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Ramalingam Kalirajan |7593 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Nov 14, 2024

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

Question by V.VIJAYAKUMAR on Nov 14, 2024Hindi

Dear Sir This is to get an advise on opting whether to clear the home loan (126 instalments Re.57000p.m) or to go for SIP. I am going to get around 40 lakh as retirement benefits shortly. Which is best option. I've no other financial commitments except this or any responsibilities. I just want peace of mind. Nothing else.

Ans: Congratulations on your upcoming retirement and achieving a debt-free, responsibility-free status. Here’s a breakdown of the pros and cons of each option to help you decide whether to clear the home loan or invest in SIPs. Each approach has its merits, but since you value peace of mind above all, we'll examine both from a holistic perspective.

1. Clearing the Home Loan
Immediate Debt-Free Status: By using Rs. 40 lakh to clear your home loan, you can become debt-free instantly. This would eliminate monthly EMI obligations of Rs. 57,000, giving you a sense of financial relief.

Interest Savings: Paying off the loan early will save you a substantial amount in interest. Over 126 remaining EMIs, the interest saved by closing the loan could outweigh potential SIP returns, depending on the interest rate of your home loan.

Emotional and Psychological Relief: For those seeking peace of mind, being debt-free is often invaluable. If not having the burden of a loan is your priority, this option ensures freedom from monthly repayments, letting you enjoy your retirement worry-free.

Financial Flexibility: Without the Rs. 57,000 monthly EMI, you’ll have additional flexibility. This can help you better manage your retirement finances or even allow for smaller, less risky investments over time.

2. Investing in SIPs
Potential for Higher Returns: Over the long term, equity SIPs typically offer higher returns compared to the interest you would save by paying off a loan. For an 8–10-year horizon, SIPs in a diversified portfolio can potentially grow the Rs. 40 lakh corpus, creating a larger retirement cushion.

Liquidity Advantage: By investing in SIPs, your money remains accessible. Should you need funds later, you can redeem SIPs, whereas funds used to clear the loan would be tied up.

Tax Benefits and Compounding: Investments in equity mutual funds benefit from compounding and, if held long-term, offer favorable capital gains taxation (LTCG above Rs. 1.25 lakh taxed at 12.5%). This could result in net returns that outpace loan interest, but the market risks must be considered.

Balancing Monthly Expenses: Continuing the loan means a fixed monthly outflow of Rs. 57,000. Ensure your retirement income is comfortably meeting your lifestyle and monthly expenses before committing to SIPs with the entire Rs. 40 lakh.

Assessing Peace of Mind
Since peace of mind is your top priority, consider the following approach for a balanced solution:

Partial Loan Repayment and Partial SIP Investment: You could use a portion of the Rs. 40 lakh to reduce the outstanding principal on your loan. This would lower your EMI burden, freeing up some cash flow each month. The remaining amount could go into SIPs, allowing for wealth growth alongside a manageable EMI.

Emergency Fund Consideration: Retaining a portion of the Rs. 40 lakh in safe, liquid instruments (like a Fixed Deposit or Liquid Fund) will provide you with emergency backup funds. This ensures peace of mind while allowing for potential SIP growth.

Evaluate Your Risk Comfort: If market fluctuations don’t align with your peace of mind goal, paying off the home loan in full might be preferable. However, if you are comfortable with moderate risk and fluctuations, SIPs could offer better returns in the long run.

Final Insights
Given that your priority is peace of mind, a balanced approach might serve best: use a portion to reduce the home loan, and allocate the remainder towards SIPs or safer investments. This way, you retain growth potential while minimizing debt obligations.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.