Investing vs Loan Repayment | 2022 | CA Rachana Ranade

"People who find themselves with extra cash can face a dilemma. Should they use the money to pay off—or at least, substantially pay down—that pile of debt they’ve accumulated, or is it more advantageous to put the money to work in investments that will grow for the future? Either choice can make sense, depending on the circumstances.

In this video we have discussed, how to understand if we should prepay the loan or we should invest the excess amount in the asset class.
In this video we have also discussed which asset class we should invest in.

Additionally, we will try to understand how to compute the amount of money we are going to save.
So to understand how to effectively decide between prepaying debt or investing, stay tuned till the end of the video. "

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Fundamental Analysis Course:

What is covered?
00:00 - Start
00:30 - Introduction
02:12 - Things to consider before making decision of prepaying loan or investing
05:18 - Exception to the rule of prepaying fast or investing in market
06:53 - Numerical example to understand the amount of saving
16:15 - Conclusion

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#RachanaRanade #loanrepayment #investing

[CARachanaRanade]

About the prepayment penalty short description with link

According to the RBI rule, banks are not allowed to charge you prepayment penalties on home loans.

[gchirag]

Being a chartered accountant, in my opinion, it's always better to knock off your loan first. It's very fancy to say that you can get 15% return from index and all but it doesn't work in that way. There are no return in straight line and you may face 2 to 3 years without having return while on the other hand you are paying hight interest in initial years. Every decision should not be taken solely based on calculations only. It's good to have a good sleep if your leverage is controlled. It's my opinion only, you may or may not agree.

[deepakagrawal]

I had preferred to close home loan and ignore all this maths. I have definitely peace of mind. :)

[shyamsundar]

Mistake 1: You missed taxes on the 47 lakhs. Even if it is invested for longer duration, LTCG has to be calculated and reduced from the 47 lakhs.
Mistake 2: when dividend payout and taxes on dividend is not even considered.( I don't know, whether you are considering 14% returns including dividend)
Mistake 3: current home loan interest rate in indian bank is 8.8% (Already RBI increased interest rate thrice without publicity)
Mistake 4: ETF & MF returns are subject to market risk, so you used only best returns rate for the calculation. You must project 3rd option with worst returns on ETF & MF.

[mathebulamkhize]

Making money is not the same as keeping it there is a reason why investments aren't well taught in schools, the examples you gave are well stationed, the market crisis gave me my first millions, people shy away from hard times, I embrace them.. well at least my advisor does lol.,

[akshaykumargowdar]

my way to handle this is don't buy property until you have 40% cash with you. repay the loan within 5 years or atleast a large chunk of principal. don't invest on stocks sip etc. always invest on land like sites in outskirts of city, farm land n earn tax free income from farm land

[akashdidwania]

Relying on possibility of equity returns can be fatal. As returns from equity is probable profit but loan interest is certain liability. Moreover, we should not assume that income will increase continuously and the expenses will not. This is just my perspective to repay as much principle as possible in the initial 5-7 years when the maximum interest amount is due to be paid. After this tenure, spare amount investment in equity would be a good proposition.

[SettyS]

The problem for lot of people is to find the right investment carriers that will give the 10-15% returns. Hence in my case also I chose to put all excess in home loan prepayment.

[ShoaibMohammad]

Investing may or may not help you to get return. But loan repayment will certainly help you reduce the loan amount

[figueroacamarillo]

I'm 58 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, we are finding it impossible to replace it. We can get by, but cant seem to get ahead. My condolences to anyone retiring in this crisis, 40years nonstop just for a crooked system to take all you worked for

[satysharma]

Repayment of loan for sure, nothing better than being debt free for a peaceful life Teacher Ji.

[vikramkumarp]

If the loan interest rate is above 10% simple go ahead and clear loan don't listen to anyone.. it's not about returns it's all about peace of mind

[petpuran_]

Hello Ma'am,
In option 2, following assumptions are made which may not be true over period of 15 years of time.

1. Assumption is investment in index fund
2. Rate of return on investment is 14% throughout 15 years.

Also following is not considered in calculations in option 1.
Persons investment after loan payout within 5_8 years also increases..that profit is missing in gain calculation in option 1

[basantchoubey]

The challenge is cash flow.. Is there a guarantee that a good cash flow will continue for foreseeable future.. In that case, it's better to invest the money rather than paying debt.. But if there is risk to cash flow, priority should be given for loan payment.. Statistically last couple of centuries, most of the business busted due to debt which they were not able to serve during bad times..

[ssmaitra]

CA Rachana has illustrated the comparison based on "absolute interest". Impact of LTCG/STCG on investment returns was not considered in the discussion.

An alternate viewpoint is to take time value of money into account i.e. look at XIRR of combined EMI & SIP installments + tax saving every year + LTCG/STCG at the end.
Put all the projected cashflows of EMI, SIP, Tax Saving, LTCG etc. into a spread sheet and calculate the estimated XIRR. Think of the whole scheme of things as a "single investment product" with incoming and outgoing cashflows. If XIRR is negative, it's unlikely the scheme will be beneficial.

Assume Home Loan interest rate of 10% & SIP return rate of 12% to keep some margin of error, in case you go wrong on estimating interest rates.

[AkashKhanwalkar]

Thank you so much for sharing your expert views. The "peace of mind" factor is rarely considered by experts.

[pranjal.pathakji]

Directly calculating the 30% tax savings on interest paid is not the ideal option because there is a 2 lakh maximum exception and most interest paid in a single year exceeds 2 lakhs. We do not receive the entire interest payment exemption. 15:25

[learnnnjoy...]

Thanks for the insightful video! It shed light on the nitty-gritty of loan repayment vs. investment, including the often-overlooked factor of changes in home loan interest rates. Once again, Thank you, @CARachanaRanade Jee !

[sathishbabu]

Madam,
Could you please help me to understand Rs. 13600 * 180 months became 80 lakhs and

14% of returns in investment are too high where we not getting even 12% returns.

So i like to get more information

[pranavagarwal]

Loan on fixed asset is always better than investment in other option.... U have not taken into account appreciation of the asset (in this case House ). After 15 years value of the house will also increase ... Lets say after 15 years house valuation has increased to 1.5cr .... In india 200% increase in house valuation after 15years is very likely... In a good Neighbor.... So effectively taking a home loan or any kindy of property loan is a win win situation