Photo: iStock
Photo: iStock

If you have a surplus after fulfilling your goals, put it in equities for the long term

  • You also need to make sure that all your goals are inflation protected
  • The interest on an education loan is paid in EMIs once the moratorium is over, which is typically after six months to one year post the completion of the course, but the interest is payable for this period as well

I am 56 years old and I recently sold a flat. I have a portfolio of mutual funds that I think is sufficient as well as enough money in fixed deposits (FDs) and real estate. I have also saved up enough to meet my two financial goals—my son’s marriage and my own retirement. Where should I invest the surplus?

—Girish Khattar

It is great that as far as your financial goals are concerned, you have enough savings to fulfil them, as well as sufficient assets spread across mutual funds, FDs and real estate. However, there is no such thing as “enough" mutual funds, or any other asset class for that matter. You also need to make sure that all your goals are inflation protected.

What is even more important is to determine a better asset class within the basket you have. For instance, bank FDs are a good asset class if you are in the lower bracket or you are a risk-averse investor and prefer a fixed-income product. Also, since your current asset position is sufficient to take care of your financial goals, it is best to reinvest the proceeds from the sale of the property in equities, preferably through the mutual fund route, as this asset class is meant for the long term, provided you have the risk appetite for it.

I want to fund my daughter’s education. Should I sell a plot of land that I have or take an education loan? Since the education loan payments start after the course ends, can I pay off the loan in a lump sum by then and avoid paying any interest?

—Harsh Sharma

The first point of consideration here is whether you should opt for an education loan or sell the vacant plot of land. This will be determined by the expectation of the increase in the value of the land over a period of time, which could be, let’s say, the tenure of the education loan. While the increase in the value of the land is a variable and, hence, unknown, the interest rate on the education loan is fixed, thereby making the decision relatively easy. Typically, the interest rate on education loans vary from 10% to 14%.

Let’s assume you get an education loan at an interest rate of 11%. The interest repayment is allowed as deduction from your taxable income under Section 80E of the Income-tax Act, which would reduce the net cost of borrowing to around 7.6% (this will also depend on your marginal rate of tax). Which option you should pick will depend on whether you think the value of the land will increase by 7.6% per annum on an average. Make it 9.5%, as you have to factor in the taxes as well. This means, the options will break-even at the rate of 7.6%. If the value of the real estate grows at a higher rate, you gain by taking a loan, but if it’s lower, you lose.

The interest on an education loan is paid in EMIs once the moratorium is over, which is typically after six months to one year post the completion of the course, but the interest is payable for this period as well.

Surya Bhatia is managing partner of Asset Managers

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