Debt Pay-off or New Investment? Choose Wisely

Nutan Gupta

20 Jun 2017

New Page 1

When faced with the dilemma between this and that, most people buck under pressure. Options tend to confuse people and the more the options, there seems to be an excess of confusion. When it comes to handling finances, the confusion increases to manifold. However, investors can make an informed decision by thoroughly researching their options, evaluating their risk appetite and financial goals to attain benefits from their investments. In case of a stuck over between pay off debt or invest the money, go through this article to make a wise financial decision.

What should you do with Rs 20 lakh in hand? If you pay-off your debts and reduce the credit mongers, you will be free from the never ending saga of debt but on the other hand if you do not leverage, you may not be able to save enough in financial assets to retire peacefully. If you are at loggerheads in a situation like this we advise you to consider your best investment options, risk tolerance and cash flow situation before making any decision.

Investment Options

It is important for you to understand that your decisions on investment are supposed to be based on the numbers you have with you and a thorough consideration into your after-tax cost of borrowing versus your after-tax return on investing.

If you are holding a diversified portfolio of investments which includes equities as well as fixed income then you need to check through your after-tax return on money invested and after-tax cost of debt. In an ideal situation your after-tax return on money invested is higher than the after-tax cost of debt.

For example, if you have a loan under your name at an interest rate that is lower than what you have invested in securities than the option to invest your money in assets is a better option. If you're an entrepreneur, than the most apt thing for you in such a situation is to invest your money in business rather than reducing your debt. While if you are nearing your age of retirement than investing in risk portfolio should be avoided and paying off the debts should be a far secure option.

Risk Tolerance

While evaluating the investment options itself, you might have noticed the need for checking on the few criterions before going forward with any decision. Your age, income, earning power and tax liabilities are the foremost priority that you should check on, apart from that your familial responsibilities, health costs, or any criteria unique to you should consider them.

You can choose to keep your liquid income as fixed income investments, investing only excess cash in equities or on financial assets.

As an investor you need to be prepared to take few risks. If you do not have an appetite for risk and are afraid of losing the money than you would be better off using your excess cash flow to pay down your debts. However, this situation has a downside to it. In case of losing your steady flow of income you will find yourself still making regular mortgage payments with meagre cash to use.

Cash and Debt

Before you begin investing or reducing debt, we advise you to have adequate liquid cash with you to handle any emergency at hand.

Credit card bills and should be paid off at the earliest as the interest rate on these is higher than what most investments will earn before taxes. Paying them at the earliest would ensure you save on the amount you pay in interest.

The Bottom Line

Paying off your debts or investing your money depends entirely on your financial situation. To save yourself from sleepless nights over debt, keep your financial goals reasonable, your head straight to keep on evaluating your investment options, risk tolerance and cash flow.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Debt Pay-off or New Investment? Choose Wisely

Nutan Gupta

20 Jun 2017

New Page 1

When faced with the dilemma between this and that, most people buck under pressure. Options tend to confuse people and the more the options, there seems to be an excess of confusion. When it comes to handling finances, the confusion increases to manifold. However, investors can make an informed decision by thoroughly researching their options, evaluating their risk appetite and financial goals to attain benefits from their investments. In case of a stuck over between pay off debt or invest the money, go through this article to make a wise financial decision.

What should you do with Rs 20 lakh in hand? If you pay-off your debts and reduce the credit mongers, you will be free from the never ending saga of debt but on the other hand if you do not leverage, you may not be able to save enough in financial assets to retire peacefully. If you are at loggerheads in a situation like this we advise you to consider your best investment options, risk tolerance and cash flow situation before making any decision.

Investment Options

It is important for you to understand that your decisions on investment are supposed to be based on the numbers you have with you and a thorough consideration into your after-tax cost of borrowing versus your after-tax return on investing.

If you are holding a diversified portfolio of investments which includes equities as well as fixed income then you need to check through your after-tax return on money invested and after-tax cost of debt. In an ideal situation your after-tax return on money invested is higher than the after-tax cost of debt.

For example, if you have a loan under your name at an interest rate that is lower than what you have invested in securities than the option to invest your money in assets is a better option. If you're an entrepreneur, than the most apt thing for you in such a situation is to invest your money in business rather than reducing your debt. While if you are nearing your age of retirement than investing in risk portfolio should be avoided and paying off the debts should be a far secure option.

Risk Tolerance

While evaluating the investment options itself, you might have noticed the need for checking on the few criterions before going forward with any decision. Your age, income, earning power and tax liabilities are the foremost priority that you should check on, apart from that your familial responsibilities, health costs, or any criteria unique to you should consider them.

You can choose to keep your liquid income as fixed income investments, investing only excess cash in equities or on financial assets.

As an investor you need to be prepared to take few risks. If you do not have an appetite for risk and are afraid of losing the money than you would be better off using your excess cash flow to pay down your debts. However, this situation has a downside to it. In case of losing your steady flow of income you will find yourself still making regular mortgage payments with meagre cash to use.

Cash and Debt

Before you begin investing or reducing debt, we advise you to have adequate liquid cash with you to handle any emergency at hand.

Credit card bills and should be paid off at the earliest as the interest rate on these is higher than what most investments will earn before taxes. Paying them at the earliest would ensure you save on the amount you pay in interest.

The Bottom Line

Paying off your debts or investing your money depends entirely on your financial situation. To save yourself from sleepless nights over debt, keep your financial goals reasonable, your head straight to keep on evaluating your investment options, risk tolerance and cash flow.

Have Referral Code?