I'm 34, Earn 4L, Owe 1.3Cr: Prepay Loans or Invest?

Ans: Hello;

You may close the outstanding personal loan entirely and the home loan by ~ 10 L with the help of your FD and MF savings.

The reduction in EMI should be diverted towards additional MF investments for your retirement and other financial goals.

Best wishes;

Ans: Hello;

You may use part of your investment to clear the personal loan.

This will reduce your EMI burden and you should divert these savings towards additional investments.

Best wishes;

Ans: Hi,

With an EMI of 1.6 lakhs and monthly expense of 70k, you have about 1.7 lakhs every month in hand to plan for financial future.

First and foremost, lets consider the 6 lakhs in saving as emergency fund that you can use for any unforeseen situation.

The personal loan of 20 lakhs that you have would be at a higher interest rate and so repaying that early should be prioritized.
The home loan is a long term commitment and the amount is quite big so continue the home loan EMI as it is.

So from the 1.7 lakhs that you have in excess each month, use about half (80K) towards accumulation/prepayment of personal loan. Check the terms of prepayment of this loan - how many times and what amount can be prepaid so as to minimize your outstanding loan amount. This way your personal loan can be closed within 1.5-2 years max.

The remaining 90k should be invested for the future. As no other goals are listed, lets just assume its wealth creation. With the long term view and investment timeline, you should look to invest this money in Mutual Funds. Unless you have other investment option you want to consider and you have knowledge and understand the risks involved, I would suggest to stay with Mutual Funds. Mutual Funds offer a lot of diversification in equity, debt and even gold funds with some exposure to overseas equity if so desired.

So constructing a good diversified Mutual fund portfolio can help generate wealth in the long term. With an amount of 90k and assuming it will increase to over 1 lakh in 2 years after personal loan is paid off, and a timeline of 20 years you can expect to accumulate a corpus of approx. 10Cr (at 12% returns).

I recommend you take guidance from a financial advisor/CFP who can help you plan towards this and also guide you on other important aspects of Life & Health Insurance, tax and Retirement. I think with the right advisor (fee based), you will be able to get to achieving your goals comfortably.

Thanks & Regards
Janak Patel
Certified Financial Planner.

Ans: You have managed your life responsibly at a young age. Owning a home, maintaining mutual fund investments, and providing for your family show discipline and focus. At 35, your income level is strong, and your financial situation can be stabilized with a few practical adjustments. Your concern about managing two loans while raising a child is valid, and it can be addressed systematically.

» Understanding Your Current Financial Situation

Your monthly family income is around Rs 2.4 lakh. Your total EMIs come to Rs 1 lakh, which means almost 42% of your income goes to debt repayment. That is a little high for comfort, especially with a one-year-old child and rising household expenses.

Your home loan balance is Rs 78 lakh with an EMI of Rs 82,000. The personal loan of Rs 8 lakh has an EMI of Rs 18,000. Personal loans generally carry high interest rates, while home loans are lower and offer tax benefits.

You also have mutual funds worth Rs 25 lakh, which gives you good liquidity. You are in a better position than many young families because you have savings available. The challenge is to use them wisely.

» Evaluating Loan Burden and Cash Flow Pressure

The total monthly outflow of Rs 1 lakh on EMIs is heavy for your stage of life. You have a growing child, family expenses, and the need to build future savings. Your wife’s income of Rs 60,000 helps, but you still face pressure on monthly cash flow.

It is important to reduce high-interest debt first. Personal loans typically carry 13%–16% interest. Home loans are around 8%–9%. If you continue both, a large portion of your income will go towards interest for several years.

Hence, tackling the personal loan first will reduce your burden meaningfully. Once that is cleared, your cash flow will improve by Rs 18,000 per month immediately. This can provide breathing space and allow you to manage household needs comfortably.

» Should You Use Mutual Funds to Prepay Personal Loan?

Yes, it is practical and wise to use part of your mutual fund corpus to close your personal loan. The logic is simple. The post-tax return from mutual funds (especially debt or hybrid) is usually lower than the interest you are paying on the personal loan.

For example, if your mutual funds are earning around 9% average annual return, but your personal loan costs 14%, you are losing value. Paying off that personal loan gives you a risk-free and guaranteed return equal to the loan interest you save.

You can use around Rs 8–9 lakh from your Rs 25 lakh mutual fund corpus to close the personal loan fully. Keep the remaining Rs 16–17 lakh invested for your long-term goals and emergencies.

By doing this, you free Rs 18,000 every month immediately. That is like earning an extra Rs 2.16 lakh per year without taking risk.

» Why Not Use Mutual Funds to Prepay Home Loan Now

Do not use mutual funds to prepay the home loan at this stage. Home loans are long-term, lower-cost loans that offer income tax benefits on both interest and principal repayment.

Also, housing loan interest after tax adjustment becomes effectively cheaper, especially if you fall in higher tax bracket. It is better to keep investing in mutual funds rather than repaying a low-interest, long-duration loan early.

If you use mutual funds to close the home loan, you will lose your emergency cushion and the power of compounding. Continue paying the home loan EMIs regularly. Focus on building future savings and liquidity instead.

» Reviewing Mutual Fund Portfolio

Before redeeming Rs 8–9 lakh to clear your personal loan, check your mutual fund portfolio composition. If you have both equity and debt funds, withdraw primarily from the debt or hybrid portions first.

Equity funds have long-term growth potential. It is better to preserve them for future goals like your child’s education or your retirement.

Also, review your overall mutual fund mix with a Certified Financial Planner. Avoid direct funds, even though they look cheaper. Regular funds through a CFP with MFD credential provide professional review, rebalancing, and ongoing guidance. This helps you stay aligned with your goals.

Avoid index funds too, as they only track an index and cannot adjust in market corrections. Actively managed funds with experienced fund managers provide flexibility and better downside protection.

» Setting Up an Emergency Fund

After closing the personal loan, maintain an emergency fund of at least six months of total expenses. This should include EMIs, household costs, and childcare expenses.

You can park this in liquid mutual funds or short-term bank deposits. For your family, this fund should be around Rs 5–6 lakh. This protects you from sudden financial shocks like medical emergencies or temporary job issues.

Do not invest this emergency fund in equity or long-term funds. It should stay fully accessible.

» Managing Monthly Budget and Lifestyle

Your fixed EMI of Rs 1 lakh will reduce to Rs 82,000 after closing the personal loan. With a household income of Rs 2.4 lakh, your EMI-to-income ratio will drop to about 34%. That is comfortable and safe.

Now review your monthly expenses. Create three categories:

Essentials (food, bills, baby needs, EMIs)

Comfort (subscriptions, dining, non-essential items)

Goals (savings, insurance, child education fund)

Allocate at least 10% of your income for savings even after EMIs. Keep growing your mutual fund investments monthly, even if through small SIPs. The consistency matters more than the amount.

» Importance of Insurance Protection

With high responsibilities and a home loan, you must secure your family with proper insurance. Take a term life insurance cover of at least Rs 1.5 crore for yourself. This ensures your wife and child can manage the home loan if anything happens to you.

Also, take family health insurance that covers your wife and baby adequately. Employer insurance may not be enough. A separate personal health plan adds safety.

Do not buy investment-linked insurance like ULIPs or endowment plans. They are expensive and give low returns. Always keep insurance and investment separate.

» Planning Future Goals

After stabilizing your current cash flow, you can refocus on long-term goals. Your child’s education and your retirement will be the next milestones.

You already have mutual funds worth Rs 16–17 lakh after using some for loan repayment. You can start new SIPs with part of your monthly surplus later. Use diversified equity mutual funds for long-term wealth creation.

Avoid overexposure to small or midcap funds. Keep a mix of large-cap and hybrid funds for balanced growth.

Revisit your goals with your Certified Financial Planner once every year. Adjust your asset mix according to your age and income growth.

» Tax Efficiency Planning

Your home loan gives you tax benefits under Section 80C for principal repayment and Section 24(b) for interest up to Rs 2 lakh per year. Continue to claim them fully.

Your mutual funds will give long-term capital gains advantage if held for more than one year. Under new rules, LTCG above Rs 1.25 lakh is taxed at 12.5%. Short-term gains are taxed at 20%.

When redeeming to close your personal loan, check which mutual funds have completed one year to reduce tax impact. Redeem those first to minimize short-term gain taxation.

» Psychological Relief and Family Stability

Debt creates stress, especially when you have a young family. Clearing your personal loan gives immediate emotional relief. That peace of mind is also a financial benefit because it helps you plan calmly for future goals.

Once the personal loan is cleared, focus on family comfort and savings growth. Keep your financial communication open with your spouse. Together, you can handle any temporary financial strain with clarity and confidence.

» Gradual Improvement Plan

After closing the personal loan and setting up your emergency fund, you can slowly increase your monthly SIPs as your salary grows. This ensures your wealth builds steadily even with EMIs.

You can also plan to make partial prepayments on your home loan every two to three years if you receive bonuses or incentives. That will shorten your loan tenure and save interest.

But do not rush to prepay at the cost of losing liquidity. Maintain balance between safety, growth, and debt reduction.

» Managing Lifestyle Inflation

As your income rises, your expenses will also rise naturally. Control lifestyle inflation consciously. Avoid taking new loans for cars, gadgets, or vacations. Prefer saving first, spending later.

If you maintain this discipline for the next five years, your financial independence will grow very fast. Your family will have security, and your child’s future will remain protected.

» Finally

Your decision should be simple: use part of your mutual fund corpus to close the personal loan immediately. Continue paying your home loan normally. Maintain an emergency fund, review insurance coverage, and restart systematic investments once cash flow stabilizes.

This approach will improve your monthly comfort, reduce debt pressure, and strengthen your family’s long-term security. You are already doing many things right; you just need to prioritize debt reduction and liquidity now.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

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

Ans: You have shown a very responsible approach by thinking carefully about how to use your inheritance. At your age and with a family depending on you, this decision can impact both your long-term stability and your children’s future. Let us analyse this from a holistic and 360-degree perspective before arriving at a suitable direction.

» Appreciation of your present financial discipline
– You are maintaining a decent lifestyle with Rs 95,000 salary.
– Managing a home loan EMI of Rs 58,000 shows strong commitment towards financial discipline.
– You also received a valuable inheritance of Rs 25 lakh, which gives you a good opportunity to improve your financial strength.
– Having two small kids, your goal of children’s education is very practical and forward-looking.

» Understanding your current financial balance
– Your EMI is taking a large portion of your salary.
– The remaining income has to handle all family expenses, insurance, and savings.
– As your wife is not earning now, your income is the only source for the family.
– Hence, liquidity and safety of savings are also important along with loan repayment.

» Emotional comfort vs financial optimisation
– Many people prefer prepaying a home loan to get emotional peace.
– However, emotional peace should not disturb long-term growth and safety.
– Prepaying gives psychological relief but may block liquidity.
– Investments, on the other hand, help money grow for future goals like children’s education and your own retirement.

» Assessing home loan from practical view
– Your home loan interest rate is probably between 8% to 9%.
– The interest is also eligible for tax deduction under Section 24(b).
– So, your effective post-tax cost may be around 6.5% to 7%.
– This cost is not high when compared with potential returns from disciplined long-term investments.
– Hence, from financial growth point of view, prepaying the full Rs 25 lakh may not be the best use of money.

» Importance of keeping liquidity
– You have small children and a single income.
– Emergencies, job uncertainty, or medical needs can come anytime.
– Prepaying the full amount will reduce your liquidity buffer.
– It is safer to keep at least 6 to 12 months of expenses as emergency fund in FD or liquid fund.
– So, keep around Rs 6 to 8 lakh aside for safety before making any other move.

» Evaluating education goal for children
– Education costs are increasing much faster than normal inflation.
– For good schools and higher studies, costs can multiply by the time your kids reach college.
– You will need a separate education corpus to fund these costs.
– Since you have around 10 to 15 years time before higher education, equity-oriented mutual funds are ideal to accumulate this corpus.
– Such investments can generate better inflation-adjusted returns than any fixed-income options.

» How to divide the inheritance
– Don’t use all the Rs 25 lakh for one purpose.
– Divide it based on three needs: safety, education, and moderate prepayment.
– For example:

Keep Rs 6 to 8 lakh as emergency reserve.

Invest Rs 12 to 14 lakh towards long-term children education goal.

Use Rs 3 to 5 lakh for part-prepayment of home loan.
– This combination will protect liquidity, grow future wealth, and still reduce some debt pressure.

» Role of part-prepayment in loan management
– Prepaying a small part (Rs 3 to 5 lakh) early can reduce tenure by few years or reduce EMI.
– It will not disturb liquidity but gives psychological comfort.
– You can choose to continue same EMI and reduce loan tenure, which saves more interest.
– Avoid closing the loan too early by giving away all inheritance because that will make you asset-rich but cash-poor.

» Why investment makes better sense for education
– Education is a planned future goal with defined time horizon.
– The earlier you start, the more compounding works for you.
– Equity-oriented mutual funds have historically delivered higher returns over 10+ years.
– Compounding in these funds can beat both inflation and loan interest over long term.
– So, investments help you build an education corpus systematically.

» Importance of disciplined investment
– Start SIPs with part of the inheritance.
– SIPs bring cost averaging and discipline.
– Continue monthly SIPs even from regular income once your comfort improves.
– Increase SIP gradually as your income grows.
– Stay invested for full term to enjoy compounding benefits.

» Choice of funds for education goal
– Prefer diversified, actively managed funds through a Certified Financial Planner or MFD.
– Regular plans give you professional support, goal review, and hand-holding during volatile times.
– Direct plans may look cheaper but they lack personal guidance and behaviour management.
– Without professional review, investors often stop SIPs in market downturns and lose long-term benefit.
– Actively managed funds can also outperform market-linked index funds because of human judgment and sector rotation.
– Index funds simply follow the market and cannot protect during downside phases.
– Hence, well-selected active funds with professional monitoring will be more suitable for children’s goal.

» Avoiding emotional decision to close loan
– Emotional satisfaction of closing loan early is temporary.
– Financial flexibility and wealth creation will give lasting comfort.
– Over the next 15 to 20 years, investments will compound and create real freedom.
– A zero-loan situation with zero corpus can create tension later.
– Hence, maintain balance between debt management and wealth creation.

» Managing risk and protection
– You are the only earning member, so risk cover is very important.
– Ensure you have a term life insurance cover of at least 15 to 20 times your annual income.
– This will protect your family from loan liability and education expenses in your absence.
– Also, have adequate health insurance for the entire family.
– These protections should not be ignored while deciding on loan or investment.

» Tax planning benefits
– The home loan gives you tax benefit on interest and principal.
– Equity mutual funds also offer favourable long-term capital gains tax treatment.
– With new LTCG rule, gains above Rs 1.25 lakh are taxed at only 12.5%.
– Hence, over time, equity investment will still be more tax-efficient than fixed instruments.
– So, you are benefiting both ways: tax-saving on loan and tax-efficient growth on investment.

» Cash flow management for monthly comfort
– Since EMI takes big portion, your monthly balance may be tight.
– By keeping part of inheritance in liquid fund, you can use it to manage temporary shortfalls.
– Avoid touching education corpus once you start it.
– Over time, as salary grows, allocate more to SIPs to build corpus faster.

» Future scope for spouse income
– If your wife can take up part-time or freelance work later, that income can be directed towards SIPs.
– Even small additional contribution each month can make a big difference in long-term education fund.
– This reduces pressure on your main salary and gives flexibility.

» Long-term wealth perspective
– Over 15 to 18 years, compounding from equity mutual funds can build a large corpus.
– The power of time in market will beat loan interest savings from one-time prepayment.
– Your children’s future should be funded from disciplined long-term compounding, not from liquidating assets later.
– Hence, let the inheritance become the seed of this long-term wealth creation.

» Managing behaviour and expectations
– Market movements can make you anxious sometimes.
– Avoid reacting emotionally to short-term ups and downs.
– Stick to the investment plan designed for your goals.
– Review once in a year with your Certified Financial Planner.
– Rebalance if required, but avoid frequent changes.

» Loan vs investment mindset
– Loans are part of financial life; you don’t need to fear them.
– Good loans like home loans help you build assets.
– Bad loans like personal loans or credit card dues should be avoided.
– Since your home loan is at moderate rate and tax-deductible, it is financially acceptable to continue.
– Focus on creating parallel investment growth rather than erasing all loan immediately.

» When to prepay more aggressively
– You can consider higher prepayment later when your income rises and kids are grown up.
– By that time, your investment corpus will also be strong.
– Once education goals are on track, any surplus can be used to shorten loan tenure.
– This strategy maintains liquidity in early years and freedom in later years.

» Psychological peace through planning
– Many people prepay loan only because they lack confidence in managing investments.
– But you can achieve peace through proper planning, protection, and diversification.
– A well-balanced plan gives both emotional and financial comfort.
– This confidence will help you stay focused on your goals without unnecessary worry.

» Finally
– Don’t use the full Rs 25 lakh for prepayment.
– Use a balanced approach:

Rs 6 to 8 lakh – emergency reserve

Rs 12 to 14 lakh – long-term SIP investment for children education

Rs 3 to 5 lakh – part-prepayment of home loan
– This strategy ensures safety, growth, and partial debt relief.
– Over time, your investment will grow faster than the loan interest saved.
– Your family will be financially secure and you will retain liquidity to face any uncertainty.
– Keep disciplined savings and periodic review with a Certified Financial Planner for sustained progress.
– This balanced path will create a stable foundation for both your children’s education and your long-term peace.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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