Home > Money > Question
Need Expert Advice?Our Gurus Can Help
Jinal

Jinal Mehta  | Answer  |Ask -

Financial Planner - Answered on May 20, 2024

Jinal Mehta is a qualified certified financial professional certified by FPSB India. She has 10 years of experience in the field of personal finance.
She is the founder of Beyond Learning Finance, an authorised education provider for the CFP certification programme in India.
In addition, she manages a family office organisation, where she handles investment planning, tax planning, insurance planning and estate planning.
Jinal has a bachelor's degree in management studies. She also has a diploma in in financial management from NMIMS, Mumbai.
... more
Vijy Question by Vijy on May 19, 2024Hindi
Listen
Money

I have home loan of 28 Lakh for 20 years, I have paid emi for almost 2 and half year. Current interest rate is 9.5. I have plan to prepay entire loan in next 3 years. I want to know can I prepay the loan or do investment in market? Also the interest rate are very high so can I switch the bank?

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
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
Money

You may like to see similar questions and answers below

Ramalingam

Ramalingam Kalirajan  |7758 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 25, 2024

Ramalingam

Ramalingam Kalirajan  |7758 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 03, 2024

Asked by Anonymous - Jul 03, 2024Hindi
Money
Hello Sir, My Home loan amount is 49L for 15 yrs, 1 year completed. EMI is 48.3K I have additional 2L in my account. I can spare additionally 30k per month towards repayment of Home Loan. I have one dilemma, Should I make Part Prepayment of my loan and reduce number of EMIs Or I invest this amount in equity and MF for my future. What are pros and cons of both.
Ans: It's great that you're thinking about your financial future and making informed decisions about your home loan and investments. Let's dive into your options: making part prepayments on your home loan or investing in equity and mutual funds (MF).

Understanding Your Current Situation
You have a home loan of Rs 49 lakhs with a 15-year tenure. You've completed one year, and your EMI is Rs 48,300. You have Rs 2 lakhs available now and can spare an additional Rs 30,000 per month.

Option 1: Part Prepayment of Home Loan
Pros of Part Prepayment
1. Reducing Interest Burden

Making part prepayments on your home loan can significantly reduce the total interest paid over the loan tenure.

2. Shortening Loan Tenure

Prepayments can also reduce the number of EMIs, helping you become debt-free sooner.

3. Financial Security

Being free from debt provides a sense of financial security and reduces monthly obligations.

4. Improved Credit Score

Paying off your loan faster can improve your credit score, making it easier to secure loans in the future.

Cons of Part Prepayment
1. Opportunity Cost

By using your funds to prepay the loan, you might miss out on potential higher returns from investments.

2. Liquidity Constraints

Using your spare funds for prepayment reduces your liquidity, which could be a concern in emergencies.

3. Tax Benefits Reduction

Home loan interest payments provide tax benefits under Section 24. Prepaying the loan reduces these benefits.

Option 2: Investing in Equity and Mutual Funds
Pros of Investing in Equity and Mutual Funds
1. Potential for Higher Returns

Equity and mutual funds have the potential to provide higher returns compared to the interest saved on home loan prepayment.

2. Power of Compounding

Investing in mutual funds, especially through SIPs, allows you to benefit from the power of compounding over the long term.

3. Diversification

Investing in different asset classes diversifies your portfolio, spreading the risk and potentially increasing returns.

4. Tax Benefits

Investing in Equity-Linked Savings Schemes (ELSS) can provide tax benefits under Section 80C.

Cons of Investing in Equity and Mutual Funds
1. Market Risk

Investments in equity and mutual funds are subject to market risk, which could lead to potential losses.

2. No Guaranteed Returns

Unlike the interest saved on loan prepayments, returns from equity and mutual funds are not guaranteed.

3. Emotional Factors

Market volatility can cause emotional stress, leading to impulsive decisions.

4. Tax on Gains

Long-term capital gains on equity investments above Rs 1 lakh are taxable at 10%.

Evaluating Your Financial Goals
Your decision should align with your financial goals. Consider these aspects:

Risk Tolerance
If you have a low risk tolerance, prepaying the loan might be a better option.

Investment Horizon
If you can invest for the long term, equity and mutual funds could provide better returns.

Financial Security
If you prioritize financial security and being debt-free, focus on prepaying the loan.

Future Financial Needs
Consider your future financial needs, such as emergencies, education, or retirement planning.

Combining Both Strategies
You don't have to choose one option exclusively. A balanced approach could work well.

Partial Prepayment and Investing
Prepay Part of the Loan
Use a portion of your spare funds for prepayment to reduce the loan burden.

Invest the Rest
Invest the remaining funds in equity and mutual funds for potential higher returns.

Mutual Funds: A Closer Look
1. Equity Mutual Funds

These funds invest in stocks of various companies, offering high returns with moderate to high risk. They are suitable for long-term goals.

2. Debt Mutual Funds

These funds invest in fixed income securities, providing stable returns with lower risk compared to equity funds. They are suitable for short to medium-term goals.

3. Hybrid Mutual Funds

These funds invest in both equity and debt instruments, providing a balanced approach to risk and return. They are suitable for investors seeking moderate returns with balanced risk.

Power of Compounding
The power of compounding works best with mutual funds. The interest earned gets reinvested, leading to exponential growth over time.

Final Insights
Your decision should align with your financial goals and risk tolerance. Here's a summary of both options:

Prepayment Pros:

Reduces interest burden.
Shortens loan tenure.
Provides financial security.
Improves credit score.
Prepayment Cons:

Opportunity cost.
Liquidity constraints.
Reduced tax benefits.
Investing Pros:

Potential for higher returns.
Power of compounding.
Diversification.
Tax benefits.
Investing Cons:

Market risk.
No guaranteed returns.
Emotional factors.
Tax on gains.
Balanced Approach:

Part prepayment and investing.
Prepay part of the loan.
Invest the rest in equity and mutual funds.
By evaluating your financial goals and risk tolerance, you can make an informed decision.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |7758 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jan 16, 2025

Listen
Money
Home loan: Hello Sir. I have a home loan of 55 Lakhs at present. I am confused about whether I should prepay my loan or keep investing money in mutual funds for 15-20 years? Pls guide me here.
Ans: Your question is important and requires a comprehensive approach. A balanced decision depends on multiple factors. Here's a detailed guide to help you.

1. Assess Your Financial Priorities
Understanding your financial goals is crucial.

Check if your priority is to become debt-free or grow your wealth.

Consider the impact of prepaying the loan on your overall financial stability.

Think about your long-term aspirations, like children’s education or retirement.

2. Evaluate Your Loan Interest Rate
The cost of your home loan matters significantly.

Compare your loan’s interest rate with the returns from mutual funds.

If your loan rate is high, prepayment could save interest costs.

If the rate is low, you might earn better returns through investments.

3. Consider the Tax Benefits of a Home Loan
Home loans provide attractive tax benefits.

Under Section 24, interest payments are eligible for deductions.

Principal repayment qualifies for deductions under Section 80C.

Reducing your loan too quickly might reduce these tax benefits.

4. Advantages of Mutual Fund Investments
Mutual funds can help you build wealth efficiently.

Actively managed funds, guided by experts, outperform passive options over time.

Investing through a Certified Financial Planner ensures professional advice.

Mutual funds are ideal for long-term goals like retirement planning.

Taxation Alert: LTCG above Rs 1.25 lakh is taxed at 12.5%. STCG is taxed at 20%.

5. Weighing Prepayment vs Investment
Making the right choice requires a balance.

Prepaying your loan reduces debt and saves interest costs.

Investing provides opportunities for wealth creation over the long term.

A mix of prepayment and investment may work best.

6. Importance of Emergency Fund
Before making any decisions, secure an emergency fund.

Keep three to six months’ expenses aside for emergencies.

Liquid funds or savings accounts are good for emergency reserves.

Do not use emergency funds for loan prepayment or investments.

7. Surrender Poor-Performing Policies (if applicable)
If you hold LIC, ULIP, or investment-linked insurance policies:

Assess their performance and future returns.

Poor-performing policies should be surrendered to reinvest in mutual funds.

Consult a Certified Financial Planner for personalised guidance.

8. Advantages of Regular Funds Over Direct Funds
Investing through regular funds has key benefits.

Regular funds come with expert advice from Certified Financial Planners.

Direct funds require in-depth research, which many investors lack time for.

Professionals ensure better fund selection and reduce potential mistakes.

9. Debt Reduction: Psychological and Financial Benefits
Reducing your loan has its advantages.

It provides peace of mind and reduces financial stress.

It improves cash flow by lowering EMI obligations.

However, ensure this does not drain your liquid savings.

10. Diversification and Risk Management
A diversified approach minimizes risk and ensures stability.

Split your surplus funds between prepaying the loan and investing.

Allocate funds based on your risk tolerance and time horizon.

Regular reviews ensure your plan remains aligned with your goals.

11. Long-Term Wealth Creation Perspective
Investments can help achieve your financial independence.

Equity mutual funds offer high returns for long-term wealth creation.

Avoid index funds due to their limited scope for outperforming the market.

A balanced portfolio with equity and debt ensures stability and growth.

Final Insights
Your decision should reflect your financial goals and priorities.

Assess the interest rate of your loan against potential mutual fund returns.

Balance between loan prepayment and investment for optimal results.

Consult a Certified Financial Planner for a customised, 360-degree solution.

Stay disciplined and review your financial plan regularly for success.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

..Read more

Latest Questions
Dr Nagarajan Jsk

Dr Nagarajan Jsk   |224 Answers  |Ask -

NEET, Medical, Pharmacy Careers - Answered on Feb 01, 2025

Listen
Career
I have completed my msc in biochemistry n now doing internship but I am confusing about my future because I see this field don't pay me inuff for life even for future... N don't have more jobs in Maharashtra. I don't like production jobs but in Pharma only production pay much so what can I do .. Can u suggest me which job is high payable after Msc biochemistry
Ans: Hi Nandu,

Greetings!

Could you please let me know which year you completed your course and whether you are currently doing an internship or apprenticeship? An internship is part of the curriculum, where students gain practical training, sometimes with a stipend and sometimes without. After completing your course, you can opt for an apprenticeship, which typically lasts one to one and a half years and includes a stipend, usually split 50%-50% between the industry and government.

If you are in the internship phase, please inform me about the specific field you are working in. Initially, you may not expect a high salary, but after gaining expertise in your field, your compensation will improve. Typically, this takes about three years, so it’s important to focus on skill acquisition for a better future.

If your internship aligns with your field of study, I encourage you to continue and consider starting a medical lab or exploring opportunities in medical devices related to biochemistry. However, pursuing a career in pharmaceutical production may not be suitable for you, as it is a different field, and you may find it challenging to grasp the processes involved since you are currently inexperienced in that area.

Please share the specific field of your internship, and I would be happy to provide more tailored advice.
with regards

Poocho. Life Change Karo!

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

Close  

You haven't logged in yet. To ask a question, Please Log in below
Login

A verification OTP will be sent to this
Mobile Number / Email

Enter OTP
A 6 digit code has been sent to

Resend OTP in120seconds

Dear User, You have not registered yet. Please register by filling the fields below to get expert answers from our Gurus
Sign up

By signing up, you agree to our
Terms & Conditions and Privacy Policy

Already have an account?

Enter OTP
A 6 digit code has been sent to Mobile

Resend OTP in120seconds

x