I am 37 year old working in IT company. My take home salary is around 1.5 lakhs but I have home loan of 45 lacs for rent out property which has a valuation of 82 lakhs. I have 23 lakh market value of shares in share market across 40 odd share, mutual fund of about 7 lakh and fd of another 7.5 lakh. I have taken out 7 lakh from my PF account and want to do part payment of 8 lakh for homeloan next month. So balance homeloan will be around 37 lakh. My question is if i plan to pay the complete homeloan next year by selling all shares, mutual fund and fd.. will it be a right decision since i dont want to take headache of an outstanding home loan? Your valuable response is awaited
Ans: You have a solid financial foundation with diversified investments across shares, mutual funds, and fixed deposits. Your home loan stands at Rs. 45 lakh, and the property is valued at Rs. 82 lakh, indicating a strong asset base. Your decision to make a part payment of Rs. 8 lakh from your provident fund will reduce the home loan to Rs. 37 lakh, which is a good step in reducing your debt.
The question at hand is whether selling all your shares, mutual funds, and fixed deposits next year to completely pay off your home loan is a wise decision. Let’s evaluate your situation from a 360-degree perspective.
Benefits of Paying Off the Home Loan
Debt-Free Status: Paying off your home loan can provide immense peace of mind. Being debt-free can reduce financial stress, allowing you to focus on other long-term financial goals.
Saving on Interest: By paying off the loan early, you will save a significant amount on interest payments. This can be especially beneficial if the interest rate on your home loan is high. Even if you have a reasonable interest rate, the long-term savings can still be substantial.
Increased Cash Flow: Once the loan is repaid, the monthly EMI burden will be gone. This will improve your monthly cash flow, giving you more flexibility in your finances.
Concerns with Selling Investments to Pay Off the Loan
While paying off your home loan sounds appealing, it is important to consider the impact of liquidating your investments. Let’s take a deeper look:
Opportunity Cost: The market value of your shares is Rs. 23 lakh, mutual funds are Rs. 7 lakh, and fixed deposits are Rs. 7.5 lakh. By selling these investments, you may miss out on potential growth in the long term. Shares and mutual funds, especially actively managed funds, have the potential to grow significantly over time, which could lead to higher returns than the interest you save by paying off the loan.
Market Timing: The share market is volatile, and selling all your shares at once might not be the best strategy, especially if the market is down. You may end up selling at a loss or missing out on future gains.
Diversification: Liquidating all your investments to pay off your loan would reduce your investment portfolio. Having a diversified portfolio helps balance risk and rewards, and selling off everything to pay off a single liability could disrupt that balance.
FD Interest Rates: Fixed deposits are a safe but low-return investment. While they don’t offer high returns like shares or mutual funds, they do provide stability. However, if the interest rate on your home loan is higher than the FD rate, liquidating FDs could make sense as you are effectively losing money on the spread between the loan interest and the FD interest.
Evaluating the Decision to Pay Off the Home Loan
Let's consider the following points before you make your decision:
Home Loan Interest vs. Investment Returns: The first step is to compare the interest rate on your home loan with the expected returns on your investments. If the home loan interest is higher than the average returns from your shares, mutual funds, and FDs, then paying off the loan may be a good decision. However, if your investments are yielding higher returns than the interest you're paying, it might be better to keep the loan and let your investments grow.
Long-Term Growth Potential: Actively managed funds and shares have the potential to generate significant returns in the long run. The power of compounding can help grow your wealth. By liquidating these investments now, you could be giving up long-term gains. This is particularly important for your financial goals like retirement, children’s education, or other milestones.
Balance Between Debt and Investments: Rather than selling off all your investments to pay off the home loan, you might consider a balanced approach. You can make a substantial part-payment towards the loan without liquidating your entire portfolio. This will reduce your debt while still allowing you to benefit from your investments’ growth.
Alternative Strategies
If you are uncomfortable with having an outstanding home loan, there are alternative strategies you could explore rather than liquidating all your investments.
Part-Payment Strategy: Instead of paying off the entire loan, you could make regular part-payments from your savings. This will reduce the loan balance and interest burden while allowing your investments to continue growing. The extra EMI savings can be reinvested in mutual funds or other financial products that align with your goals.
Systematic Withdrawal Plan (SWP): Rather than selling all your mutual funds at once, you could opt for an SWP. This allows you to withdraw a fixed amount periodically, which could be used for part-payments on the loan. This way, you can continue to benefit from market growth while gradually reducing your loan burden.
Reinvest Your Savings: Once you have repaid a portion of your loan, you can reinvest the EMI savings in mutual funds through SIPs or other long-term growth options. This will help you build wealth while maintaining a balanced financial portfolio.
Risks of Selling All Shares and Mutual Funds
It’s important to address the potential risks involved in liquidating all your shares and mutual funds:
Tax Implications: Selling shares and mutual funds could lead to capital gains tax. Long-term capital gains on shares and mutual funds above Rs. 1 lakh are taxable at 10%, while short-term gains are taxed at 15%. You may need to pay a significant amount in taxes if you sell all your investments at once.
Missing Future Growth: Shares and mutual funds, particularly equity funds, have historically provided high returns over the long term. By selling these investments now, you may miss out on future growth opportunities, especially if the market performs well in the coming years.
Lack of Liquidity: By selling all your investments, you may end up with limited liquidity. It's essential to maintain an emergency fund and have enough liquid assets to cover unforeseen expenses.
Benefits of Continuing Your Home Loan
While paying off your home loan may seem like a relief, there are advantages to continuing with the loan:
Tax Benefits: Home loans provide tax benefits under Section 80C (for principal repayment) and Section 24(b) (for interest repayment). These deductions can reduce your overall tax liability, providing you with financial savings every year.
Low-Interest Rate Environment: If your home loan interest rate is relatively low, it may not be a burden to continue with the loan. Low-interest loans are manageable and can be balanced with investments that provide higher returns.
Inflation Advantage: Over time, inflation reduces the real value of debt. This means that while your loan amount stays the same, its value in real terms decreases as inflation rises. In other words, you’ll be paying off the loan with “cheaper” money in the future.
Final Insights
Paying off your home loan early can bring peace of mind, but it’s important to carefully evaluate the decision from all angles. While eliminating the loan will reduce your financial burden, liquidating all your shares, mutual funds, and fixed deposits may not be the best strategy for long-term wealth building.
Instead, you could consider a balanced approach, making part-payments on the loan while allowing your investments to grow. This would reduce your debt burden without sacrificing future growth potential. It’s also worth considering the tax implications and opportunity costs of selling your investments.
Ultimately, the decision should align with your financial goals and risk tolerance. If the peace of mind of being debt-free is more important to you than potential long-term gains, paying off the loan may be the right decision. However, if you’re willing to manage the loan for a few more years, you could potentially build greater wealth by allowing your investments to grow.
Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner,
www.holisticinvestment.in
