Hello Nikunj Saraf, Is it a good option to pay off your car loan with the mutual fund money you have?

Ans: Hi, thanks for sharing your plan. It’s crucial to analyze it thoroughly before proceeding. Borrowing money to buy a depreciating asset and investing the rest in mutual funds involves significant risks. Let’s break it down.

Borrowing for a Depreciating Asset
Purchasing a car with a loan requires careful consideration:

Depreciation: Cars lose value quickly. Buying a used car means it’s already depreciated, but it will continue to lose value.
Loan Costs: Personal loans come with interest rates. This increases the overall cost of the car.
Necessity: Evaluate if buying the car is essential. If it’s not absolutely necessary, it’s better to avoid this purchase.
Risks of Borrowing to Invest
Investing borrowed money in mutual funds or bonds is risky:

Market Volatility: Mutual funds, including index funds and hybrid aggressive funds, are subject to market fluctuations. You could lose money if the market performs poorly.
Interest Burden: The interest on the loan might outweigh the returns from investments, especially if the market underperforms.
Financial Stress: Managing loan repayments while hoping for investment returns can create financial stress.
Investing in Index Funds and Hybrid Aggressive Funds
Let’s discuss the potential pitfalls and considerations:

Index Funds: These track the market index. While they are low-cost, they still carry market risks. In a downturn, your investment value can drop significantly.
Hybrid Aggressive Funds: These have a mix of equity and debt, but the equity component can still be volatile. They aim for higher returns but come with higher risk.
Bonds: They provide stable returns but are usually lower than equities. Investing in bonds alone may not yield enough to cover loan interest and principal.
Systematic Withdrawal Plan (SWP)
Using SWP to generate regular income has pros and cons:

Regular Income: SWP can provide a steady income stream, which might help manage loan repayments.
Depletion Risk: The invested corpus can deplete faster than expected if the market performs poorly or withdrawals are high.
Taxes: SWP withdrawals are subject to capital gains tax, which can reduce net returns.
Dangers of Combining Borrowing and Investing
Here are key points to consider:

Double Risk: You’re taking on debt (a fixed obligation) while investing in market-linked instruments (variable returns). This creates a double risk.
Interest vs. Returns: Loan interest rates are usually fixed and can be high. Investment returns are not guaranteed and can be lower than the loan interest.
Liquidity Crunch: If the market performs poorly, you might struggle to repay the loan and meet other financial needs.
Recommended Approach
Here’s a safer and more balanced approach:

Avoid Loan for Car: If the car is not absolutely necessary, avoid taking a loan for it. Consider other transportation options or save up to buy a car without a loan.
Build Emergency Fund: Ensure you have a robust emergency fund before investing or taking on any debt.
Clear Existing Debts: If you have any existing debts, prioritize clearing them before taking on new ones.
Invest Wisely: Continue your existing investments in mutual funds, but do so with disposable income, not borrowed money.
Diversify Investments: Diversify your portfolio across different asset classes based on your risk tolerance and financial goals.
Alternatives to Consider
Use Savings for Car: If buying a car is necessary, use your savings rather than taking a loan. This avoids interest costs.
Increase Savings Rate: Boost your monthly savings and investments gradually to meet your goals without borrowing.
Goal-Based Planning: Align your investments with specific goals, ensuring a balanced approach to risk and return.
Final Insights
Borrowing to buy a depreciating asset like a car and investing the borrowed money in market-linked instruments is highly risky. The potential returns might not outweigh the interest costs and market volatility. It's better to avoid this approach unless the car purchase is absolutely necessary. Focus on building a strong financial foundation, clearing existing debts, and investing wisely with your savings. This approach will lead to a more secure financial future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: considering that you are getting loan at 5.5% flat rate for 7 years you can consider 2 ways to do it. one is to pay a 3.5 down payment and put 5 Lakh in MF. You can consider index funds, which will reduce the risk and provide 12 to 14 % returns. your 5 Lakh will become about 8 lakh. you pay installments from your regular income. This way, after 6 years, you can have about 9 lakh in your account, and you can withdraw 6k per month for fuel expenses for a lifetime. . second, pay installments from your MF account by SWP, and you will have about 3 Lakh left in account at end of loan.

Ans: Taking a loan against mutual funds and investing in stocks or mutual funds is risky. It can amplify gains, but it also increases losses. A structured approach is necessary before considering such a move.

Understanding Loan Against Mutual Funds
A loan against mutual funds allows borrowing against existing investments.

The lender provides funds based on the fund’s value.

Interest is charged on the borrowed amount.

The loan amount depends on the type of mutual fund.

Equity funds get a lower loan amount due to volatility.

Debt funds get a higher loan amount due to stability.

Key Risks of This Strategy
Market Risk
If markets fall, the value of mutual funds decreases.

The lender may ask for additional funds.

If unable to pay, the lender may sell mutual fund units.

Interest Burden
Interest charges reduce overall returns.

If investments do not perform well, losses increase.

Returns must be higher than the loan interest to make gains.

Liquidity Issues
Mutual funds remain pledged with the lender.

In an emergency, withdrawal is not possible.

This creates financial stress.

Compounding of Losses
Borrowing to invest increases risks.

If new investments lose value, losses multiply.

Debt burden increases if market returns are negative.

Potential Benefits (Only If Used Carefully)
Can provide liquidity without selling investments.

May work if investments give higher returns than loan interest.

Useful if markets are at a strong growth phase.

Suitable for short-term liquidity needs if repayment is quick.

Alternative and Safer Approaches
Use Emergency Fund Instead of a Loan
Always keep at least six months’ expenses as an emergency fund.

This avoids unnecessary borrowing.

Avoid Borrowing for Stock Market Investments
Investing with borrowed money is risky.

A market downturn can wipe out capital.

Never invest with money that is not owned.

Increase SIP Instead of Taking a Loan
A disciplined SIP approach creates wealth.

It avoids unnecessary interest payments.

Long-term investing in equity mutual funds provides better risk-adjusted returns.

Who Should Completely Avoid This Strategy?
Investors with no stable income.

Those with existing high-interest loans.

People without an emergency fund.

Investors with low risk tolerance.

Those new to stock markets or mutual funds.

Final Insights
Borrowing against mutual funds is a high-risk strategy.

Interest costs can reduce or wipe out potential gains.

It is only suitable for short-term liquidity needs.

Safer investment approaches provide better financial stability.

Building wealth through consistent savings and investing is a better strategy.

Avoid unnecessary risks and focus on sustainable wealth creation.

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

Ans: Understanding Your Question Clearly

You have a loan of Rs 5 lakh.

Loan interest rate is 10.1% per annum.

You have Rs 5 lakh in mutual fund.

You are thinking of withdrawing mutual fund.

You want to close the loan fully.

Let us understand from all sides now.

Interest Cost vs Mutual Fund Returns

Loan costs you 10.1% every year.

Mutual funds may give 12–14% yearly.

But mutual fund returns are not guaranteed.

Loan interest is fixed and guaranteed outgo.

So it is a stress on your monthly cash flow.

You may be paying EMI from your salary.

Check These Factors First

Is mutual fund equity or debt?

How long you were invested in that fund?

Is this fund linked to a goal?

Do you have any other emergency fund?

Are you comfortable with zero mutual fund balance?

Do you have fresh SIPs continuing monthly?

Please answer these in your mind before moving ahead.

If Fund Is Linked to a Goal

Then do not withdraw it now.

You will damage your goal progress.

It may impact your child’s future or your retirement.

If Fund Is Unlinked to Any Goal

Then you can consider using it.

But you must evaluate taxes and returns.

Check if gains are long-term or short-term.

Tax Rules for Mutual Fund Withdrawal (New)

Equity Mutual Fund:

If held more than 1 year:

LTCG above Rs 1.25 lakh taxed at 12.5%.

If held less than 1 year:

STCG taxed at 20%.

Debt Mutual Fund:

All gains taxed as per your slab.

No indexation benefit anymore.

You may end up paying tax on gains.
So total withdrawn value will be less.
This will be a loss if you didn’t account for it.

Use This Logic Before Withdrawal

Use your mutual fund only if:

You are debt-stressed or losing sleep.

EMI is too high compared to income.

Loan is not giving any asset or value.

Mutual fund is not linked to future goal.

You are ready to rebuild investment via SIP.

Otherwise, you can do alternate planning.

360-Degree Assessment for Better Decision

• EMI Pressure

Are you struggling with monthly EMI?

If yes, consider part-payment instead of full.

• Emergency Fund

If mutual fund is only emergency money, don’t withdraw it fully.

• SIP Continuation

Ensure SIP continues even after withdrawal.

• Loan Type

Is loan personal, education or credit card converted to EMI?

Personal loans at 10% can be high-cost.

You save more if you close early.

Use of Partial Withdrawal Strategy

Withdraw Rs 2–3 lakh now.

Use it to part-prepay the loan.

This reduces interest burden and EMI.

Keep balance Rs 2–3 lakh invested.

Maintain liquidity for emergency.

This is a balanced approach.

What to Avoid

Do not redeem full fund if it is goal-based.

Don’t stop SIP to repay loan.

Don’t take another loan to close this loan.

Don’t withdraw if mutual fund has huge exit load now.

Don’t listen to general tips from friends or relatives.

Always evaluate through a Certified Financial Planner.

Role of Mutual Fund Type

Equity Mutual Fund

Volatile in short term.

Suitable for long goals only.

If market is down now, don’t withdraw in loss.

Debt Mutual Fund

Safer for short term.

Better than FD in post-tax returns.

If fund gain is high and maturity is done, redeeming is ok.

Advantage of Regular Mutual Fund with CFP Support

Helps match fund with life goals.

Gives idea whether to hold or sell.

Reviews done every quarter.

Support in tax harvesting.

Gives exit timing advice.

Protects your money during down market.

Avoids panic withdrawals like now.

Direct mutual fund lacks all these benefits.
Direct fund investors often withdraw in fear.
They don’t have emotional or technical guidance.

Index Funds Not Suitable Now

Index funds do not protect in falling market.

They lack sector rotation.

Fund manager cannot take defensive calls.

In this uncertain period, active funds are better.

They adapt to conditions and preserve returns.

How to Decide Final Action

• Make sure fund is not for child education or retirement.
• Calculate actual tax impact before redeeming.
• Compare total loan interest vs fund return after tax.
• Do partial withdrawal if full is not needed.
• Speak to Certified Financial Planner before redeeming.

Finally

Loan repayment is important.
Mutual fund growth is also important.
Balance both based on your personal goal map.
If loan affects peace of mind, repay partly.
If fund is critical for future goal, let it grow.
Don’t use direct mutual fund route to decide alone.
Always invest and exit via planner-led plan.
Keep your SIPs running for long-term wealth.
Use partial prepayment to manage EMI smartly.
Let your money decisions be peaceful and structured.

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