I saved 5 lakhs in my bank account. Should I use it to repay my home loan or invest in stocks? Please suggest.
The decision as to whether or not to pay in advance depends on a number of factors. The decisive factor is whether, taking into account the tax advantages available to you, you can generate more income from the funds than the interest on your home loan. Another factor that plays an important role are psychological reasons for being debt-free.
An investment in equity is not recommended. If you want to invest in equity, you should do so through a systematic transfer plan (STP), in which you put the lump sum in a liquid fund and from there invest the money in a system of your choice.
If you want to use the amount as a lump sum, you can use it to repay the home loan early instead of investing in equity, although the after-tax home loan interest cost may be quite low in your case. A loan can be repaid prematurely in whole or in part at any point in time. Some lenders may charge you a prepayment fee on top of the principal prepaid amount. Please check funding needs in the near future before making the final decision on early repayment of your home loan, as in the event of future funding needs you will not be able to borrow at the rate at which you are getting a home loan. Therefore, in addition to the emergency needs in the near future, take into account the need for funds at the time of the disbursement of the home loan beyond the regular EMI. Finally, you should also consider the tax benefits of a home loan and the possibility of using it at a higher rate of return than the after-tax interest cost.
Balwant Jain is a tax and investment professional and can be reached at [email protected] and @jainbalwant on Twitter
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