I have taken a home loan for which I pay an equated monthly instalment (EMI) of Rs 11,000. It’s for 18 years. I want to build a corpus. I am looking at two options. One, to pay an EMI as usual and invest some money through systematic investment plans (SIP) or direct equity. Two, to take a gold loan on my gold investment and payoff 50% of the loan. The remaining amount I plan to repay within three years. Should I first get rid of my loan and then start investing or should I do it simultaneously? My time horizon is 5-10 years.
The housing loan you have taken will be giving you a tax incentive in case the house property is self-occupied or rented out. Housing loan interest rates are the cheapest compared with any other loan. If you include the tax benefits, then it gets even better. Any other loan will be at a much higher cost and this is also true for gold loans.
Further, if you believe you can pay 50% of the loan in three years, then you can do the same with existing loans. However, you should look at retiring your loan within your time horizon of 10 years. This will also ensure you have surplus funds to create a corpus and where you can start an SIP. You should avoid direct stocks and prefer mutual funds.
I will soon retire from a government-owned company. I wish to park my provident fund (PF) for one year with my employer. This will give me a cushion to plan investment. Is it okay to do so?
It is not very clear on how you want to use your PF. Do you plan to leave your PF for one year with your employer after you retire? Or do you plan to withdraw the PF after your retirement but invest the same with your employer (in a fixed deposit, or FD)?
In case you plan to let your PF remain the way it is, your PF will continue earning the interest at the applicable rate. However, you need to be careful as now any inoperative accounts do not earn any interest if there are no credits in the account for a continuous 36 months. But as you plan to hold the account for a year’s time, this may be a good strategy. However, you need to be aware of the time it takes to withdraw the PF fund, which does not make it a very liquid investment. Hence, you need to plan accordingly.
In case you plan to redeem PF and then reinvest in your company, i.e. in their FD or a similar scheme, you need to consider the credit ratings of the company and as you have worked in the company you would be well aware of the company’s growth, future prospects and earnings. Generally, company FDs need to be done with care and the tax implication also needs to be considered as the interest which you earn is taxable.
Continuing holding the PF is a better option between the two.
Surya Bhatia, certified financial planner and principal consultant, Asset Managers
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