The Reserve Bank of India’s (RBI) decision to reduce the repo rate, translating into smaller equated monthly instalments (EMI) for loan repayments, and the Union Budget lowering the tax burden will boost disposable income. This will allow individuals to save more and spend on long-deferred purchases.
Though the proportion of investing, loan repayment and spending are subjective, experts say, middle-aged individuals who have multiple financial responsibilities and goals ahead should invest 50% of the additional disposable income in equity mutual funds via systematic investment plans (SIP) yielding annualised returns of at least 12%.
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Allocating 30% toward prepaying loans, particularly high-interest ones such as personal loans and credit card outstanding, will reduce overall interest burden and improve financial stability. The rest can be put for discretionary expenses or building an emergency fund for liquidity. “This proportion will ensure a balance between wealth creation, reducing liabilities, and maintaining liquidity,” says Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor.
Sonam Srivastava, founder, Wright Research, says investing ensures inflation-beating returns, while debt reduction enhances cash flow. “By allocating the sudden rise in disposable income efficiently, individuals can secure their financial future while optimising both returns and debt repayment, maximising the benefits of lower interest rates and tax savings,” says Srivastava.
Those with home loans should gradually prepay to save on the interest over a longer period. “To be debt-free in five years for a housing loan, ensure that you are paying at least 20% of the loan balance every year through a combination of EMIs and pre-payment,” says Adhil Shetty, CEO, Bankbazaar. com.
Step up investments
For investments, one must consider today’s annual income and adjust for 6% inflation over the next 10 years. That will give an estimation of the annual income one can expect at the age of 50. Multiply that by 25 to get the investment goal. Let us say that number is Rs 1 crore. With an annual return of 12%, one should invest about Rs 50,000 a month in an equity-oriented mutual funds to achieve his financial goal in 10 years.
Investing a portion of savings not only helps build financial security but also optimises tax benefits. Certain investments such as Public Provident Fund and National Pension Fund are exempt from tax at maturity.
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