There are two cases where prepaying your loan would make sense:
You have a floating rate of interest on your Home Loan and interest rates are rising.
You got the loan recently (between one and three years ago) and the interest component is high.
There are two cases where investing in Mutual Funds would make sense:
You are getting tax benefits on your Home Loan and prepaying might reduce these benefits.
Cost of the loan minus tax benefits would be much lower than the returns you will get from Mutual Funds.
Let’s consider an example to understand this better. Suppose you have a Rs. 30 lakh Home Loan with an interest rate of 11% p.a. and a loan tenure of 15 years. If you prepay Rs. 2 lakh at the end of 3 years (after taking the loan), you would save Rs.4.81 lakh of interest on your loan. If the same was invested in a Mutual Fund earning a return of 10% p.a. for 10 years (assuming you don’t reinvest the return earned), you would get Rs. 4 lakh. So, in this case, prepaying your Home Loan is more beneficial than investing in a Mutual Fund.
If you are looking to invest in a Mutual Fund, click here.