i wish to purchase new car i10, should i purchase the same through own money or should i take a vehicle loan from bank and the money own by my to be kept as FDR or liquid mutual fund

Ans: Whether it is a good option to pay off your car loan with mutual fund money depends on your personal financial situation and goals. Here are a few factors to consider:

Opportunity cost: Consider the potential opportunity cost of selling your mutual funds. If the mutual funds have appreciated in value and are likely to continue growing, selling them to pay off your car loan could result in losing out on future gains.

Risk tolerance: Mutual funds are a type of investment that carries some level of risk. Consider your overall risk tolerance and investment goals before making a decision.

Liquidity: Consider the liquidity of your mutual funds and the timeline for your car loan. If you may need access to the funds in the near future, it may not be a good idea to sell them to pay off your car loan.

Interest rates: Compare the interest rate on your car loan to the expected return on your mutual funds. If the interest rate on your car loan is high and the expected return on your mutual funds is low, it may make sense to use the funds to pay off the loan.

Ultimately, the decision to pay off your car loan with mutual fund money should be made after considering your unique financial situation and seeking advice from a financial advisor or tax professional.

Ans: It's great that you're planning ahead for your car purchase. Here's a strategy to help you achieve your goal:

• Define Your Goal: Start by determining the exact amount you'll need to purchase your car in five years. Consider factors like the type of car you want and any additional expenses such as insurance and maintenance.

• Calculate Required Investment: Once you have your target amount, calculate how much you'll need to invest monthly to reach your goal. Use an online investment calculator or consult a financial advisor to determine this amount based on your expected rate of return.

• Choose Suitable Investments: Since your investment horizon is relatively short-term (five years), focus on relatively low-risk investment options that offer steady returns. Consider investing in a mix of debt instruments such as fixed deposits, recurring deposits, and debt mutual funds. These options provide stability and liquidity while offering reasonable returns.

• Systematic Investment: Set up a systematic investment plan (SIP) where you contribute a fixed amount regularly towards your investment portfolio. This disciplined approach helps you accumulate wealth over time by harnessing the power of compounding.

• Review and Adjust: Periodically review your investment portfolio to ensure it remains aligned with your goals and risk tolerance. As you approach your target date, consider gradually shifting your investments to more conservative options to protect your capital from market volatility.

• Emergency Fund: While focusing on your car savings, don't forget to maintain an emergency fund to cover unexpected expenses or financial emergencies. Aim to have at least 3-6 months' worth of living expenses set aside in a readily accessible account.

• Seek Professional Advice: Consider consulting with a Certified Financial Planner (CFP) to develop a customized investment plan tailored to your financial goals, risk tolerance, and time horizon. A financial advisor can provide valuable insights and guidance to help you achieve your objectives.

By following these steps and staying disciplined with your savings and investment strategy, you can work towards accumulating the necessary funds to purchase your dream car in five years. Remember to stay focused on your goal and adjust your plan as needed along the way.

Ans: You're welcome! If you have any more questions or need further assistance, feel free to ask. Best wishes on your financial journey!

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Let’s first look at the assets and liabilities you currently have:

Provident Fund (PF): Rs 45 lakhs
Fixed Deposits: Rs 50 lakhs
Mutual Funds: Rs 10 lakhs
National Pension Scheme (NPS): Rs 6 lakhs
SBI Elite Scheme: Rs 10 lakhs
Axis policy: Rs 5 lakhs (paying Rs 1 lakh per year for 10 years)
SBI Mutual SIP/Insurance: Rs 6 lakhs
Plot of Land: Rs 50 lakhs
Home Loan: Rs 9 lakhs (EMI of Rs 25,000 per month)
You also mentioned that you have an additional Rs 10 lakhs which you are considering for a down payment on a new car worth Rs 27 lakhs.

This is a very good base of financial assets. Let’s assess whether buying a car right now is a wise decision based on your current financial standing and future needs.

Evaluating the Car Purchase

Buying a car is often an emotional decision, but it’s also a big financial commitment. You’re considering a down payment of Rs 10 lakhs for a car worth Rs 27 lakhs. Let’s break down the key factors:

Liquidity Impact:
You plan to use Rs 10 lakhs from your available funds for the car down payment. This amount is a significant chunk of your liquidity. Reducing your liquid cash could make it harder to cover any unexpected expenses.

EMI Commitment:
If you finance the remaining Rs 17 lakhs, your EMI could be between Rs 35,000 to Rs 40,000 per month (assuming a typical car loan tenure and interest rate). This would add to your current EMI of Rs 25,000 for the home loan, bringing your total EMI commitment to around Rs 60,000 to Rs 65,000 per month.

Total Monthly Outflow:
You may want to consider your total outflow, including living expenses, EMIs, and any other financial responsibilities. It’s crucial to ensure that your monthly cash flow can comfortably accommodate all these commitments without stretching your budget.

Asset Depreciation:
A car is a depreciating asset. Over the years, its value will decline, and it will not contribute to your wealth-building efforts. Meanwhile, your existing investments like mutual funds, PF, and NPS will continue to grow in value.

Alternative Use of Funds:
The Rs 10 lakhs down payment could alternatively be invested in a high-return investment option. Over time, this could help you achieve long-term financial goals more effectively.

Assessment of Current Loan Situation

You currently have a home loan of Rs 9 lakhs, which is manageable. The property’s value (Rs 1.2 crore) far outweighs the loan, which is positive. However, adding another loan in the form of a car EMI will increase your monthly financial burden.

At present, you are paying Rs 25,000 per month for the home loan. If you go for the car loan, the total EMI commitment will rise significantly. It’s important to ask yourself if you are comfortable with this higher commitment.

Insurance Policies: Reviewing SBI Elite Scheme and Axis Policy

Both the SBI Elite Scheme and Axis Policy require attention. These are investment-cum-insurance products, and such products often do not deliver the best returns. They also come with higher costs and offer limited flexibility in terms of withdrawals.

SBI Elite Scheme: You have Rs 10 lakhs invested here. While it may have some insurance benefits, the returns might not be competitive compared to mutual funds or other pure investment products.

Axis Policy: You are paying Rs 1 lakh annually for this policy. Over 10 years, you will have contributed Rs 10 lakhs. It’s important to check if the returns are aligned with your goals.

Consider reviewing both policies with the help of a Certified Financial Planner to assess if continuing them is beneficial. If they are underperforming, you may want to consider surrendering them and reinvesting in more flexible and higher-return instruments like mutual funds.

Asset Allocation and Diversification

You currently have a good mix of assets, including:

Fixed Deposits
Provident Fund
Mutual Funds
NPS
Real Estate
However, it’s important to ensure that your asset allocation aligns with your risk tolerance, liquidity needs, and future goals. For instance:

Fixed Deposits:
While safe, they offer lower returns compared to mutual funds or equities, especially in the long run. As inflation rises, the real returns on fixed deposits diminish.

Provident Fund and NPS:
Both these assets offer long-term growth but have limited liquidity. They are ideal for retirement planning, but you cannot rely on them for immediate needs like the car purchase.

Mutual Funds:
Your mutual fund investments of Rs 10 lakhs are valuable growth assets. However, you could review their performance and consider reallocating to more actively managed funds for better returns.

Car Purchase: Is It a Risk?

To answer your direct question: Is buying the car right now a risk? Based on the analysis, here’s what I think:

Monthly EMI Burden:
The new car EMI will significantly increase your monthly outflow. It’s essential to ensure that you can comfortably afford this without compromising your savings or future investments.

Impact on Liquidity:
The Rs 10 lakhs down payment will reduce your liquid reserves. You still have FDs, but those might be tied up for long periods or may not give the best returns if broken early.

Wealth-Building Impact:
Investing the Rs 10 lakhs in growth assets like mutual funds could help you build wealth faster. A car, being a depreciating asset, will not contribute to wealth creation.

If the car is a necessity and you have carefully assessed your cash flow, you could go ahead. But if it’s a desire that can wait, consider postponing the purchase. Instead, focus on building more liquid wealth to cover future goals like your home loan repayment or emergency needs.

Final Insights

Buying a Rs 27-lakh car is a significant financial decision. While you have a strong financial base, the added EMI burden and liquidity impact should be considered carefully.

Your existing investments are solid, but there’s room for optimization. I would recommend revisiting your insurance-cum-investment policies. A Certified Financial Planner can help review these and guide you toward better investment strategies.

Consider delaying the car purchase if it’s not urgent. Use the Rs 10 lakhs for investments that could offer better returns over time. This way, you’ll strengthen your financial position and have more flexibility for future big-ticket purchases.

In short: Evaluate your monthly cash flow and risk tolerance. If you're comfortable with the increased EMI, go ahead. But, if you feel stretched, it’s better to wait and focus on building more liquid assets.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Your approach to financial planning is commendable. Managing debt wisely ensures better financial stability. Let’s evaluate whether repaying the car loan early is beneficial or if continuing EMIs is the right choice.

1. Understanding the Loan Cost
Your car loan is Rs 12 lakhs for 7 years.

EMI deduction from salary is Rs 21,900 per month.

The total interest paid over time depends on the loan’s interest rate.

Car loans usually have higher interest rates than secured loans.

Vehicles depreciate fast, reducing resale value over time.

Paying more interest on a depreciating asset is not ideal.

2. Evaluating Mutual Fund Redemption
Mutual funds offer higher returns over a long period.

Withdrawing now may affect your long-term wealth creation.

Equity mutual funds are volatile in the short term.

Premature withdrawal may lead to capital gains tax.

Selling now could lead to missing future market growth.

The impact of taxes must be considered before withdrawing.

3. Impact of Early Loan Repayment
Prepaying the loan saves on future interest.

A lump sum payment reduces financial stress.

You free up Rs 21,900 per month for other investments.

No EMI improves cash flow for savings and expenses.

Some banks charge prepayment penalties. Check your loan terms.

4. When to Consider Paying Off the Loan?
If your mutual fund gains exceed the loan’s interest rate.

If the car loan’s remaining tenure is long.

If you want to reduce financial obligations quickly.

If you are not dependent on the mutual fund for future goals.

If your overall investments are stable after the withdrawal.

5. When to Continue with EMIs?
If your mutual fund is growing at a higher rate than the loan interest.

If withdrawing now impacts your long-term financial goals.

If you have sufficient cash flow to handle EMIs comfortably.

If loan prepayment affects liquidity for emergencies.

If the interest paid is manageable without much financial burden.

6. Tax Considerations on Mutual Fund Withdrawal
Equity mutual fund gains above Rs 1.25 lakh taxed at 12.5%.

Short-term gains taxed at 20%.

Debt mutual fund gains taxed as per your income slab.

Redeeming mutual funds may reduce tax efficiency.

7. Balanced Approach for Optimal Benefits
Partial prepayment reduces loan tenure without depleting mutual funds.

Paying off a portion ensures lower EMIs.

Continuing EMIs while investing extra savings keeps wealth growing.

Evaluating liquidity needs before withdrawing is crucial.

Keeping an emergency fund before any financial decision is advisable.

Finally
Your decision should align with your financial stability, goals, and investment growth. If your mutual fund portfolio is performing well, it may be better to let it grow. However, if loan interest is high, partial or full repayment can be considered. A balanced approach ensures financial security while maximizing returns.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

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