Repaid your loan? Here is what you should do next.

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There’s a broad smile on your face now that you have repaid your loan. And why not. It is an achievement of sorts. You have withstood the test of time, discipline and patience to repay your loan. Your first instinct is to reward yourself with the money that no longer gets sucked out of your account every month as EMIs. But if you can overcome this initial temptation and redirect this amount for financial goal planning, you can end up increasing your money. The ideal way to do so is by using that amount to invest in a mutual fund through a systematic investment plan (SIP).

Why go with mutual funds?

You are already used to not seeing your so-called EMI amount. So, why fritter that money away when you have no loan to pay? Why not invest that amount instead? Investing can only help you increase your money. There are many investing options that can help you build wealth. There is equity, debt and there is mutual fund.

While equity can be quite risky, debt investments yield low returns. Mutual funds, meanwhile, sit somewhere between them. This is because your money is put in several sectors of the economy, which is known as diversification. This helps in reducing the risk factor and at the same time, have the potential to provide high returns.

You might ask how diversification helps in cutting down risk? Let’s go with a generic example. Say, you have put money on stocks and gold. The stock investment goes awry but the money you put on gold yields high returns. That means your stock losses are offset by high gold returns.

Even the most grizzled of advisors will tell you to diversify your investment as they help minimise risk.

There are many types of mutual funds available. Some of them are:

• Equity fund: You can invest in several company stocks. You don’t have to invest in just one particular stock. The returns are high too. There is another advantage. There are professional fund managers who invest the money for you. They are specialists who can invest on your behalf. You don’t have to be a stock market savant. Hand over the money to them and they’ll do the rest. But do some research. Check which equity funds are performing well. Don’t invest in them blind-folded.

• Debt fund: These invest in debt instruments, such as government bonds, treasury bills and corporate bonds. While equity funds can be a tad risky, these funds provide you a sense of stability. The returns may be lower compared to their equity counterpart. But they are not affected by market volatility. These funds are ideal for low-risk investors, especially those who are planning to invest in fixed deposits (FDs) or keep their money in savings accounts. Just a rich aside, debt funds can provide higher returns than FDs and savings account. But again, do your research before investing in one.

• Balanced funds: Also known as hybrid funds. They are a blend of equity and debt. They provide the best of both worlds: reasonable high returns and stability.

You might think they’d be expensive to invest in. After all, investing in individual stocks or debt can knock you back a bit, financially speaking. But that’s not the case with mutual funds. You can invest as little as Rs 500 every month. Plus, you have your ‘EMI money’ too. You won’t have to twist your knickers to invest in mutual funds – an investment option that can help your money grow. Remember that the more you invest, the larger your final kitty will be. The war-chest can be used for your wedding, child’s education or even retirement.

Now, let’s talk about how you can invest every month. As mentioned previously, there’s something called systematic investment plan, also called SIP. You can use SIP to invest in mutual funds.

The advantages of SIP investment

• Open ended – There are many investment options like Unit Linked Insurance Plans or Public Provident Fund that have a long lock-in period, ranging from one year to 15 years. This means you can’t withdraw your investment before the policy matures. You can but you’d need to pay a penalty. This is not the case with SIP investment. You can redeem it whenever you want. However, it is advisable to invest for the long run. Mutual funds flourish if you keep your money for longer periods.

• Flexibility – You can choose your investment amount. You can also increase or decrease your SIP amount.

• Rupee cost averaging – This is a way in which you can buy more units of the scheme when markets are low and lesser units when markets are high. To put it simply, SIPs buy more when the market is low and buy less when the market is high.

• Power of compounding – Simply put, this means that the returns from your investments are reinvested into the principal amount. Thus, the longer you remain invested in a SIP, the more you stand to gain.

• Tax benefit – If tax-saving is your primary objective, you can consider rerouting the EMI amount into a mutual fund known as ELSS, also called equity-linked savings scheme. Investment of up to Rs 1.5 lakhs in an ELSS scheme qualifies under tax exemption under Section 80C of the Income Tax Act of India. An ELSS, therefore, offers the dual benefit of capital appreciation and tax benefits.

The last word

Why not use your ‘loan amount’ to invest? You may be smiling now (and you should) because if you have repaid your loan. But that can soon fade away if you spend the money needlessly. That’s why it is ideal to look at investment opportunities. And right now, mutual funds are one of the best investing options. So, why wait? Take use of SIPs to start building a mini-fortune.

Franklin Templeton is a fund house that offers a plethora of mutual funds. You can click here to know more about the different funds on offer.

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