Home Loan vs Mutual Fund: Repay home loan first or invest money, know everything in one click?

Business Desk – Home Loan vs Mutual Fund: Whenever a person gets a large lump sum amount, it is often advised that instead of making home loan prepayment, he invests that money in mutual funds. The argument given is that if a mutual fund gives an average return of 15%.

You have to pay only 8% interest on home loan, so keep paying EMI every month from your investment earnings (SWP). This strategy certainly looks attractive on paper, but the actual data of 15 years shows a different picture.

The math is correct, but the market doesn’t always support you.

This strategy can be successful only if the stock market continues to give good returns every year. But in reality, sometimes the market rises rapidly and sometimes it also registers a sudden big fall. At such a time, if you are withdrawing money to pay EMI every month through Systematic Withdrawal Plan (SWP), then in the falling market you have to sell more units at a lower price.

This is the reason why the principal amount of investment starts decreasing rapidly. Even if the market recovers later, the portfolio does not return to its previous state and long-term returns also get affected.

What came out in the 15 year record?

This strategy was tested on the actual record of last 15 years on home loan of Rs 1 crore. The results were completely opposite to expectations. The performance of four different types of mutual funds was analyzed. Of these, three funds remained such that at the end of the investment, there was not enough money left to completely cover the interest paid on the loan. Not only this, in two big funds the entire investment was lost about three years before the completion of the loan tenure. After this, the remaining EMI had to be paid directly from one’s own pocket. Even though a fund has given good returns, it is not a guarantee that similar performance will be seen every time in future.

The biggest danger is mental pressure

This strategy is not limited to mathematics only, but also increases mental stress. Even when the market falls and the value of the portfolio continues to decline, EMIs have to be paid every month. In such a situation, many investors panic and sell their investments at a loss, due to which the loss increases further.

What if you lose your job or have a medical emergency?

The weakest aspect of this strategy is that it is based on general conditions. If you lose your job, your income reduces or there is a medical emergency in the family, it can be difficult to handle the burden of EMI and investment simultaneously. In such circumstances the entire financial plan can get spoiled.

After all, which one is wiser to choose?

If you have extra money and your goal is financial security, reducing the burden of the home loan first or paying it off completely is considered a safer option. This reduces interest expenses, eliminates monthly EMIs and also reduces future financial risks. At the same time, if your income is stable, adequate emergency fund is available and you can take the risk of market fluctuations, then only a strategy like running EMI by investing in mutual funds can be considered.