Can the Returns of Equity Mutual Funds Make You Debt-free?
Last Updated : Aug. 2, 2019, 12:45 p.m.
Long term loans such as home loans can be very enduring to say the least. Since it carries on for around 20-30 years on an average, it would require you to maintain discipline in your day-to-day spends, helping you repay the loan easily. Paying off the monthly EMI smoothly for long can add so much to your reputation as a borrower. However, life can take a U-turn at any time. You may remain jobless for an extended period, which could make repayment a tedious task. But not if you take something out of your pocket now to invest in a top-performing equity mutual fund. It can generate surplus money to an extent that you can pay off the debt easily. Won’t you ask, how can equity funds generate such money? You will, right? To know the answer, read the post further.
How Can Equity Funds Help You Get Rid of Debt?
What works for investors reposing faith in these funds is the money so collected gets dispersed across a wide range of equity instruments, which can be a big multiplier to wealth over time. Equities come with a high return proposition albeit there are fluctuation risks involved. It could potentially hand you with a sum to pay off the outstanding loan balance as would prevail on the said date. To give you a glimpse of the role of equity funds in paying off the debt faster, you can see an example below.
Example – Shekhar Bansal has been servicing a 20-year home loan of ₹50 lakh for the last one year. He is paying the EMI of ₹44,665 at an interest rate of 8.90% per annum. If he invests ₹10,000 in an equity fund monthly, he can generate a sum of around ₹32 lakh in 12 years from now. At that time, the outstanding loan balance would be around ₹27 lakh. So, the equity fund investments can help Shekhar close out the loan in 12 years. Overall, the loan will run for 13 years since the investments are presumed to be made a year later to the beginning of the repayment. Shekhar can reduce the interest payment by nearly ₹10 lakh using the investment surplus.
Which is Better – SIP or Lump Sum – to Invest in Equity Funds?
You can invest in equity mutual funds via a Systematic Investment Plan (SIP) or lump sum. While SIP means periodical investment in mutual funds, the lump sum is typically a one-time investment in the said asset class. As the SIP has a power of compounding effect, you can generate substantial wealth over time. Also, the SIP tends to operate better than the lump sum in a fluctuating market scenario by keep accumulating the units at different prices. The constant accumulation of units at different prices over the investment term tend to average out the cost of investments and reduce the impact of fluctuations. It, therefore, helps you do away with the nearly impossible task of timing the market that most do without any success.
Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme document carefully before investing”.