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Should I invest for the long term or use the surplus to prepay my education loan?

Dhirendra Kumar sheds light on investing the surplus in equity

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I am 26 and currently working as a Market Research Analyst. I have an outstanding education loan of about Rs 10 lakh and usually, I am left with a monthly surplus of Rs 5,000 to 7,000. Should I continue to accumulate it in my savings account with an objective of pre-paying my loan or should I invest it elsewhere? The interest rate is somewhere around 9 per cent.
- Shipra

You need to just revisit the terms of your education loan. One is that the interest rate is somewhere around 9 per cent but things like what is your obligation, how often you're supposed to pay, etc., also matter. If you just accumulate the surplus money in your savings bank account, it will not earn more than anywhere between 4 to 6 per cent, which is not good enough. It means if you're going to keep it in your savings bank account, you might periodically repay your loan as well.

If you really want to carry on with your loan and accumulate your money in a manner that will generate a higher return than your interest on the outstanding loan, then you should consider investing in equity or an aggressive hybrid fund. But for this, you need a time frame of at least three-five years. If you have five or more years and you can defer the repayment of your loan during that period, you may consider doing an SIP. This may, in the long-term, provide you with more money to repay because the differential between 9 per cent and the rate of return that you can earn on your investments will be an extra gain.