50-Year-Old with 6 Lakh Home Loan - Should I Prepay or Invest?

Ans: You have a home loan balance of Rs 6 lakh with an EMI of Rs 40,000 and a tenure of two years. In four months, you expect Rs 10 lakh from an LIC maturity. You are considering setting off the loan and investing the balance or continuing the EMI and investing the full amount in large-cap mutual funds.

Let's evaluate your options from a 360-degree perspective.

Benefits of Prepaying the Home Loan
Interest Savings: Paying off your loan early saves significant interest costs. Home loans, even with tax benefits, carry an effective interest burden.

Emotional Relief: Being debt-free provides mental peace and financial security, especially as you approach retirement.

Risk Reduction: Prepaying eliminates the uncertainty of managing liabilities in unpredictable scenarios like job loss or health issues.

Drawbacks of Prepaying the Home Loan
Loss of Tax Benefits: Prepaying the home loan means losing the deductions under Section 80C and Section 24(b) of the Income Tax Act.

Opportunity Cost: The amount used to prepay could potentially yield higher returns if invested elsewhere.

Evaluating Investments in Mutual Funds
You mentioned large-cap and blue-chip mutual funds as options. Here are the key points:

Actively Managed Large-Cap Funds
Professional Expertise: Fund managers analyze market trends and adjust portfolios to optimize returns.

Potential for Outperformance: They aim to beat benchmark indices, offering a chance for higher returns than index funds.

Drawbacks of Index Funds
Limited Flexibility: Index funds are passive and cannot adapt to market changes.

Lower Customization: They replicate the index and do not consider specific investor goals.

Regular Funds vs Direct Funds
Benefits of Regular Funds: Investing through a Certified Financial Planner ensures expert guidance. They help with fund selection, portfolio rebalancing, and goal tracking.

Drawbacks of Direct Funds: Managing them requires time, expertise, and constant monitoring, which can be challenging.

Key Considerations Based on Your Age
At 50, financial stability and debt freedom become critical.

Prioritize risk management over aggressive wealth accumulation.

Ensure a clear plan for retirement with adequate savings and investments.

360-Degree Solution
Option 1: Prepay Home Loan and Invest Balance
Use Rs 6 lakh to settle the home loan.
Invest the remaining Rs 4 lakh in a mix of large-cap mutual funds and safer debt funds.
Redirect the Rs 40,000 EMI amount towards SIPs in actively managed funds.
This approach offers debt freedom and builds wealth through disciplined SIPs.

Option 2: Continue EMI and Invest Full Amount
Invest the Rs 10 lakh in a diversified portfolio, including large-cap equity and debt funds.
Allocate Rs 40,000 EMI for the remaining two years from regular income.
Gradually move funds to safer options as you approach retirement.
This approach leverages compounding returns but retains the loan liability for two years.

Tax Implications
Equity mutual funds: Long-term capital gains above Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains are taxed at 20%.

Debt mutual funds: Gains are taxed as per your income slab.

Factor these into your decision when investing or redeeming funds.

Recommendations
If mental peace and debt freedom are priorities, Option 1 is better.

If you are comfortable with the EMI and can handle market risks, consider Option 2.

Avoid overexposure to a single asset class like large-cap funds. Diversify across equity, debt, and hybrid funds.

Finally
Every decision must align with your goals, risk tolerance, and retirement needs. Consulting a Certified Financial Planner can help you make a well-informed choice.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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