both long-term and short-term gains are taxed as per your income slab.

Hence, long-term investing helps reduce taxes and improves post-tax returns. A Certified Financial Planner ensures your portfolio remains tax-optimised and compliant.

» Behavioural Discipline in Financial Growth

Investing success is not just about where you invest. It’s about staying disciplined and consistent.

– Don’t stop SIPs during market corrections.
– Avoid reacting to short-term news.
– Keep reviewing your plan every 6–12 months with your Certified Financial Planner.

Such behaviour builds real wealth over time, even more than high returns in short periods.

» Building Wealth Step by Step

At age 26, you have time on your side. Your earning potential will grow, and your debts will reduce.

You can use this early stage to learn the habit of saving and investing every month.

– Maintain at least 25–30% savings ratio from your income.
– Automate your investments through SIPs.
– Avoid unnecessary spending or lifestyle inflation.

Over 5–10 years, even small consistent SIPs will grow into large wealth.

» Avoiding Common Financial Mistakes

Many young earners make mistakes such as:
– Ignoring insurance and emergency funds
– Chasing quick returns
– Investing based on friends’ suggestions
– Choosing direct or index funds without guidance
– Focusing only on loans and ignoring investments

You can avoid these by following a structured approach under a Certified Financial Planner’s guidance.

» Periodic Review and Rebalancing

Your financial journey will evolve with new goals and income changes.

– Review your loans, insurance, and investments every 6 months.
– Adjust your investment mix based on goal progress.
– When your loan closes, redirect that EMI amount towards SIPs.

This way, your savings rate will grow automatically without reducing your lifestyle comfort.

» Preparing for Post-Debt Phase

Once your loans end, you will have an extra Rs 54,000 monthly. That is a powerful opportunity to accelerate wealth creation.

– Convert that EMI into SIPs.
– Build a strong multi-goal portfolio covering retirement, home purchase, and financial independence.

Starting early and staying consistent can make you financially independent much sooner than you think.

» Maintaining a Balanced Lifestyle

Financial health also depends on emotional and lifestyle balance.

– Keep a realistic monthly budget.
– Reward yourself occasionally without guilt.
– But always pay yourself first through SIPs and savings.

This approach helps you live comfortably today and build security for tomorrow.

» Finally

At your age, with stable income and awareness, you are already on the right track. You don’t need to rush into loan closure or heavy investment. You only need balance and consistency.

Your next steps should be:
– Build Rs 3–3.5 lakh emergency fund.
– Take proper insurance coverage.
– Start Rs 5,000–10,000 SIP in actively managed regular mutual funds.
– Part-prepay your personal loan when you have bonuses or extra cash.
– Review progress every 6 months with a Certified Financial Planner.

Following these steps will give you a 360-degree financial solution. You’ll have liquidity, protection, growth, and peace of mind — all at once.

You are already thinking right. Now it’s time to act systematically.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment