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Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 10, 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

Asked by Anonymous - Jun 26, 2025Hindi

Hello Sir, I wanted to seek your advice regarding my home loan situation. Two years ago, I took a home loan of Rs 52 lakhs, and as of now, the outstanding amount is Rs 50 lakhs. Starting from 1st July, the interest rate on my loan will change to 7.4%. I am considering doing a balance transfer to Bank of India, which is offering the same interest rate but with an Overdraft (OD) facility. I have a surplus/emergency amount of Rs 5-10 lakhs, which I plan to keep in the OD account. This amount will be treated as a prepayment, thus reducing my interest burden, while still being available in case of emergencies. The balance transfer process would incur a cost of approximately Rs 40-50k, but I believe it would be beneficial in the long run. Alternatively, I am thinking to invest that surplus amount in the market, specifically in mutual funds (MF), which are expected to yield at least a 12% return in the long term, considering the Long Term Capital Gains (LTCG) tax and the 30% tax bracket. Could you kindly advise me on whether I should opt for the home loan OD facility or invest the surplus amount in the market? Your guidance on this matter would be highly appreciated. Thank you for your time and assistance. Best regards,

Ans: ? Current Home Loan Snapshot
– You originally took a Rs 52 lakh loan.
– Outstanding is now Rs 50 lakh.
– From 1 July, interest rate will be 7.4%.
– Bank of India OD facility offers same rate.
– You intend to deposit Rs 5–10 lakhs in OD account.
– That amount will offset interest, yet remain accessible.

? Balance Transfer Decision – Interest Offset vs Costs
– Balance transfer incurs Rs 40–50k one-time.
– If you keep Rs 10 lakh in OD, interest benefit saves monthly cost.
– Calculate how many months savings recoup transfer cost.
– With 7.4% interest, Rs 10 lakh saves about Rs 6,167/month interest.
– That saves ~Rs 74k annually, repaying cost in under a year.
– OD facility gives flexibility since funds remain available.
– So balance transfer with OD offset makes sense financially.

? Risk of Investing in Market Instead
– Investing surplus in mutual funds can yield ~12% long-term.
– But this return is not guaranteed annually.
– Market returns are volatile, especially short-term.
– In 30% tax bracket, after LTCG tax, net return may drop.
– LTCG above Rs 1.25 lakh taxed at 12.5%.
– So net return might be around 9–10%.
– That return is marginally higher than home loan interest.
– But you lose guaranteed interest savings on home loan.

? Comparing Two Paths Analytically
– Option A: FT home loan with OD offset gives ~7.4% financed debt cost, reduced by OD offset.
– Option B: Invest in mutual funds hoping for ~9–10%, but with risk and volatility.
– Option A offers guaranteed savings; Option B offers potential gain with risk.
– For long-term stability, guaranteed cost saving often favours debt reduction.
– However, you could split surplus: some to OD, some to MF.

? Suggested Split Approach
– Allocate Rs 5 lakh into OD as virtual prepayment.
– This saves interest, and fund remains liquid.
– Use remaining Rs 5 lakh to invest in mutual funds.
– This diversifies between guaranteed saving and growth potential.
– Ensure mutual fund FP is with a certified MFD with CFP.
– Use actively managed mutual funds, not index or direct.
– Actively managed funds offer better downside protection.

? Tax and Return Considerations
– Debt interest of 7.4% is deductible only under property income context.
– Mutual fund LTCG taxed at 12.5% above ?1.25 lakh.
– Net MF return around 9–10%, after tax.
– Net savings from OD route are tax-free as they reduce interest.
– Hence effective cost-saving from OD is better post-tax.

? Step-Wise Action Plan
– Step 1: Process balance transfer to BOI with OD facility.
– Step 2: Deposit Rs 5 lakh into OD as offset.
– Step 3: Allocate remaining surplus to equity SIPs.
– Step 4: Review OD account and MF performance every quarter.
– Step 5: Gradually increase MF SIP as surplus grows.

? Monitoring and Rebalancing
– Monitor OD utilization each month.
– Avoid drawing interestable balance from OD.
– Track mutual fund returns annually.
– Adjust MF SIP based on risk and equity performance.
– Use SWP in future for income needs, especially post-retirement.

? Final Insights
– OD offset on home loan gives secure interest savings.
– Investing some surplus in MFs adds growth potential.
– This split balances safety and wealth creation.
– Use actively managed funds with CFP oversight.
– Reassess loan and market conditions regularly.
– With this plan, you manage costs and still grow wealth.

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

Asked on - Jul 29, 2025 | Answered on Jul 29, 2025

Thank you sir for your valuable suggestion and guidance.

Ans: You're welcome! If you have any more questions or need further assistance, feel free to ask. Best wishes on your financial journey!

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

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