I have availed Rs 23 lakh loan from SBI for 15 years; my EMI is 22350, however, I pay Rs 30,000 every month. Is it correct or should I change my EMI. Please guide me.

Ans: Hello;

Is it possible for you to make a partial withdrawal from GPF?

If yes, then use it to repay the loan and reduce the EMI burden commensurately.

Never do investment with borrowed money, except for home meant for self use.

Worst case sell agricultural land or plot and use the proceeds to reduce outstanding loan and hence EMI outgo.

Best wishes;

Ans: You are 28 years old and earning Rs. 1 lakh per month.

You have taken a loan of Rs. 40 lakh, with Rs. 31 lakh already disbursed.

Your EMI is Rs. 35,100 per month at an 8.65% interest rate.

You need clarity on whether to prepay the loan or invest in mutual funds.

Your financial decisions today will impact your long-term wealth and stability.

Key Factors to Consider
1. Interest Rate vs. Investment Returns
Your home loan interest rate is 8.65% per annum.

A well-diversified mutual fund portfolio can deliver higher long-term returns.

If investment returns exceed 8.65%, investing will build wealth faster than prepayment.

If returns are lower than 8.65%, prepayment will save more money in the long run.

The choice depends on your risk appetite and financial goals.

2. Liquidity and Emergency Fund
Loan prepayment reduces future liabilities but also locks up funds in the property.

Investing ensures liquidity, allowing easy access to funds if needed.

Before deciding, ensure you have an emergency fund of at least six months' expenses.

Emergency funds should be in liquid instruments, not tied to long-term investments.

3. Tax Benefits on Home Loan
Home loan interest payments offer tax deductions under Section 24(b) up to Rs. 2 lakh per year.

Principal repayment qualifies for deductions under Section 80C up to Rs. 1.5 lakh per year.

Prepaying the loan reduces tax benefits, while investments provide wealth creation.

Consider the tax impact before choosing prepayment over investment.

4. Future Financial Goals
List your short-term and long-term financial goals.

If planning major expenses in the next 3-5 years, maintaining liquidity is better.

If long-term wealth creation is the focus, investments can be prioritized over prepayment.

A balanced approach can ensure financial flexibility while reducing loan burden.

Pros and Cons of Loan Prepayment
Advantages of Loan Prepayment
Reduces total interest paid over the loan tenure.

Improves cash flow in the future by reducing EMI burden.

Provides peace of mind by becoming debt-free earlier.

Disadvantages of Loan Prepayment
Reduces liquidity, making it harder to manage unexpected expenses.

Leads to lower tax savings on interest payments.

Misses the opportunity to generate higher returns through investments.

Pros and Cons of Investing in Mutual Funds
Advantages of Investing
Has the potential to generate higher returns than loan interest rates.

Keeps your funds liquid and accessible for future needs.

Offers flexibility to diversify across asset classes.

Provides tax-efficient wealth creation in the long run.

Disadvantages of Investing
Market fluctuations can impact short-term returns.

Requires disciplined investing and a long-term perspective.

Returns are not guaranteed, unlike the fixed benefit of interest savings from prepayment.

Balanced Approach: Best of Both Worlds
Instead of fully prepaying or only investing, a balanced approach works best.

Allocate funds for prepayment and investments based on your financial priorities.

Consider prepaying small amounts yearly to reduce loan tenure without losing liquidity.

Continue investing systematically to build wealth alongside reducing debt.

Steps to Follow for an Optimal Decision
1. Build an Emergency Fund First
Save at least six months’ worth of expenses before considering prepayment or investment.

Keep this fund in a liquid asset like a savings account or liquid mutual fund.

2. Check Loan Prepayment Terms
Some banks charge penalties on prepayment, especially for fixed-rate loans.

Ensure there are no additional costs before making a decision.

If prepayment charges exist, investing may be a better option.

3. Invest in Mutual Funds for Long-Term Growth
Investing a portion of your surplus ensures wealth accumulation over time.

Choose diversified funds for a balance of growth and stability.

Invest systematically through SIPs to average out market volatility.

Regular funds through a Certified Financial Planner ensure professional fund management.

4. Make Partial Prepayments Annually
Instead of bulk prepayment, consider making small additional payments each year.

Even Rs. 1 lakh per year can significantly reduce loan tenure and interest burden.

This allows you to maintain liquidity while still reducing debt faster.

5. Reassess Your Strategy Periodically
Financial priorities change over time, so review your approach annually.

If interest rates increase, prioritize prepayment.

If market conditions favor investments, increase mutual fund contributions.

Stay flexible to maximize financial benefits.

Finally
Loan prepayment and investing both have their advantages.

A balanced approach ensures financial security and wealth creation.

Maintain an emergency fund before committing to either option.

Invest systematically to build long-term wealth.

Make small prepayments yearly to reduce the loan burden.

Review your strategy regularly to stay aligned with financial goals.

The right choice depends on your comfort with risk, tax benefits, and long-term objectives.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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