Sometimes, we may get year-end bonus by the employers or another surplus money. Once we get the money, the real confusion starts, whether to invest the money in mutual funds or prepay the loan or buy a jewellery or invest in fixed deposit. Mostly Prepay the loan or Invest in the market. In the post, we would discuss how to take a decision on this based on different factor.
Surplus money in Fixed deposit:
In case you have planned expense within one year for this surplus money, better to keep the money in fixed deposit. The expense would be paying the school fees for your children or initial payment of your dream home. For short term, keep the money in fixed deposit.
Surplus money in Gold Jewellery:
We should keep 6 months of our monthly expenses as emergency fund. If you don’t have emergency fund, it is better to buy gold jewellery by the surplus cash. Gold jewellery would help in emergency and it can be convert to cash immediately. Gold is investment as well as emergency fund accumulation.
Surplus money to prepay loan:
Prepaying the loan by extra cash differs based on loan type. In case home loan, loan interest rate would be around 8 per cent whereas mutual funds interest rate that one can expect in long-term or say 10 years or more would be at least 12 per cent. So, continuing with home loan EMI and choosing mutual funds instead of home loan prepay is a better option for an earning individual. Experts went on to add that continuing with home loan EMI helps save income tax outgo as well. In case you are paying more than 40% of your income as EMI for the loan, it’s better to use lump sum money to repay a part of it to reduce the EMI amount.
If the rate on your loans is lower than 12%, do not repay and start to invest.
If you have a personal loan or credit card rollover, then you must repay. The costs of these type of loans are far higher; in the range of 12 percent and above.” If you have high-interest-rate credit card debt, focus on paying it off first. Interest rates on credit cards are so high that you can never get ahead.
If you have loan which is more than 12% interest, you’re probably better off paying it off before investing.
Based on the interest rates on loans and the returns from various asset classes, I recommend the following steps for a financial reboot.
- One, pay all your outstanding credit card dues and avoid 30-45% annual interest.
- Two, prepay or close the personal loans.
- Three, build a corpus by gold jewel that should be at least six months your monthly household expenses.
- Four secure it in a sweep-in fixed deposit if you have short term expense.
- Last , repay home loans or loans against property in case EMI is more than your 40% of your monthly income.
You validate your financial status with above 5. Your financial position satisfies all the 5 factors, you can plan to invest the money in mutual funds or stocks in the market. You can start with Nifty index mutual funds in case you are beginners.
Paying off loan can reap some valuable financial rewards in the short-term. But investing can benefit you in the long-term.
Start your investment today in Nifty index mutual funds before spend the extra cash in your hand.