I am 40 years old and have taken a career break for a year. I received Rs 5 lakh as my gratuity and want to invest this amount in an avenue where I can get compounding interest. I want to use this money to end my home loan of Rs 18 lakh by May next year. I also have an LIC policy which will complete 10 years in December this year, so I will be able to withdraw Rs 4 lakh from it. Where should I invest the money to get high returns? I am ready for high risks too.
You should start using your gratuity proceeds for making home loan prepayments instead of investing it for just 11 months and then, redeeming the investment for making prepayments. Same should be the case with your LIC maturity proceeds if you intend to invest it for just 5 months and redeem the investment to prepay your home loan. The earlier you make prepayments, the higher would be your savings in home loan interest cost.
In the long term, the returns generated by equities or equity mutual funds are usually higher than the home loan interest rates. However, for the short-term investment horizon that you have, equities as an asset class can be very volatile. Moreover, equity indices are also in their all-time highs. Thus, any major correction or prolonged bearish phase in the equity markets during your investment horizon can sharply erode the market value of your investment. This would either lead you to book losses for making prepayments or postpone your prepayment plans.
While investing your gratuity and LIC maturity proceeds in fixed income instruments would ensure capital preservation and income certainty, the post-tax returns generated by these instruments would be much lower than the interest rates charged on your home loan.
As published in Economic Times on July 10, 2023