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Ramalingam Kalirajan |10881 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Sep 08, 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 Prajwal on Sep 04, 2025Hindi

Hello. I currently have a home loan of 52 lakhs with 16 years remaining on the tenure. Following the recent RBI repo rate update, my interest rate has been reduced to 7.5%. Could you please advise whether it's more beneficial to use this amount to make a prepayment towards the principal of my home loan or to invest it in stocks or mutual funds every month? I pay an EMI of 60k every month towards home loan. But I was thinking if I accumulate 30k every month extra and pay it towards home loan principle. That way I could close the home loan early? Or invest that 30k into mutual funds? Which option would offer better financial returns in the long run - closing the loan early or investing for potential growth?

Ans: You are thinking carefully about whether to close your home loan earlier or to invest in mutual funds for wealth creation. This is a very common and important decision for many salaried individuals, especially when interest rates change. Let us explore this in detail from all angles.

» Current Situation Analysis
– Your home loan balance is Rs 52 lakh.
– EMI is Rs 60,000 per month.
– Interest rate is now 7.5%, which is reasonable.
– Loan tenure remaining is 16 years.
– You are considering extra Rs 30,000 per month.
– This amount can either be used for prepayment or investment.

» Advantage of Prepaying the Loan
– Prepayment reduces outstanding principal directly.
– This lowers total interest paid in long run.
– Loan tenure reduces significantly.
– You become debt-free much earlier.
– It gives peace of mind and emotional comfort.
– Lower liability improves financial safety for family.
– With less debt, you feel more secure in uncertain times.

» Limitation of Prepayment
– Home loan is among cheapest loans due to tax benefit.
– You lose Section 24(b) deduction on interest.
– You also lose Section 80C deduction on principal.
– After tax benefits, effective cost is much lower than 7.5%.
– Prepayment reduces liquidity as money gets locked in property.
– You cannot access this amount easily for future needs.
– It may reduce your ability to invest for wealth growth.

» Advantage of Investing Extra Amount
– Mutual funds have potential to give higher returns than 7.5%.
– Over long term, well-chosen active funds can create strong growth.
– Rs 30,000 invested monthly for 16 years can build a large corpus.
– This can easily outgrow the saving from loan prepayment.
– Money remains more flexible and liquid compared to locked prepayment.
– Investments can be aligned to retirement, child’s education, and independence.
– Over time, compounding in mutual funds gives exponential growth.

» Limitation of Investing
– Market returns are not guaranteed.
– There can be short-term ups and downs.
– Wrong scheme selection or poor discipline can reduce return.
– Many investors mistakenly choose index funds for simplicity.
– But index funds only copy the market and cannot beat it.
– They lack flexibility during market corrections.
– Actively managed funds, when reviewed by a Certified Financial Planner, perform better.
– Direct funds without expert review may also mislead investors.
– Regular funds through a trusted CFP give better guidance and monitoring.

» Comparing Risk and Reward
– Prepayment gives assured saving at 7.5% return equivalent.
– Investment gives potential for higher return, usually 10% to 12%.
– The difference grows very large over 16 years.
– But investment carries volatility that must be accepted with patience.
– Safety-driven people prefer loan closure.
– Growth-driven people prefer investing for wealth creation.

» Balanced Middle Path
– You do not need to choose only one option.
– You can split Rs 30,000 into two parts.
– Use one part for loan prepayment.
– Use other part for long-term investment.
– This way, you reduce loan faster while also creating wealth.
– Balance reduces stress and keeps growth opportunities alive.
– Over time, you can adjust ratio depending on market and personal goals.

» Long-Term Wealth Creation Angle
– If you only prepay, you save interest but wealth growth is limited.
– If you only invest, you grow wealth but keep loan longer.
– Balanced approach gives you psychological relief and strong portfolio.
– When investments grow, they can later be used to close loan fully.
– This avoids locking funds too early.

» Emotional and Lifestyle Factor
– Debt-free living feels peaceful for many.
– But wealth compounding brings greater freedom in later years.
– You must reflect on which gives more comfort: early loan closure or large wealth corpus.
– Financial decisions are not just numbers; peace of mind matters equally.

» Final Insights
Your thought process is correct and practical. Loan prepayment saves interest but sacrifices growth. Mutual fund investment builds larger wealth but requires patience with market ups and downs. A balanced split of Rs 30,000 into partial prepayment and partial investment is a strong strategy. Over time, wealth creation through well-managed funds, supported by a Certified Financial Planner, can beat loan cost and create real financial independence. This way, you achieve debt reduction, liquidity, tax efficiency, and long-term wealth growth together.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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

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