Payoff Debt or Invest – What should be my priority ?

POSTED BY roshan85 ON June 8, 2014 8:56 am COMMENTS (12)

Hello Guys,

I am a working with IT MNC. Currently I have taken 30 Lac loan for house for 20 years at 10.15 % floating rate. I have already pre-paid 1.75 Lac other than EMIs. So now the tenure has become 17 years. I do not have any other investments.

I will be going on foreign assignment for long term and I can save around 70-90 K per month.

I am in dilemma whether to keep prepaying for housing loan or invest in Mutual fund which can yield me more than 10-15 % year. I am confuse because though mutual fund investment is beneficial, they are subject to risk.

So another solution can be payoff some debt and put some in investment. what that ration should be?

Can anyone help me here?

Thanks

Roshan

 

12 replies on this article “Payoff Debt or Invest – What should be my priority ?”

  1. roshan85 says:

    hi Ashish.. thanks for your suggestion.

  2. Ashish Garg says:

    You may also consider increasing your EMI to continue with interest benefit and also closing in your loan a little faster. Since you can save about 70-90K per month, you may look at increasing your EMI by another 20-25K and invest rest in the MFs (as you have chosen).

    You already have insurance against loan so may be you can postpone the term insurance for now, but then you have to take it in future say next 2-3 years or so. With every year passing your premium would also increase (as it depends upon age). So decide accordingly.

    Ashish

  3. roshan85 says:

    hi Sharath,

    Yes right when I took a loan, that time itself I have taken 2 insurances one for Loan cover for 30 Lac (I think this is what you are saying) and other insurance for Property against fire and damages. Both are single premium.

    So I am covered for only Loan amount. I want to know if another term insurance is required as of now as I am just 28 and unmarried?

    Regarding, Jeevan Anand when I was checking thru forum, I came to know something about “Paid off” after 5 years is better than Surrendering. What is this “Paid off”? I did not get the complete understanding. Any idea?

    Thanks a lot for taking time out to respond to my queries.

    1. sharath Mumbai says:

      Surrendering is ending your policy then and there and getting money back. Paid off is stop paying premiums and waiting till maturity to get the money as per the premiums paid. Paid off would give you some more amount but your money would be locked in for the entire policy term.
      This article covers advantages and disadvantages of your single premium home loan insurance.
      http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?autono=893877
      Do you have any dependents? Parents or brothers ? If yes, then take a term insurance.

      1. roshan85 says:

        Sharath,
        Thank you for sharing this information and getting back on jeevan anand query.

        The home loan premium can be declared under 80c, but as I paid in single go, I could only get benefit one time. If it was term insurance with annual premium, I could have applied for 80c benefit each year.

        With prepayments I reduced 3 yrs but at the same time as it is home loan cover I also lost cover for 3 yrs. I will keep loosing cover further as and when I do prepayment. Anyways, mistake has happened already. :'(

        1. sharath Mumbai says:

          Hi rohan, I think you mis-understood the concept of home loan insurance.
          That insurance only covers your loan amount in case any untoward happens to you. No matter if it is for 20 years or 5 years. That insurance would cease to exist once you clear home loan. so, there is no mistake here.. and no need to worry.
          And regarding 80C, whatever loan principal you pay in a year, you can show it under 80C. And I think your company provides you PF. So, both these amounts combined, should very well cross the 1 lakh bracket for 80C.
          Interest part is covered in section 24.

  4. sharath Mumbai says:

    Hi Roshan, you have a home loan and its a big responsibility/liability. What would happen to that loan/home in case anything happens to you? You should for sure take term insurance. That is a misconception that term insurance is needed when you are married and have kids. Its needed when you have responsibilities/ liabilities/ dependents. yes, you can surrender jeevan Anad after 5 years.

    cheers

  5. roshan85 says:

    i do have lic jeevan anand 5L sum assured 21yrs.. already paid 4 premium 25k/yr… next premium due in sept. Im thinking to surrender it

  6. roshan85 says:

    Sharath,
    I am single yet so have not taken any term. Do you think its required right now as i am just 28?
    As far as emergency fund is concerned, i have used all of it (1.75L) for pre-paying. will have to build that again.

  7. sharath Mumbai says:

    4 to 5 funds should be fine.
    on another note, did you take adequate insurance and kept aside adequate emergency fund ?

  8. roshan85 says:

    Hi Sharath,

    Thanks for your response. I did not thought about tax benefit I would get in future 🙂

    So markets are now at all time high and I think there is still scope for growth for mid cap equity funds. So if I have only 1 large cap fund and 2 mid cap funds to start with SIP and another 1 for Debt fund, will it be too much crowded.

    Can you suggest how many funds should I keep?

    Thanks,
    Roshan

  9. sharath Mumbai says:

    Hi Roshan,
    In my opinion, you can pay some extra 2-3 lakhs this year in your home loan as this is the early stage and the interest part would come down. Your interest rate is also 10.15% and it might come down hopefully. So putting your money completely in home loan would save you that approx 10% interest (which is less than what mutual funds would give you in long run). Moreover, interest paid on home loan would be exempted from tax. So, better let it be there for the rest of the tenure.
    As you are getting some extra money, you can start some SIP in mutual funds. I know markets are on higher side, but as it is SIP, it would even out in some time. If still worried about high markets, you can put 50% in Equity SIP, 10% in Debt and 40% in liquid funds every month. When the market is normal you can do STP from liquid fund to Equity fund. So, after some period of time, it would be 90% equity and 10% debt.

    Hope this helps

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