How SIPs Can Help You Prepay Housing Loan

Vijai Mantri: Your SIP continues. You will have, on an average, one or maximum twice this occurrence happening in the entire 20-year period, because if the SIP is delivering more than 12% today, the markets are rising. And when the markets rise, and you take money out at that time and then you eventually see the market goes through a phase of correction or is flattish. At that time. you don’t create 12% IRR. So, invariably, it happens once in the lifetime of the 20-year period.

But if it happened earlier, then a large part of the principal gets repaid. Then, automatically your tenure comes down dramatically. Suppose I am doing Rs 33,000 SIP, in a year I am doing close to Rs 4 lakh SIP.

In a three-year period, I am doing Rs 12 lakh SIP, and the 12% IRR created a Rs 15-17 lakh portfolio.

If I repay that, I am almost repaying 20% of my housing loan in the beginning itself. So, a lot in the beginning, in the initial phase, the interest component is high. So, I am taking care of the principal parts, so, the interest component also comes down in my overall scheme of things.

Now, the interesting part is once you repay your housing loan over whatever–sometimes it is 12 months and sometimes just 13 months, sometimes it is in the 12th year, 13th year and 14th year–we do that, then convert that EMI also into SIP. Your SIP continues.

Suppose you started on April 1, 1994, with this assumption. At the beginning of the 13th year, your entire house loan has been repaid through this structure. Now, Rs 1 lakh EMI gets converted into SIP, your Rs 33,000 SIP is also there.

…the portfolio value today would be more than Rs 8 crore if you started in 1994. Then, we did for 1995-98. I have done this number crunching till the year 2010.

In the last 15-16-years, 20-year is the completed period on an average. In the best year, you paid in a 10-year period, in the worst you paid in a 14-year period.

So, your burden comes down substantially. It also allows you the flexibility to take money out from equities, not on the basis of view, but on the basis of prefixed targets that are being hit, and I am using that money to pay the liability.

Else what happens, people take money from the equity market and then sit on cash. The markets are rising then they will give all kinds of justifications about why they could not participate.

So, this allows in a very structured way the reduction of liability for the client. It also allows them to continue to do SIP because you have taken money out from the SIP with a plan not based on view and your SIP continues.

So, it gives a lot of comfort to you to continue with the SIP. It is a win-win situation in my opinion for most Indian investors.