Home loans act as a helping hand for most of us in order to own a house, right? And the long tenures of 20-30 years and big-ticket loan amounts of home loans imply that they occupy a significant part of our income during work-life years.
So, when we become parents, we wouldn’t want our child’s educational aspirations to hit a roadblock due to the burden of home loan EMIs, right? While on the other hand, we should be equally aware that the combination of shorter work-life years and increased average life expectancy is a strong indicator of the rising importance of having a sufficient retirement corpus.
Hence, while making efforts to strike a balance between these two goals and at the same time paying Canara Bank Home Loan, we are often confronted with the dilemma of prioritizing one over another.
Let us discuss how home loan borrowers should handle investments for these two goals, and even if confronted with the decision to prioritize one over another, what course of action should be taken when serving a home loan.
Which one to prioritize?
When caught in this dilemma, what most parents who are side by side serving Canara bank home loan end up doing is compromising on the creation of retirement corpus to adequately finance their child’s higher education. This is where the mindset needs to be changed. Compromising on your retirement corpus would expose you to the risk of becoming financially dependent on your children during your post-retirement years, which may financially burden them as well, especially if they are repaying loans simultaneously.
Although both these goals are equally important, remember that just like the Canara bank home loan helps to own a home, an education loan can assist in funding your child’s higher education. But no one will lend you to fund your post-retirement expenses, barring the reverse mortgage loan facility, which anyway doesn’t have much prominence in our country.
So when it comes to prioritizing one of these goals, even if you are repaying a low Canara bank home loan interest rate, the retirement corpus needs more attention for sure. Creating a retirement corpus is extremely critical because retirement is something that is bound to happen, & you have to be prepared for it and ensure that you would have a sufficient corpus in place once you retire.
And how to achieve both these goals?
Begin early- While repaying your Canara bank home loan, an early start can help you take care of both these goals of retirement and a child’s higher education. The sooner you start with investing, the lesser you have to invest. Whereas, delaying your investments would imply that you will have to shell out more money in order to timely accumulate sufficient corpus. Therefore, it would be prudent to begin early for the timely creation of adequate corpus as this would allow more time for your money to grow and benefit from the power of compounding. Moreover, even if you are planning to opt for an education loan to fund your child’s higher education, remember that it usually involves 5%-15% margin money, which has to be arranged by you.
An early start can help to lower the monthly investment amount required to accumulate the target corpus, thereby leaving more room to focus on other financial goals such as continuing the EMI at Best Home Loan Interest Rates, owning a vehicle etc.
What to keep in mind while planning for long term goals?
Factor in inflation and longevity risk while estimating corpus-Factoring in the cost of inflation while estimating the corpus is pivotal for the accumulation of adequate corpus. Remember that over time, inflation reduces your purchasing power, implying that the future cost of an educational course or your living expenses would be much higher than its current cost.
So, whether you are estimating the corpus for your child’s higher education corpus or your retirement fund, make sure you factor in the inflation-adjusted costs and not the current cost, besides factoring in the interest rate regime (both current and expected), which would impact your Canara bank home loan interest rate.
Additionally, you need to tackle the longevity risk while estimating your retirement corpus. With the advances in medical science, the average life expectancy is also rising. A longer than expected life expectancy can increase the risk of running out of your retirement portfolio during your lifetime. A good way to deal with this longevity risk would be to let a portion of your corpus remain invested in equity mutual funds during your post-retirement life.
Invest in equity funds- When you are already repaying your Canara bank home loan, you would already be paying a significant part of your monthly income as EMIs. So, for the part of your income which you can invest for other crucial life goals, it’s important to ensure to invest in the right instruments for wealth creation. So, instead of investing in fixed income investments which seldom beat inflation rates, opt for equity mutual funds to accumulate a corpus for your long term goals. Equities have consistently proven to be the most suitable asset class for long-term investments involving a time horizon of 5 years and above. It beats other asset classes and inflation rates by a wide margin over the long term.
Moreover, equities are less riskier over the long term and provide higher returns which assist in the timely accumulation of adequate corpus. Risk-averse investors who might be hesitant towards investing inequities entirely can consider the option of balanced mutual funds, as these involve a mix of both debt and equity and are primarily aimed at balancing the risk-reward ratio for such investors.
Also, no matter at what Canara bank home loan interest rate you are serving the EMIs, it would just be prudent to invest in mutual funds via the SIP route instead of lump-sum for wealth creation without overburdening your finances, as SIPs negate the need to time the market and inculcates financial discipline through regular and systematic investments at predetermined date and intervals, whether weekly, monthly, quarterly etc.
Shift corpus to less risky avenues as you near the goal- As you near your target corpus, shift a major proportion of your corpus from equity funds to low-risk securities such as debt funds, high yielding savings account or fixed deposits, which have been providing regular interest rates of up to 7% p.a at present. Doing so would prevent your accumulated corpus from the short term volatility of equity mutual funds since these low-risk instruments provide a higher degree of liquidity and capital protection to your accumulated corpus.