Mutual Funds

Fund query: How to plan SIPs when you have home loan EMIs

Aarati Krishnan | Updated on March 13, 2021

I am 33 years old, and had been investing in MFs through the SIP route. I was planning a for long-term investment, mainly towards a retirement corpus. But two years ago, I decided to purchase a premium apartment by a very reputed builder. Since then, I have had to temporarily stop my SIP investments to manage the down-payment, EMIs and other related expenses. I currently have investments in Axis Bluechip, Kotak Multicap, ICICI Prudential Large & Mid Cap, Aditya Birla Sun Life Equity Growth, and L&T Midcap. I wanted to know if I should exit/switch from the underperforming funds. Also, recently, I started investing ₹10,000 a month in NPS as I thought it a good choice for retirement. I plan to continue SIPs in Axis Bluechip. Should I make any changes to my plan?

Krishna

While buying a home of your own is a personal choice that tends to give you a lot of satisfaction, doing it too early in your career can have many disadvantages. Acquiring a home too early can lead to the EMI taking up too much of your disposable income, depriving you of savings potential for other equally important goals.

Given that rental yields in India are very low, occupying your home is often vastly preferable to renting it out to tenants. But living in your own home ties you down to a specific location and city. The reduced mobility resulting from this may reduce your flexibility on career choices, should your future employers want you to relocate.

You’ve not shared details of how much of your disposable income is taken up by the home loan EMI. If it is restricted to 30-40 per cent of your pay, as it should ideally, you should try and step up your savings out of the remaining surpluses so that your other long-term goals such as retirement do not suffer. If the EMI outgo is much larger than 30-40 per cent, this is a good time to try and get better rates by transferring your loan to another lender.

Fortunately, floating-rate home loans in the market today are available at rates as low as 6.7 per cent for borrowers with high credit scores. Given that we are at the bottom of a rate cycle, you can even try and lock into fixed-rate home loans even if they are at a premium to these rates. Home loan companies and banks usually offer much better rates to their new customers than to existing ones.

If the EMI outgo is much larger and leaves you with very little surplus, you should also try to prepay a part of your loan whenever you have a lumpsum saved up or receive a windfall, such as a bonus, from your employer.

From the list of funds you’ve provided, Axis Bluechip, Kotak Multicap (now Flexi Cap) are among the good performers in their respective categories. ICICI Prudential Large & Mid Cap and L&T Midcap are middle-of-the-road performers. There is no need to exit these funds.

From your query, it is not clear if you own Aditya Birla Sun Life Flexi Cap (earlier ABSL Equity), Aditya Birla Sun Life Frontline Equity or Aditya Birla Sun Life Equity Advantage. If it is the first, it is again a middle-of-the category performer and can be held. If it is Frontline Equity, it may best to replace it with a Nifty 100 index fund.

To build a sizeable retirement corpus, you will need a substantial equity allocation in your monthly investments. Currently, you probably achieve this through your monthly ₹10,000 investment in the NPS.

The NPS scores over mutual funds on low costs and flexibility to switch asset allocation and fund managers without extra costs or taxation. But a big minus with the scheme is that 40 per cent of your final maturity proceeds at retirement are required to be mandatorily invested in annuities, which yield low post-tax returns.

The equity plans under NPS have also had trouble outperforming index funds as well as active multi-cap funds, despite their low-fee structure.

You can, therefore, consider using your NPS investments for the corporate bond and government bond exposures in your retirement kitty while supplementing your NPS investments with SIPs in carefully chosen equity mutual funds (active and index) for the equity component of your portfolio. SIPs in equity funds will also allow you to exit underperformers if need be. You can run equity fund SIPs in Axis Bluechip and Kotak Multicap, along with Axis Nifty 100 Index Fund and ICICI Prudential Nifty Next 50 Index Fund. Do use the services of a qualified financial planner to work out the sums you would need for a comfortable retirement and your other long-term goals.

Send your queries to mf@thehindu.co.in

Published on March 13, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor