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POSTED BY ON May 14, 2014 3:16 pm COMMENTS (8)
Hi all,
This is my first post here though I have been reading regularly. I have a clarification regarding our current financial situation. Hope to find suggestions here.
I am 32. My husband is 34. And we have 2 kids.
We have one apartment in my name, bought before marriage. It is worth Rs.90L as on date. We pay EMI towards the same. Fixed % of 8.5 from ICICI. Bought in 2005. Outstanding principal is Rs.11L today.
We purchased another apartment in 2012 as a joint loan. We live there. It is worth Rs.1.4Cr as on date. Bought on SBI Maxgain loan. ROI is 10.4%. Total outstanding as of date is 59L. We have also parked Rs.15L in Maxgain OD. So effective principal outstanding is Rs.44L.
Other than these two we have ZERO investments (discounting PF from our companies).
I am planning to quit soon. My husband will be able to manage both the EMIs from his salary.
We are caught in the dilemma whether to park all our extra monthly savings and our yearly bonus from time to time in the Maxgain account or to start a regular SIP in long term equity funds.
Husband says Maxgain effectively gives us guaranteed 10.4% taxfree returns and so we should look at closing out our loan first before starting SIP. He feels that instead of paying a SIP in the hope that it will give us good returns, we can park that money in the Maxgain account which gives 10.4% effectively and also provides good liquidity in case of emergency. Meanwhile I feel that we need to regularly invest in SIP for long term benefits.
What’s the experts’ take on this?
And a side question: while the interest from FDs are taxed, why is effective benefit got from deposit from SBI Maxgain not taxed? Is parking my money in SBI Maxgain OD account with ROI of 10.4% not effectively the same as having an FD which pays me 10.4%?
Regards,
Swapna
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Hi Swapna,
Congrats you have a great understanding of the advantages of Maxgain. Comparing post tax returns of Max gain with post tax returns of Debt instruments would be an apple’s to apples comparison. So post tax break at 30% bracket Max gain will be around 7.5% whereas post tax return from Debt instruments would be generally lower after tax free options have been exhausted. That being so it probably makes sense to fund Maxgain for the debt component of your portfolio. This is independent of your planned asset allocation though.
You defenietly need to make avenue to make investment may be you can start SIP in few mutual funds and then park only the bonuses you get into max gain hence you will have both covered. Also remember equity based good MF will provide atleast 2-4% above sensex/nifty and with historical calculation sensex/ nifty has returned in range of 15-17% so even if you estimate conservatively for 12% its still a lot better than what you get from max gain
Ashal, I am not sure I understood the last part. In case of Maxgain, what gives me extra 10.4% returns is the amount I park in the MG account and my repayment of loan should not matter as long as I don’t park more than my outstanding principal. Till then whatever money I park in my MG account is effectively getting me 10.4%. Right?
So if I park more amount this month in my MG account, I am avoiding the interest for this extra amount in the next month, right? And the extra interest component that I would have paid from my EMI next month (if I had not parked this extra amount) is now getting accumulated as extra money in my MG account, which will again result in more extra money accumulation, right? That sounds like positive compounding to me.
Dear Swapna, I think the very basic idea of Max Gain to both of you is clear but your husband is missing the point that with each passing day, the saving in Max Gain ‘ll come down whereas even post tax return from an FD of 9% ‘ll be better than the interest saved in Max Gain over next 10-15-17Y of your loan. Do not go by my words. check on your own. Calculate and post the results to your husband.
How this is possible? This is possible due to difference in compounding. In case of FD, it’s forward or positive compounding. the interest is also earning more interest. In case of Max Gain, there is negative compounding. As you repay loan, each month the saving of interest ‘ll come down.
Thanks
Ashal
You mean a SIP which does an ECS every month from my MG account? But how does that matter whether I fund the SIP from my salary account or my MG account except for the minimal interest from my salary date or MG credit date till the date of SIP ECS? Can’t understand. Sorry, can you explain?
But still his argument is that to get (post tax) 10.4% returns in MF would be tough and doesn’t sound an attractive proposition when compared to taxfree 10.4% returns from Maxgain.
I know this is just a case of convincing, but I am not able to give him convincing data for this case.
Dear Swapna, how about keep parking more money in MG but at the same time, RUN SIPs into Eq. MFs from it?
Thanks
Ashal
Thank you for your answer.
I understand that we need to diversify. We are not going to invest anymore in real estate. The focus is only on closing out our loan asap. If we start investing elsewhere, loan closure will take longer time.
My husband’s counter to my suggestions of opening an RD or an FD is that no bank offers 10.4% on RD or FD or PPF, etc. So why put money in something which you definitely know that you are getting lesser than your Maxgain benefit. And if I talk about SIP, he says Mutual funds & equity are not guaranteed, whereas SBI Maxgain is assured gain.
I am confused.
Hi,
I personally feel that you guys should start investing in other asset class like FD/Mutual Funds/Equity. Keeping all your money in real estate is not a good idea unless you are planning to close the home-loan in short term (2-3 years).
Apart from the asset diversification perspective, the experience and learning you get from investing in other asset class is invaluable.
The maxgain OD account return is not taxable because it is not income. You are reducing your expenses and I think no body taxes us (yet !) on reducing expenses.