Mutual fund returns are rising, and investors are seeing significant gains. At the same time, home loan interest rates remain high, leaving many wondering if they should redeem their mutual funds and use the money to prepay their home loans. It’s a critical financial decision that depends on multiple factors.
Adhil Shetty, CEO of Bankbazaar.com, explains, “When mutual funds deliver higher returns, they can outpace the interest you pay on a home loan. For instance, if your mutual fund generates 12% annual returns while your home loan rate is 9%, you gain a 3% net advantage by staying invested. Redeeming the funds would mean losing this potential growth.”
However, this calculation depends on the consistency of mutual fund performance. Equity mutual funds, for instance, are market-linked and can fluctuate. If your investments are volatile, you may not see steady returns, making prepayment more attractive.
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Evaluate the Home Loan Interest
Home loans come with long tenures, which means paying high interest over time. Even if your interest rate is moderate, the cumulative interest can be significant. By prepaying a portion of the loan, you can reduce your principal amount and save on interest.
For example, if you have a Rs 50 lakh loan at 8.5% for 20 years, prepaying Rs 10 lakh can save you over Rs 13 lakh in interest and reduce your loan tenure by several years. This can bring peace of mind and financial freedom.
Tax Implications of Both Options
Mutual fund redemptions may trigger capital gains tax. The Long-Term Capital Gains (LTCG) tax on equity mutual funds is 12.5% for gains exceeding Rs 1.25 lakh per financial year, while capital gains on debt mutual funds is taxable at the recipient’s applicable income tax slab rate, rather than the new 12.5% LTCG tax rate.
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