I am 25 years old and have an education loan with an outstanding amount of Rs14 lakh. I earn around Rs1 lakh per month and pay an EMI of Rs30,000 every month towards the education loan. I would like to contribute Rs15,000 additionally to either savings or repaying and finishing the loan. Below are two plans I am exploring.
1. Start investing and save money over the next few years, by the time I marry at 27 or 28 years.
2. Aspiring to finish off my loan by 28 by extending the EMI to Rs45,000 per month.
Should I prioritize investing or repaying the loan with the extra amount? Kindly advise.
—Venkat Nikhil K
It is not easy to decide whether we should be repaying the loan or shall we be saving the same amount, which could have been used for prepaying the loan amount. What will make your task easier is a comparison between the interest rate on education loan versus the expected earnings rate on investments. And what further eases your task is the kind of loan you have, i.e., education loan. Income-tax regulations give you benefits for paying interest on education loan under Section 80E of the income-tax Act. The deduction of interest on education loan is over and above the tax saving under Section 80C. And there is no maximum limit determined for the interest payment, i.e., the entire interest paid is deductible from your taxable income (not the principal repayment). Based on your marginal rate of tax, which is 30%, the cost of borrowing on the loan is reduced accordingly. Hence, the net cost of borrowing (tax adjusted) versus the expected returns is what needs to be compared. And as you plan to save for the long-term and with age on your side, you can consider taking risks and have a reasonably higher exposure to equity as an asset class. So, over a longer duration, the equities (tax adjustment not required as Indian-listed equities acquires a tax free status if held for more than 12 months from the date of purchase) should be able to outperform the net cost of borrowing. And you should then target to repay the loan within 7 years of starting the repayment, as the tax benefit for education loan repayment is available for the said period only.
I am planning to get married in 4 years and want to have Rs12 lakh at that time. My annual salary is Rs8 lakh and expenses are Rs3.6 lakh. Kindly suggest suitable investments to make.
Your annual potential to save is Rs4.4 lakh, which is a good Rs36,000 per month. Assuming your income and expenses are constant, the overall savings corpus would be close to Rs17.60 lakh. But do note that income would go up every year with increments and bonuses and the expenses will also increase in line with inflation the increase in standard of living.
So, considering that Rs17.60 lakh is the principal contribution, the total value of the portfolio—assuming an interest rate of 10%—would be about Rs21.67 lakh. You need to distribute the portfolio across various financial needs where one need is your marriage. The corpus available after 4 years is more than your target. Hence, the surplus savings can be invested for a longer duration. You can consider a hybrid balanced funds for creating the marriage corpus and equity funds for long-term investments. In case you believe that you may need funds in the short term, you can also consider having a debt asset base—which could be bank fixed deposits or short-term debt mutual funds.
My son is suffering from cancer and I need money for his treatment. I have investments in mutual funds and stocks worth Rs40 lakh and three flats worth Rs3.5 crore. Should I sell one of the flats or should I liquidate my investments?
It is really sad but you have to face the reality. The key going forward is to ensure having liquidity in your portfolio. And your portfolio with a 90% allocation to real estate is already heavily skewed towards real estate, thereby implying low liquidity. You should consider selling one of the flats. The sale proceeds, net of tax, should be invested in ultra-short-term and short-term bank deposits or mutual funds, based on the need of money. The rationale of investing for short term is easy access to money with high degree of safety and liquidity.
Surya Bhatia is managing partner at Asset Managers.
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