Withdraw from where – DSOPF, FDs or MFs – when Money is required?
This is always a tough decision to make and we should go back to our basics of why we invested in a particular investment avenue in the first place.
DSOPF is a long-term Provident Fund (PF) and is to be taken out only for events which are major milestones in one’s life, like higher education, marriages, very expensive travels etc, or really big emergencies like medical.
Mutual Funds (MFs) are omnibus investments which can be used for any purpose, duration and future needs. So, depending on the way your MF portfolio is structured, it can be used. For example, if you have catered for emergencies in your portfolio by taking very short term MFs, then this may be the resource to tap. But if it is equity-heavy, then taking it out for emergencies may be incorrect if you have other resources available. Equity MFs and long-term debt MFs are the best ways to build up long term wealth. Thus, a MF portfolio should be correctly poised to be ready for whatever purposes you think you want to use it for.
FDs are best taken for short term uses including emergencies. Since they usually have very low rates of interest and are quite tax-inefficient, they should neither form a big part of your portfolio nor be invested with any long-term goals in mind. They would always give negative tax-and-inflation adjusted returns. Withing the FDs, high-quality corporate FDs are always better as an investment than bank FDs but corporate FDs take time to be prematurely liquidated if money is required in a hurry.
If you plan well in advance using the above parameters, you may never have to face the dilemma which the subject of this snippet poses!
(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)
Should I Invest the Surplus Money or Prepay My Home Loan?
Do you have a home loan on your head? Are you confused about whether to pay off the loan or invest that amount?
Usually, this question arises when you have surplus money in your hand and you wonder which way to go ahead.
Before making a decision, keep the following points in mind:
- Tax Advantage: You receive a tax advantage for both principal and interest payments on your home loan. You can avail a tax benefit up to Rs 1.5 lakhs on the principal amount and an additional benefit for home loan interest up to Rs 2 lakhs in a financial year after your house is ready.
- Loan Remaining Period: As the interest part is higher in the earlier days of any loan due to the concept of Equated Monthly Instalments (EMI), you can reduce your overall interest outgo by part-paying the loan in initial days. But if your loan has already completed around half its tenure, repaying it may not be a wise idea as the interest part has declined substantially.
- Psychological Burden: You should also consider how much of a psychological burden a loan would place on you or your family. For example, at the time of retirement, almost everybody wants to be loan-free. You don’t want to spend your golden years carrying the psychological burden of a loan and its EMIs.
- Market Returns: If you can get a better rate of return from intended investments than the current interest rate on your home loan, then you can go for investment. As we know, the market is volatile, so the time horizon should be clear in your mind before investing the money.
There is no straight answer to this question. Your current physical and mental state, availability of money and the above four factors should help you to decide whether it makes sense for you to prepay or continue with the loan and invest that money, or maybe take a half-way call on both.
(Contributed by Yogesh Gola, Associate Financial Planner, Team Vikrant, Hum Fauji Initiatives)
Controlling the Hurricane..!!
The mind is turbulent. Controlling the mind is just like controlling a hurricane, or maybe even more difficult. Anxiety is the biggest obstacle to our happiness.
We check our whatsapp, facebook, instagram, investment summary, etc very frequently. And how frequently we do this, represents our anxiety level.
Investors often ask us what is the use of financial advisors when everything is available at a click on the internet. They need to understand that the need for advisors has increased exponentially nowadays because of this same fact: “Everything is available at a click.”
Under the influence of spontaneous emotions like anxiety, fear and greed, decisions may be taken at the spur of the moment which may be very difficult to reverse back.
In an attempt to chase high returns, investors forget the real purpose of money in their life – their family’s goals and requirements – and repent later.
It’s not an easy task to control this hurricane, and the teachers, coaches, financial advisors, etc are all deeply involved in assisting you in doing this.
What about the new investors?
Even Master Blaster Tendulkar considered his coach the major influence in his success right until his retirement…!!
(Contributed by Jatin Uppal, Deputy Manager, Hum Fauji Initiatives)