Home loan part-payment or SIP? or both?

POSTED BY sushila ON December 21, 2012 5:08 pm COMMENTS (6)

Hi Manish,
 
I am a close follower of ur blog. U are doing a great job. I am one of the person whose life is enlightened by your knowledge sharing on financial planning.
 
I jointly with my husband has taken SBI maxgain home loan. Emi & maintenance eats 52% of our income and around 35% evaporates in our home expenses. Approx 10% is what we can save right now. Situation may change once our kid will start going to school after 2 yr.
 
We are planning to park our excess money in maxgain a/c to gain benefits of overdraft facility. Also, emergency fund of 2-3 months is kept aside. We have PPF a/c but off late we did not had money left. Planning to put atleast 3000 pm.
 
Now after getting knowledge from ur/other blogs on SIP and power of coumpounding, here are my queries. please reply for me to get out of this confusion.
 
1. Shall we start SIP from half of the savings say 5000 and half the amt as recurring deposit per month. Our plan is to use recurring deposit for part payment of Home loan and SIP for creating wealth in long run say 10 -15 yrs. Is this the right way??
 
2. Planning to start 2000 in Hdfc Balanced as i am a beginner in mutual funds and then will start with large cap ICICI focused Bluechip Int G and mid and small cap IDFC premier equity with 2000 each. Focus will be 15 – 20 yrs. Please comment.
 
We can plan to increase our sip once we are out of this home loan. We are keen to close our home loan in 8-10 yrs to save interest.
 
Awaiting your response.
 
Regards,
Sushila

6 replies on this article “Home loan part-payment or SIP? or both?”

  1. [email protected] says:

    Hi Ramesh,

    Thanks for answering all my queries with such a good patience.
    Will check out for Franklin Prima Plus.

    Have a nice day!!!
    Sushila

  2. Ramesh says:

    1. I would not like to add anything in this. 🙂
    good that it is clear. Just make sure, you have the thought process in a written manner, because that may be helpful some years down the line. Believe me, when things are not working well, you are not in the best way to re-think why you did the things you did.

    2. HDFC Balanced is a good fund to start with. Another fund which I can recommend is Franklin Prima Plus.

    A total of 2 funds are more than enough.

  3. [email protected] says:

    Thanks Ramesh….

    1. I am clear now….My hubby is even convinced…….we need not worry now……..Recession and job stability kept worrying us of our recently taken HL….i guess we will be more comfortable as years passby….we decided to put bonus and the rent (yearly rent which we receive from this property) each year in part-payment each yr…..not on monthly basis……may be our next focus would be buying a commercial shop.

    2. We have started 2000 sip in hdfc balanced….thanks for all the knowledge we got from this website from last year….Our next step is again start saving in ppf from this year and sip in 2-3 MFs…….which MFs would you advice for us???? our focus is 15-20 yrs with medium risk-appetite…

    Regards,
    Sushila

  4. Ramesh says:

    1. (contd). Mathematically and financially speaking (not emotionally), pre-payment only helps the bank and never you. In general, any thing which the banks want you to do is tilted in their favor and not yours. Moreover, debt is good (it is not bad), when the rate of return of your investment is actually more than the debt rate. So, if you are putting the “pre-payment” money into assets which will give you more return than debt in the longer run, then that is a desirable thing. Otherwise, if you want to keep that money in cash / low return taxable FD/RD or some other low return debt assets than the 10-12% home loan, then it is better to prepay. I hope this makes it clearer.

    In case you are emotionally obsessed by clearing the home loan, then the above does not matter much, because the emotional burden itself will take away any financial / mathematical benefits.

    So, think over it. Both from your own and your husband’s points of view.

    2. Yes, a balanced fund is a good way to start. And once, you see a reasonable amount, you can add 1/2 more funds too. You can choose those, when you start them. Personally, I am not a big fan of ICICI focused blue chip. For that matter, any focused fund should not be there at all, in my opinion.

  5. sushila bhandari says:

    Thnx Ramesh for your valuable inputs.

    1. Accepted..but still i am of the idea that we should be loan-free so that we can free-up some money each month for investment….Also, its not that we should pay the last penny for HL part-payment and left with nothing. Instead, do you think half of the saving should go in part -payment and half in investment?? plz let me know.

    2. If yes, do you think starting SIP in balanced funds via fundsindia is a good idea in current scenario….My small SIP would earn gud in 10-15yrs time due to power of compounding……..on later date, may be one equity-diversified and one mid & small cap funds. I have chosen ICICI Pru Focused Bluechip Inst G and IDFC Premier Equity Plan A.

    Plz help me out of this confusion.

    Regards/ Sushila

  6. Ramesh says:

    1. Do not Pre-pay should be your mantra.
    Reason: https://www.jagoinvestor.com/2011/04/loan-amortization-emi.html <--go through this. After 10 years of a 20 year loan, you would have approx. 70-75% principal still remaining, while the bank has already got around 70% of the interest which it would have gotten over the entire loan period. So banks are always doubly happy if they get the interest first (which they get in every EMI system), and then get the principal faster by pre-payment. 2. Increase your assets by whatever asset allocation you are comfortable with. This is the only thing which will be there for you in case you will need it. A self-occupied home is not such a great asset. Do not worry, over next few years, your incomes should rise upwards and then use that to increase your assets only. Do not unnecessarily worry about pre-paying every year or two-yearly. Use the compounding for your own benefit and not for the bank's. This would appear to be unconventional thinking, but give a proper thought about it.

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