I am 38 years old working in private bank with salary of 95000 per month. I have home loan of 62 lakhs outstanding with 18 years remaining and EMI is 58000. My wife is not working and we have two small kids. I got inheritance of 25 lakhs from my father. Should I prepay home loan or invest for children education which is expensive these days?

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