Acing retirement investing when you have a home loan to repay

Retirement investing is one such goal that by virtue of being far off on the horizon of time can get relegated to the background in the face of shifting priorities in life. Be it a sudden exigency that triggers a change in income levels or a sense of feeling overwhelmed by material distractions, most of us are familiar with the phase when investing for retirement gets pushed to the back burner. On the other hand, sometimes, despite having an eye on the goal of building a kitty for retirement, you may find yourself unequipped to stay committed to your goal because of debt liabilities. One such instance when investing regularly for retirement can become tricky is when you have taken a home loan. Home loans are big-ticket loans and you may have to divert a sizable portion of your monthly earnings to your EMI payments which can make it difficult for you to perform a balancing act with your savings and investments. In such a scenario, you may not be able to pay as much attention to retirement investing as you should.“Last year we took a home loan whose repayment tenure is 15 years. We had carefully deliberated how it would impact our expenses and our financial goals before we availed of the loan. Despite that, some months it becomes hard to keep the show running without any hitch because leakages due to unforeseen circumstances are bound to happen now and then. Our budgeting rules have become stricter so that our savings and investments are least impacted,” narrates Suresh Ajmani, a 38-year-old businessman based in Kanpur.Anant Ladha, founder of Invest Aaj for Kal says, “If you are planning to opt for a home loan, consider the rule – 5-20-25-40. Your home loan should not exceed 5 times your annual income, loan tenure should not exceed 20 years, your home loan EMIs should not be more than 25% of your salary and total EMIs should not exceed 40% of your salary at any time.”Considering many investors struggle to have a clear idea of the extent to which they should rely on loans for buying a home, Ladha recommends a formula: “Before taking a home loan always consider having atleast six times of your monthly expenditure in an emergency fund, investments equal to or more than 20% of your home value and finally you should ensure that even after paying EMIs you should be able to invest 25% of your total income for your goals.”The juggling actAjmani believes that while juggling everything on the financial front after having taken a big-ticket loan can seem daunting, a little bit of mindfulness can go a long way in helping you stay on track. “The idea is the optimum utilization of monetary resources at any given point in time – for instance, mindlessly trying to prepay the home loan in fits and starts whenever you have a surplus, is not going to benefit you much in the long run. However, it is of utmost importance to stay abreast of credit card debts and personal loans because those typically carry higher interests than home loans and left to accumulate can create a dent in finances.”The opportunity cost conundrumLadha concurs that you should not get too smitten by the idea of mindlessly pumping a chunk of your income every month towards EMI repayments in the hope of early repayment. He explains, “An understanding of opportunity cost can be very useful while repaying your home loan. Suppose you have received a lumpsum amount through gratuity or a bonus. You have two options: you can either pay back your home loan partially or whatever may be outstanding or invest the capital in a financial instrument to earn returns. You should analyse the opportunity cost of using the money which goes into repayment before making this decision – for instance if you have an outstanding loan of Rs. 5 lakh at an interest rate of 10% per annum, you can either choose to repay the loan and live a debt-free life or invest the money in a product that gives you returns of say at least 13% per annum. Thus, the opportunity cost of repaying the loan, in this case, is the additional earning that you will have to forego, unfortunately. Also, factor in your home loan interest deduction in income tax while doing these calculations.”Ajmani says, “I had to bring down my EMI slightly because initially, they constituted a very high proportion of my monthly income. I was finding it difficult to invest towards my goals and I realised this wasn’t sustainable. Not having an investible surplus every month is a risky affair as you are essentially living paycheck to paycheck and should there be an emergency, you may find yourself in a spot where you may even default on your loan repayments.”Acing retirement planningPreeti Zende, founder of Apna Dhan Financial Services says, “Retirement is the only financial goal in which a corpus would get spent over the course of decades! But often, short-term goals like purchasing a house or building a reservoir for kids’ education occupy centre stage, and retirement planning shifts lower on the priority list. This is why it is important to start investing for retirement early on – you will have more time and you can accumulate a sizable corpus and make use of the power of compounding by investing small amounts.”Zende recommends a mix of different kinds of mutual funds with an asset allocation formula based on an individual’s risk-taking capacity for building the retirement kitty comfortably while you repay your home loan. “A combination of different financial products for retirement planning can provide better risk management and asset diversification. Equity mutual funds along with Employee Provident Fund (EPF), Public Provident Fund (PPF), and National Pension Scheme (NPS) can be used for retirement planning.”Explaining further, she says, “You can construct an equity portfolio based on the core and satellite approach. You can have 50% exposure in Nifty Index funds or large-cap funds, 30% in high-rated flexicap funds, and 20% in midcap mutual funds. One can have a good combination of passive and active investment strategies to lower the cost and optimize the return. You can go with Nifty 50 as well as Nifty Next 50 along with an active Flexicap fund. Alternatively, you can also opt for Nifty 50 as a passive fund and flexicap and midcap as active funds. The choice of the combination depends on one’s risk-taking ability.”Action pointsEnsure that you have adequate health and life insurance coverage for your dependents. This will help you sail through any emergencies with minimal disruption to your overall financial health.If you have been in the habit of putting money aside for your emergency fund, continue doing that because that corpus can help you deal with any unexpected curveballs that your insurance may not be able to protect you from. This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.