Which is more Important – Prepayment or Investment?

Whether to stop investing money when home loan EMI starts, is a good financial decision?

Regular investing with long term objective is desirable.

But investing is still recommended when a person has home loan burden?

For an average individual, home loan EMI is perhaps the biggest expense that one incurs on monthly basis.

This is one reason why when home loan EMI starts, people are forced to compromise on lot of things.

The first casualty is investment.

To make up for the EMI payments each month, people halts their running investments to nearly zero levels.

In the initial months, the pinch of home loan EMI is felt the most.

Suddenly from zero levels, a expense in tune +30% starts in form of EMI payment.

Even for a financially healthy person, this level of expense adjustment is tough to manage.

People generally liquidate all their investments and savings while purchasing a home.

The cost of homes for an average person is so high that this kind of action is understandable.

After lapse of few months, when the person gets adjusted to EMI’s, he starts to save some money.

If the person is financially aware, the first thing that he/she will do with his savings is to make prepayments on home loan.

I personally follow the principle of early home loan prepayment to its core.

But does this mean that payment of EMI and making prepayments is sufficient?

Not investing while the home loan EMI is in progress is acceptable?

In the first year this may be the case, but when no-investment-status is maintained for longer duration, it is not advisable.

The bigger question is, people who have spare funds, should distribute their savings between prepayment and investment?

The answer is a big YES.

How to invest money when Home Loan EMI Starts.

When a person buys a home, the invested money gets locked.

This is illiquid money that cannot be partially liquidated.

This is one reason why a real estate property is called as hard asset.

Consider a case where one faces a medical emergency and there is a requirement of Rs.150,000.

A person who has only hard assets (like residential property worth Rs.18 lakhs) cannot generate this Rs.150,000 from his property.

Unlike hard assets, Mutual funds, stocks etc are paper assets.

There is a lot of flexibility when one is dealing with paper assets.

Consider a case where one faces a medical emergency and there is a requirement of Rs.150,000.

A person who has paper assets (like stocks worth Rs.10 lakhs) can be easily sold partially to generate Rs.150,000

Informed investing in paper assets like stocks and mutual funds can be treated as ones locked savings.

Whenever one desires, the same can be sold (partially or fully) to have liquid cash in hand.

No matter how well one is invested in real estate properties, it is still essential to keep a back-up of liquid paper assets.

Paper assets (stocks, mutual funds) not only gives great returns but are also redeemable when needed.

It works great in times of emergency.

Final Words…

Having a back-up plan for tough days is a must.

Real estate properties like self-occupied homes cannot ensure such a requirement.

Building and maintaining an emergency fund in form of paper assets is a good idea.

It not only locks the money but are easily redeemable when necessary.

If ones EMI’s is say Rs.25,000, investing Rs.2,500 (10%) into a index fund is a good idea.

It will not only give decent long term returns but also ensure good investment diversification.

Investing in index fund through SIP route is advisable.

Over a period of time, when ones earning power increases, SIP proportion can also be systematically increased.

Make sure that you do not stop investing when home loan starts.

Building a simultaneous portfolio of paper assets is strongly suggested.

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