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Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 13, 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 - Oct 13, 2025Hindi

I am 42 year old businessman with home loan outstanding of 1.2 crores and EMI is 1.65 lakhs per month. My business income fluctuates between 3 to 5 lakhs monthly. I have fixed deposits of 45 lakhs and my CA suggested to prepay loan. But interest rates are coming down so confused whether to prepay now or invest FD money in business expansion?

Ans: » Long-term interest rate outlook & your loan cost

Current home loan interest rates for top banks are around 7.3 % to 9 % range depending on profile and tenure.

The benchmark rates in India are expected to stay around 5 % to 5.5 % for policy rates. (So borrowing costs may ease modestly)

If interest rates fall further, your loan’s effective interest cost may reduce somewhat in future.

But falling rates are not guaranteed; timing such cuts is risky.

» Opportunity cost of deploying FD money vs debt saving

Your FD of Rs. 45 lakh currently yields a relatively safe but low return (after tax).

If business expansion using that money can generate returns above the cost of borrowing (net of tax), it may beat the “guaranteed” saving from prepaying debt.

But that higher-return path also carries risk: business fluctuations, market risk, delays.

Prepaying debt gives you a “risk-free return” equal to interest cost saved (less tax).

» Cash flow volatility & risk buffer

Your business income fluctuates between Rs. 3 lakh to 5 lakh monthly. That is reasonable variation.

But your loan EMI is fixed at Rs. 1.65 lakh monthly, which is a heavy fixed burden.

If you commit FD money to expansion and business underperforms, you may struggle to meet EMI or other obligations.

Keeping some liquidity buffer is prudent — you should ideally maintain emergency reserves equal to several months’ fixed costs.

» Tax implications & interest deduction

Interest paid on home loan is a deductible expense (within limits under Income Tax) for individual residential home (section under housing loans), so part of your interest gives you tax benefit.

Prepaying debt reduces interest outgo — but also reduces your interest deduction over future years.

The net “after-tax cost” of your home loan is lower than the headline rate — that must be considered.

» Leverage considerations & capital structure

Using debt wisely (leverage) is normal in business. If your business returns exceed the cost of debt, leverage helps grow equity returns.

But too much debt increases financial risk, especially during downturns.

Since you already have a large home debt, adding further risk is not ideal.

» Partial prepayment or staggered approach

Rather than “all or nothing”, you may adopt a hybrid strategy: prepay a portion of the debt now, and allocate some capital toward business expansion.

This gives you benefit of reducing interest burden and still keeps “skin in business growth”.

You may also leave part of FD intact as liquid reserve for contingencies.

» Assessing expansion projects carefully

Before diverting FD to expansion, assess each project’s projected return, payback period, downside risk, working capital needs.

Only fund expansion that has high probability of returns above your cost of debt and in line with your comfort level.

Avoid speculative ventures; stay with core business strengths.

» Liquidity, buffer & flexibility

Maintain liquidity cushion for unplanned expenses, cyclical downturns.

If you tie up all FD in business, you may lose flexibility to respond to emergencies.

Prepayment of debt reduces obligations and gives breathing space, especially if rates don’t fall as expected.

» Interest rate risk & timing risk

If you wait, rates may or may not fall. If rates rise, your cost will go up and opportunity to prepay cheaply is lost.

Prepaying now locks in benefit from high cost debt.

But if rates fall significantly, your prepayment “benefit” may be less than expected gains in future.

» Psychological benefit & peace of mind

Having a lower debt burden gives psychological comfort.

Debt weighs you down mentally, especially when business is volatile.

Even if returns from business are high, stress of debt can reduce decision clarity.

» What I lean toward (my CPF view)

I would not rush to prepay the full loan.

I would use a partial prepay approach: allocate maybe 30–50 % of FD to debt reduction.

Keep the rest as buffer and for selective business investments.

If a business opportunity with strong ROI arises, use “excess cash” beyond the buffer to invest.

» What triggers shift to heavier prepayment later

If interest rates refuse to fall or start rising again, lean toward more prepayment.

If business environment turns weak and risk of default rises, shift to more security (debt reduction).

If your business’s internal projects begin giving consistent high returns above debt cost, gradually channel more into business.

» Risk & return tradeoff summary

Prepaying gives assured “return” by lowering interest burden, with low risk.

Business investment may give higher returns, but with higher risk.

Your job is to balance between safety and growth, leaning toward security in your stage.

Finally, you may adopt this distilled path:

Prepay a portion now to cut stress and interest burden.

Keep reserve liquidity.

Use the rest of capital selectively in high-confidence expansion projects.

Revisit your debt position periodically as interest rates evolve.

You are already in strong position with sizeable FD. A partial prepayment gives you safer downside while letting upside from business growth remain.

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

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

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