Planning to purchase a property & for that my bank is offering a personal loan where they would provide 10 lakh 36 months tenure & need to pay back 11 lakh 60 thousand at the end if 36 months. I have my mutual fund so which options would be viable going for the loan or redeeming MF which has a ROI 10 percent. Please advise

Ans: You are thinking smartly by comparing both choices before deciding. Many people take loans emotionally. You are instead analysing the numbers and logic. That shows maturity in financial thinking. As a Certified Financial Planner, I truly appreciate this balanced view.

» Understanding Your Situation

You wish to buy a property. For this, your bank offers a personal loan of Rs 10 lakh for 36 months. You will repay Rs 11.6 lakh at the end of three years. That means you pay Rs 1.6 lakh extra. This is your total interest cost. You also have mutual fund investments earning around 10% returns per year. So, you want to know if it’s wiser to redeem your funds or take the loan.

Let’s evaluate both options carefully.

» Evaluating the Loan Option

A personal loan is an unsecured loan. So, the interest rate is usually high. In your case, the cost of Rs 1.6 lakh on Rs 10 lakh over 3 years works out to about 5.3% per year simple rate. But the real annualised rate or effective cost could be around 9–10% once we consider reducing balance.

Banks also charge processing fees, documentation fees, and sometimes insurance on the loan. Those costs increase your total expense. So, even if the simple calculation looks cheaper, your total outgo will be more.

You must also remember that loan EMIs are compulsory. You must pay every month, no matter what happens. This reduces your flexibility. If any emergency happens, you still have to pay the bank.

» Evaluating the Mutual Fund Option

Your mutual fund is giving 10% return. That means your money is working efficiently. It is growing steadily and beating inflation. If you redeem now to buy the property, your returns stop immediately. Also, if the mutual fund is equity-based, you may need to pay capital gains tax.

For equity mutual funds, if you have held them for more than one year, any long-term capital gain above Rs 1.25 lakh in a financial year will be taxed at 12.5%. If you redeem within one year, short-term gains are taxed at 20%. For debt mutual funds, both short and long-term gains are taxed as per your income tax slab.

So, you must check how long you have held your funds. The tax can make redemption costlier than it looks.

» Comparing Both Choices

Let us look at both options from different angles –

– If you take the loan, you will pay interest around 9–10% per year effectively.
– Your mutual fund earns 10% per year.
– After tax, your real mutual fund return may fall to around 8–9%.
– So, both look almost similar in numbers.

However, financial decisions are not only about numbers. We must see cash flow, liquidity, risk, and peace of mind.

If you redeem the mutual fund fully, you lose the power of compounding. You also reduce your emergency buffer. Once that money is used for property, it becomes illiquid. You can’t get it back easily. On the other hand, if you take a loan, your investments continue to grow. You keep your long-term plan intact.

But, the loan adds fixed EMIs. If your income is stable and you have enough monthly surplus, EMIs will not stress you. Then the loan is manageable. But if your income is uncertain or you already have EMIs, more debt can create pressure.

» Assessing Emotional Comfort

Money decisions also have emotional sides. Some people feel peaceful when they avoid loans. Some feel comfortable keeping investments untouched and repaying slowly. You must choose what gives you better emotional comfort.

If you get mental relief by being debt-free, then redeeming your mutual fund is better. But if you value liquidity and ongoing growth, taking a loan is better.

» Evaluating Opportunity Cost

The opportunity cost here is the return you lose if you redeem your funds. Suppose your mutual fund continues giving 10% returns. In three years, Rs 10 lakh can grow to around Rs 13.3 lakh before tax. If you redeem now, you lose that potential gain.

If the loan costs you Rs 1.6 lakh total over three years, that looks lower than your potential fund growth. That means keeping the fund invested can still create more wealth. But this depends on market performance. Equity returns are not guaranteed.

So, if your mutual fund is equity-based, you must assess risk tolerance. If the market drops soon after you take the loan, you will face both EMI and reduced portfolio value.

» Liquidity and Safety Factors

Liquidity is how easily you can access money during need. Mutual funds offer high liquidity. But once redeemed for property, that liquidity is gone.

Loans reduce liquidity because of EMIs. If your job or business income is stable, EMIs are fine. If not, it may affect cash flow safety.

So, your safety depends on income stability, not only on returns.

» Evaluating from a 360-Degree View

A property purchase should not disturb your financial ecosystem. Your investments must continue to grow for long-term goals like retirement, child education, or financial independence.

If your mutual fund is part of your long-term wealth plan, redeeming it for property may delay those goals.

If property purchase is very important emotionally or practically (for example, your first home or family comfort), then you may allocate some portion from mutual fund redemption and balance through a small loan. That keeps both sides balanced.

» Impact of Taxation and Cash Flow

When you redeem mutual funds, the tax can eat a part of your gain. Even though the loan looks costlier, it does not attract any tax when you repay. So, the after-tax cost comparison is slightly different.

If you are in a higher tax slab, then redeeming debt mutual funds becomes less efficient because the gain will be taxed as per your slab rate.

In such a case, taking a short-term loan may look better financially.

» Long-Term Wealth Impact

If you continue mutual fund investment for long-term compounding, the effect is powerful. Compounding works best when money is left untouched for long. Even a three-year break can reduce your wealth creation.

A Certified Financial Planner always aims to keep compounding alive. If your EMI capacity supports it, then continue your mutual fund investments and take a moderate loan. That way, your long-term wealth grows while you meet your property goal.

» Risks in the Loan Option

Though the loan keeps investments intact, there are risks.

– Delay or default in EMI can hurt your credit score.
– Job loss or income cut can make EMI payments hard.
– Interest rates are mostly fixed, but other charges can add up.

You must check your total debt-to-income ratio. Try to keep EMIs below 35–40% of your take-home pay.

» Risks in the Redemption Option

If you redeem your mutual fund, you may regret it later. The market might give strong returns after your redemption. You will miss that growth.

Also, after using that money for property, your liquidity reduces. You can’t easily convert that asset into cash without selling.

You also lose diversification. Mutual funds give liquidity and diversification across sectors. Property gives only one asset exposure.

» Evaluating Behavioural Impact

Behavioural discipline is key. Many people redeem mutual funds thinking they will reinvest later, but they often don’t. Once that money is used, restarting investment becomes tough.

So, if you redeem now, you may delay restarting investments, and that delays wealth growth.

Loans enforce financial discipline because of fixed EMIs. That ensures continuous payment and future growth of investments.

» Analytical View of Both Paths

– Redeeming mutual fund gives immediate ownership without debt, but reduces long-term wealth.
– Taking a loan keeps wealth creation alive but increases EMI pressure.

If your monthly cash flow is strong, the second path (loan) is better. If your cash flow is tight, then part redemption and part loan is better.

» Hidden Costs and Real Returns

Loan EMI is not the only cost. There are also processing fees, documentation, and GST on interest. Similarly, mutual fund returns also face taxation and exit load if redeemed early.

So, compare total post-tax and post-charge figures. That gives a fairer comparison.

» Smart Middle Path

You can consider a mixed approach. Redeem a small part of your mutual fund and take a smaller loan. This reduces EMI pressure and also keeps some funds compounding. It balances risk and liquidity.

This approach also reduces tax outflow on capital gains because you redeem only partly.

» Insight on Debt Management

Debt is useful when it helps build an appreciating or essential asset. But personal loans must be used carefully because they are unsecured. If you default, it directly affects your credit history.

If your goal property is not an essential purchase, avoid taking high-cost personal loans. Wait, save, and plan better.

» The Role of a Certified Financial Planner

A Certified Financial Planner helps align your decisions with your life goals. They evaluate not only the numbers but also your emotional comfort, tax impact, insurance coverage, and retirement plan.

If you work with one, you can create a complete strategy where your home purchase, investments, protection, and liquidity all stay balanced.

» Financial Planning Perspective

Buying property is a financial and emotional decision. You must not disturb your long-term financial independence for short-term comfort.

Ensure you have –
– Adequate emergency fund of at least 6 months’ expenses.
– Health and term insurance coverage.
– Ongoing SIPs for future goals.
Only after these are intact, you should commit to new debt or property purchase.

» Final Insights

You are thinking wisely before deciding. If your income is steady and EMIs will not disturb other goals, taking the loan and continuing your mutual funds can be more beneficial.

If you prefer peace of mind and dislike loans, then redeem your funds and stay debt-free.

You can also choose a balanced path—part loan, part redemption. That will keep both liquidity and comfort intact.

Always see the full picture—cash flow, taxation, liquidity, goals, and emotional comfort. Numbers alone don’t decide financial success. The right balance and disciplined planning do.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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