An NRI dilemma

Let's imagine a scenario where an NRI is in a conundrum of whether to use his surplus to repay his home loan or to invest it in a mutual fund in India. The dilemma is compounded by the risk of currency depreciation and the return expectation that one should have from mutual funds over the long term. Here we provide a brief framework as to how to assess the situation and the course of action that can be taken.

First of all, the currency risk would always prevail and there is no way to pre-empt it with surety. Also, it boils down to whether one should use the surplus for prepaying the loan as and when they have money or whether to invest it in mutual funds with a long-term perspective.

The general personal finance advice is to repay the loan first and then save. It's sound advice specifically if someone has high-interest borrowings like credit card dues, consumer loans, etc.

Historically, equity funds have given quite impressive returns over long periods of time - eight to 10 years. And the trend is likely to continue. As a category, the flexi-cap funds have returned more than 14 per cent over the last 10 years. Much higher than the cost of borrowing.

You can check out the 'Funds' section of Value Research Online to discover the best mutual funds for you.

So to decide whether to invest or prepay the loan, one should analyse the trade-off between the return that one expects from investing in equity funds and the cost of borrowing. The return expectation should be conservative and realistic enough.

However, investing the surplus rather than pre-paying the loan should not be at the cost of losing your sleep. If the outstanding debt makes you worry or if you are unsure of the future cash flows, it would be better to prepay it.

Also read: What to do with your investments when you become an NRI?