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Should I Pay Off My Housing Loan with Mutual Funds?

Ramalingam Kalirajan |7545 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jan 16, 2025

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 Anoop on Dec 04, 2024Hindi

I am having mutual funds of app RS 1.50 cr and housing loan of app Rs 70 lacs. on mutual funds the average return in the last few years is app 15%. On Housing loan Interest rate is 8.6%. Considering future stock market and other conditions etc should I clear my Housing loan from Mutual funds or should i continue as it is

Ans: You have a significant mutual fund portfolio and a housing loan. This presents an important financial decision. Let’s analyse this scenario thoroughly to guide you effectively.

1. Appreciating Your Financial Discipline
Building a mutual fund portfolio of Rs 1.50 crore is remarkable.

Managing a housing loan responsibly alongside is commendable.

2. Understanding the Trade-Offs
The decision to prepay or continue depends on multiple factors:

Housing loan interest rate is 8.6%.

Mutual funds have delivered a 15% average return recently.

Consider post-tax returns and opportunity costs while deciding.

3. Tax Implications on Housing Loan
Home loans offer tax benefits under Sections 80C and 24.

Principal repayment qualifies under Section 80C up to Rs 1.5 lakh annually.

Interest payment deduction is available up to Rs 2 lakh under Section 24.

Prepayment will end these benefits, impacting your net tax savings.

4. Taxation on Mutual Fund Withdrawals
Long-term capital gains (LTCG) above Rs 1.25 lakh on equity funds attract 12.5% tax.

Debt fund withdrawals are taxed as per your income tax slab.

Factor these taxes into the decision to withdraw.

5. Potential Growth of Mutual Funds
Mutual funds, especially actively managed funds, can offer long-term wealth creation.

Market fluctuations may impact short-term performance, but long-term potential remains strong.

By staying invested, you can benefit from compounding over time.

6. Prepayment vs. Investing
When Prepayment May Be Beneficial:
If your housing loan EMI strains your monthly budget.

If you prefer being debt-free for peace of mind.

If the market outlook indicates subdued mutual fund returns.

When Continuing the Loan is Better:
If your mutual fund returns consistently exceed 8.6%.

If tax benefits significantly reduce your effective loan cost.

If you are comfortable managing the EMIs without liquidity issues.

7. Considering a Hybrid Approach
Use part of your mutual fund portfolio for partial prepayment.

This reduces your loan burden while retaining market exposure.

Ensure an emergency fund remains intact before withdrawing.

8. Building a Comprehensive Strategy
Align your decision with your financial goals and risk appetite.

Maintain diversification to balance growth and safety.

Consult a Certified Financial Planner to evaluate future scenarios.

Final Insights
Your choice depends on balancing financial returns and personal priorities.

If returns from mutual funds exceed loan cost, continuing is logical.

If being debt-free aligns with personal peace, partial prepayment helps.

A hybrid strategy can offer the best of both worlds.

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.