SIP or VIP?

Every one of you must be aware of the concept of SIP which is called as ‘Systematic Investment Plan’. Under this you will keep on investing a fixed amount on a particular date of every month into the Mutual Fund plan of your choice. This will definitely give you advantage of rupee cost averaging. As you are making purchases at regular interval at varying prices, it will give you better returns in the long term.

Irrespective of the market conditions, the same amount will be deducted from your account periodically and will be invested into the market. But have you ever thought that your returns would be maximized if you can invest more money when market is down and less money when market is up. Every person wants this kind of control over their portfolio, but in practice this is not possible.

What if I say that you can have this control over your investment while doing SIP only? Yes, you read it correct. Here comes the term called VIP which stands for ‘Value Averaging Investment Plan’. This approach goes one step forward to SIP.

So what exactly happens in this approach? Here is the brief description of the same:

Some Mutual funds allow you to start a monthly SIP in the debt schemes of your choice. So let’s say you have started a SIP of 1000 Rs. in a particular debt scheme. Now the fund house calculate the market condition based on all the valuation tools available in the market and classify the market into 3 broad categories:

1.  High – Market is at its peak.
2.  Low – Market is at its low.
3.  Medium – Market is somewhere between High and low.

After deciding the market condition, they will transfer a certain amount from that debt fund into one of the equity fund of your choice on 10^th of every month. Now the question which might arise in your mind is- what is that specific amount?

That amount is calculated as follows, for 1000 Rs. SIP:

• Rs. 1500, when market is Low
• Rs. 1000, when market is Medium
• Rs. 500, When market is High

This will help you maximize your returns further. As it will take in account the rupee cost averaging effect as well as it will help you to time the market that too without putting any stress on your mind.

Thus, I would personally recommend you to have at least one VIP plan, which really helps you to generate wealth in the long term.

If you need any help regarding the same, please do not hesitate to bother me. I will put in my best efforts to explain you the things further in detail.

Is Prepayment of Home Loan a good option?

These days the prices of Real estate are so high that home loan becomes an obvious thing, if you are planning to buy your dream home.

But have you ever think that prepayment of home loan is a good idea or not and whether it would be beneficial to you in the long run?

Here in this article, I will explain various scenarios based on which you will be able to realize that prepayment will surely leads to huge benefits in the long run.

Scenario:

Let’s take an example where Mr. A has taken a loan of 60Lakhs for his home at a floating rate of 11% for 20 years tenure. His monthly EMI would be Rs.61,931. Thus he would end up paying Rs. 1,48,63,440 at the end of 20 years which include the interest payment of Rs. 88,63,440.

The below chart shows the Principal and Interest payment over next 20 years. The green portion of the chart represents the Interest payment and blue represents the principal payment.

Now what will happen to your loan if you prepay 1Lakh at the end of one year? This will reduce the amount outstanding to Rs. 5835274 and thus the total interest paid by you now will be 76,07,880.  Thus you end up saving a whopping 12Lakh Rs. just by making prepayment of Rs. 1Lakh

Whenever you make a prepayment, you have two options:

1.    Keep the EMI same and reduce the Tenure,
2.    Keep the tenure same and reduce the EMI.

So which one is better out of these two? Let’s consider our earlier example only and evaluate the scenario.

·        -  If you keep the EMI same and reduce the tenure, the effective tenure would now be 18 Year and 1 Month. The total interest paid till the end of loan tenure is 76,07,880.

·        - If you keep the tenure same and reduce the EMI, your new EMI would be Rs. 60,383. The total interest paid till the end of loan tenure in this case would be 86,41,920,  means a saving of Rs. 2Lakh.

Thus it is always advisable to keep your EMI same and reduce the loan tenure to reap the extra benefits.

There is one more scenario – whether to prepay on a regular basis or to prepay a minimum amount (keeping the EMI same)?

Let’s suppose you continually prepaying 1Lakh for 5 years and in another case you prepay 5Lakh at the end of fifth year. Now which one would be better?

·       - In first scenario where you will be prepaying on a regular basis, the total interest paid by you till the end of loan tenure will be 60Lakhs.

·       - In the second case where you prepay 5Lakh at the end of Fifth year, the total interest paid by you till the end of loan tenure will be 64Lakhs.

Hence it is obvious that making regular prepayments is much more beneficial than making lump sum payment.

Therefore, it is always favorable to make prepayment of your home loan whenever you have surplus cash available with you and to maintain the EMI at the same time. Since Interest is always calculated on outstanding loan amount, repaying will reduce the same and therefore lowering the interest amount payable.

Hope this article will make some changes in your financial life and will help you to understand the benefits associated with Prepayment.