It’s not easy to decide when there are several routes available. When one buys a home through a home loan, they must consider their financial position and accordingly decide how they plan on paying off the EMI (Equated Monthly Instalments). The quandary now comes when an investor has surplus cash and are unable to decide whether they should prepay their home loan or rather invest in mutual funds. This article aims to solve this dilemma for you by helping you make the right investment decision.
Factors to consider before you decide between investing in mutual funds and prepaying your home loans
There are many factors that have the potential to sway the choice of investors. They are:
- Risk profile
If you are someone who gets an easy scare, staying away from the equities would be a better alternative for you. This is because equity markets are quite volatile in nature. They have several fluctuations with high inconsistencies in the short-run which might even result in negative returns. So, if you get panic attacks seeing the short-term dips in the market, it would be helpful if you prepay your home loan to lead a stressful life.
- Emotional condition
Are you one of those individuals who gets bothered with the mere thought of being in debt? Maybe you are apprehensive to not be a victim of debt trap. Whatever may be the reason, if paying off your debt makes you happy, you might want to prepay your home loan.
If you are one of those investors who wishes to boost their liquidity, then it is advised to invest in mutual funds, especially fixed-income securities such as liquid funds or debt funds. If you are looking for short-term liquidity, then you might consider investing in debt or liquid funds as equity funds are not ideal for you.
- Other financial goals
Do you have particular financial objectives that need to be met in the immediate future? Then, you are probably better off investing in mutual funds instead of prepaying your home loan.
So, should you invest in mutual funds or prepay your home loan?
In our opinion, it is suggested that you continue to pay off your home loan as you did, and invest the spare amount in mutual funds. There are two main reasons behind this decision. They are:
- Though mutual funds do not guarantee significant, or even positive returns, they have the potential to generate substantial returns over a prolonged duration as opposed to the interest rates paid for prepaying your home loan.
- A smart investor always calculates their real gains only after accounting the taxes. So, if you are in the highest tax bracket, you can claim several tax deductions and save a substantial amount on tax.
Having said that, always consider your personal situation before deciding the right investment avenue for you. You can always consult a financial advisor who can help you in these daunting situations. Happy investing!