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By:

C.S. Krishnamurthy

21 June 2025 at 7:45:51 pm

Let Your SIP Fight Your EMI

When Ramesh bought his first home, he was delighted. The keys were finally in his hand, but another number immediately occupied his mind: the monthly EMI. “Now that I have some money left after paying my EMI, what should I do with it?” he asked his financial adviser. “Or should I start investing? And if I invest, won’t I be carrying a loan unnecessarily?” A home loan can run for 15, 20 or even 25 years, while the desire to become debt-free keeps growing. But does a borrower necessarily have...

Let Your SIP Fight Your EMI

When Ramesh bought his first home, he was delighted. The keys were finally in his hand, but another number immediately occupied his mind: the monthly EMI. “Now that I have some money left after paying my EMI, what should I do with it?” he asked his financial adviser. “Or should I start investing? And if I invest, won’t I be carrying a loan unnecessarily?” A home loan can run for 15, 20 or even 25 years, while the desire to become debt-free keeps growing. But does a borrower necessarily have to choose between repaying the loan faster and investing for the future? What if both could be pursued simultaneously? Could a Systematic Investment Plan (SIP) create a corpus that eventually helps reduce or even close the home loan? The idea merits consideration. A SIP is not a magic formula for becoming debt-free, but it can create a second financial track alongside the regular EMI. Two tracks, one objective Consider an illustration. Suppose a borrower takes a home loan of ₹50 lakh at an assumed interest rate of 8.5 pc for 20 years. The EMI would be around ₹43,400.
Instead of putting every available rupee into the loan, the borrower could consider investing ₹10,000 a month through a SIP, provided the household cash flow permits it. At an assumed annualised return of 12 pc, a ₹10,000 monthly SIP could grow to roughly ₹8.24 lakh in five years, ₹23.23 lakh in 10 years, ₹32.22 lakh in 12 years and ₹50.45 lakh in 15 years. While these are not guaranteed returns, the possibility of higher returns is also not ruled out. Meanwhile, the outstanding home loan would gradually decline through EMIs. Over eight to 10 years, the SIP corpus could become substantial enough to give the borrower an additional financial option. The important point is not to decide today exactly when the loan will be closed, but to review the position when the time comes. Why not simply prepay? Prepaying the home loan provides a relatively certain benefit because every rupee of principal repaid reduces future interest outgo, subject to the loan terms and applicable rules. The SIP serves a different purpose. It creates a financial asset and, over the long term, gives the investor an opportunity to participate in the growth potential of financial markets. The decision point comes later The strategy need not have a fixed finish line. After eight to 10 years, the borrower can review the situation rather than mechanically redeeming the SIP. What is the outstanding loan, the investment value and its performance? What are the prevailing market conditions? Is part-prepayment more appropriate than full repayment? These questions can guide the decision. If the corpus has grown sufficiently and circumstances are favourable, the borrower may consider using part of it to reduce the outstanding loan or, if appropriate, redeeming enough to close the loan completely. If the investment is better retained for the long term, there is no compulsion to exit merely because 10 years have passed. The strength of the strategy lies in this flexibility. Think beyond the loan A long-term SIP is not merely a future home-loan repayment fund. It can become a wealth-creation vehicle in its own right. Compounding rewards patience. A disciplined monthly investment held for the long term can help build a corpus for retirement, children’s education, other life goals or financial independence. Thus, while the home loan moves towards closure through the EMI, the investment has the opportunity to grow alongside it. Once the loan is eventually closed, the EMI disappears. Instead of allowing that money to quietly disappear into lifestyle expenses, the borrower can redirect some or all of the former EMI towards investments. A sensible balance This approach is not a universal prescription. Some borrowers may prefer aggressive loan prepayment, while others may find the combination of EMI and SIP more suitable. The SIP amount should also be comfortable. If ₹10,000 strains the monthly budget, start with less. The strategy should strengthen financial security, not create financial pressure. Adequate emergency savings and appropriate insurance should also form part of the overall financial plan. The larger lesson is simple: a home loan need not automatically put wealth creation on hold. With disciplined cash-flow management, a long-term investment approach and periodic reviews, the EMI can continue paying for today’s home while the SIP works towards tomorrow’s financial freedom. In the end, the question need not be, “Loan or investment?” It can be: “How can I use both wisely?” Disclaimer: “Mutual funds are subject to market risks. Read all scheme-related documents carefully.” (The writer is a retired banker and author. Views personal.)

Should You Prepay Your Home Loan?

Writer: Kaustubh Kale
Kaustubh Kale
Apr 25
2 min read

For many families, a home loan is the biggest financial commitment of their lives. So, it is natural to think that the faster you repay it, the better it is. After all, becoming debt-free sounds emotionally satisfying and financially responsible.


But personal finance is not only about emotions. It is also about opportunity cost.


Cheap Money

A home loan is usually among the cheapest forms of borrowing available to an individual. In many cases, especially for younger borrowers with longer tenure loans, the interest rate tends to be in a moderate range and is often on a floating basis. In the long term, as the economy grows, interest rates eventually reduce. 


If your home loan is currently costing you around 7.5% to 9%, this rate of interest will eventually go down in the future. Importantly, your long-term investments can potentially grow at 10% to 15% if you build a good basket of stocks, mutual funds, and gold. Thus, aggressively prepaying the loan may not always be the smartest move. The money used to reduce a relatively low-cost loan could possibly work harder elsewhere - in equity mutual funds, hybrid funds, direct equities, and gold as part of a balanced portfolio.


The Mistake

This is where many people make mistakes. They become obsessed with closing the home loan quickly and end up diverting most of their surplus income towards prepayment. In the process, they ignore other equally important goals such as retirement, children’s education, children’s marriage, and vacations. Basically, a home is one financial goal, not the only financial goal.


So, should you prepay your home loan? Yes, you can. But do not overdo it.


Smarter Way

A practical way to handle this is to increase your loan repayment gradually rather than aggressively. For example, if your income rises by 10% this year, you may consider increasing your effective home loan outflow by a similar percentage. If your EMI is 20,000 and your salary rises from 1 lakh to 1.10 lakh per month, paying around 22,000 instead of 20,000 can be a sensible middle path. Similarly, if you receive a bonus, you may use a portion of it, perhaps one-third of it, for prepayment.


This method helps you reduce the burden gradually and in a staggered manner, while also creating wealth in parallel by increasing your monthly investments in other assets.


Dividing Income

A useful rule of thumb is to divide your income equally into three buckets - regular living expenses, loans and EMIs, and long-term investing for future goals. If too much of your money goes into home loan prepayment, your long-term wealth creation may suffer.


Remember, life will continue to demand money for many other important goals.


Compounding Work

So, do not chase home loan prepayment blindly. Build financial assets in parallel through smart investing, prepay moderately, and let compounding work in your favour.


(The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal. He could be reached on 9833133605.)

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