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Should I use my lump sum to reduce my home loan or invest it in mutual funds?

Dhirendra Kumar gives a few broad rules to approach this dilemma

I am an officer in Maharashtra Bank and am posted in Mumbai. I sold some land in Pune for Rs 30 lakhs. I want to buy a flat worth Rs 50 lakhs in Mumbai for which I am getting a loan. I want to know whether I should use this Rs 30 lakh amount for the flat or invest it and finance the flat entirely with the loan.
- Sanjay, Mumbai

Transcript: This is primarily for you to decide. However, I can give you a few broad rules for this dilemma. First, only buy a flat to live in and not as an investment, and second, make sure your EMI is below one-third of your monthly income. If both these rules are met, you can continue with your home loan. The strategy here is that you get more returns from your mutual fund investments than the interest you pay on your home loans. However, this strategy is unique to home loans and does not extend to credit card or personal loans which you must pay off. Invest if you are willing to wait for more than 5 years and do not invest in one go.

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