Save, Invest or pay off debt?
This is perhaps the most often asked question. I have seen people mess up quite dramatically. One HR consultant once called me and said “I have Rs. 52,000 where can I invest?’. So I got of on the pedal saying “Equity is good for the long term….etc”. Then when there was a blank from the other side, I thought let me make it simpler.
I asked her how much has she paid on the credit card…she said Rs. 1600. Then I found that she was paying ONLY 5% OF THE AMOUNT OWNED – because that FIGURE was in BIG, BLACK AND BOLD! Then she paid off Rs. 32,000.
This of course is an extreme case, but there are many howlers. One girl about to join for her MBA was doing an SIP in an equity fund. Now when she needed money, she found her NAV at 50% of her investments. Both aggression and pessimissum can be bad for a portfolio. If you know exactly when you need the money you are normally better off in a debt instrument if the period is less than 3 years. Only if you have a vague idea – and say the period is 10+ years away should you think of an equity fund.
If you have a personal loan (or worse credit card debt @ 51% p.a. from the bank which does not let people sleep), a car loan, etc. I am not sure that you should be investing at all! Partially yes perhaps, but normally investing makes sense only when you have just a home mortgage. Most other loans are likely to be expensive and tax unfriendly.
So it is really very difficult to give one short answer. It really depends on case to case. For a 23 year old girl who wants to do her MBA 2 years hence, and fund her marriage expenses (at least partially)….bank recurring deposit or A MIP (with 20% in equity) is not a bad option at all. STAY AWAY FROM EQUITIES!
shiva
Subra, thanks for this post! I face enormous pressure from my parents and in-laws to pay off my home loan (@8% for 20 years at 37k per month EMI). I strongly resist it and route my money to SIPs on decent mutual funds. I don’t have any other debts and I don’t anticipate having to take out the invested money for the next decade or two (unless something goes horribly wrong). I think I’m right in continuing my home loan instead of paying it off..
Abhinav
Hi Subra
thanks for the post and your views. I completely agree with the same. Equity is good only for the long term – but due to consistent downturn in the markets, the problem I face is what constitutes long term – for e.g. once for a goal due in next 5 years, I had recommended keeping an debt:equity of 80:20. but that also backfired as the debt returns were offset due to weak performance in equity….
also, we can go into n no. of calculations on qn of fresh investing vs closure of home loan – i believe the psycholigical aspect of this has to be also looked into – somebody like me will want to get rid of loan burden” as early as possible, despite investing giving 1-2% better returns..
thanks for your wonderful posts again!