Nirav recently received a ??5 lakh semi-annual bonus, and he’s now wondering if he should prepay part of his home loan or if he should invest the money.
In such cases, it is most often suggested that the person use the money to invest instead of prepaying the mortgage. This is mainly, first of all, because of the tax benefit. Second, since mortgage rates are low when you compare them to long-term equity-linked investments, most assume that investing money 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 could get a minimum return of 11%.”
It’s a great strategy to follow in a bull market, but it can get 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 it can be prepaid, Mehta said.
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