Nirav recently received a ₹5 lakh semi-annual bonus, and he is now wondering if he should prepay part of his home loan or invest the money.
In such cases, it is most often suggested that the person use the money to invest instead of prepaying the home loan. It is mainly, first, because of the tax advantage. Second, since mortgage rates are low if you compare them to long-term equity-linked investments, most assume investing the cash would be a better strategy to follow.
Yes, that’s definitely something to consider, said Deepak Krishnan, financial planner at Mangrove Wealth, adding. “Home loans are in the 7-8% range and for equity investments you can get a minimum return of 11%.”
It’s a great strategy to follow in a bull market, but the same can turn disastrous in a bear market, Krishnan said. In this case, the investor will end up with a depressed portfolio.
What should Nirav do?
Under no circumstances should one hold a financial liability or hold a loan if there is a possibility of prepaying it, Mehta said.
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