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This article is more than 3 month old.

Close your home loan or invest in equities? What should you do with surplus cash

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Home loan borrowers are under confusion after they are able to accumulate some cash, whether to prepay a home loan or to invest it in equities. The answer to this question cannot be a direct one and needs to be considered holistically.

Close your home loan or invest in equities? What should you do with surplus cash
Home-loan borrowers often face a dilemma on accumulating some surplus liquidity, whether to prepay loan or to invest in equities or other instruments. Going by the recent trends when interest rates have fallen sharply while markets have posted strong returns, it has become an even hard choice to make for borrowers between prepayment vs equity investment. Experts opine that there can't be a simple answer and multiple variables are at play here.
A person's total investment portfolio, savings in equity, income pattern, future income streams, short-term family responsibilities have to be considered before arriving at a decision here, says Vijay Singhania, Chairman, TradeSmart, while adding that an individual can give preference to investing in equities over a loan repayment.
"We have a thriving equity market where India is in a place where it has never been in the recent past and companies are posting record profits with high growth visibility. On a long-term basis, investing in equities has always been fruitful," Singhania told CNBC-TV18.
Paisabazaar.com's Senior Director Gaurav Aggarwal, however, takes a more cautious view pointing that current equity markets valuations are high amid talks about a pending correction sooner or later whereas home loan interest rates may have bottomed out.
Borrowers with substantial liquity surplus, hence, should prioritise prepayment to reduce interest outgo, Aggarwal said. A part of existing surplus can be kept aside for incremental investing in equity funds through a Systematic Investment Plan (SIP) of at least 1-year tenure, he added.
Aggarwal also advised investors to route their investments in equity mutual funds through SIPs over lump sum investments.
“Lump sum investment in equity mutual funds, and that too in a staggered manner should be attempted only during steep corrections or bearish market conditions as quality equities are available at attractive valuations during such market conditions."
Existing home loan borrowers having sizable residual tenure, Aggarwal said can also transfer their existing home loan to another lender at lower interest and then opt for the home loan saver/overdraft option.
"Under the overdraft option, a savings or current account is opened for the home loan borrower to deposit his/her surpluses and is linked to the home loan account. The interest cost of the home loan is calculated after deducting the balance maintained in the savings/current account from the outstanding loan amount. This can lower the interest cost for the borrower. He/she is free to withdraw from the savings/current account as and when any fund requirement arises," he told CNBC-TV18.
Thus, the home loan overdraft option allows a home loan borrower to derive the benefit of making prepayments while maintaining liquidity.
In the context of choosing between home loan prepayments and investing in equity funds, Aggarwal said that a home loan overdraft option would allow a borrower to deposit surpluses in the linked savings/current account and then, withdraw from it to invest the lump sum in equity funds in a staggered manner during market corrections.
Disclaimer: 
The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
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