Should I prepay my home loan or invest the surplus in mutual funds?

I am now 36 and have a lump sum of Rs 36 lakh. Should I use it to pay off my home loan or invest in equity funds for my retirement?
- Rudra

Go with equity funds here. But before talking about it, I would like to highlight that we always urge to never borrow. But borrowing to buy a home is one such loan that is fairly acceptable. It comes at a comparatively low cost and gets you a tax break. Thus, home loans turn out to be the only justifiable borrowing.

But a home loan comes with two riders - subject to that you are going to live in this house which will actually save your rental outflow. And it should not be an investment, as the rental yield will not justify the interest you will incur. The appreciation is all up in the air - when it happens, when not and when will the supply improve or squeeze, etc., remain blurry.

Also, I would like to warn those who consider real estate as an investment - it is not the same old real estate. The folklore that you heard that someone bought a plot for Rs five lakh which is now worth Rs five crore is not there anymore. We see the other side of the story that you bought something that you never received or that never went up in value/appreciated or that notionally has gone up but one is unable to sell it.

For the EMI of the home loan, I hope you already made sure that the EMI (Equated Monthly Installment) of the borrowed money does not exceed one-third of your income. I hope you have taken care of all these things while taking that home loan.

Now coming to the investable surplus you have, invest this money in equity funds but don't do that in a hurry. I would say spread this investment over a period of two-three years. The general thumb rule to decide the duration is to spread it over half the time it has taken you to earn this amount. If it is a once in a lifetime kind of windfall, spread it over three years.

This article was originally published on September 25, 2019.