Mary Quite Contrary How Does Your Money Grow?
Microsoft Excel is a wonderful tool. Even a tech dummy like me recognizes this. In the hands of a semi-educated financial planner/advisor the tool is lethal. At the turn of the millennium, analysts used Excel to extol Infosys and its growth at over 100% compounded annually.
I am an unabashed Infy fan, but I could not imagine Infosys being bigger than the rest of India, which it would have been at that growth rate. Logic and economics combined to tell me that would be impossible. I now have no Infosys on my portfolio, but will surely buy when I like the price.
Planners use their financial calculators and Excel to drag columns and rows to tell you what you will earn, need at retirement, how much you can spend and the like. The parameters are extrapolated to show a fixed rate of increments, returns and inflation. This is stupid, because life and economics has little respect for the Excel drag function. Inflation and deflation can follow each other before one realizes it.
One does not die as one plans or hopes. Real life takes a break from Excel! Magazines and papers are full of advice for government employees about to receive their increments and arrears. Of all the template material that masquerades as the best thing to do, I find the home loan prepayment suggestion hardest to digest.
Should You Prepay Your Home Loan?
As I mentioned, a popular bit of advice I read on many papers and a few magazines is on handling your bonus and increments. They ask you to use most of the money to prepay your mortgage (home loan), considering the high and rising interest rates.
Let me use a personal and very real example – my mortgage has risen from 7.5% to 13.25% (mine is the costliest bank lender). This is terrifying. Still, if I ignored the 80C benefit on payment of the loan principal (I have nothing left of the Rs. 1 lakh after Life Insurance premia and PPF), my cost on the loan is 8.75% considering the tax at 33.99% being the top of the bracket, inclusive of surcharge and cess.
The will be a lot higher for those who avail of the 80C on home loan EMIs paid and lower for those in a lower tax bracket. The principle does not change under either of these circumstances. My surplus invested in a 375-day FMP during March at 10.25% would be over 10% post-tax in the growth option, considering double indexation. The 6 month FMP I invested in last week at 11.75% will fetch me 10.08% post tax in the dividend option.
Simple common sense, which makes up most economics, tells me that cash is a nice thing to have – I might use the FMP maturity or any surplus in more attractive investments, if I can get them, while a prepaid home loan is cash permanently with the bank. Vitally at times of turmoil and uncertainty it is good to increase the amount of liquidity one has for contingencies, I also make more money in the process; every Rs. 1 lakh not prepaid fetching me an annual surplus of at least Rs. 1,250.
