A home loan is an easy way to buy your dream house and repay comfortably in Equated Monthly Installments (EMIs). Given property costs are very high, particularly in urban areas, a lot of buyers' loan tenures range anywhere between twenty and thirty years.
The interest rate burden on these multi-year home loans sometimes is equal to the loan amount or even higher more than doubling the repayment outgo. Apart from early repayment of principal, are there any ways to reduce or offset this interest burden over the long term?
Experts say the answer to this is — start a Systematic Investment Plan (SIP) in equity mutual funds or index funds.
In an interaction with CNBC-TV18, Nitin Mathur, CEO at Tavaga Advisory Services said that if borrowers start a SIP equal to 10 percent of the monthly installment amount as soon as the home loan EMI begins, the full home loan cost can be recovered.
Mathur explains this with an example.
“On a Rs 30 lakh home loan for 25 years (at 6.75 percent interest), an individual has to repay about Rs 62 lakh which is more than double the principal amount. At the same time, by investing only Rs 6 lakh (10 percent of monthly installment) in SIPs of mutual funds over 25 years, one can build a corpus of around Rs 66 lakh (with an estimated return of 15 percent p.a.),” Mathur said.
Seconding Mathur’s view, Anil Pinapala, CEO and Founder at Vivifi India Finance said that if one has disposable income after all the payment obligations, it’s always a good idea to start a SIP.
“This would help in saving higher than fixed deposit returns and can be considered as a set-off against the interest on the home loan. However, investments into mutual funds are subject to market risk and hence, it is advisable that investors evaluate the fund in which they would like to invest based on their current and immediate future lumpsum cash requirements,” he cautioned.
For the uninitiated, SIP allows investors to park money in small amounts and at regular intervals. This inculcates a habit of regular saving and investing and hence builds a financial discipline in the life of the investor. Additionally, it allows an investor to put the money at different levels of the market cycle and thus in long-term wealth creation. At times when the markets are high, the monthly SIP would buy fewer units and when the markets are low, the same monthly SIP amount would buy more units. This means, over time one can earn a solid return, without paying very high prices for any unit.
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.
(Edited by : Ajay Vaishnav)