Mutual Fund vs Home Loan: Which One First

You have just bought that dream house and are busy paying the home loan EMIs. The stock markets are doing well and you also want to invest in an equity mutual fund. Now comes the problem. Should you repay home loan EMIs or invest your hard-earned money in an equity mutual fund?

Home loan and equity mutual funds are opposite in nature. With a home loan, you commit future expenses to acquire an important capital asset. (This is your new house). Calculate home loan EMIs with IndianMoney.com Home Loan Calculator. A mutual fund is an investment. It helps build wealth and make you rich. Now comes the dilemma. Should you buy a house by availing a home loan or build wealth through investments?

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Mutual Fund vs Home Loan: Which One First?

The difference between availing a home loan to buy your dream home and investing in mutual funds is your job situation. If you have a stable job and can afford the home loan EMIs and don’t have your own home, then avail a home loan. Banks have been cutting home loan rates getting that dream house within reach. Just make sure home loan EMIs don’t exceed 40% of your income.

Now, if you don’t have a stable job and stay in a rented house, you must invest your hard-earned money. On a job loss, you may not be able to pay the home loan EMIs. Finances could be tied-up and you won’t have the luxury of searching for a new job.

See Also: How To Invest In A Mutual Fund For Beginners?

Build Wealth and Then Buy the House

If you are paying less house rent, then consider investing in an equity mutual fund, if it matches the risk profile. This gives you an opportunity to build wealth by making smart investments and then buying the house.

Scout for cheap home loan rates when you have sufficient money. Buy that dream home when your income is high enough to repay that home loan. Invest in equity mutual funds for the long-term to build wealth.

What if you want to buy the house in 2-4 years? If you want to buy a house in a short time-frame, invest only that portion in an equity mutual fund that you can hold for the long-term. Keep the money you need for a down payment in debt funds. Make sure to have an emergency fund with at least 5-6 months of living expenses to meet any contingencies.

See Also: Mutual Fund Returns

Should You Buy a House If You Have a Low Salary?

Delay buying a house and continue investing in mutual funds, while staying in rented accommodation. This must continue as long as you have low income. You will also enjoy the HRA tax benefit.

What is the HRA Tax Benefit?

You enjoy the HRA tax exemption under Section 10-13A. The deduction is the lowest of:

• The actual house rent allowance received from your employer.
• 50% of basic salary + dearness allowance if you are living in a metro city. This is 40% of basic salary + DA if you are living in a non-metro city.
• Actual rent paid minus 10% of basic salary + Dearness Allowance.

See Also: Mutual Fund - A Complete Analysis

With time your salary rises. The HRA exemption is soon negligible with a high salary. Focus on buying the house of your choice with a low-cost home loan. The capacity to repay the home loan EMIs goes up. The investments are large enough to meet long-term financial goals. Create a contingency fund for emergency expenses.

Then comes the next question. If you have excess money, should you prepay the home loan or invest in equity mutual funds. This would help earn a higher return (You enjoy the compounding benefit or return on return). This is above the home loan interest rate you pay in the long run.

See Also: Everything You Need To Know About Mutual Funds

You have another option. You may continue to invest in mutual funds rather than repay home loans early. You continue to enjoy tax benefits under Section 80C on home loan principal up to Rs 1.5 Lakhs a year and under Section 24 on home loan interest up to Rs 2 Lakhs a year.

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