Queries

Loan EMIs Should Not Exceed 35-40% Of Monthly Income

Jasmine Kahlon

I have another three years left to pay off my home loan. The original tenure was 15 years. I don’t have regular salary, so, I want to repay the loan and not have the lingering liability. Plus, I would like to divert the money thus saved to enhance my health insurance and emergency funds. My loan interest rate is 6.5 per cent. Is it advisable to pay off the home loan?

It is always advisable to pay off debt if you find the loan burdensome. In the early stages of a home loan, the interest portion is huge. But it can be reduced by partly paying the loan. Since your loan tenure is almost ending, you would have already paid off a major portion of the interest. Now, it is likely that most of the EMI would be the principal amount.

Before deciding to pay off the loan, one needs to check on various factors. While more information is required to analyse your particular situation, in general, some of the questions you need to ask yourself are: my current EMI; outstanding principal amount; tax slab, age, income, expenses and family structure; goals; current insurance (life and health); investments, etc.

Ideally, the EMI should not exceed 35-40 per cent of your monthly income. The lower is better. Also consider the fact that the home loan principal component of the EMI gives you tax benefits under Section 80C of the Income-tax Act, 1961, and the interest amount is considered for tax benefit under Section 24(b). It also gives you better credit score.

Another option (as only three years of the loan are left) is that if you have some extra funds, you could use some of it to pre-pay the principal and the rest to enhance the health insurance and emergency fund. Enhancing health cover should be the first priority as insufficient health cover may lead to loss of your savings in case of hospitalisation. After this, you can start investing for long-term goals. The interest on your loan is 6.5 per cent, but with a long-term investment (of eight years and above), you can potentially get returns in double digits.

Hina Shah CFPCM Financial Coach, LUHEM

Kasturirangan

I want to invest a little amount in gold for the long term. How should I go about doing this?

Some of the modes available to invest in gold are: physical gold and digital mode via gold exchange-traded funds (ETFs), gold mutual funds and Sovereign Gold Bonds (SGBs). Investing in physical gold has certain issues such as risk of theft and storage expenses (locker rent), which need to be borne to manage this risk.

Investments in gold ETFs (buying and selling) happen on a stock exchange with gold as the underlying asset. Gold ETFs are passive investment instruments that aim to track the domestic gold price.  

Gold mutual funds have a fund of funds structure. They primarily invest in Gold ETFs as the underlying asset.  

SGBs are issued by the Reserve Bank of India and come with a tenor of eight years. Early redemption is allowed after the fifth year. The bond is tradable on exchanges, if held in demat form.

It is important to keep in mind that gold is a hedge against inflation and investors should have a maximum of 5-10 per cent exposure to gold in their overall portfolio. Equity as an asset class has outperformed the price increase in gold and will be a more appropriate asset class to achieve long-term financial goals.

Suhel Chander CFPCM, Handholding Financials

Naresh Kushwaha

I am 45 years old and have four family members who are dependent on me—my wife, two children (aged 7 and 10 years), and my mother. I would like to write a Will as I have some inherited property as well. Please advise on the basic steps I should be aware of.

The objective of writing a Will is to give clarity regarding distribution of your assets among your heirs. Plus, the Will should be legally valid.  

You can start by making a list of all your assets and liabilities (including savings bank accounts, fixed deposits, accounts with Public Provident Fund, National Pension System and Employee’s Provident Fund, house property, plot, mutual funds, and others). 

Think clearly about how you want these to be distributed–do you want them to be distributed overall or individually, for example, one fixed deposit for your mother, another for your wife. It is recommended to distribute the assets individually between your mother and wife, so that there is no dispute among them over any asset in future. You may want to have only your wife and mother as beneficiaries as your children are still minors.  

Also, think about a secondary beneficiary in case the primary beneficiary is no more when the Will needs to be executed. This will make it clear as to who the assets should pass on to in the event of the primary beneficiary’s death. If the secondary beneficiaries are your minor kids, who will be their guardian (in case your wife, who is their natural guardian, is no more). Naming an additional guardian is recommended, in the unfortunate demise of both the parents simultaneously.  

You need to name an executor of the Will – the person who has to ensure that the contents of the Will are executed. Ideally, it can be the beneficiary (if there is only one) or it can be a trusted third party who is unbiased (if there are multiple beneficiaries). Ideally the executor should be younger to you so that the chances of the executor outliving you is higher. You can also mention a secondary executor, if the primary executor is unable to act as your executor. 

The next decision is finding witnesses to the Will (ideally, two witnesses; not related to any of the beneficiaries).  

Once you have clarity on the above aspects, connecting a lawyer for the actual drafting is highly recommended so that it is valid in all legal respects. A doctor’s certificate stating you are of sound mind and capable of making decisions on your own at the time of writing the Will, is also recommended.  

You may consider keeping the beneficiary in the Will the same as the nominee in the asset. If these are different, the beneficiary will supersede the nominee.  

UMA S. CHANDER Certified Financial Planner ^CM, Handholding Financial