Both taking a home loan and starting a mutual fund SIP fall under the category of personal financial decisions that are based on individual requirements. By going the SIP path, you may invest monthly starting at a smaller amount at regular intervals, which will automatically result in accumulation that could lead to long-term fortune. In contrast, the advantages of taking out a home loan include helping to pay for your dream home while also saving money on taxes, enhancing credit limits, enjoying capital appreciation, and avoiding paying rent. Financial advisors advise that you should, generally increase your SIPs annually, by at least 10%. By increasing your SIP, you’ll gain the advantages of higher inflation protection, faster goal achievement, and assistance in growing your corpus to a bigger size. However, let’s use the scenario where you have a home loan and a mutual fund SIP. In this situation, which should you increase: the EMI on your home loan or the SIP amount?
Based on an exclusive interview with CA Manish P Hingar, Founder at Fintoo, the spokesperson said “A systematic investment plan (SIP) is a way to invest a fixed amount of money regularly in a mutual fund scheme while increasing the home loan EMI means increasing the amount you pay towards repaying your home loan each month. Deciding between the given options as to which is better, depends on your personal financial situation and goals. It is a good idea to consider your current financial situation and whether you are able to afford the additional expense of increasing your EMI. Additionally, you should also consider the rate of interest on your home loan, as well as the expected returns on your SIP investment.”
Situation 1: Increasing Home Loan EMI
CA Manish P Hingar said suppose, you have taken a home loan of ₹50 Lakhs for a 20 years tenor at 8.5% interest p.a., your monthly EMI will be ₹43,391, and you will be paying a total interest of ₹54,13,897.
With your annual increment in your income, consider increasing your EMI monthly by 5% every year this will help you to save up to ₹19.5 Lakhs on interest costs and reduce your loan tenure by approximately 7.5 years.
Also, as per income tax rules, you can claim a tax deduction of up to ₹1.5 lakhs under Section 80C for the principal amount paid in a financial year and can claim up to ₹2 lakhs on the interest amount under Section 24(b) every year.
Situation 2: Increasing SIP
CA Manish P Hingar said suppose you have started a SIP of ₹40,000 per month in an equity mutual fund for 20 years, assuming a CAGR of 12% and with an annual increment in your income, you decided to step up your SIP by 5% every year then you will be able to create a corpus of ₹5,49,50,493 which is ₹3,90,78,835 as potential capital gains on your investment of ₹1,58,71,658 versus a potential gain of Rs 3,03,65,917 if you don’t step up your SIP every year and that is a difference of ₹87,12,918 in the gains.
Conclusion
CA Manish P Hingar said “The above two situations illustrate that, though stepping up your EMI helps you to save interest costs and reduces your loan tenure but investing in a mutual fund SIP and stepping it up gradually every year creates a significant corpus to meet your future financial goals. It is important to consider the rate of return at which you are planning to invest versus the rate of interest payable on the loan. Having said that, if your primary goal is to save for the long-term, such as retirement, then investing in a SIP may be a wise decision. However, if your priority is to pay off your home loan as quickly as possible, then increasing your EMI may be a better choice.”