A reader says, “I have a query regarding mf investment vs loan prepayment. I have an SBI MaxGain home loan account where I can park surplus funds and save on interest. Now I’ve approx 20L outstanding there, and I’m about to receive approximately the same amount from a different venture”.
“I have two options. 1. deploy all the funds in MF over six months. Initially, I thought of using a mix of index and debt funds, but in light of recent tax changes, I need to think about the debt fund portion. 2. Park the funds in the home loan account and use interest saved ~20k for mf investments. I can use this arrangement for the remaining 15 yrs of tenure. What do you think?”
We have never been fans of overdraft-based home loans like MaxGain. It is a needless complication. A simple home loan that can be pre-closed gradually, along with regular goal-based investments, is sufficient.
Typically readers are worried about servicing debt for several years, and if they get a lump sum equal to the loan outstanding, they would think of pre-closing the loan. In your case, you seem quite comfortable with servicing the debt.
Therefore, the simplest and smartest move (IMO) is to continue EMIs from your monthly income and deploy the Rs. 20 lakhs lump sum into an asset allocation suitable for long term goals. Parking the amount in an overdraft account to save on interest wastes capital.
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Please note whether taxed as per slab or not, the place of debt in a portfolio is non-negotiable. Also see: New debt fund tax rule: How to change my investment strategy?
Other readers in a similar situation may divide the lump sum into two chunks – partially prepay with one chunk and invest the other as per your goals. The division can be as per your comfort level if you invest enough for your goals. If not, more should be allocated for investments.