28-Year-Old with 5 Lakh Savings and 40 Lakh Study Loan: What to Do?

Ans: Your current situation presents a few important areas to address: managing your education loan, optimising your savings, and creating a long-term investment plan. Let’s explore each aspect carefully to set you on the right financial path.

Evaluating Your Financial Situation
Age: At 28 years, you have a good time horizon for wealth accumulation.

Savings: You have Rs. 5 lakh in savings, currently placed in a Fixed Deposit (FD).

Education Loan: You have a Rs. 40 lakh education loan, of which Rs. 10 lakh is already disbursed.

Given your age and the fact that you are in the early stages of repaying a significant loan, focusing on a balanced approach between debt repayment and investment is critical.

Managing Your Education Loan
Interest Rates: Education loans typically come with an interest rate between 8% to 12%. This means your loan will grow quickly if not managed effectively. Start by understanding the exact interest rate on your loan.

Loan Repayment Strategy: Since only Rs. 10 lakh has been disbursed so far, you can create a repayment plan to reduce future interest burdens. Pay the interest on the disbursed loan while studying. This will reduce the compounding effect once repayment starts.

Part Payments: Once you begin earning, try to make part-payments on your loan whenever possible. This will significantly reduce your overall interest payments in the long run. Prioritising loan repayment over high-risk investments is prudent, especially with a large amount of debt.

Tax Benefit: Under Section 80E of the Income Tax Act, the interest paid on education loans is tax-deductible for up to 8 years. Take advantage of this once repayment starts.

Optimising Your Rs. 5 Lakh Savings
The current placement of your Rs. 5 lakh in an FD may not be the best use of funds, given that FDs offer lower post-tax returns compared to other investment options. Here’s what you can do:

Shift to More Efficient Investments: Consider moving your funds from FD to more growth-oriented options. Keeping them in FD, especially with inflation, can erode the purchasing power of your savings over time. A better approach would be to look at a combination of debt and equity mutual funds.

Debt Funds for Stability: You can allocate a portion to debt mutual funds. These funds offer better post-tax returns compared to FDs and still provide a low-risk avenue. Keep in mind that debt mutual funds are taxed as per your income slab for both short-term and long-term capital gains.

Equity Funds for Growth: Since you are young, you can consider placing a part of the Rs. 5 lakh into equity mutual funds. This will give your savings an opportunity to grow over time. However, since you have an education loan, limit your exposure to equity for now and increase it gradually as your financial situation improves.

Investment Strategy Moving Forward
As you start earning, setting a systematic investment plan (SIP) is a smart way to build wealth gradually while managing risk.

Start with Small SIPs
Equity Mutual Funds: Over the long-term, equity mutual funds offer better returns than most other asset classes. Begin SIPs with a smaller amount to build the habit. Allocate a higher percentage of your portfolio to large-cap and flexi-cap funds for stability with growth.

Debt Mutual Funds: A portion of your investments should go into debt mutual funds for security and liquidity. These funds can act as an emergency buffer and reduce your overall risk.

Balanced Asset Allocation
Since you have a loan burden and are in the early stages of your career, a balanced approach is essential. You could look at a 70:30 equity-to-debt ratio to optimise growth while managing risk.

Emergency Fund: Use part of the Rs. 5 lakh to create an emergency fund. You should keep at least 6 months' worth of living expenses in a liquid fund or savings account for emergencies.
Addressing the Study Loan vs Investment Dilemma
The priority between investing and repaying your education loan will depend on the interest rate of your loan and your expected investment returns.

Higher Loan Interest: If your loan interest rate is higher than 10%, it’s wise to focus on paying down your loan faster. This is because investments in equity and debt funds may not consistently deliver returns higher than the cost of your loan.

Balance Strategy: If your loan interest is manageable, you can adopt a dual strategy. Continue making regular loan payments while investing small amounts in equity and debt funds to keep your money growing.

Tax Efficiency of Investments
Equity Mutual Funds: Equity mutual funds are taxed at 12.5% on LTCG above Rs. 1.25 lakh. Therefore, with proper planning, you can manage taxes efficiently when withdrawing your money in the future.

Debt Mutual Funds: Gains from debt funds are taxed according to your income tax slab for both short-term and long-term capital gains. Ensure you invest in them keeping in mind your tax bracket and future income levels.

Insurance and Risk Coverage
Health Insurance: While managing your loan and investments, don’t forget to have adequate health insurance in place. It’s essential to avoid any unexpected medical expenses that could derail your financial plan.

Term Insurance: Once you begin earning, consider taking term insurance. This will secure your family’s future in case of any unfortunate events and will also provide a cost-effective risk cover.

Regular Portfolio Review and Financial Planning
Periodic Review: Review your financial plan every six months to ensure it aligns with your changing financial goals and income. This will help you stay on track for your loan repayment and wealth creation goals.

Certified Financial Planner: Once you begin earning, it might be helpful to consult a Certified Financial Planner to help fine-tune your investments and loan repayment strategies. A professional can offer personalised advice based on your specific situation.

Final Insights
Education Loan: Focus on managing your education loan and reducing interest costs.

Savings Optimisation: Shift your Rs. 5 lakh to better investments, including debt and equity mutual funds.

Start Investing Early: Begin SIPs in mutual funds to develop financial discipline and long-term wealth creation.

Balanced Approach: Adopt a balanced approach between loan repayment and investing to ensure financial stability.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner

www.holisticinvestment.in

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