Hello sir, I am 39 years old and having monthly in-hand salary of 1.7L. I took SBI home loan of 95L at 8.5% ROI in April 2023. EMI is 73K. I am doing regular prepayment of 77K in addition to EMI. Can you please advise if this is correct approach or I shall invest in market rather than doing prepayment?

Ans: It depends on your financial goals and investment profile. If you have many goals to achieve, then investments will make sense.. but if u are closer to retirement and all your goals are achieved, then prepay the loan. Also, loan refinancing is also a good option if lower interest rates are available

Ans: Hello;

You may close the outstanding personal loan entirely and the home loan by ~ 10 L with the help of your FD and MF savings.

The reduction in EMI should be diverted towards additional MF investments for your retirement and other financial goals.

Best wishes;

Ans: You are 39 years old with a monthly income of Rs. 2.25 lakhs.
You have a home loan of Rs. 14 lakhs outstanding with an EMI of Rs. 37,500.
The loan tenure remaining is 4 years.
You have mutual fund investments worth Rs. 24 lakhs.
You hold gold bonds worth Rs. 3 lakhs.
You maintain a short-term fixed deposit of Rs. 12 lakhs as an emergency fund, covering 12 months of expenses.

Your financial discipline and foresight are commendable. Let's analyze your situation and explore the best course of action.

1. Home Loan Prepayment Considerations

Prepaying your home loan can reduce your interest burden.

With 4 years left, interest savings may be moderate.

Prepayment can provide psychological relief from debt.

It can also improve your credit score.

However, consider if prepayment charges apply.

Some banks may levy penalties for early closure.

Ensure you have sufficient liquidity post-prepayment.

Avoid dipping into your emergency fund for prepayment.

Evaluate if the interest saved outweighs potential investment returns.

2. Mutual Fund Investment Perspective

Your mutual fund corpus is substantial at Rs. 24 lakhs.

Equity mutual funds have historically offered 9-12% annual returns.

Staying invested can potentially yield higher returns than loan interest saved.

Mutual funds offer liquidity and flexibility.

They can be aligned with long-term financial goals.

Consider the tax implications of redeeming mutual funds.

Long-term capital gains above Rs. 1.25 lakh are taxed at 12.5%.

Short-term gains are taxed at 20%.

Evaluate if the net returns justify staying invested.

3. Emergency Fund Adequacy

Your emergency fund covers 12 months of expenses.

This is a robust safety net.

Ensure the fixed deposit is easily accessible.

Avoid using this fund for loan prepayment or investments.

Maintain this buffer for unforeseen circumstances.

4. Adjusting EMI and Redirecting Funds

Reducing EMI to Rs. 20,000 can free up Rs. 17,500 monthly.

Redirecting this amount to equity investments can build wealth.

Ensure that the extended loan tenure doesn't increase total interest significantly.

Consider the opportunity cost of lower EMI versus higher investment returns.

Align this strategy with your risk tolerance and financial goals.

5. Tax Implications and Benefits

Home loan interest payments qualify for tax deductions under Section 24(b).

Principal repayments are eligible under Section 80C.

Prepaying the loan may reduce these tax benefits.

Evaluate the net tax impact before making a decision.

Consult a tax professional for personalized advice.

6. Psychological and Emotional Factors

Being debt-free can provide peace of mind.

It reduces financial obligations and stress.

However, consider if this aligns with your long-term wealth-building goals.

Balance emotional satisfaction with financial prudence.

7. Final Insights

Maintain your emergency fund intact.

Evaluate the interest saved from prepayment versus potential investment returns.

Consider reducing EMI and investing the surplus if it aligns with your goals.

Ensure any decision supports your long-term financial objectives.

Regularly review your financial plan with a Certified Financial Planner.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

Ans: You are 28 years old and earning Rs. 2 lakhs monthly. You have a home loan of Rs. 70 lakhs with a high EMI of Rs. 1 lakh. Your interest rate is 10%, and 9 years are left. You also need Rs. 50,000 for your monthly living expenses.

Let me assess your financial situation from a 360-degree view. I will keep my explanation simple, practical, and in your best interest. Let us go point by point.

  

  

Assessing Your Present Situation

You earn Rs. 2 lakhs per month.

  

  

You pay Rs. 1 lakh as EMI.

  

  

You spend Rs. 50,000 on home expenses.

  

  

You are left with Rs. 50,000 as monthly surplus.

  

  

Your home loan interest is 10%, which is very high.

  

  

Your loan tenure is still 9 years, which is long.

  

  

You are just 28 years old, which is a strong advantage.

  

  

You have high earning years ahead of you.

  

  

Your saving discipline is already visible.

  

  

Appreciation to you for that.

  

  

Understand the Real Cost of Home Loan

10% interest on Rs. 70 lakhs is very costly.

  

  

Even if your EMI feels manageable now, the total interest is huge.

  

  

Over 9 years, you will pay lakhs in interest alone.

  

  

It eats into your wealth creation silently.

  

  

Paying this off slowly means losing compounding opportunity.

  

  

The earlier you reduce the loan, the more you save.

  

  

Especially in the first half of loan, interest is higher.

  

  

So prepayment now makes bigger difference than later.

  

  

Should You Use the Surplus for Prepayment?

Yes, partly.

  

  

Use a portion of Rs. 50,000 surplus monthly for prepayment.

  

  

Start with Rs. 30,000 to Rs. 35,000 per month.

  

  

Every small prepayment reduces interest and tenure.

  

  

Do not wait to collect a large amount.

  

  

Make frequent small prepayments.

  

  

Prefer reducing tenure over EMI in prepayment.

  

  

Tenure cut saves more interest than EMI cut.

  

  

Your first priority now is to reduce loan burden.

  

  

What About Mutual Fund Investment?

Yes, mutual funds are powerful tools.

  

  

They give good growth over long term.

  

  

But do not use mutual fund returns later to repay loan.

  

  

This strategy is risky and uncertain.

  

  

Mutual funds work best when used for long-term wealth creation.

  

  

Do not invest now just to exit for loan later.

  

  

That will break compounding and returns will be low.

  

  

Also, mutual funds carry short term market risk.

  

  

You may need money during market fall.

  

  

You may book loss or low returns.

  

  

That is why mutual funds are not a short-term loan payoff tool.

  

  

How Much to Allocate to Mutual Funds?

After Rs. 30,000 to Rs. 35,000 monthly for prepayment,

  

  

You can use remaining Rs. 15,000 to Rs. 20,000 for mutual funds.

  

  

Choose long term SIPs with at least 10-year view.

  

  

Do not stop SIPs mid-way unless emergency.

  

  

Mutual funds will grow your second wealth stream.

  

  

They are for goals like retirement, child future, etc.

  

  

Equity mutual funds give inflation-beating returns in long run.

  

  

Actively Managed Funds – Not Index Funds

Index funds only copy stock indices like Nifty or Sensex.

  

  

They don’t have expert management.

  

  

They don’t try to beat the market.

  

  

During market falls, index funds also fall.

  

  

They are not suited for people with goals and timelines.

  

  

They give average performance.

  

  

Actively managed funds have expert fund managers.

  

  

They try to beat the market actively.

  

  

They manage risk better in market cycles.

  

  

For someone like you, actively managed funds are better.

  

  

Regular Plans Through Certified Financial Planner

Many people prefer direct mutual funds.

  

  

They choose them to save commission cost.

  

  

But direct funds come without any expert guidance.

  

  

Wrong fund choice or bad timing can hurt returns.

  

  

No one reviews or rebalances your portfolio.

  

  

You may hold underperformers without knowing.

  

  

Instead, invest in regular plans through a Certified Financial Planner.

  

  

You will get proper selection, annual reviews, and exit timing help.

  

  

Planner will guide during market corrections and policy changes.

  

  

The value of advice is bigger than cost saved.

  

  

Emergency Fund and Protection First

Before investing or prepaying fully, keep safety money.

  

  

Set aside 6 months of expenses in a liquid fund.

  

  

This is your emergency fund.

  

  

Don’t use this for investing or loan repayment.

  

  

Also ensure proper health insurance for yourself.

  

  

Without medical cover, one hospital bill can shake finances.

  

  

If not covered, take health insurance now.

  

  

Avoid Real Estate and Gold for Investment

Buying more real estate to earn and repay loan is risky.

  

  

Real estate is not liquid.

  

  

Maintenance, legal issues, and delays make it worse.

  

  

Gold too does not grow fast.

  

  

Keep gold only for tradition or occasion.

  

  

Not as investment to pay loan or grow wealth.

  

  

Tax Planning Around Mutual Funds

Mutual funds now have new tax rules.

  

  

If you hold equity funds for more than 1 year,

  

  

Gains above Rs. 1.25 lakh are taxed at 12.5%.

  

  

Short-term gains are taxed at 20%.

  

  

Debt fund gains are taxed as per your slab.

  

  

Plan redemptions smartly to reduce taxes.

  

  

A Certified Financial Planner can help manage this.

  

  

Loan Interest vs. Investment Returns

Loan costs you 10% every year.

  

  

Mutual funds may give more over long term.

  

  

But in short term, returns are not guaranteed.

  

  

Hence, prepayment gives assured saving of 10%.

  

  

Mutual funds give long term growth.

  

  

A balance of both is best for you.

  

  

Step-Up Strategy for Future

As salary increases, increase your monthly investment.

  

  

Also increase your prepayment amount.

  

  

This keeps your loan period shorter.

  

  

You will save more interest over time.

  

  

You will also build wealth alongside.

  

  

Do not keep surplus idle in bank account.

  

  

Use it smartly for goals or loan cut.

  

  

Finally

You are young and earning well.

  

  

Use this early power wisely.

  

  

Keep investing monthly in mutual funds for long term goals.

  

  

Use surplus now to reduce high interest loan.

  

  

Do not depend on future mutual fund returns to close loan.

  

  

Instead build both side-by-side.

  

  

Create emergency fund and protect with insurance.

  

  

Don’t invest in index funds or direct funds.

  

  

Actively managed funds with Certified Planner is a better path.

  

  

Keep reviewing every year and adjust.

  

  

Discipline and consistency will help you grow and stay debt free.

  

  

You are on the right track. Stay focused.

  

  

Best Regards,
  
K. Ramalingam, MBA, CFP,
  
Chief Financial Planner,
  
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Your disciplined savings and investments are impressive. Choosing between prepaying your home loan or investing in equity is an important decision. Let’s explore this carefully from a 360-degree perspective.

Understanding Your Current Financial Position
Age: 36 years

Monthly Income: Rs. 3,00,000

Home Loan Outstanding: Rs. 10 lakhs

EMI: Rs. 38,000 for 34 months

Investments:

Mutual Funds: Rs. 32 lakhs

Provident Fund: Rs. 39 lakhs

PPF: Rs. 19.5 lakhs

Fixed Deposits: Rs. 12 lakhs

Shares: Rs. 10 lakhs

RBI Bonds: Rs. 32 lakhs

Gold: Rs. 26 lakhs

NPS: Rs. 16 lakhs

You have a good mix of assets with balanced debt and equity investments. Your loan tenure is less than 3 years, which is relatively short.

Benefits of Prepaying Your Home Loan
Reduces Interest Outflow: Early repayment cuts down total interest paid.

Improves Debt-Free Status: Paying off loan early gives peace of mind.

Enhances Cash Flow Post-Tenure: After prepayment, you free up Rs. 38,000 monthly.

Boosts Credit Score: Clearing loan early positively impacts creditworthiness.

However,

Interest Rate on Home Loan: If it is low (around 7% or less), benefits reduce.

Inflation Effect: Loan EMI is fixed and inflation reduces real cost over time.

Liquidity Impact: Using liquid assets for prepayment can reduce emergency funds.

Advantages of Continuing Investments in Equity
Potential for Higher Returns: Equities can outperform loan interest over time.

Compounding Benefit: Staying invested builds wealth with power of compounding.

Flexibility: Investments can be partially liquidated if needed.

Tax Benefits: Equity investments held long-term have favourable tax treatment.

On the other hand,

Market Risk: Equity returns fluctuate and carry volatility.

Emotional Pressure: Loan repayments give fixed discipline; investments can tempt premature withdrawal.

Comparative Assessment of Prepayment Vs Equity Investment
Interest Rate vs Expected Returns: Compare your home loan rate and expected equity returns.

Time Horizon: With 34 months left, loan payoff is near. Equity needs longer horizon.

Risk Appetite: Comfort with market volatility influences choice towards equity.

Liquidity Needs: Ensure emergency funds and liquidity are intact before prepaying loan.

Tax Considerations
Home Loan Interest: You can claim deductions on interest paid up to Rs. 2 lakhs per year.

Principal Repayment: Eligible for deduction under specified sections.

Capital Gains: Equity investments are subject to tax on gains above Rs. 1.25 lakh at 12.5%.

Debt Investments: Taxed as per income tax slab.

Optimizing these helps reduce tax outflow legally.

Impact on Your Financial Goals
Financial Independence: Prepaying loan helps reduce liabilities sooner.

Wealth Creation: Staying invested in equity helps build corpus for future goals.

Risk Management: Diversify investments to balance risk and returns.

Emergency Fund: Maintain at least 6 months of expenses in liquid form.

Suggested 360-Degree Strategy
Continue EMI Payments: Maintain regular EMI to benefit from tax deductions and discipline.

Avoid Large Prepayment: Since tenure is short and interest likely low, avoid big prepayment now.

Increase Equity SIPs: Use surplus funds to invest regularly in actively managed equity funds.

Review Asset Allocation: Balance equity and debt as per your risk tolerance.

Monitor Loan Interest Rate: If rates increase, consider partial prepayment.

Maintain Liquidity: Keep fixed deposits and liquid funds untouched as emergency corpus.

Health and Life Insurance: Ensure adequate coverage to protect family financially.

Estate Planning: Draft a will for smooth transfer of assets.

Risks of Index Funds and Direct Funds in Your Context
Index Funds: They follow the market blindly without active management.

Lack of Flexibility: Cannot adjust to market changes or company performance.

Potential Lower Returns: Active fund managers can capitalize on market inefficiencies.

Direct Funds: Require personal expertise to choose and monitor.

Limited Guidance: You lose the benefit of professional advice and regular monitoring.

MFD Regular Plans: Certified Financial Planners offer professional fund management.

Final Insights
Prepaying home loan early is less beneficial given short tenure.

Invest surplus funds in actively managed equity funds with disciplined SIPs.

Maintain liquidity and emergency funds for financial security.

Review your portfolio annually to keep it aligned with your goals.

Proper insurance and estate planning complete your financial wellness.

Your financial foundation is strong. Small tweaks and focused approach can help grow wealth steadily.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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