Banks are cutting home loan rates. Feel this is the right time to buy that dream house? You are definitely right. But, you must keep an eye on home loan interest rates. As Albert Einstein says, “Compound Interest is like the eighth wonder of the World.” He who understands it earns it. He who doesn’t pays it.
Find this difficult to understand? Let’s have an example. Ravi recently purchased his dream home in Bengaluru. He availed a home loan of Rs 50 Lakhs at home loan interest rate of 9% and 20 year tenure, to get the dream house. He ends up paying home loan EMIs of Rs 44,986. This doesn’t seem much of a problem as Ravi runs a thriving business. You can calculate home loan EMIs using IndianMoney home loan calculator.
Let’s dig a little deeper. Ravi ends up paying a total amount of Rs 1.08 Crores with a whopping Rs 58 Lakhs in interest. More than 50% of the loan amount goes in interest. So can Ravi recover the interest paid on home loan EMIs? Yes, he can. Let’s find out how.
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If you invest just a fraction of home loan EMIs in a good mutual fund scheme, you can recover interest paid on home loan. Just invest in mutual funds through SIP and get back interest on home loan.
See Also: How to Select the Best Home Loan?
Let’s assume Ravi invests Rs 7,000 a month through SIPs in equity mutual funds. (Not too much for a businessman who runs a thriving business). The SIP investment must continue across home loan tenure of 20 years. Let’s assume an average return of 11%. What would be the returns?
Use IndianMoney investment calculator and calculate mutual fund returns through SIPs for 20 years. You get more than Rs 61 Lakhs which means Ravi recovers interest on home loan. (Interest cost on home loan was Rs 58 Lakhs). A fraction of the EMI invested (Ravi invested just Rs 7,000 a month), helped recover interest paid on home loan EMIs. Simple isn’t it?
See Also: Tips to Close Home Loan Early
If you can manage to pay home loan EMIs, you can afford to put in a fraction of that amount in SIPs of mutual fund. Now, many people fear investing in equity believing they would lose hard earned money.
Equity mutual funds invest in stocks across sectors. They enjoy the diversification benefit and you enjoy good returns on staying invested for the long term.
Though stocks are volatile, the volatility tends to even out over the long term. This makes the investment fairly safe if you stick with it for the long term.
When it comes to mutual funds, systematic investment plans or SIPs are the eighth wonder of the World. If you invest just Rs 500 a month for 35 years, you get Rs 97 Lakhs which is nearly a crore. This is for average returns. Imagine you get great returns? Many people believing investing in stocks is gambling. This is not true.
Investing in mutual funds is regulated by SEBI. Moreover, AMFI runs the highly successful education program, Mutual Funds Sahi Hai. The sole purpose of this program is to educate the investors on benefits of investing in mutual funds, invest in mutual funds through SIPs with just Rs 500 a month, risk and return in mutual funds and so on.
What do you learn from this? Investing in mutual funds through SIPs gives compounding returns. This is return on return and the secret to grow rich. Invest in mutual funds based on risk profile. This is the ability and willingness to bear risk. Mutual funds offer high returns at high risk. Make investing in mutual funds through SIPs a monthly exercise and reap the returns.
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