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Should I clear my loans or invest my money?

Ramalingam Kalirajan |7256 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Dec 10, 2024

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 - Dec 10, 2024Hindi

Iam retired state govt employee I will draw pension of Rs.58000 and will get lumsum of 5600000 beside I will get rent of 75000. Housing loan of 4000000 and 1500000 gold loan EMI is 61500 including Insurance. Suggest whether I should clear the entire loans or invest properly

Ans: You have a clear income and debt structure. A pension of Rs. 58,000, rental income of Rs. 75,000, and a lump sum of Rs. 56 lakhs provide robust cash inflow. On the other side, you have two significant loans—a housing loan of Rs. 40 lakhs and a gold loan of Rs. 15 lakhs. Your monthly EMI of Rs. 61,500, including insurance, impacts your cash flow.

The decision to clear loans or invest requires analyzing multiple angles. Let's evaluate step by step.

Evaluating Loan Repayment
1. Interest Rates Analysis

Housing loans usually have lower interest rates, especially for retired government employees.
Gold loans generally carry higher interest rates than housing loans.
2. Tax Benefits

Housing loans provide tax deductions under Section 80C and 24(b).
Repaying the housing loan entirely removes this tax advantage.
3. Financial Comfort

Continuing EMIs ensures liquidity for other goals.
Clearing loans offers peace of mind and reduces financial obligations.
Investing the Lump Sum
1. Diversification for Safety and Growth

Divide the Rs. 56 lakhs into debt and equity investments.
Debt investments ensure safety and regular income.
Equity investments can provide long-term growth potential.
2. Focus on Debt-Free Retirement

Allocate funds to secure essential expenses post-retirement.
Retaining liquidity helps manage unforeseen expenses.
3. Tax-Effective Planning

Tax-efficient investments can optimize post-tax returns.
Consider long-term capital gains taxation for equity mutual funds.
Calculating Cash Flow Balance
1. Income vs. Expenses

Post-retirement income: Rs. 1.33 lakhs (pension + rent).
EMI obligation: Rs. 61,500.
Net disposable income: Rs. 71,500 (excluding insurance).
2. Post-Loans Scenario

Clearing loans reduces your outflows.
A debt-free position increases monthly savings.
Suggested Action Plan
Step 1: Addressing High-Interest Loan
Clear the gold loan as it has higher interest rates.
Reducing this burden improves monthly cash flow.
Step 2: Partial Housing Loan Repayment
Consider a partial prepayment of the housing loan.
This will reduce EMIs and interest outgo.
Step 3: Allocate Remaining Funds to Investments
Create a balanced portfolio with equity and debt investments.
Ensure it aligns with your risk appetite and goals.
Step 4: Emergency Fund Creation
Keep 6–12 months’ expenses as an emergency fund.
Park this amount in a liquid or ultra-short-term debt fund.
Step 5: Insurance and Legacy Planning
Review your insurance coverage for adequacy.
Plan for wealth transfer to ensure family financial security.
Benefits of Investing Through Regular Funds with a Certified Financial Planner
Regular funds provide guided expertise for financial goals.
Certified Financial Planners ensure disciplined investment strategies.
They monitor your portfolio and make necessary adjustments.
Direct funds lack personalized advice, leading to uninformed decisions.

Insights on Index Funds
Index funds mimic market indices but lack active management.
They cannot outperform markets during corrections.
Actively managed funds adapt to market trends for better returns.
Final Insights
Combining debt repayment with smart investments creates financial stability. Clearing the gold loan reduces high-interest liabilities. Partly repaying the housing loan offers balance between liquidity and debt reduction. Investing the remaining lump sum ensures future growth and income stability.

Collaborating with a Certified Financial Planner ensures tailored financial strategies. Their expertise aligns your financial decisions with long-term goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

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.