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Have 10 lakh in hand? Should you prepay home loan or invest in mutual funds?

Home loan EMI payment and mutual funds investment are two different aspects of portfolio management and they needs to be treated differently, say tax and investment experts. (iStock)Premium
Home loan EMI payment and mutual funds investment are two different aspects of portfolio management and they needs to be treated differently, say tax and investment experts. (iStock)

  • Portfolio management: If more than half your home loan tenure is over, you should choose mutual funds as majority of the home loan interest has been already paid, say tax and investment experts

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Ravi Ujjwal is a 40 year old professional and he has 10 lakh surplus amount in hand. Now, he is in confusion whether to prepay home loan or go for mutual funds investment. In fact, Ravi is not the only personal who come across such situation. There are huge numbers of earning individuals who want to repay home loan whenever they have surplus amount in hand. They have a belief that coming out of loan repayment burden should be first and foremost objective of their portfolio management. However, if we look at tax and investment experts’ views, they think just reverse of it.

According to tax and investment experts, home loan interest rate would be around 8 per cent whereas mutual funds interest rate that one can expect in long-term or say 10 years or more would be at least 12 per cent. So, continuing with home loan EMI and choosing mutual funds instead of home loan prepay is a better option for an earning individual. Experts went on to add that continuing with home loan EMI helps save income tax outgo as well.

Mutual funds vs home loan EMI

Advising investors to continue with home loan EMI and invest surplus amount in mutual funds; Pankaj Mathpal, Founder & MD at Optima Money Managers said, "If someone has taken home loan for 20 years, he or she must remember that majority of the EMI portion comprise home loan interest in first 5 years. So, prepaying home loan after paying most of the interest part won't be a wise decision. And one must remember that home loan EMI payment and mutual funds investment are two different aspects of portfolio management and they needs to be treated differently. Home loan interest rate would be around 8 per cent whereas mutual funds return calculator suggests that in long-term, one can expect at least 12 per cent return on one's mutual fund investments. So, it’s better to continue with home loan EMI and invest the surplus money in mutual funds."

Income tax benefit

Highlighting the income tax benefit in choosing mutual funds instead of home loan prepayment; Vinit Khandare, CEO & Founder at MyFundBazaar India said, "On the flipside, continuing home loans EMI will get you income tax deduction benefits. Moreover, if more than half your tenure is over for your home loan, it doesn’t make any sense to prepay as majority of the interest component of the home loan has been already paid."

Eye on retirement planning

On how mutual funds will enable an investor to create extra fund for retirement corpus; Vinit Khandare of MyFundBazaar India said, "Assume keeping certain presumptions in mind - home loan interest rate of around 8 per cent and mutual funds RoR being 12 per cent - having 10 lakhs in hand, it will be beneficial for the investor to grow one's money through mutual funds investment because it will enable investor accumulate promising corpus towards its retirement."

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