Hello Guru, need advice if I can take personal loan of 15 lakhs and use 5 lakhs to purchase used car, rest money I will SWP in index fund or hybrid aggressive fund or half in bonds and half in swp. Continue till money last and than sell car, and...

Hello Guru, need advice if I can take personal loan of 15 lakhs and use 5 lakhs to purchase used car, rest money I will SWP in index fund or hybrid aggressive fund or half in bonds and half in swp. Continue till money last and than sell car, and close loan. Will this plan work?

Ans: Hi, thanks for sharing your plan. It’s crucial to analyze it thoroughly before proceeding. Borrowing money to buy a depreciating asset and investing the rest in mutual funds involves significant risks. Let’s break it down.

Borrowing for a Depreciating Asset
Purchasing a car with a loan requires careful consideration:

Depreciation: Cars lose value quickly. Buying a used car means it’s already depreciated, but it will continue to lose value.
Loan Costs: Personal loans come with interest rates. This increases the overall cost of the car.
Necessity: Evaluate if buying the car is essential. If it’s not absolutely necessary, it’s better to avoid this purchase.
Risks of Borrowing to Invest
Investing borrowed money in mutual funds or bonds is risky:

Market Volatility: Mutual funds, including index funds and hybrid aggressive funds, are subject to market fluctuations. You could lose money if the market performs poorly.
Interest Burden: The interest on the loan might outweigh the returns from investments, especially if the market underperforms.
Financial Stress: Managing loan repayments while hoping for investment returns can create financial stress.
Investing in Index Funds and Hybrid Aggressive Funds
Let’s discuss the potential pitfalls and considerations:

Index Funds: These track the market index. While they are low-cost, they still carry market risks. In a downturn, your investment value can drop significantly.
Hybrid Aggressive Funds: These have a mix of equity and debt, but the equity component can still be volatile. They aim for higher returns but come with higher risk.
Bonds: They provide stable returns but are usually lower than equities. Investing in bonds alone may not yield enough to cover loan interest and principal.
Systematic Withdrawal Plan (SWP)
Using SWP to generate regular income has pros and cons:

Regular Income: SWP can provide a steady income stream, which might help manage loan repayments.
Depletion Risk: The invested corpus can deplete faster than expected if the market performs poorly or withdrawals are high.
Taxes: SWP withdrawals are subject to capital gains tax, which can reduce net returns.
Dangers of Combining Borrowing and Investing
Here are key points to consider:

Double Risk: You’re taking on debt (a fixed obligation) while investing in market-linked instruments (variable returns). This creates a double risk.
Interest vs. Returns: Loan interest rates are usually fixed and can be high. Investment returns are not guaranteed and can be lower than the loan interest.
Liquidity Crunch: If the market performs poorly, you might struggle to repay the loan and meet other financial needs.
Recommended Approach
Here’s a safer and more balanced approach:

Avoid Loan for Car: If the car is not absolutely necessary, avoid taking a loan for it. Consider other transportation options or save up to buy a car without a loan.
Build Emergency Fund: Ensure you have a robust emergency fund before investing or taking on any debt.
Clear Existing Debts: If you have any existing debts, prioritize clearing them before taking on new ones.
Invest Wisely: Continue your existing investments in mutual funds, but do so with disposable income, not borrowed money.
Diversify Investments: Diversify your portfolio across different asset classes based on your risk tolerance and financial goals.
Alternatives to Consider
Use Savings for Car: If buying a car is necessary, use your savings rather than taking a loan. This avoids interest costs.
Increase Savings Rate: Boost your monthly savings and investments gradually to meet your goals without borrowing.
Goal-Based Planning: Align your investments with specific goals, ensuring a balanced approach to risk and return.
Final Insights
Borrowing to buy a depreciating asset like a car and investing the borrowed money in market-linked instruments is highly risky. The potential returns might not outweigh the interest costs and market volatility. It's better to avoid this approach unless the car purchase is absolutely necessary. Focus on building a strong financial foundation, clearing existing debts, and investing wisely with your savings. This approach will lead to a more secure financial future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Let’s first look at the assets and liabilities you currently have:

Provident Fund (PF): Rs 45 lakhs
Fixed Deposits: Rs 50 lakhs
Mutual Funds: Rs 10 lakhs
National Pension Scheme (NPS): Rs 6 lakhs
SBI Elite Scheme: Rs 10 lakhs
Axis policy: Rs 5 lakhs (paying Rs 1 lakh per year for 10 years)
SBI Mutual SIP/Insurance: Rs 6 lakhs
Plot of Land: Rs 50 lakhs
Home Loan: Rs 9 lakhs (EMI of Rs 25,000 per month)
You also mentioned that you have an additional Rs 10 lakhs which you are considering for a down payment on a new car worth Rs 27 lakhs.

This is a very good base of financial assets. Let’s assess whether buying a car right now is a wise decision based on your current financial standing and future needs.

Evaluating the Car Purchase

Buying a car is often an emotional decision, but it’s also a big financial commitment. You’re considering a down payment of Rs 10 lakhs for a car worth Rs 27 lakhs. Let’s break down the key factors:

Liquidity Impact:
You plan to use Rs 10 lakhs from your available funds for the car down payment. This amount is a significant chunk of your liquidity. Reducing your liquid cash could make it harder to cover any unexpected expenses.

EMI Commitment:
If you finance the remaining Rs 17 lakhs, your EMI could be between Rs 35,000 to Rs 40,000 per month (assuming a typical car loan tenure and interest rate). This would add to your current EMI of Rs 25,000 for the home loan, bringing your total EMI commitment to around Rs 60,000 to Rs 65,000 per month.

Total Monthly Outflow:
You may want to consider your total outflow, including living expenses, EMIs, and any other financial responsibilities. It’s crucial to ensure that your monthly cash flow can comfortably accommodate all these commitments without stretching your budget.

Asset Depreciation:
A car is a depreciating asset. Over the years, its value will decline, and it will not contribute to your wealth-building efforts. Meanwhile, your existing investments like mutual funds, PF, and NPS will continue to grow in value.

Alternative Use of Funds:
The Rs 10 lakhs down payment could alternatively be invested in a high-return investment option. Over time, this could help you achieve long-term financial goals more effectively.

Assessment of Current Loan Situation

You currently have a home loan of Rs 9 lakhs, which is manageable. The property’s value (Rs 1.2 crore) far outweighs the loan, which is positive. However, adding another loan in the form of a car EMI will increase your monthly financial burden.

At present, you are paying Rs 25,000 per month for the home loan. If you go for the car loan, the total EMI commitment will rise significantly. It’s important to ask yourself if you are comfortable with this higher commitment.

Insurance Policies: Reviewing SBI Elite Scheme and Axis Policy

Both the SBI Elite Scheme and Axis Policy require attention. These are investment-cum-insurance products, and such products often do not deliver the best returns. They also come with higher costs and offer limited flexibility in terms of withdrawals.

SBI Elite Scheme: You have Rs 10 lakhs invested here. While it may have some insurance benefits, the returns might not be competitive compared to mutual funds or other pure investment products.

Axis Policy: You are paying Rs 1 lakh annually for this policy. Over 10 years, you will have contributed Rs 10 lakhs. It’s important to check if the returns are aligned with your goals.

Consider reviewing both policies with the help of a Certified Financial Planner to assess if continuing them is beneficial. If they are underperforming, you may want to consider surrendering them and reinvesting in more flexible and higher-return instruments like mutual funds.

Asset Allocation and Diversification

You currently have a good mix of assets, including:

Fixed Deposits
Provident Fund
Mutual Funds
NPS
Real Estate
However, it’s important to ensure that your asset allocation aligns with your risk tolerance, liquidity needs, and future goals. For instance:

Fixed Deposits:
While safe, they offer lower returns compared to mutual funds or equities, especially in the long run. As inflation rises, the real returns on fixed deposits diminish.

Provident Fund and NPS:
Both these assets offer long-term growth but have limited liquidity. They are ideal for retirement planning, but you cannot rely on them for immediate needs like the car purchase.

Mutual Funds:
Your mutual fund investments of Rs 10 lakhs are valuable growth assets. However, you could review their performance and consider reallocating to more actively managed funds for better returns.

Car Purchase: Is It a Risk?

To answer your direct question: Is buying the car right now a risk? Based on the analysis, here’s what I think:

Monthly EMI Burden:
The new car EMI will significantly increase your monthly outflow. It’s essential to ensure that you can comfortably afford this without compromising your savings or future investments.

Impact on Liquidity:
The Rs 10 lakhs down payment will reduce your liquid reserves. You still have FDs, but those might be tied up for long periods or may not give the best returns if broken early.

Wealth-Building Impact:
Investing the Rs 10 lakhs in growth assets like mutual funds could help you build wealth faster. A car, being a depreciating asset, will not contribute to wealth creation.

If the car is a necessity and you have carefully assessed your cash flow, you could go ahead. But if it’s a desire that can wait, consider postponing the purchase. Instead, focus on building more liquid wealth to cover future goals like your home loan repayment or emergency needs.

Final Insights

Buying a Rs 27-lakh car is a significant financial decision. While you have a strong financial base, the added EMI burden and liquidity impact should be considered carefully.

Your existing investments are solid, but there’s room for optimization. I would recommend revisiting your insurance-cum-investment policies. A Certified Financial Planner can help review these and guide you toward better investment strategies.

Consider delaying the car purchase if it’s not urgent. Use the Rs 10 lakhs for investments that could offer better returns over time. This way, you’ll strengthen your financial position and have more flexibility for future big-ticket purchases.

In short: Evaluate your monthly cash flow and risk tolerance. If you're comfortable with the increased EMI, go ahead. But, if you feel stretched, it’s better to wait and focus on building more liquid assets.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment