My wife and I earn Rs 60,000 to 1,25,000 per month. I have a 28 lakh loan taken 2.5 years ago at 9.5%. I plan to prepay it fully in the next 3 years. I have surplus funds I could either use for prepayment or invest in mutual funds or equity...

My wife and I earn Rs 60,000 to 1,25,000 per month. I have a 28 lakh loan taken 2.5 years ago at 9.5%. I plan to prepay it fully in the next 3 years. I have surplus funds I could either use for prepayment or invest in mutual funds or equity markets. Given current equity returns ( approx. 12 to 14 per cent CAGR), would investing be better than loan prepayment (saving approx. 9.5% interest)? Also, is refinancing to another bank at less than 8.5% or a balance transfer advisable now?

Ans: Hello;

This is myth being sold to people by vested interests.

Returns from market linked investments cannot be assured.

Although one can make an approximate guess about market returns based on past performance but please keep in mind that past performance is no guarantee of future results.

Therefore repayment of the outstanding loan should be the preferred choice.

Already you are on the verge of closing your loan therefore transferring balance loan to other lender at this stage doesn't make sense. Because it will have costs
(foreclosure fees, Processing charges etc)involved which may nullify your interest rate savings.

Best wishes;

Ans: You’ve taken thoughtful steps towards your financial goals. At 35, with a 2BHK in Pune, a home loan, good savings, and a strong CTC of Rs 24 lakh, your current profile reflects maturity and focus. You are saving Rs 70,000 to Rs 80,000 monthly, which shows financial discipline. Setting a goal like financial freedom by 50 is a bold and powerful move. You're already on the right track.

Now, let’s explore in detail whether you should prepay the loan or invest for higher returns.

? Home loan vs investment: Understand the opportunity

– Your home loan interest rate is 9%.
– EMI is Rs 42,000 per month.
– You’re saving almost twice that.

– The key question is: can your investments earn better than 9%?
– Historically, quality mutual funds have delivered better returns.
– But that’s not guaranteed every year.

– Home loan prepayment gives sure-shot savings on interest.
– Mutual fund investment gives potential higher gains over long term.
– So, it becomes a choice between safety and potential.

? Tax benefit angle of home loan

– You get Section 24 benefit on home loan interest.
– Up to Rs 2 lakh per year is allowed as deduction.
– Also Rs 1.5 lakh under Section 80C for principal repayment.

– If you prepay the loan fast, you lose these benefits early.
– These reduce your effective loan interest cost.
– So, don't rush to close the loan fully without evaluating this.

? Emotional security vs financial logic

– Some people feel peace after clearing loans.
– If you value being debt-free, part prepayment gives peace.

– But remember, wealth creation often happens through patience.
– If you can digest some risk, investing has better long-term gains.
– If financial freedom by 50 is your aim, investing will help more.

? Mutual fund investing: A strong path for wealth

– Mutual funds help you beat inflation and grow money faster.
– With Rs 70,000+ saving, monthly SIPs can compound greatly.
– Equity mutual funds suit your 15-year horizon.

– For 15-year goals, equity is less risky.
– Longer holding reduces market timing risk.
– Diversify across sectors and market caps.

– Investing regularly brings rupee cost averaging.
– Discipline and patience give strong reward over time.

? Why actively managed mutual funds are better

– You didn't ask about index funds. That’s good.
– Index funds copy the market and don't beat it.
– No fund manager tracks companies actively.

– In bad markets, they can't avoid weak stocks.
– During falls, index funds fall fully with market.
– Actively managed funds select better companies.

– Professional fund managers adjust portfolio as per cycles.
– They can protect downside better.
– So, they suit long-term serious goals like financial freedom.

? Systematic investing vs lumpsum prepayment

– Your savings are monthly. So SIPs fit better than lumpsum.
– SIP gives better cost averaging than home loan prepayment.
– Markets fluctuate. SIP makes volatility your friend.

– You don’t need to decide everything now.
– You can split your surplus smartly.
– Say 80% to SIPs, 20% for prepayment once a year.

– This way, you balance both goals.
– You invest regularly and reduce loan yearly.

? Your target: Financial freedom by 50

– That’s a 15-year horizon from now.
– Mutual funds have proven wealth creation over such duration.
– With your income, you can invest steadily.

– Don’t stop SIPs unless emergencies force it.
– Increase SIPs when you get increments.
– Let your lifestyle remain stable while income grows.

– Start with goal-based investing.
– Define what financial freedom means to you.
– Is it passive income? Or just no job compulsion?

– Once defined, invest backward from that target.
– A certified financial planner can map exact monthly SIP needed.
– Mutual fund compounding can help you get there early.

? Prepay smartly but don’t prioritise it fully

– Consider one bulk prepayment each year.
– Use part of bonus or surplus once a year.
– This brings down principal faster.

– Don’t overdo prepayment.
– Let your investment portfolio also grow.
– Once loan tenure drops below 10 years, slow down prepayment.

– Let investment take the front seat.
– Reason: In early years, interest part is high.
– So, prepaying early has more impact.

– But beyond midpoint, investment grows faster than loan savings.
– That's the time to stop prepayment and focus only on SIP.

? Choose regular mutual fund plans through a CFP-guided MFD

– Some people choose direct plans online.
– Direct plans save commission but lack guidance.

– You invest alone without expert support.
– If markets fall, fear may force wrong exit.
– No one is there to hold your hand.

– Regular plans offer guidance through a Certified Financial Planner.
– They help you handle volatility, change schemes if needed.
– Proper review ensures you reach your goal.

– So, pay a small fee via regular plan.
– It saves you lakhs by avoiding wrong moves.
– Choose funds through a CFP-guided MFD, not randomly online.

? Emergency fund and insurance: Don’t ignore these

– Before investing, have 6 months’ expenses in savings.
– Keep it in liquid mutual fund or sweep FD.

– Also review your life cover.
– Do you have a term plan? If not, buy one.
– Avoid ULIPs or endowment plans.

– Term plan of at least 15x of yearly income is safe.
– Health insurance beyond employer policy is must.
– Buy family floater policy of at least Rs 10 lakh.

? Avoid real estate for future investing

– Don’t add more property as investment.
– Real estate has low liquidity and high cost.
– You already have a home.

– Instead, mutual funds give better flexibility.
– Exit anytime, switch anytime.
– Real estate ties up your capital for long.

– For financial freedom, liquidity matters.
– Mutual funds score better here.

? Monitor portfolio and align it with goal

– Review your portfolio every year.
– Don’t change funds every few months.
– Stick to good funds for long term.

– If one fund underperforms for 3+ years, consider changing.
– But avoid jumping for short-term underperformance.

– Have different funds for different goals.
– Use SIP for long-term and lumpsum for medium-term needs.

– Rebalance once a year with planner’s help.
– Keep risk profile aligned with your age and goals.

? Lifestyle inflation: Be aware and control it

– As income rises, expenses silently rise.
– Avoid lifestyle upgrades unless needed.

– Keep investing ratio high even when income grows.
– Don’t let EMI + expenses eat future wealth.

– Say no to unnecessary gadgets, loans, memberships.
– Save first. Spend later.

– That’s the way to become financially free early.

? Finally

– You’ve done well by buying a house and managing a solid surplus.
– With Rs 70,000 to Rs 80,000 monthly savings, wealth creation is possible.

– Use this wisely between investment and prepayment.
– Prioritise mutual fund investing via SIPs with long-term view.

– Keep partial yearly prepayment to lower interest outgo.
– Let this combo give you both peace and growth.

– Regular review, discipline, and right guidance will lead to your goal.
– Financial freedom by 50 is not a dream. It’s a plan.

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