Mutual Fund : Investors who have placed their money in mutual funds have experienced significant returns, with many schemes reporting annual gains between 30% and 50%. This impressive performance has led to substantial increases in the value of their investments. However, there is a growing concern among investors regarding the sustainability of these gains, particularly in light of potential market downturns that could result in losses.
For those sitting on considerable profits from mutual funds, a critical decision arises: should they withdraw funds to pay off home loans or other debts, or should they maintain their investments?
It is important to consider that home loans typically have long repayment periods, which can lead to substantial interest payments over time. Even with a low-interest rate, the total interest paid can amount to several lakhs. By opting for prepayment, investors can decrease their principal balance and save on interest costs.
Conversely, home loans come with tax advantages under sections 80C and 24(b), and prepaying the loan could diminish these deductions. If tax exemptions are a key strategy for managing taxable income, fully repaying the loan may not be the most prudent choice. Additionally, withdrawals from mutual funds are subject to taxation, with long-term capital gains (LTCG) tax on equity mutual funds set at 12.5% for profits exceeding Rs 1.25 lakh per financial year, while capital gains from debt mutual funds are taxed according to the individual’s income tax bracket.
Could pose a financial risk if an emergency fund is not in place
Furthermore, mutual funds are liquid assets, allowing for quick access to cash in emergencies. In contrast, once a home loan is prepaid, the property is effectively locked in, which could pose a financial risk if an emergency fund is not in place. Therefore, redeeming mutual funds to prepay a loan without a solid financial cushion may leave investors exposed to unforeseen circumstances.
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