Here is How You Can Comfortably Pay Your Home Loan

By | May 28, 2012

In this era of high inflation, borrowing a loan has become a matter of utmost importance. Although the repayment aspect of it may seem quite difficult, there are certain ways by which you can cushion your finances and repay your loan with ease!

The stock markets have become increasing volatile these days. With high interest rates looming the economic world, investors, borrowers etc are feeling the brunt of it. The only way by which you can manage to overcome this bite is by careful financial planning. It is worth noting that any financial plan when treated with patience and discipline definitely pays off at the end.

There are a lot of avenues which home loan borrowers can look into for investing their funds in order to pay their home loan. Although most financial advisors advice many investors to save up the amount required to buy their dream home without any debt, due to the rising inflation the returns on investments may not be sufficient. In such scenarios loans can be helpful. Investing in equity and Mutual Funds (MFs) is definitely one good way to chop off some burden on your finances due to the rising EMIs. Investing in Mutual Funds through the Systematic Investment Plan (SIP) route is much better than investing in direct stocks.  It is important to ensure that the liquidity of those funds are high so that the amount can be immediately utilized to prepay your loan or your EMIs when the interest rates hike.

By prepaying, the overall cost of the home loan is reduced as well. However, investments in Mutual funds and stocks are not beneficial for those investors who do not have a good risk appetite. For such risk averse investors, debt instruments are the best options.

Investments in debt instruments are yielding better and higher returns than compared to their equity counterparts. The main reason being the Reserve Bank of India (RBI) has given the market something to cheer about. They have managed to successively hike key policy rates in the hope to bring down the rate of inflation.

What does that mean for you?

The policy hikes result in increased interest rates advantages for individuals both in terms of deposit rates and borrowing rates. Therefore those investors who do not enjoy a good risk appetite, the debt instruments provide them a safe haven.

Fixed Deposits:

Currently, FDs are providing interest rates at the rate of 9% for a term of 1-3 years. FDs can be utilized when there is a possibility for you to earn as surplus on any of your other funds, for example, a bonus or maturity of an investment.

You can utilize the entire amount of the FD along with its interest at the end of the tenor to make a part pre payment of your loan.

Recurring Deposit:

If you have a lump sum amount that you wish to invest at once, RDs can be a better option. At the end of the tenor you can utilize the amount to prepay your loan. What you need to know is that the more you invest the better are your chances to earn higher returns at the end of the tenor.

Fixed Maturity Plan:

FMPs are generally offered by Mutual Funds (MFs). As the name suggests, your fund will mature only after a fixed date and you will not be able to exit the fund before the fund matures. As an investor this can be a viable option for you, since this fund quite tax efficient, but it is not as secure as an FD.

The tax twist

Before you go ahead investing in any fund is it equity or debt, it is important that you ensure that you take the tax aspect into account. Since, once you fund matures, post taxes the value of the returns may come down considerably. If the fund you are investing in has a better indexation policy you will be able to earn high tax benefits however, the risk involved will also be more.

Therefore it is important for you to understand your risk appetite before you step into investing in any kind of fund. But the best mantra is diversification. It is best if you can manage to diversify your portfolio and allocate your funds into debt and equity instruments.

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