Dear Sir. I have an active home loan of 59lacs ( originally 1.37cr, which has been prepaid ) on which I pay monthly EMI of 2.8lacs. At this rate, the home loan will be completed by June 2027. Monthly interest amount on home loan is around Rs 36k I have a similar amount as bank balance which can help to finish the home loan. The property which I have invested is under construction and apart from the existing loan amount, I plan to pay the builder from my own funds whenever there is a demand. The balance payment is around 1cr. Please advise if it's a better option to finish the home loan or invest in MF in staggered approach to get better returns. My current MF portfolio is around 1.3cr spead across all asset class.

Ans: You have Rs 43 lakhs and plan to buy a flat worth Rs 1.4 crores due for completion in 2029. Here's an analysis of your options:

Current Investment Plan
1. Initial Payment:

Paid 10% (Rs 14 lakhs) upfront.
Remaining Rs 30 lakhs available.
2. Investment Allocation:

Rs 20 lakhs in PPFAS Flexi Cap Fund.
Rs 10 lakhs in HDFC Balanced Fund.
3. Loan Details:

Sanctioned loan amount: Rs 1.2 crores.
Option 1: Partial Loan and Additional SIP
1. Plan:

Use Rs 87 lakhs from the loan.
Use returns from mutual funds for the rest.
Pump in an additional Rs 30k per month as SIP.
2. Benefits:

Lower EMI, making it easier to manage monthly expenses.
Ability to invest more monthly, enhancing wealth creation.
Option to pre-close the loan in 8-10 years.
3. Considerations:

Assess the expected returns from mutual funds.
Ensure the investments outperform the loan interest rate.
Option 2: Full Loan Amount
1. Plan:

Use the full Rs 1.2 crores loan.
Keep the Rs 30 lakhs in mutual funds.
2. Benefits:

Larger loan amount may offer tax benefits.
Investments remain intact and grow over time.
Flexibility to use investment returns for other goals.
3. Considerations:

Higher EMI impacts monthly cash flow.
Loan tenure may be longer, increasing interest paid.
Comparative Analysis
1. Loan Interest vs. Investment Returns:

Compare the loan interest rate with the expected returns from mutual funds.
If mutual fund returns are higher, keeping investments intact might be beneficial.
2. Monthly Cash Flow:

Evaluate your ability to manage higher EMIs.
Consider the impact on your overall financial stability.
3. Pre-closure Option:

With lower EMIs, pre-closure of the loan becomes feasible.
Additional SIP investments can create a pre-closure fund.
Recommendations
1. Balanced Approach:

Use a mix of both options.
Opt for a partial loan and keep some investments intact.
2. Regular Review:

Monitor your mutual fund performance regularly.
Adjust investments and loan repayments based on market conditions.
3. Financial Goals:

Align your investments with long-term goals like retirement.
Diversify your portfolio to balance risk and returns.
Final Insights
Considering your goals, a balanced approach of partial loan and maintaining investments is optimal. Regularly review and adjust based on performance and market conditions.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

Ans: Assessing Your Current Financial Situation
You are 36 years old with two young kids.

Your monthly salary is Rs. 1.8 lakh.

Home loan EMI is Rs. 55,000 per month.

Other monthly expenses are Rs. 50,000.

Your current assets include Rs. 9 lakh in mutual funds and Rs. 3 lakh in equity.

No other savings apart from these investments.

You plan to fully repay your Rs. 24 lakh home loan by April 2025.

You are considering investing in another real estate property.

You are evaluating whether to pay off your current home loan first or take an additional loan.

Evaluating Home Loan Repayment
Paying off your home loan will free up Rs. 55,000 per month.

This can increase your savings and investment capacity.

However, prepaying the loan reduces liquidity, which is important for financial security.

Home loan interest rates are lower than potential investment returns from mutual funds.

Instead of full prepayment, partial repayment with continued investment may be better.

Assessing your loan’s interest rate versus expected returns is essential.

Managing Your Cash Flow and Investments
After EMI and expenses, you have Rs. 75,000 surplus per month.

With no emergency savings, all surplus going into loan repayment is risky.

Maintaining liquidity through an emergency fund is crucial.

Investing part of the surplus in mutual funds can create better long-term returns.

A balanced approach between loan prepayment and investment can be more beneficial.

Risks of Purchasing a Second Property
Real estate is illiquid and requires significant investment.

Rental yields are generally low, offering about 2-3% annually.

Capital appreciation is uncertain and depends on market conditions.

Maintenance, taxes, and potential vacancies add to costs.

If property prices fall, you may face financial stress with a higher loan burden.

Opportunity Cost of Investing in Real Estate
Investing in equity mutual funds offers better long-term returns.

You can achieve financial freedom faster through diversified investments.

Real estate locks in a large amount of money with slow growth.

Liquidity is lower compared to mutual funds or fixed-income instruments.

Recommended Financial Strategy
1. Build an Emergency Fund
Keep at least 6-12 months of expenses in liquid funds.

This ensures financial security and avoids forced withdrawals from investments.

2. Balance Loan Repayment and Investments
Instead of full prepayment, allocate some surplus towards investments.

Partial prepayment can reduce interest burden without affecting liquidity.

Continue investing in mutual funds for long-term wealth creation.

3. Avoid Purchasing Another Property
With limited savings and liquidity, another property will increase financial risk.

A second home loan will add EMI burden and reduce investment potential.

Diversifying into equity and fixed-income investments is a better approach.

Real estate investment limits flexibility in case of financial emergencies.

4. Strengthen Your Investment Portfolio
Increase SIP contributions in mutual funds to build long-term wealth.

Focus on a mix of large-cap, mid-cap, and flexi-cap funds for diversification.

Invest in debt funds or fixed-income instruments for stability.

Ensure a proper asset allocation based on risk tolerance and goals.

5. Secure Your Family’s Future
Ensure you have adequate term life insurance to protect your family.

Health insurance for yourself, spouse, and kids is necessary.

Create a financial plan for your children’s education and future needs.

Finally
Paying off your home loan is beneficial but should not drain liquidity.

Investing in mutual funds offers better flexibility and growth.

A second property will increase financial stress and limit investment potential.

Maintaining a balanced approach ensures financial stability and long-term wealth creation.

Prioritize an emergency fund, investments, and financial security before taking new liabilities.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

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

Ans: Home loan outstanding: Rs.40 lakh.

Mutual fund portfolio value: Rs.44 lakh.

Considering redeeming mutual funds to prepay home loan.

Planning to reinvest Rs.60,000 monthly in mutual funds post prepayment.

EMI savings expected from home loan prepayment will fund new investments.

Evaluating the Decision to Prepay Home Loan Using Mutual Funds
Benefits of Prepayment:

Interest Savings: Prepaying reduces the principal and interest outgo over the loan tenure.

EMI Relief: EMI burden decreases or tenure shortens, improving monthly cash flow.

Psychological Benefit: Being debt-free sooner offers peace of mind and financial freedom.

Points to Consider:

Cost of Borrowing vs Returns: Home loan interest rates generally range 7%-9%.

Mutual Fund Returns: Equity mutual funds may yield higher returns over long term but come with volatility.

Tax Benefits: You lose home loan tax deductions on principal and interest repaid early.

Liquidity Risk: Redeeming a large MF corpus reduces liquidity for emergencies or opportunities.

Comparing Returns and Risks
Home loan interest is a guaranteed outflow.

Mutual funds, especially equity funds, provide potential but uncertain returns.

Market fluctuations can reduce your mutual fund portfolio value temporarily.

Equity investments require at least 5-7 years for better compounding effect.

Prepaying the loan offers a risk-free return equal to the interest rate saved.

Impact of Taxation and Deductions
Home loan principal repayment gets deduction under Section 80C (up to Rs.1.5 lakh).

Interest repayment is deductible under Section 24 (up to Rs.2 lakh).

Prepaying reduces future tax benefits on interest and principal.

Mutual fund redemptions incur capital gains tax.

Long-term capital gains (LTCG) on equity funds above Rs.1.25 lakh taxed at 12.5%.

Short-term capital gains (STCG) on equity taxed at 15%.

Debt fund gains taxed as per income tax slab.

Using EMI Savings for Fresh Investments
After prepayment, EMI reduces or loan tenure shortens.

You plan to invest Rs.60,000 monthly in mutual funds using EMI savings.

This helps rebuild your portfolio gradually with disciplined investing.

Monthly SIPs benefit from rupee cost averaging, reducing market timing risk.

Long-term SIPs in actively managed funds offer better growth potential than lump sum investing.

Risk and Emotional Factors
Prepayment provides guaranteed interest savings, reducing financial stress.

Investing in mutual funds offers potential growth but market volatility can be stressful.

Financial discipline is needed to continue SIPs after prepayment.

Market downturns may cause portfolio value decline, testing your patience.

Suggested Balanced Approach
Partial Prepayment:

Consider using part of the MF portfolio to prepay a portion of the loan.

Retain some investments for liquidity and growth potential.

This balances interest savings and future wealth creation.

Continue Systematic Investing:

Continue SIPs in mutual funds with the EMI savings.

Focus on actively managed funds aligned to your risk profile and goals.

Maintain Emergency Fund:

Keep sufficient liquid emergency fund separate from investments.

Avoid using entire MF portfolio for prepayment to maintain financial safety net.

Monitoring and Periodic Review
Review home loan interest rates regularly for opportunities to refinance or prepay.

Track mutual fund performance and adjust SIPs or asset allocation as needed.

Assess your financial goals every year and adapt investment plans accordingly.

Consult a Certified Financial Planner periodically for personalized advice and adjustments.

Final Insights
Your question reflects good financial awareness and planning intent.

Prepaying your home loan fully by redeeming mutual funds has pros and cons.

Full prepayment reduces interest outgo but may sacrifice potential higher MF returns.

Tax benefits from loan repayment will reduce once prepayment is made.

Partial prepayment is a prudent option to balance interest savings and investment growth.

Using EMI savings for fresh SIPs is a disciplined approach that rebuilds wealth gradually.

Maintaining liquidity and emergency funds is critical to avoid financial stress.

Active monitoring of loans and investments ensures alignment with changing goals and markets.

Your approach shows maturity in handling debt and investments.

Sustained financial discipline, periodic reviews, and professional advice will keep you on track.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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

Ans: Hi,

Redeeming your investments to prepay home loan is not a good idea. But in your case your total EMIs are more than 50% of your monthly income which is not at all recommended.
Try to close jewel loan if possible as the amount is less than that of the home loan.
Preclosing jewel loan would mean lesser EMI per month. And you can start investing the EMI of Jewel loan - Rs. 12500 towards your mutual fund portfolio.

Also start building an emergency fund of 6 months of your expenses and have ample health & life insurance.

You can consult a professional Certified Financial Planner - a CFP to know which funds to invest in. A CFP will guide you with exact funds to invest in keeping in mind your age, requirements, financial goals and risk profile.

Best Regards,
Reetika Sharma, Certified Financial Planner
https://www.instagram.com/cfpreetika/