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Ramalingam Kalirajan |10906 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jun 18, 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 - Jun 17, 2024Hindi

Hi Sir, Im 25 years old working in IT having salary around 1 Lac per month, O have started my retirement planning thorough PPF,NPS and having safety of health emergency by term and health plans (self and parents). However I have debt of 10 Lacs personal loan which iam planning to repay in 2 years with combination of chit fund (5L)and mutual fund not sure how much to keep every month for closing it in 2 years. Kindly guide me sir

Ans: Understanding Your Financial Position
Firstly, congratulations on starting your retirement planning early. At 25, you have a significant advantage by investing in PPF and NPS. These investments will compound over time, providing a robust retirement corpus. Additionally, having health and term insurance for yourself and your parents is a prudent step towards ensuring financial safety during emergencies.

However, the personal loan of Rs 10 lakh is a considerable debt burden. Planning to repay it in two years is ambitious but achievable with disciplined financial management.

Current Financial Setup
Let's break down your current financial situation:

Monthly Salary: Rs 1 lakh
Personal Loan: Rs 10 lakh
Retirement Investments: PPF, NPS
Insurance: Health and term plans
Debt Repayment Plan: Using chit funds (Rs 5 lakh) and mutual funds
Your goal is to repay the personal loan within two years while maintaining your existing financial commitments. This requires a strategic approach to budgeting, saving, and investing.

Debt Repayment Strategy
Repaying Rs 10 lakh in two years means you need to repay approximately Rs 5 lakh per year. This translates to around Rs 41,666 per month.

Step-by-Step Debt Repayment Plan
1. Create a Detailed Budget

Start by creating a detailed monthly budget. List all your income sources and expenses. This will help you identify areas where you can cut costs and allocate more towards loan repayment.

2. Allocate Monthly Savings

Set aside a specific amount each month exclusively for debt repayment. Aim for Rs 41,666, but adjust based on your monthly budget.

3. Use Chit Fund Wisely

Chit funds can be useful, but they come with risks. Ensure the chit fund you invest in is reliable and well-managed. Use the chit fund to generate a lump sum for loan repayment. However, don't rely solely on this; complement it with other savings and investments.

4. Invest in Mutual Funds

Invest in mutual funds to generate returns that can aid in repaying the loan. Choose actively managed funds, which offer the potential for higher returns compared to index funds. Invest through a Certified Financial Planner (CFP) for expert guidance and regular portfolio management.

Balancing Investments and Debt Repayment
While repaying debt, it’s crucial not to neglect your other financial goals. Here's how to balance between investments and debt repayment:

1. Prioritize High-Interest Debt

Focus on repaying high-interest debt first. Personal loans usually come with high-interest rates, so prioritize them over other lower-interest obligations.

2. Continue Retirement Investments

Don’t stop your PPF and NPS contributions. These long-term investments are crucial for your retirement planning. Allocate a smaller portion of your salary towards these while prioritizing debt repayment.

3. Emergency Fund

Ensure you maintain an emergency fund. This fund should cover at least six months of living expenses. It provides financial security during unexpected situations without the need to dip into your investments.

Detailed Monthly Plan
Here’s a suggested breakdown of your monthly salary:

1. Debt Repayment: Rs 41,666

This is the primary allocation towards repaying your personal loan within two years.

2. Retirement Investments: Rs 10,000

Continue contributing to your PPF and NPS. This will ensure your long-term financial goals stay on track.

3. Emergency Fund: Rs 5,000

Allocate a small amount each month to build or maintain your emergency fund.

4. Living Expenses: Rs 30,000

Budget your monthly living expenses carefully. Cut unnecessary costs to allocate more towards debt repayment.

5. Mutual Fund Investment: Rs 10,000

Invest in mutual funds through a CFP. Choose funds that align with your risk profile and financial goals.

Benefits of Actively Managed Funds Over Index Funds
Actively managed funds are handled by professional fund managers who aim to outperform the market. These managers make strategic investment decisions based on market conditions and opportunities. This can potentially provide higher returns compared to index funds, which merely replicate the market index.

Disadvantages of Direct Funds
Direct mutual funds have lower expense ratios but require significant financial knowledge and time commitment. Managing these funds without professional guidance can lead to suboptimal investment decisions. Investing through a CFP ensures professional management and alignment with your financial goals.

Regular Monitoring and Adjustments
Regularly review your financial plan. Market conditions and personal circumstances can change, necessitating adjustments. A CFP can help with ongoing portfolio management and ensure your investments are on track to meet your goals.

Financial Discipline
Maintaining financial discipline is key. Stick to your budget, avoid unnecessary expenses, and ensure timely debt repayments. This will help you achieve your goal of repaying the personal loan within two years while continuing to invest for the future.

Risk Management
Manage risks by diversifying your investments. Don’t put all your money into high-risk investments. Balance between debt, equity, and other asset classes to safeguard your principal amount and achieve steady returns.

Tax Efficiency
Consider the tax implications of your investments. Short-term capital gains on equity investments held for less than one year are taxed at 15%. Debt fund returns are taxed based on your income tax slab if held for less than three years. A CFP can help you optimize your investments for tax efficiency.

Final Insights
Repaying a Rs 10 lakh personal loan in two years while maintaining your investments is challenging but achievable. Create a detailed budget, prioritize high-interest debt, and allocate monthly savings towards repayment. Use chit funds and mutual funds strategically, and continue your retirement contributions. Maintain an emergency fund and manage risks through diversification. Regularly review and adjust your financial plan with the help of a Certified Financial Planner. By following these strategies, you can achieve your financial goals without compromising on long-term investments.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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.