I am 40 years old and have a five-figure salary in a relatively reliable company and have no other financial obligations such as elderly parents or children, I have a parental home in south Delhi to live in and have collected a 3 crore mortgage to build a commercial complex that is likely to generate good rent. I am asking for your advice on repaying the loan. EMI, should I start paying off now from my significant savings or continue to lend and invest my surplus in other asset classes like mid-term mutual funds for my retirement and hobby. I am new to the stock market and have no interest in real estate etc.
1) The interest rate on a home loan is 8%
2) I have a cover
3) My funds for emergency assistance may be enough for 6-9 months.
4) My employer takes care of my health insurance.
Thanks again for your help and warm wishes.
Answer by Harshad Chetanwal, founder of Mywealthgrowth.com
Many people wonder whether to pay back loans or invest in funds that yield a higher rate of return than the interest rates on the loan. While decisions are subjective as they depend on many factors, some additional information about the remaining life of your loan would be more helpful.
Home loans are structured in such a way that you pay off most of the interest in the early years. Just to give you an example, if the loan is for 20 years, with no part of the repayment after 5 years of EMI repayment, you would simply pay off 12% and 30% in the case of a 10 year loan. Consequently, those in the early years of the loan can use partial prepayment to reduce the impact of interest.
You have no financial obligations to your parents or children and are going to invest before retirement. An aggressive strategy might involve comparing the current home loan interest rate of 8% with the long-term potential of 10-12% return on stocks and thus investing in stocks. Taking advantage of the Home Loan Interest Tax Credit also increases your total income. Note, however, that this is a high risk option because stocks are an extremely volatile asset class. Only take this route if you have a very high risk appetite.
Avoid direct investment in stocks and use the mutual funds route to invest surplus. For starters, you can invest in Nifty Index Fund (any AMC), Parag Parikh Flexicap Fund, UTI Flexicap Fund, Mirae Asset Large Cap Fund, and Canara Robeco Emerging Equities Fund. You can invest 50% of the lump sum currently and do SIP within 6 months for the remaining 50% of these funds. You can also set up regular SIPs on these funds to generate monthly surplus.
A little warning: if you are looking for an investment horizon of less than five years, you may have to follow a cautious strategy because you cannot invest all of your surplus in stocks in the short term. For this time horizon, the combination of equity and debt works better, and the return on that portfolio will be lower compared to the entire stock portfolio. There is a possibility that these incomes may be closer to the home loan interest. In this case, it is better to spend the money to pay off the loan.
At the same time, it is important to keep track of changes in the rates for home loans. If interest rates rise in the future, you may have to reconsider your investment strategy, as in the past the interest rate on a home loan was around 9-9.5%. In such a case, it may be better to use the surplus to pay off the loan, since there is a marginal difference in the return on your investment and the increase in your home loan interest rate.
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