Here’s a situation that we face sometimes – you got a lumpsum, say 10 lakhs, from some source, say a matured policy paid over 20 years. What should you do with this money now? Should you prepay a home loan that you had taken some years back, or should you invest this money in some mutual funds?
The typical answer that comes to our mind is that coming out of loan repayment burden should be first and foremost objective, and so we must prepay the home loan. However, if we look at it from both tax and investment perspectives, it would suggest not prepaying the loan but making some investments.
Tax and investment experts suggest that home loan interest rate would be around 7-8 per cent whereas mutual funds interest rate that one can expect in long-term 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. Continuing with home loan EMI helps save income tax outgo as well.
We 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. Continuing home loans EMI will get income tax deduction benefits as well. Investing in mutual funds will help build a corpus for the long-term and help you retire comfortably.
So the lumpsum fund is better off invested in good mutual funds.
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