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Synopsis : Invest in mutual funds for higher returns over prepaying home loans. Consult experts for wise financial decisions.
Equity mutual funds have historically delivered returns surpassing those of home loan interest rates, potentially augmenting your long-term wealth significantly.
Choosing between investing in mutual funds or directing funds toward prepaying your home loan depends on various factors such as your financial objectives, risk tolerance, and prevailing rates of returns and interest. Here’s a customized scenario to illustrate the comparison:
Investing in mutual funds offers several advantages:
Potential for higher returns: Historical data shows that equity mutual funds have yielded returns higher than home loan interest rates, presenting an opportunity for substantial wealth accumulation over time.
Wealth accumulation: By investing in mutual funds, you can build a fund for future goals like retirement or your child’s education. Additionally, you could eventually pay off your home loan while retaining surplus funds, as investing allows your money to potentially grow faster than the interest saved through loan prepayment.
Tax benefits: While prepaying your home loan may offer tax deductions on interest payments, investing in mutual funds could provide tax advantages such as long-term capital gains tax benefits for holdings exceeding a year.
Sanjiv Bajaj, Jt. Chairman and MD of Bajaj Capital Ltd., advocates for mutual fund investments over home loan prepayment. For example, if the home loan interest rate stands at 8.30% and the expected mutual fund return is 12% (after taxes), prioritizing loan prepayment may not be optimal due to the following reasons:
Prepayment benefit: While prepaying your home loan guarantees a return of 8%, investing in mutual funds could potentially yield a higher return of 12%, even after taxes.
Mutual fund potential: Mutual fund investments offer an opportunity for greater wealth accumulation compared to the assured return from home loan prepayment.
However, Harsh Gahlaut, CEO and Co-founder of FinEdge, argues that practically, directing funds towards repaying the home loan may be more prudent. Lowering debt can free up a higher monthly surplus for disciplined future investments and provide peace of mind by reducing debt servicing liabilities.
Nonetheless, comprehensive financial planning is essential. It’s advisable to allocate monthly surpluses toward long-term financial objectives through systematic investment plans and use any additional income (e.g., bonuses, asset sale proceeds) to reduce debts.
Gahlaut emphasizes consulting an investment expert to analyze income, debt, and surplus ratios, and identify key financial goals to make informed investment decisions.
