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Home loan EMI, credit card debt... Help!
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August 15, 2008

Are you in a debt trap? Do you have too many loans outstanding and you do not know how to repay them?

If you have some surplus cash then should you retire your home loan first or invest that amount in stocks or in mutual fund SIPs?

What do you do in times when the interest rate on your home loan has doubled in the last four years? 

To answer these and various other money and invetsment related queries, financial planning expert Vetapalem Sridhar, hosted a chat with GA readers on July 30. For those of you who missed the chat, here's the unedited transcript:

sailesh asked, Hello; I am 34 years old, have one daughter who is 4 years old and expecting another in 6 months. My monthly income is around 40000/month. I have invested in Bajaj Allianz (3000/month), Reliance Natural Resources [Get Quote] (2000/month), ICICI [Get Quote] Infrastructure (2000/month)and DSP Merrill Lynch T.I.G.E.R. (2000/month). Also, have invested 10000/- (one time) in Reliance diversified power, and also taken ULIP of HDFC [Get Quote] Young Star for 10000 quarterly. Please advise if I am in course for a safe future for my children and our retired lives, or do I need to invest in anything more ?

Vetapalem Sridhar answers, Hi Sailesh, there is a lot of improvement that is possible. U hv invested only in sector/thematic funds. This has to change. The first step to building a gud portf is to pick 2-3 large cap/diversified funds, which help build the core part of ur portf. Something like Reliance Vision, HDFC Growth, Franklin Bluechip. Once done u can look at adding 1-2 aggressive mid cap funds. Only after this is done should u look at a sector fund. And sector fund should be picked only if u understand that sector well and can take informed decisions. Take adequate TERM Insurance cover as to ensure that the objectives of ur family can be taken care in case something happens to u. Continue with HDFC YS. Do not invest in any more insurance based investments.

sanju asked, Hello Sir, Currently I am putting monthly 10k+ amount in MF via SIP, I have 16 lac rs. homeloan with EMI of Rs17k. My question is shall I stop SIP for some months and collect some money and do the part payment for homeloan or shall I increase the EMI. As Homeloan interest rate is now doubled, currently I am paying 13.25% in ICICI. Increasing EMI looks me sensible but still need your views.

Vetapalem Sridhar answers, Dear Sanju, this is the approach that I would recommend. First collect some funds and maintain liquidity to ensure that u have around 3-4 mths worth of EMI payments set aside. This is important as in case ur income flow stops temporarily, u would be in a position to keep paying EMIs. Once this is done, then continue with ur regular investing as planned. The reason is when interest rates go up equities go down, due to which u can purchase equities at a lower cost and hence make higher returns. This higher return which can be made with a long term (5-7 yrs) horizon would more than make up for the high interest that u r paying. Over and above ur regular investing if u r able to spare funds (like a lumpsum bonus that u receive) it should be used to prepay the housing loan.

jayakumar asked, hi, good day. i have an o/s housing loan of 3.5 lakhs and am in a position to repay this from my fds. in view of tax benefit i am averse to touching my fds but is it a better idea to repay the o/s loan than paying emi for the next about 4 years.

Vetapalem Sridhar answers, Hi Jayakumar, In the end yrs, the interest component of the loan is low and hence tax benefit advantage is not so high. Prepaying the housing loan would be better if u r planning to keep the money in a bank FD. However if u invest the money into equities with a 5-7 yrs horizon then prepayment may not be such a gud idea.

ravimittal asked, What do you say about 2500 in magnum contra, 200 in Reliance RSF an 200 in reliance vision monthly

Vetapalem Sridhar answers, Hi Ravi, Gud funds. I think it is a gud idea.....

SOURAV asked, Sir, I have to invest Rs. 35k under 80C. Ready to take risk. I have LIC [Get Quote] and SIP (KOTAK & SUNDARAM-both ELSS). Plz tell me. I will follow as u sugest. Doing to get tax benefit. Need excellent return. So plz..

Vetapalem Sridhar answers, Hi Sourav, U r already on the right track by doing a SIP into ELSS funds. Continue to add to them itself. Take up an adequate TERM Insurnace Cover. Do not invest in any more insurance policies. Returns will be gud, if u invest with a 5-7 yrs horizon.

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jayan asked, 
Sir, I have the following mutual funds with a long term horizon of 10-15 yrs. HDFC top 200 (G) Rs. 2000 pm DSPML equity (g) Rs. 6000 pm DSPML TIGER (g) Rs. 2000 pm In addition to the above, I would like to get into one or two funds where I wish to invest some lump sum amount. Please advice which one suits to me (for a horizon of 2-3 yrs)

Vetapalem Sridhar answers, Dear Jayan, 2-3 yrs is a short horizon. I would suggest that u atleast consider a 3-5 yrs horizon. For this horizon invest in a large cap fund. U already have 2 large cap funds. U can invest in them itself or u can look at options like Reliance Vision, Sundaram Select Focus, etc.

kimti funds asked, at present if i invest 1 lac in mutual fund ,what will be return after 15 year

Vetapalem Sridhar answers, Assuming that u invest in a diversified equity oriented Mutual Fund delivering a 14% annualised return ur 1L should grow to around 7L in 15 yrs. This is a reasonable expectation during this tenure.

Rajen asked, Sir, I am 35 years old earning 35K per month. I have credit card debt of about 2L, home loan of 18L for which the EMI is 20K. I have a wife and daughter. I am in a tight financial crunch as the creddit card interest is mounting. I have swtched credit cards to avail balance transfer and reduce interest. I am also being called by recovery agents. Do you think it is good to take personal loan and finish off the credit card debt? Please suggest what to do.

Vetapalem Sridhar answers, Hi Rajen, u r in a tight spot. After paying ur EMI u r left with 15K. Now if u convert ur CC debt into a Personal Loan, ur outgo will increase. U do not hv a choice, would suggest that u get ur credit card debt converted into a Personal Loan.

Rupesh asked, Hi,I have taken home loan of 15 lakhs @ 10% in May for 10 years. Now the interest is 11.25% and my tenture of the loan is increased to 11%. Please advice should I increase the EMI or let the tenture be increased. Which one is good option. Currently I'm paying 19830 as EMI and I can pay upto 25K to 30K as EMI without any problem. Please advice.

Vetapalem Sridhar answers, Hi Rupesh, u r in a comfortable state. Ideally this is wat should be done. First identify ur long term objectives and goals in life. Based on this u should determine how much u should invest each yr. This investment should keeping happening regularly. Over and above this any money tht u r able to save should be used to prepay the loan. This approach will ensure that u do not lose focus from building wealth to meet ur long term objectives/ goals in life.

kato asked, Hello � I have a 5year housing loan for Rs 20lacs � with 28 months already gone. It was taken at 8.5% on floating rate basis � in March2006. Outstanding balance is Rs 7.30Lacs � as I already prepaid Rs 4.50Lacs last year. I think outstanding months are 37 � additional 5 month due to increase in the interest rate. EMI is around 41K. I am now in a position to pre pay this entire amount � and hence clear the loan. My query is � whether I should do it? � especially when FMPs and liquid funds are giving 10% plus and by prepaying I will also loose the tax benefit completely? For year ending 31/03/08, the interest payout was 1.25Lacs � hence fully deductible. Please advise. Conventional wisdom says that debt free status is always good � but does it make financial sense in this case? Thanks

Vetapalem Sridhar answers, Dear Kato, a rational decision making suggests that investing money into equities with a 5-7 yrs focus and paying EMIs on time would be a wise startegy. Again emotionally if a debt bothers u then, by all means go ahead and prepay it.

suresh asked, Sir, My age is 38 and my insurance cover is for 10 Lacs (Pure Term). My income is Rs. 4.5 Lacs P.A. My wife (Housewife) is 37 years old. My household Exp are 12-13 K per Month. The balance almost goes off in paying of credit card balances (Total 4 Lacs). Two sons (13 & 10) please suggest a insurance plan or amount of cover to protect my family in case of early death. As there is no savings at all.

Vetapalem Sridhar answers, Dear Suresh, how come u have built up so much credit card debt? The first thing that u MUST do is cut ur credit card into 2 pieces. Involve ur children into clearing the credit card debt by explaining to them wat all is happening. The reason is that they might hv already learned how easy it is to use a Credit card. This education will hep their future. Take up a 10 yrs TERM Insurance cover of another 15L atleast. U can get quotes from Reliance Term Plan, SBI [Get Quote] Shield, ICICI Pru lifeguard WROP. If possible convert the CC debt into a Personal Loan.

srihari asked, Hi Sridhar, I earn 42000/- per month. I have loans around 15k PM. MY current living expenses go upto another 15k I have two Jeevan ANand policies of 5 lakhs each for a premium of 48k PA. I have an ulip of 40k in Moneyplus LIC PA for 5 yrs period. Please advise me where else i can invest? And advise me on whether i shud continue with my existing investments?

Vetapalem Sridhar answers, It maybe a better idea to replace the existing Insurance based investment plans with an adequate single TERM Insurance Cover. Once this is done the additional money should be invested with a 10-15 yrs horizon (just like the insurance policies), into a SIP in diversified Mutual Funds. HDFC Grwoth, Reliance Vision, Sundaram Select Focus, SBI Contra, DSPML Equity, etc r gud choices.

Tamal asked, Sir, I started investing in Stocks from Feb2008. I have read few books & acquired the basic knowledge.As of now, whatever I invested, value is reducing. Whether it is prudent to invest in stock now. If not, should I go for MF or Fixed Maturity Plan as introduced recetly by various AMUs. Thanks

Vetapalem Sridhar answers, Hi Tamal, as u hv read about shares I would suggeset that u now read about asset alloction. It is important to maintain Equity as well as debt investments. The equity part should go to equity oriented Mutual Funds. For the debt part FMPs can be considered as an option, taking into consideration liquidity requirements. Read thro the following link to know more about asset allocation

jacky asked, Hi Sridhar, I and my wife earn Rs75K PM. Wehave saved about 11 lakhs till date.I am 25 years old. Can you suggest how should i invest my money to get the best return with average risk.

Vetapalem Sridhar answers, Hi Jacky, u seem to be doing very gud. I would suggest that the part of the savings that u can invest with a 5-7 yrs should be invested into 4-5 equity oriented Mutual Funds. This is wat will help u built wealth in the long run. U can achieve Financial Freedom within the next 15 yrs if u plan things well.

anil asked, Hi Sridhar, I have 2 daughters the elder is 10 year old the younger is 4 years old I need to invest long term for their higher studies, what kind of investment would be the best that would take care of this can you help??

Vetapalem Sridhar answers, Dear Anil, first get urself an adequate TERM Insurance cover to protect ur family in case something happens to u. Then start of with a regular SIP into around 2 equity oriented Mutual Fund schemes to build funds for ur daughters needs. U can look at funds like HDFC Grwoth, DSPML Equity, SBI Contra, Reliance Vision, etc.. Also read thro the following link, Investing for children A Slide Show, click NEXT to read thro.

MAK asked, I have invested in HDFC Growth, SBI Magnum contra, HDFC Top200 and SBI Select mid cap. I am planning to add two more SIPs. Please let me know which one I should choose out of following: Kotak Opportunities, TIGER DSP, Reliance Growth, Franklin Prima Plus. Or any other suitable fund

Vetapalem Sridhar answers, U already hv 4 funds. Add just one more. Pick from among Kotak Opportunities and Sundaram SMILE. U hv a well balanced portf in place. REmain invested with a long term focus.

ganpath asked, hi People are talking about Spread the investment in various way like MF, FD, GOLD what could be best ratio to invest 1 Lac in various method?

Vetapalem Sridhar answers, Hi Ganpath,. All individuals are unique and their situations vary widely. So there is no general ratio which would be best for all. U need to figure out an asset allocation plan that would best suit ur individual case and make a strategy accordingly. A way of planning is this. Keep 3-5 mths worth of mthly expenses in ur savings bank. Then put away a chunk of money into a bank FD to take care of any emergencies. Of the remaining money that u plan to invest, maintain an asset allocation that enables u to earn a targeted return based on ur future needs.

Wadaman asked, I am 25 years old, annual income 11 Lakhs, paying off a personal loan, with an emi of 5639 till 2011 Feb. Also have credit card dues of approximately 1.4 lakhs. Do you think I should continue with my monthly SIP of 6000 into Kotak Opp, DSP Tiger and DSP Tax Saver or first aim to pay off loans. I have monthly expenses of 35000, incluing house rent. Also, can you comment on the MFs I have chosen? Plus, should I go in for insurance? i so, which ones?

Vetapalem Sridhar answers, Dear Wadaman, first take up an adequate TERM Insruance cover. Get quotes from Reliance TERM Plan, ICICI Pru Lifeguard WROP, SBI Shield. In case of credit cards the interest charged works out to 36-42% annualised. So it does make sense to stop all SIPs and divert this money towards paying the CC debt. Once the CC debt is paid, restart the SIPs and then u can look at adding funds like HDFC Growth or Reliance Vision to ur portf.

mnigam asked, After a bull run of equities for 4 years, now what should be strategy for investiment. I have an exposure of appox 7L in mutual funds (mostly related to equities) and exposure of appox 2L in direct equities and bank deposits of appox 10L

Vetapalem Sridhar answers, Have patience. Do not sell any equities. Mkts will not remain down forever. If possible continue to invest regularly during the down mkts. Maintain a sensible asset allocation. If u need money use ur debt part. Over time equities would rise delivering gud returns. U already seem to be doing gud.

Preetha asked, Hi Sridhar, Is real estate set to slow down with EMIs becoming costlier? I have a Home loan of Rs 28 Lakh payable for 20 years at floating interest at 11% few months back. How much would this interest go up?

Vetapalem Sridhar answers, Hi Preetha, It is not possible to say how much more interest rates will rise. It appears that they will not rise too much from current levels. Having said that we should be prepared to see interest rates remain at relatively higher levels for sometime to come as global inflation would remain high. Continue to pay EMIs as per schedule and over time also build some reserve fund and keep it liquid to take care of any difficult times when u r short of money to pay EMIs.

wannabefinanciallyfree asked, I am planning to invest in mutual funds (in SIP) and since I am only 26 years old, I like to invest in aggressively managed funds so that I'll probably get huge returns in 5 to 10 years time frame. I have chosen Sundaram Select Focus Regular Plan (G), DSP ML TIGER Fund RP (G) or DSP ML Top 100 Equity RP(G) and Templeton India Growth Fund (G). I am planning to invest Rs.1000 per month (totally Rs.3000 per month) in each of these funds for around 10 years. Are my choices good or do you recommend some other funds for me?

Vetapalem Sridhar answers, All funds u picked are gud. Most funds u hv picked r large cap funds and would be more stabler funds. U may look at replacing DSPML Tiger with Sundaram SMILE or SBI Midcap which r relatively aggressive funds.

navin asked,  Sir, I am 28 yrs. old and I've monthly income of Rs. 25K. I have taken car loan for which the EMI is 7300. My monthly expenditure o rest of the other thing is almost 13500. Pl suggest me that whether i should start any SIP or retain the residual money to maintain liquidity. PLEASE ADVICE SIR

Vetapalem Sridhar answers, Hi Navin, some liquid funds must be maintained. Over time build around 4-5 mths worth of expenses and keep them liquid. Once this amount is built up, then u can think of starting a SIP into around 2 funds. Invest with a 5-7 yrs horizon then.

saurabh asked, Mr Sridhar. I want to invest in a commercial office space property. How does a loan against LIC or ICICI life insurance ULIP policy work? Is it advisable to take loan this way or to take a commercial property loan?

Vetapalem Sridhar answers, If it is a Equity ULIP then loan against them may not be easy. The loan rates for commercial property r now quite high - around 15-16%. Work out a financial model and see if it fits into ur Return On Investment criertia before u take any decision on going ahead with the proposal.

shashwat asked, hello sir my salary is 34k take home per month. i have term ploicy of 25lacs,a medical poilcy for 1 lac for me and my wife. i have four SIPS of 1000 each in MF staring this fiscal year. but i didnt see that this portfolio is right,i think i am not doing well on financial planning front i still have TDS for 1700 rs per month can u suggest some more refined planning .my intention is not to save income tax but something more promising to build my savings.

Vetapalem Sridhar answers, U hv already done things right. Do not invest in any insurance based investments. Continue with the SIPs and over time increase the amts in them as ur savings potential increases. If ur sec 80C limit is not complete, then invest into a ELSS Mutual Fund.

Vetapalem Sridhar says, That is all for today Friends! Catch up with u soon....

Vetapalem Sridhar is a financial planning specialist based in Pune. He can be reached at

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