How SIPs can help you prepay a home loan

Vijai Mantri: Your SIP continues. You will have, on average, once or at most twice this event over the entire 20 year period, because if the SIP delivers more than 12% today, the markets are up. And when the markets go up, and you withdraw money at that time, you finally see that the market is going through a correction phase or is flat. At this moment. you are not creating a 12% IRR. So invariably it happens once in the lifetime of the 20 year period.

But if it happened earlier, a large part of the principal is refunded. Then, automatically, your tenure decreases dramatically. Suppose I make Rs 33,000 SIP, in one year I make nearly Rs 4 lakh SIP.

Over a period of three years, I make a Rs 12 lakh SIP, and the IRR of 12% has created a Rs 15-17 lakh portfolio.

If I pay that off, I’m paying off almost 20% of my home loan at the very start. So a lot in the beginning, in the initial phase, the interest component is high. So I take care of the main parts, so the component of interest also enters into my general scheme of things.

Now the interesting part is once you pay off your home loan on anything – sometimes it’s 12 months and sometimes it’s only 13 months, sometimes it’s 12th year, 13th year and 14th year – we let’s do it, and then convert that NDE into a SIP as well. Your SIP continues.

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

… the value of the portfolio today would be over Rs 8 crore if you had started in 1994. Then we did that for 1995-98. I did this calculation until 2010.

In the past 15-16 years, 20 years is the average completed period. The best year you paid over a 10-year period, the worst you paid over a 14-year period.

Thus, your burden decreases considerably. It also gives you the ability to withdraw money from stocks, not based on a view, but based on pre-set goals that are met, and I use that money to pay the liability.

Otherwise, people take money from the stock market and then sit on money. Markets go up so they will give all sorts of justifications as to why they couldn’t participate.

So, this allows in a very structured way the reduction of liability for the client. It also allows them to continue doing SIP because you took money out of SIP with a non-view based plan and your SIP continues.

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

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