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Save AND repay your loan

Uma Shashikant | June 27, 2005

Got a question about your money? What you should or should not do with it?

Our expert Uma Shashikant has the answers.

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My problem is actually the opposite of those who write in.

When it comes to spending, I am fairly conservative and spend only on the basic amenities. As a result, I manage to save a substantial portion of my income. Over the years I have been able to accumulate a substantial amount of capital.

But the problem starts here.

Being conservative where money is concerned, I am unable to get myself to invest anywhere other than bank deposits.

Any suggestions to break the jinx would be most welcome.

- Rajesh Vohra

You surely have an unusual problem!

I would suggest you begin small. Invest 10% of your savings in a tax saving fund. This is a mutual fund that invests in the shares of companies and simultaneously offers a tax benefit.

The tax break is the discount you earn on your investment... That must sound nice! To obtain more information on these funds, read Invest in an ELSS fund.

If pure equity puts you off, try investing in a balanced fund with a good track record. These are mutual funds which invest in both equity and fixed return investments. Put in just 10% of your savings. 

After some time, when you see the results and feel more comfortable about the whole thing, you can invest more. 

Choose well known, well-run mutual funds. Read How to compare mutual funds and How risky is your mutual fund to help you select the right fund.  

You could even try a Systematic Investment Plan. Over here, you put in fixed amounts in a mutual fund every month. Depending on the Net Asset Value (price of a unit of a fund) on that day, units are allocated to you. Begin with Rs 1,000 per month. 

To understand how an SIP works, read How to invest in a mutual fund.

Review your decision after a year. When it comes to taking risk, small steps help. 

I take home a monthly salary of Rs 13,000. My monthly expenses are Rs 5,000 and the rest goes home since my dad is clearing a loan of around Rs 4,00,000.

I am 24 and want to start saving and planning for my future. How do I go about repaying my father's debt (he is unable to) and also save some money?

- Richa Chaudhary

Why don't you consider splitting your money between repaying your father's debt and saving for yourself? You will give your money some chance to grow. 

Split your savings between equity funds and balanced funds.

Equity mutual funds invest in the shares of companies. Balanced funds invest in both equity and fixed return investments.

I do not want to make a value judgment, but I think it is only fair that you give your father a chance to make the effort to pay as much as he can. 

After a few years of saving, if you still find that your father cannot chip in, you can use the investment you have made to pay the balance.

I've taken an educational loan of Rs 2,00,000 at 10.75% per annum for my wife. I also have a post office fixed deposit for Rs 2,00,000 which gives me interest at 6.25% per annum.

Is it advisable to break the deposit and pay the loan?

- Venkat

On the one hand, it is obvious that carrying a debt at 10.75% and saving at 6.25% does not make much financial sense. If you look at it from this point of view, it makes sense to break the deposit and repay the loan.

But there can be other considerations. You may like to look at your post office deposit as a saving that can be used for emergencies. In such a case, you may prefer repaying the loan in installments, instead of giving up what you may think is a secure investment. 

To see the tax benefits on an education loan, read Your questions on education loans answered.

You may also want your wife to start working after her education and take the responsibility for her loan. I am not saying that you insist that she does so. But if you have limited savings, you may like to run the debt until your income is augmented.

Illustration: Dominic Xavier

Got a question for Uma Shashikant? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

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Number of User Comments: 1




Sub: Vohra & his Substantial Savings.

Using any scheduled Bank to Park your Savings is Foolish. Bank accounts should be used ONLY for bank 'transactions' complying to their Rules and Regulations. ...


Posted by C.N. Shankar




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