Decision making can be quite dreary when there are multiple options involved. When we purchase a house through a home loan, we often take into account our financial condition and subsequently decide how much we can afford to pay off as EMI. However, with time, as our income increases exponentially, the dilemma of prepaying the loan or rather investing in mutual funds often crosses our mind. This article aims to ease the burden on you and helps you choose the right approach for your investments.
Factors to consider before choosing between prepayment of home loans and investing in mutual funds
Several factors affect this decision of investors. They are:
- Risk appetite
Do you get panic attacks as soon as the markets take a dip? As an investor, you should be mindful that the equity markets are quite volatile and returns earned on mutual fund investments are not fixed. There might come a brief period of time when the returns could also be negative. An investor is advised to be quite patient with their mutual fund investments and have an investment horizon of at least 5 years. - Emotional state
Does being in debt bothers you? If your personal well-being is affected by being stressed out about being in debt, then it is advised to pay off your debt. - Liquidity
If you are looking to improve your liquidity, then it is recommended to invest in mutual funds, especially debt mutual funds than prepaying your loan. If you are looking for short-term liquidity, then equity funds might not be the best bet for you. You can also consider moving your home loan into a smart home or super-saver loan kind of structure. Over here, the extra funds are held in the home loan account. This will aid in reducing the interest paid on home loans while also offering one with the desired liquidity simultaneously, with the rate of home loan equivalent to the rate of return. If you have a significant goal approaching in a short period, say 3 to 5 years, you might consider investing in debt mutual funds. - Other financial goals
Do you have other financial goals whose investment horizons are quite close by? If yes, you are better off with investing in these goals than prepaying your home loan.
So what should you do?
It’s better if you continue your home loan and invest the surplus in mutual funds. There are two chief reasons behind it. They are:
- Sure, mutual fund investments do not promise guaranteed returns to investors. However, equity mutual funds tend to offer a higher rate of returns in the long run when compared to the interest rates paid on a home loan.
- As an investor, you should calculate real gains only after the tax benefits. So, if you fall under the highest tax slab, you might be able to save a significant amount on taxes by claiming several deductions.
