Home Loan: Is prepaying a home loan through mutual fund investment a feasible option?

Rising home loan interest rates have been a matter of concern as it increases the financial burden of borrowers. To prevent paying higher interests over time, home loan borrowers often pay higher EMIs every month and even go for the prepayment. However, prepayment of a home loan isn't an easy task and requires a huge amount.

Prepayment of a home loan helps in reducing the debt burden but it’s a good option when you have a surplus fund. On the other hand, you may not also get certain tax benefits on home loans if you foreclose a loan. These days many home loan borrowers are also relying on the mutual fund investment to prepay the home loan.

However, ascertaining whether it's a feasible idea could be difficult. It’s important to consider multiple factors, including the return on your mutual fund SIPs before you decide to prepay home loan with your SIP investments.  

Is prepaying home loan through mutual fund investments feasible?

Potentially higher returns: Though mutual fund SIPs come with a high risk, they also offer attractive returns. These returns can be used to prepay the home loan amount easily compared to other investment options that offer way lesser returns.

Risk mitigation: In mutual fund investments, risk is mitigated to some extent when the amount is invested in a diversified portfolio of stocks across various sectors. So, you can be assured of safety of investments to an extent along with lucrative returns. Therefore, mutual fund SIPs could be a better option than investing in the equity market directly, which is more prone to market volatility.

Savings on interest: Since mutual fund SIPs offer attractive returns too, in a shorter period of time compared to other investment options like Fixed Deposits (FDs), you'll be able to prepay the loan faster than expected. This will result in savings on the interest that you would have paid while repaying the loan for a longer tenure.

Create wealth: By regularly investing in mutual funds, you will be able to create a sizable amount before using it to prepay a home loan. There are high chances that your investment could be worth way more than the loan repayment amount and the surplus assets could be beneficial for you in the future.

How to prepay home loan using mutual fund SIPs?

Experts advise that home loan borrowers should initiate a mutual fund SIP that equals to a third of the Equated Monthly Instalments (EMIs). For instance, if you have taken a loan of Rs 1 crore at 10 per cent per annum interest rate for 20 years then your EMI every month would be around Rs 96,500. So, you should invest about Rs 32,100 in mutual fund SIPs, which is a third of the EMI amount.

While you would eventually repay about Rs 2.3 crore, the SIPs would create a corpus fund of a matching amount that could ease your financial burden by the time of repayment. Moreover, you can also choose to prepay the loan way earlier using the wealth created by these mutual fund SIPs. This would enable you to save on the interest along with a sizable investment corpus.