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Ramalingam

Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 18, 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
Asked by Anonymous - Apr 24, 2024Hindi
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My age is 34 Years. Home loans 60 Lacs (EMI - 55k) 2 year old. I am planning to sell my parent's old property which will give me another 30 Lacs. My parents are forcing me to buy another home for investment. So shall I repay my Home Loan or buy another property of that money.

Ans: Assessing Your Financial Situation
At the age of 34, managing a significant home loan while considering an additional property investment requires a careful assessment of your financial situation and long-term goals. Let's evaluate the two options: repaying your home loan versus buying another property.

Option 1: Repaying Your Home Loan
Advantages:

Interest Savings: By repaying your home loan early, you can save a substantial amount on interest payments over the loan tenure.
Reduced Financial Stress: Lowering or eliminating your EMI burden (?55,000 per month) can provide significant financial relief, allowing more disposable income for other investments or expenses.
Improved Credit Score: Early loan repayment can positively impact your credit score, enhancing your ability to secure future loans at better interest rates.
Increased Equity: Owning your home outright increases your net worth and provides greater financial security.
Considerations:

Opportunity Cost: While repaying your loan reduces debt, it also means the ?30 lakhs won't be available for potentially higher-return investments.
Liquidity: Once the money is used to repay the loan, it's not easily accessible for emergencies or other investment opportunities.
Option 2: Buying Another Property
Advantages:

Appreciation Potential: Real estate can appreciate over time, potentially providing significant returns on investment.
Rental Income: A second property can generate rental income, which can supplement your salary and help with loan repayments.
Diversification: Investing in property can diversify your portfolio, balancing other investments like equities or mutual funds.
Considerations:

Market Conditions: Real estate markets can be volatile. The property's value and rental income potential depend heavily on location, market trends, and economic conditions.
Additional Loan: Purchasing another property might require taking an additional loan, increasing your debt burden.
Maintenance Costs: Real estate investments involve maintenance, property taxes, and other ongoing costs.
Liquidity Risk: Real estate is not a liquid asset. Selling property can take time and may not always yield the expected return, especially in a down market.
Comparing the Two Options
Repaying Home Loan:

Pros: Immediate interest savings, reduced financial burden, improved credit score, and increased equity.
Cons: Limited opportunity for higher returns, reduced liquidity.
Buying Another Property:

Pros: Potential for capital appreciation, rental income, and diversification.
Cons: Market risk, potential need for additional loan, ongoing maintenance costs, and liquidity risk.
Recommendations
Evaluate Your Financial Goals and Risk Tolerance:

Long-Term Stability: If your priority is financial stability and reducing debt, repaying your home loan is the safer option. It provides immediate relief from the EMI burden and saves on interest costs.
Growth and Income: If you are comfortable with the risks and can manage an additional loan, buying another property could offer long-term growth and rental income. Ensure the property is in a high-demand area with good rental potential.
Hybrid Approach:

Partial Loan Repayment: Consider using part of the ?30 lakhs to partially repay your home loan, reducing your EMI burden. This balances debt reduction and preserves some funds for other investments.
Diversified Investments: Instead of buying another property, you might invest the remaining amount in diversified assets like mutual funds, stocks, or a mix of safer debt instruments and equity for growth and income potential.
Professional Advice:

Consult a Certified Financial Planner to tailor your investment strategy based on your financial situation, risk tolerance, and long-term goals. They can provide a detailed analysis and help you make an informed decision.

Conclusion
Balancing debt repayment and investment opportunities requires careful consideration of your financial goals, risk tolerance, and market conditions. While repaying your home loan offers immediate financial relief and stability, investing in another property can provide growth and rental income. A hybrid approach might offer a balanced solution, combining debt reduction with diversified investments.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
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.
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Ramalingam

Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 30, 2024

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Hi Sir, I am 41 years old I would like to know that should I repay my Home Loan . My pending Loan tenor is 126 months amount is Rs.16,70,000.00. I have investment in PPF that is around 12 Lakhs getting due on Oct-2025. and investment in Mutual funds worth around 3.5 Lakhs. I wish to repay the loan from this two investments. I earnings are from Salary which is around 8,00,000/-. as i come under 30% tax bracket.
Ans: Considering your situation, here are a few factors to consider before deciding whether to repay your home loan using your PPF and mutual fund investments:

Interest Rate Differential: Compare the interest rate on your home loan with the return on your PPF and mutual fund investments. If the interest rate on your home loan is higher than the return on your investments, it may be beneficial to repay the loan.
Tax Benefits on Home Loan: Evaluate the tax benefits you receive on your home loan repayment. Home loan repayments qualify for tax deductions under Section 80C of the Income Tax Act. If you avail of these tax benefits, consider the impact of loan repayment on your tax liability.
Liquidity Needs: Assess your liquidity needs and financial goals. Repaying the home loan will reduce your debt burden but may tie up a significant portion of your investments. Ensure you have sufficient emergency funds and consider the impact on your long-term financial goals.
Investment Horizon: Consider the investment horizon of your PPF and mutual fund investments. If you have a longer investment horizon and expect higher returns from these investments compared to the home loan interest, you may choose to continue investing and repay the loan gradually.
Overall Financial Picture: Review your overall financial situation, including other debts, expenses, and retirement planning. Ensure that loan repayment aligns with your financial goals and improves your financial well-being in the long run.
It's advisable to consult with a financial advisor or tax consultant who can provide personalized guidance based on your specific circumstances and help you make an informed decision.

..Read more

Ramalingam

Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 29, 2024

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Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 27, 2024

Asked by Anonymous - Jul 21, 2024Hindi
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I am 32 years old. I am earning 1.5 Lakh per month. I have 26 Lakh in PF, 12 lakh in Mutual Fund, 2 Lakh in NPS, 8 Lakh worth gold (90 % in jwellery). I have recently bought one residencial property with housing loan of 30 Lakh for 10 years. I just bought one more residential property worth 28 Lakh. Shall i go with one more housing loan or i pay for it from PF as then i wont have any backup...my pension is covered by government.
Ans: Current Financial Position
Age: 32 years old
Monthly Income: Rs. 1.5 lakhs
Provident Fund (PF): Rs. 26 lakhs
Mutual Fund Investments: Rs. 12 lakhs
National Pension System (NPS): Rs. 2 lakhs
Gold: Rs. 8 lakhs (90% in jewellery)
Housing Loan: Rs. 30 lakhs for 10 years (recently bought residential property)
New Residential Property: Rs. 28 lakhs
Government Pension: Covered
Key Considerations
Financial Backup

Using your PF to pay for the property will deplete your emergency funds.
Keeping some reserves is crucial for unforeseen expenses.
Housing Loan

Taking another loan means additional EMI, which will affect your monthly cash flow.
Evaluate your repayment capacity considering your current loan.
Investment Strategy

Balance between liquidity, growth, and safety.
Diversify investments to manage risk.
Evaluating Options
Using Provident Fund
Advantages:

No additional EMI burden.
Property is fully paid off.
Disadvantages:

Depletes emergency funds.
Reduces long-term retirement corpus.
Taking Another Housing Loan
Advantages:

Keeps PF intact for emergencies.
Leverages debt to acquire property.
Disadvantages:

Additional EMI burden.
Impact on monthly cash flow.
Recommendations
Maintain Financial Backup
Emergency Fund: Always keep at least 6 months of expenses in liquid form.
PF as Backup: Your PF acts as a safety net for long-term needs.
Evaluate Loan Affordability
EMI Impact: Ensure your total EMI does not exceed 40% of your monthly income.
Current EMI: Calculate the impact of the new loan on your existing financial commitments.
Optimal Use of PF
Partial Withdrawal: Consider partial withdrawal from PF if necessary. Keep a portion intact for emergencies.
Diversified Investments: Ensure your PF is balanced with other investments.
Investment in Mutual Funds
Growth Potential: Continue investing in mutual funds for long-term growth.
Review Portfolio: Regularly review and adjust your mutual fund portfolio based on performance and goals.
National Pension System (NPS)
Retirement Savings: Continue contributing to NPS for additional retirement benefits.
Tax Benefits: Utilize tax benefits under Section 80C and 80CCD(1B).
Gold as an Asset
Diversification: Gold provides a hedge against inflation and currency risk.
Liquidity: Gold in jewellery form is less liquid. Consider converting some to more liquid forms like ETFs.
Final Insights
Balancing liquidity and growth is key. Maintain your PF as a financial backup. Evaluate your capacity for an additional housing loan. Continue investing in mutual funds and NPS for long-term growth. Ensure your investment portfolio is diversified to manage risks effectively.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jan 29, 2025

Asked by Anonymous - Jan 24, 2025Hindi
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I am 36 years old with two kids 3.75 years old and 1.25 year old. I have outstanding home loan of 24 lakh. I have mutual fund holding of 9 lakh and 3 lakh in equity. I don't have other savings. My monthly salary is 1.8 lakh and home loan emi is 55k/month and other expenses are 50k/month. I intent to pay off my home loan entirely by April 2025. And then save and focus on purchasing other real estate property. Request you to advise if I should pay off current home loan and then invest in second ( given opportunity cost of rising real estates ) or should I keep current emi and take additional loan to purchase second property as 24 lakh rupees would not be enough for second property.
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

..Read more

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Asked by Anonymous - Mar 15, 2025Hindi
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I AM THINKING OF TAKING A LOAN OF 5,00,000 AGAINST MY CURRENT MUTUAL FUND MOTILAL OSWAL SMALL CAP FUND AND REINVEST IT IN SAME FUND FOR NEXT 3 YEARS. I DON'T WANT LIQUIDITY FOR NEXT 3-4 YEARS. SEEING THE MARKET IS LOW RIGHT NOW CAN I EXPECT A REURN? SHOULD I CONSIDER THIS OPTION?
Ans: Taking a loan against your mutual funds and reinvesting in the same fund may seem like an opportunity to maximise gains. However, this strategy carries significant risks.

Key Risks to Consider
1. Market Uncertainty
Small-cap funds are highly volatile.
A temporary market correction doesn’t guarantee strong returns in the next 3 years.
If the fund underperforms, you could face both a loan repayment burden and lower returns.
2. Interest Cost vs. Expected Returns
Loan interest rates on mutual fund pledges typically range from 9-12% per annum.
Your small-cap fund must generate higher returns than the loan rate to make this strategy profitable.
If the fund returns below 12% CAGR, your effective gains will be negligible or negative.
3. Forced Liquidation Risk
If the market corrects further, your lender may sell your pledged mutual fund units to recover the loan.
This could happen at a loss, forcing you to exit at a lower NAV.
4. Overexposure to a Single Fund
Investing additional money into the same small-cap fund increases concentration risk.
Instead, diversification across flexi-cap, mid-cap, and small-cap funds is better.
Alternative Approaches
Instead of taking a loan, consider:

SIP Investment Strategy

Continue SIPs in a staggered manner rather than a lump-sum reinvestment.
This reduces the risk of investing at an unfavourable price.
Diversified Portfolio Allocation

If markets recover, large-caps and flexi-caps may rebound earlier than small-caps.
Diversifying into these categories will balance returns and risk.
Rebalancing Your Current Portfolio

If you have underperforming funds, consider shifting money to stronger funds.
This avoids borrowing costs and interest rate risks.
Final Insights
Taking a loan against your mutual fund for reinvestment is not advisable due to the high risk of market downturns, interest costs, and forced liquidation. Instead, a disciplined SIP approach in diversified funds will offer better risk-adjusted returns.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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