I am 40 years old with a five-figure salary from a relatively secure company, and no other financial liabilities like elderly parents or children, I have a paternal house in south Delhi to live and have raised a Rs3 crore home loan to construct a commercial complex, which is likely to fetch good rent. I seek your advice on the repayment of loan EMI, should I start repaying now from my substantial savings or continue with the loan and invest my surplus in other assets classes say medium-term mutual funds for my retirement and hobbies. I am a novice in the shares market and not interested in real estate etc
1) Interest rate on a home loan is 8%
2) I have life cover
3) My emergency funds may last for 6 to 9 months
4) My health insurance is taken care by my employer
Once again thanks a lot for your help and assistance warm regards.
Answer by Harshad Chetanwala, founder, Mywealthgrowth.com
Many people wonder whether to repay loans or invest in avenues that give higher return than loan interest rates. While the solutions are subjective as it depends on multiple factors, some additional information about the remaining tenure of your loan would have been more helpful.
Home loans are structured in such a way that you pay most of the interest component in initial years. Just to give you an example if the loan is for 20 years, without any part repayment after 5 years of paying EMI you would have just repaid 12% and 30% in case of 10 years of the loan. Hence those who are in the initial years of their loan can make use of part prepayment to reduce the impact of interest.
You do not have any financial commitments towards parents or children and you are looking at investing for your retirement. An aggressive strategy can involve comparing the present home loan interest rate of 8% compared to long term return potential of 10-12% from equities and thus investing in equities. If you are availing tax benefit on home loan interest payment then it also adds to your overall return. However, note that this is a high-risk option because equities are an extremely volatile asset class. Adopt this path only if you have an extremely high risk appetite.
Avoid direct equities and use the mutual funds route to invest your surplus. 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 to start. You can invest 50% of the lumpsum amount at present and do SIP of 6 months for the remaining 50% across these funds. You can also set up regular SIPs in these funds for your monthly surplus as well.
Just a word of caution, if you are looking for investment horizon of less than five years, then you may have to follow a cautious strategy because you cannot invest entire surplus in equities for short term. For such time horizon, a blend of equity and debt investment works better and the return from this portfolio will be less compared to all equity portfolio. There is a possibility that these returns can be closer to your home loan interest. In such a case, it would be better to use the money to repay the loan.
At the same time, it is important to keep an eye on changes in home loan rates. If interest rates increase in the future, you may have to relook into your investment strategy as in past home loan interest rate have been around 9-9.5%. In such a case, it may be better to use the surplus to repay the loan as there is marginal difference in the return from your investment and increased interest rate of your home loan.
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