An outstanding loan of Rs.1 crore is stressful. It is enough to drive away anyone’s sleep. When Kapil (name changed), a doctor by profession, bought a 2BHK apartment without thinking much about how he was going to repay such a hefty loan; that is exactly what happened to him. Kapil found that despite his good income he was struggling with his finances. This state of affairs continued for three years.
Kapil was in a bind. A look at his investment pattern will show us why. Kapil was investing 30% of his annual income in multiple FDs instead of repaying the high interest loan. While the bank charged an interest rate of 9% on the home loan, his FDs were fetching him annual returns of 6.25%, effectively 4.18% post tax returns.
In spite of earning well, Kapil was under a lot of financial stress. When he voiced his worries to a friend, Kapil was advised to take the help of Dilip Shenoy, a financial advisor.
Dilip reviewed the situation and advised Kapil to open a home saver account to repay his loans.
Home saver accounts give the borrower an option to deposit excess savings in an account linked to the home loan account. Account holders can withdraw from this account in case of emergency as it has overdraft facility. Simply put, such an account uses your deposit in current or savings account to offset some part of the principal amount from the loan account, reducing the overall loan liability.
“On analysing Kapil’s situation, I realised that a home saver account was a better choice for him. A home saver account not only helps reduce the loan liability, it offers liquidity to account holders,” Dilip said. Kapil saved Rs.5 lakh annually on interest payment with the home saver account, and his loan liability came down significantly, the financial advisor told Cafemutual.
On probing, Dilip found that Kapil wanted to start his own clinic post retirement; he also needed money for his children’s higher education and wedding. A busy doctor, Kapil had not made any concrete plans to achieve these goals. “When we discussed his future goals, I made him realise the importance of saving for retirement. I told him about the future value of his post retirement expenses after inflation,” Dilip said.
He further said, “After analysing Kapil’s risk appetite and time horizon, I advised him to start investing in equity funds through SIP. I recommended him to start investing a total of Rs.40,000 monthly in diversified equity funds through SIP – Rs.20,000 for his clinic, Rs.10,000 for children’s education and wedding and Rs.10,000 for post-retirement expenses.”
Explaining the rationale for his recommendations, Dilip said that Kapil has a high risk appetite and long term horizon. “We have set a target of accumulating Rs.6 crore post retirement to fund his financial goals. Since Kapil is currently 36 years old and he plans to retire at 65, we have close to 29 years to invest. Equity funds are the best fit for long-term investments as these provide better risk adjusted returns,” the financial advisor adds.