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I'm 32, IT pro, high loan: Should I clear debt or invest?

Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jun 03, 2025

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

Asked by Anonymous - May 22, 2025Hindi

I am 32, working in the IT sector with a 2.2 lakh monthly salary. I have a 70 lakh home loan (EMI 95,000) and a 5 lakh car loan (EMI 15,000). My mutual fund investments are worth 10 lakh and I have 3 lakh in FDs. Should I use some of this to reduce my home loan burden or continue paying EMIs and let the investments grow?

Ans: This will help in giving a thorough perspective before deciding on any loan prepayment or continuing with current investments.

1. Income and Cash Flow Analysis

You earn Rs. 2.2 lakhs per month. This is a strong and stable income.

EMI outgo is Rs. 1.10 lakhs. This is around 50% of your income.

This is on the higher side. Ideally, EMIs should stay within 35-40% of income.

There might be stress if any emergencies come up or income drops.

So, reviewing loan structure is a good thought at this stage.

2. Loan Structure – Home and Car

Home loan of Rs. 70 lakhs with Rs. 95,000 EMI. This is quite large.

Car loan of Rs. 5 lakhs with Rs. 15,000 EMI. It’s a shorter-term loan.

Together, both loans reduce monthly flexibility.

Focus first should be on clearing smaller, high-cost loans like the car loan.

Prepaying home loan partially is a secondary goal.

3. Investments – Mutual Funds and FDs

Mutual fund corpus of Rs. 10 lakhs is a good start.

But it’s important to assess purpose, tenure, and allocation.

Are these funds for long-term wealth creation or short-term goals?

Fixed deposits of Rs. 3 lakhs offer low returns after tax.

FD returns are fully taxable. They barely beat inflation.

4. Emergency Fund Assessment

First priority is to maintain 6 months’ expenses as emergency buffer.

Your monthly outgo (EMIs + living costs) may be Rs. 1.6 lakhs.

So, you must have Rs. 9–10 lakhs in liquid form.

FDs can be a part of this emergency fund.

Don’t use full FD or mutual fund corpus for loan prepayment.

5. Evaluating Car Loan Prepayment

Car loan interest is usually higher than home loan.

Car is a depreciating asset. No tax benefit on this loan.

If you prepay the car loan, you reduce financial pressure quickly.

Use part of FD or MF to close this car loan.

This will improve monthly surplus and reduce interest drain.

6. Assessing Home Loan Prepayment

Home loan gives tax benefit under Section 80C and 24(b).

Interest outgo is high in early years, but helps in tax savings.

Prepaying helps reduce tenure or EMI. But it’s not urgent.

Consider prepaying if you have surplus beyond emergency fund.

But don’t use your long-term investment corpus entirely.

7. Mutual Funds vs Loan Repayment

Mutual funds have long-term compounding benefits.

They are designed for wealth creation over 7+ years.

Redeeming now will disturb your compounding cycle.

Also, mutual fund growth can outperform home loan interest.

Equity mutual funds give higher post-tax returns over time.

LTCG above Rs. 1.25 lakh is taxed at 12.5%.

But short-term gains are taxed at 20%. Be mindful of tax.

So, redeeming funds now may not be tax-efficient.

Instead, continue SIPs and allow compounding to work.

8. Role of Regular Plans and Certified Guidance

Avoid investing through direct plans on your own.

Direct funds lack personalised advice and regular reviews.

Without expert input, portfolio risk may go unchecked.

Investing through a Certified Financial Planner ensures goal-based planning.

They help with rebalancing, tax-efficiency, and strategic allocation.

Regular funds through a trusted MFD with CFP backing are wiser.

9. Index Funds – Limitations and Gaps

Index funds simply follow the market. No active management.

They don’t protect in volatile or falling markets.

No scope to outperform during sideways market phases.

Actively managed funds adapt better to changing cycles.

Fund managers make allocation shifts based on opportunities.

This adds a layer of defence and opportunity.

Index funds have no such flexibility or oversight.

10. Tax Benefits – Should Not Be Ignored

Home loan gives Rs. 2 lakh deduction on interest.

Principal repayment qualifies for Rs. 1.5 lakh under Section 80C.

These help lower your tax outgo each year.

If you prepay now, you lose some of these benefits.

Evaluate prepayment only after considering full tax impact.

11. Improving Monthly Surplus – Priority Action

After clearing car loan, your surplus rises by Rs. 15,000 monthly.

Use this for SIPs or step-up loan prepayments.

This keeps wealth creation and debt reduction going together.

Avoid lump sum loan closure by breaking investments.

Instead, increase EMI by Rs. 5,000-10,000 monthly later.

This will reduce home loan tenure effectively.

12. Maintain Balanced Asset Allocation

Don’t exit mutual funds completely. That disturbs asset balance.

Equity allocation should match your goals and age.

FD is low-return, low-risk. Equity is high-return, high-risk.

Keeping both is necessary for stability and growth.

Real wealth creation happens only through disciplined equity investing.

13. Emotional vs Financial Decisions

Loan burden feels heavy emotionally. But decisions must be logical.

Don’t rush to be debt-free if it harms long-term wealth.

Check facts, compare returns, and choose wisely.

14. Additional Suggestions for Overall Health

Review your insurance. Check if you have adequate term cover.

Ensure you have health insurance for yourself and family.

Avoid mixing insurance with investment. ULIPs, endowments don’t serve either purpose well.

If you hold such policies, assess surrender and move to mutual funds.

Start goal-based planning: retirement, children’s education, travel or other life goals.

Align each investment with a specific time-bound goal.

15. Debt-to-Investment Balance

Your investments are Rs. 13 lakhs, loans total Rs. 75 lakhs.

This imbalance needs to improve over time.

Keep boosting your investment side without large withdrawals.

As income grows, increase SIPs and EMIs gradually.

16. Debt Consolidation Not Required Now

You have only two loans. No need for consolidation.

Focus is only on optimising repayment pace.

Also build wealth in parallel.

Finally

Use part of your FD to clear the car loan now.

Continue mutual fund SIPs for long-term wealth creation.

Don’t redeem equity investments for home loan prepayment.

Maintain emergency fund at 6 months’ worth of expenses.

Slowly increase surplus usage towards either SIP or part prepayment.

Avoid direct funds and index funds for now.

Get your plan reviewed yearly by a Certified Financial Planner.

Your financial base is good. Now it’s time for structure and discipline.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

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