The major factor is whether you are able to earn more income on the funds than the rate of interest being paid on your home loan after considering the tax benefits available to you
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I have saved 5 lakhs in my bank account. Should I use it to repay my home loan or should I invest in equities? Please suggest.
The decision whether to prepay or not will depend on various factors. The major factor is whether you are able to earn more income on the funds than the rate of interest being paid on your home loan after considering the tax benefits available to you. One more factor which plays an important role is psychological reasons of being debt free.
A lump sum investment in equity is not advised. If you wish to invest in equity you should do it through systematic transfer plan (STP) where you put the lump sum money in liquid fund and from there the money gets invested in scheme of your choice.
If you wish to use the sum in a lump sum manner, you can use it to prepay the home loan rather than investing in equity even though the post-tax interest cost on home loan might be pretty low in your case. A loan can be prepaid either in part or in full at any given point of time. Some lenders may charge you a pre-payment fee on the principal amount prepaid. Please assess the fund requirements in near future before you take the final decision on prepayment of your home loan as in case you need fund in future, you will not be able to borrow at the rate at which you get home loan. So in addition to contingency needs take into account the fund requirement in near future at the time of paying the home loan beyond the regular EMI. Finally you should also consider the tax deduction benefits available on a home loan and the possibility to deploy it at higher return than the post-tax interest cost.
Balwant Jain is a tax and investment expert and can be reached at firstname.lastname@example.org and @jainbalwant on Twitter