While your home loan EMI is running, you may also face dilemma on whether to use excess money, that becomes available on account of salary hikes, in repaying home loan in advance or invest it in equity MF.
You may have got confused by the comparison, as mutual fund (MF) is an investment product, while home loan is committing future expenditures to acquire a capital asset (a house) now. So, both are opposite in nature – you first invest in MF to build wealth for your future, while you take a loan to acquire an asset first and repay afterwards.
However, both are similar in the sense that both help you in creating wealth – one through investment and the other by taking a loan.
So, what should be your priority – buying a home by taking a loan or creating wealth through investments and buy a home later?
The answer may differ from case to case and situation to situation. If you have a stable non-transferable job but don’t have a house of your own, you may consider buying a house early, provided you find a suitable one of your choice, the rate of inflation in real estate and house rent are very high and home loan rates are low enough to bring EMIs within your reach. Remember, your EMI should never be more than 40 per cent of your income and the aim should be to keep the percentage as low as possible.
On the other hand, if you don’t have a stable job, prefer to stay in rented accommodation and save as much you can to invest. This is because job uncertainty may put you in big trouble if you take loan and fail to repay it in case of unfortunate job loss. Moreover, buying home would bind you in a place and may stop you from looking for a better job opportunity elsewhere.
Also, if the house rent and rate of inflation in housing sector are low, you may choose to build wealth first by making higher investments and look for opportunity to buy a house of your choice with least financial burden, when home loan rates are cheaper and your income becomes high enough to pay back home loan, if any. In such a scenario, you may invest in equity MF for long term to enjoy equity returns to build higher wealth.
However, if you are planning to buy a house shortly, say about within 3-4 years, invest in equity MFs only that portion of money that you would need after long time to meet long-term financial goals and put the money, that you would need at the time of making down payment to buy the house, in debt funds.
What is Repo Linked Lending Rate, Home Loan? RLLR meaning, comparison vs MCLR
Even if you are planning to buy a house early, remember to invest first to build the fund needed for down payment, apart from creating an emergency fund containing not less than 6 months of your salary, which may be invested in liquid funds or fixed deposits with adequate liquidity.
You may also choose to delay buying a house and continue investing in MFs by staying in rented accommodation as long as your income is low and you get considerable tax benefit on account of HRA exemption. When the HRA exemption becomes negligible due to high enough salary, you may go for buying the house of your choice as not only your capability to pay home loan EMI would be high but your investments would also become sufficient to meet other financial commitments.
While your home loan EMI is running, you may also face dilemma on whether to use excess money, that becomes available on account of salary hikes, in repaying home loan in advance or invest it in equity MF that would generate higher return than the rate of home loan interest in long run.
It will also depend on how much investments you have already made to meet other financial goals.
If you don’t have any investments to meet other financial goals, you must invest the excess amount even if you fetch lower returns to meet short-term financial goals followed by long-term ones.
Even if you have build some corpus, you may still choose to invest in MF rather than repaying home loan early, as, apart from the return you get on investments, you will also enjoy tax benefits available on home loan repayments.