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Should you invest money or put it toward your home loan

When you give a thought about your financial health, it may make more sense to consider both the options of accelerating mortgage payments and making investments with the remainder.

India TV Business Desk Reported by: India TV Business Desk New Delhi Updated on: July 06, 2019 17:40 IST
Representational image
Representational image

If you want to secure your future and be sure that you are making your financial decisions right, then you must plan for investments in your present. And for the purpose of getting higher returns on your income, India comes with a diverse investment market, where investors can opt for varied offerings. Different investment options provide you with several benefits. While some investments can be safe and secure with low risk involved, others can come with greater risk and offer higher returns. While some investments might involve physical assets, other may need acquiring of electronic financial assets.

Most of the people think that if they have some cash saved up, they can either make an investment or put it towards your home loan down payment. Many experts think that eliminating or reducing your mortgage is the safest and most secured financial decision that one can make. As the experts think that after you are done with the mortgage, you are free to invest your money for any long term period and work how you want. But, with several investment options available to select from, the final decision emerges to be tricky, challenging and hard.

However, focusing on only avoiding or reducing your home loan EMI may not be a right choice each and every time. Sometimes you can even benefit from making investment and earn some interest on your surplus money. When you give a thought about your financial health, it may make more sense to consider both the options of accelerating mortgage payments and making investments with the remainder. There are several questions to consider before deciding what to do with “extra” cash. At first glance, it might seem like the obvious selection to pay down as much as you can to reduce your mortgage. But first, ask yourself a few questions:

What kind of return could I make on my investment?

If you are young and looking to buy a home, you not only have time to pay down your mortgage (which is currently at low levels), but your home will also grow in value as it would have plenty of time for the same. And you will also be able to enhance your wealth with time through your timely investments in future. Also, if you put your money in the market at young age, you can avail much return over a period of time as your investments would have a lot of time to grow. Also, when you are making investments at a young age, you are not required to invest your money in high risks investments, as you have enough time for your investments to grow.

What investment options to explore?

Mutual funds

Mutual funds are one of the favourite investment options available and people looking to earn good returns are taking advantage of the same. When you invest in mutual fund, your money is invested in diverse portfolio of offerings. These comprises of stocks, bonds, money market instruments and other securities. Mutual funds come with a low barrier entry and prove to be affordable to all the investors.

You don’t have to be an expert to invest in mutual funds as they are easy to understand. You can also earn higher returns and your earnings will be tax free as well. But, with these pros there are some cons as well. The only drawback with mutual funds is that you have no guarantee on what you earn. The performance of mutual fund depends on market conditions and hence becomes very uncertain and unpredictable.

Also, your fund manager makes the call for you on what to buy and sell. His decisions may or may not always be best for you and thus it becomes really essential for you to be aware that you trust someone else with your hard earned money.

Fixed deposits (FD)

Fixed deposits are secure investments that have been around for a long time now. They offer guaranteed returns over a specified period of time. You can invest your money in Fixed Deposits for a specified period and earn interest based on the rate announced by the bank in advance. Most banks now offer interest on fixed deposit at somewhere between 5-7% based on the period of investment. The interest rate on fixed deposit can help you earn returns on your surplus money. But, interest earned from your fixed deposits is subject to TDS unless you select a fixed deposit that offer a lock-in period. So you cannot maximise the benefits at maturity.

Recurring deposits (RD)

Recurring deposits are like fixed deposits but they come with an easy payment plan. In recurring deposits, you can make investments by breaking it up month by month, instead of making a massive chunk of your money invested at once. This makes it easier for you to invest; as you don’t have to invest all of your money at one go.

Recurring deposits also come with a fixed tenure just like fixed deposits and through the period you can continue investing fixed sum of money. Recurring deposits also come with a similar interest structure like that of fixed deposits and tend to offer a guaranteed return on investment, which make it a secure investment. But, if you compare fixed deposits to recurring deposits, fixed deposits will make you earn more returns for the same period of time because of the compounding effect on their rate of interest.

Saving for your home – A lifetime investment

All the investment options listed above are financial investments. Your home, on the other hand is a tangible asset. Unlike other investments, a real estate purchase is a high value investment, which needs a high amount in savings before you buy a home. With house property, you can live in your own home and see it grow in value and even earn money by renting it out.

You can also get home loan to make it easy for you to buy your dream home as banks are ready nowadays to lend money to home buyers. As you invest in buying a property and spend a lot of money in doing the same, the situation yields you with good returns as your home property continues to grow in value. If you are planning to buy your home property in a big city or developing neighbourhood, you can easily expect your home to grow in value at about 10-15% every year.

So, it is crucial to consider all the investment options available and evaluate your goals as an investor before finalizing any investment decision. If you want to grow your wealth and want to earn returns while increasing your savings, then you can invest in mutual funds, fixed deposits, recurring deposits and other investment options. But, if you have a mortgage on your home purchase, then you can also consider accelerating your mortgage payments. But, you can prioritise in making investments than accelerating mortgage payments as mortgage payments does not cost you much. The mortgage payment on your home property does not have hefty interest charges on your loan as your home loan is against your home property, which makes it a secure loan. On the other hand, you can earn interest and returns if you consider investing your money on other investments.

Whatever you decide, just carefully consider all the options available and evaluate the risk involved before you invest. You can also seek help from experts who can guide you in your financial planning to make sure that you are making the right decision.

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