I am 40 years old and have taken a career break for a year. I received Rs 5 lakh as gratuity and want to invest this amount in an avenue where I can get compounding interest. I want to use this money to repay my home loan of Rs 18 lakh by May next year. I also have an LIC policy, which will complete 10 years in December this year, so I will be able to withdraw Rs 4 lakh from it. Where should I invest the money to get high returns? I am ready to take high risk.
Naveen Kukreja, CEO and Co-founder, Paisabazaar.com:
You should start using your gratuity proceeds for making home loan prepayments instead of investing it for just 11 months and then redeeming it to prepay the loan. The same should be the case with your LIC maturity proceeds. Do not invest for just five months and redeem to prepay your home loan. The earlier you make prepayments, the higher would be your savings in home loan interest cost.
In the long term, the returns generated by equities or equity mutual funds are usually higher than the home loan interest rates. However, you have a short-term investment horizon and equities as an asset class can be very volatile in such a short period. Moreover, equity indices are also at an all-time high. So, any major correction or prolonged bearish phase in the equity markets during your investment horizon can sharply erode the market value of your investment. This means that you would either end up booking losses for making prepayments or would have to postpone your prepayment plans.
While investing your gratuity and LIC maturity proceeds in fixed income instruments would ensure capital preservation and income certainty, the post-tax returns generated by these instruments would be much lower than the interest rates charged on your home loan.
Does it make sense to buy a second house after the loan for the first one has been paid off? The responses to such queries on the Internet are biased as most are from property websites. In the current economic scenario, when home loan rates have bounced back, should one buy a second house in a tier 1 city? Should one opt for land instead of an apartment, or is it better to keep investing in mutual funds?
Raj Khosla, Founder and Managing Director, MyMoneyMantra:
With sufficient disposable income in hand, investment in real estate can be a good decision as long-term prices and rentals tend to rise. Besides, property purchase offers tax benefits. However, the decision is not so simple and depends on various factors, such as cash-flow requirements, risk-return appetite, which is the most important, and time horizon of the investment. Mutual fund investment should be continued as it offers liquidity, high returns in the long term, and is an important tool for retirement planning. Real estate investment, whether in property or land, is a good option, but you should not put all the eggs in one basket.
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