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How to Prepay Your Home Loan Using Mutual Fund SIP?

Highlights

  • Want to finish your home loan before the original tenure? Look to generate corpus using the mutual fund SIP route!
  • But how much should you invest and which funds should you trust for the same? Find out here!

Buying a home is like a dream come true for many Indians. And many have fulfilled their dream using loans from banks and other financial institutions. However, the dream must not become a burden for you! Life doesn’t get any easy as you grow older. So, if you face any unforeseen circumstances years down the line, it won’t be easy for you to repay the loan. To ensure you ride those tough times successfully, make sure to accumulate enough savings to prepay your loan before it runs its full lifetime.

But how will you save the desired corpus for prepayment? Maybe you should think of investing in mutual funds via a Systematic Investment Plan (SIP). An SIP helps you invest a fixed sum of money in mutual funds at any of these predetermined intervals – daily, weekly, fortnightly, monthly, quarterly, half-yearly or annually. However, the monthly interval is the most feasible option. Read this post more to know how can you make home loan prepayment via SIPs.

How Much You Need to Invest in SIP for Prepayment?

This will depend pretty much on your loan structure, income, savings and expenses, etc. The loan structure means how much loan you need to pay, the rate of interest and the time for which the loan will be there. All you need to do here is to put these variables in the EMI calculator. Not only will you see the Equated Monthly Installment (EMI) that you are paying, but also the principal & interest that you will pay each year through the installments. If you check the calculation thoroughly, you’ll also get to see the likely outstanding balance every year. Now decide the time by which you can pay off the loan either in part or full.

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Expected Rate of SIP Returns Will Also Dictate the Monthly Investment Amount 

Use the SIP calculator and see the surplus you are likely to generate across different periods. You need to enter the monthly SIP investment amount, the expected rate of annual return and the investment period in the calculator. As far as the rate of return is concerned, it is not fixed and varies according to market conditions. Just put a conservative figure of 12% and see what the calculator flashes out. 

An example below will help you figure out the monthly investment amount better.

Example – You took a loan of ₹50 lakh at 8.75% interest rate for 20 years. With that, the EMI turns out to be ₹44,186. At this pace, you could end up paying interest of around ₹56,04,529 through the EMIs. Assuming you earn ₹1 lakh, the income post the EMI deductions will come out as ₹55,814. Now if you spend another ₹30,000 towards household and travel, you will still be left with a handy ₹25,814.

Keeping in mind the contingencies one may face, you can earmark at least ₹10,000 towards SIP. You can close the loan fully in 12 years at an assumed return of 12%. In 12 years, you’ll accumulate a sum of around ₹32.20 lakh (approx.), more than the likely outstanding loan balance of ₹30.42 lakh (approx) by that time. You might ponder over your retirement days and think of saving some surplus to live those times. Let’s be told it’s the right thing to do. You can pay a chunk of the total outstanding balance and let the corpus build on further with an SIP. 

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Why Should You Go for Home Loan Prepayment Via SIPs?

A question worth asking given the numerous investment avenues in place. An SIP is worth investing in on account of the following factors. 

Average Investment Cost Comes Down

The money you invest in SIP goes into stocks of various companies having different fundamentals and scenarios. So, there’s no denying the volatility your SIP investments may face in a long period. But since the money goes on a month on month basis, the number of units allotted and the price of acquiring those units will differ each time. So, when the market falls, your investments will buy more units at lower prices. As the market goes up, the SIP investments will buy less units at greater prices. What this does is lowers down the average cost of investment. 

Scope for Greater Returns with the Power of Compounding Feature

SIP investments are likely to generate greater returns owing to the ‘Power of Compounding’ feature. The compounded returns elevate your earnings to a greater level, easily accommodating the inflation that may be the case. 

Investments Remain Under the Supervision of Fund Managers

What makes a difference between investing in stocks directly and via mutual funds is the highly experienced fund managers that take stock of the latter. They take the call on your behalf taking into consideration the prevailing market scenario. As the market is all but full of volatility, it can be extremely tricky to invest directly in stocks if you don’t have the requisite knowledge. 

Helps Maintain Investment Discipline

The monthly SIP investments will make you maintain the spending discipline required to invest the desired sum in mutual funds. 

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Having said all the qualities of mutual fund SIP investments, you must not get perturbed by short and medium-term fluctuations that can be the case here. So, adjust your mind accordingly and accumulate enough for home loan prepayment via SIPs, by the time you wish to.

Which Mutual Funds Should You Look to Invest in via SIP?

As it’s about home loan prepayment, you should choose a mutual fund that must have performed over the long-term. At the same time, it won’t be bad to consider 2 to 3 funds via SIP. With that, you are only increasing the pace of diversification. The maximum chunk should go to large-cap and multi-cap funds. A bit of exposure in mid or small-cap is also warranted. But choose the funds carefully by checking their performance consistency and the kind of asset allocation they come with.

Equity Funds3-year Return5-year Return10-year Return
Axis Bluechip Fund16.43%15.17%-
SBI Focused Equity Fund14.61%14.41%16.46%
Mirae Asset Large Cap Fund8.42%11.34%14.81%
SBI Small Cap Fund8.28%12.87%20.68%
Axis Midcap Fund14.74%13.86%-

Note – Data sourced from Value Research as on Feb 18, 2020.

Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme related documents carefully before investing”.