If your home loan rate is 8.5% and you expect SIP returns of 12%, the math favors SIP. But that 12% is uncertain. The 8.5% saving is guaranteed. Risk-adjusted, many advisors recommend a hybrid: invest in SIP but also prepay 1 EMI extra per year.
Worked examples
Vikram, 38, ₹40L home loan at 8.5% — bonus ₹5L to deploy
Vikram has 15 years left on his loan. If he prepays ₹5L, he saves ~₹9.4L in interest and closes the loan 2 years early. If he invests ₹5L as lumpsum SIP at 12% for 15 years, he gets ~₹27.4L. After LTCG tax (~₹2L), net: ₹25.4L. SIP wins by ₹16L in nominal returns. But Vikram is also off the loan 2 years earlier — peace of mind has value.
Frequently asked questions
Is it better to prepay home loan or invest in mutual funds?
Mathematically, SIP wins if equity returns exceed your loan rate (net of tax benefit). But prepayment is risk-free. Many advisors recommend doing both — invest monthly SIP and make one lump-sum prepayment per year.
Does prepaying a home loan have tax implications?
Principal repayment (including prepayment) qualifies for 80C deduction up to ₹1.5L/year. Prepayment itself doesn't attract any tax, but it reduces future interest — which reduces the Sec 24 deduction.