Three Smart Things To Do With Rs 50,000

Have you just had a minor windfall gain of Rs. 50,000 or so? Your first impulse would be to splurge it, of course. However - before you make that trip to the mall, do bear in mind that even a little bit of money when deployed in the right direction can help you realise significant benefits in the long run.

Here are three simple but powerful ways in which you can put your pennies from heaven to good use towards your financial betterment.

Smart Move #1: Prepay your Home Loan
Let’s face it – a Home Loan is supremely expensive proposition. Even at the current interest rates of 9.25 per cent or thereabouts, your EMI on a 50 lakh loan amount would be close to Rs. 46,000 per month for a 20-year tenor. That works out to a mammoth interest outgo of close to 60 Lacs on your principal amount of 50 Lacs! You’re probably already aware that for the first half of your loan tenor, the EMI’s are composed mainly of interest repayments. For instance, the first-year principal repayment in the aforementioned example is a mere Rs 90,000 or so.

Making prepayments early in the loan cycle can have a pronounced effect on your overall interest savings amount and on the loan tenor as well. If you’ve just about started a home loan sometime in the past five years, your first priority must be to utilize this Rs 50,000 to make an early prepayment. A prepayment made in the 12th month, for instance, will lead to a substantial interest saving of Rs. 2.5 lakhs- and what’s more, you’ll own the property in entirety six months sooner as well. Even a prepayment made as far down as the end of the fifth year of your loan can lead to an interest saving of Rs 1.6 lakhs, and a four-month reduction in your loan tenor. It would be a very wise move to commit your little windfall into making a prepayment to your home loan, before all else.

Smart Move #2: STP into an ELSS
STP... ELSS… too much jargon for you? Well, it’s really quite simple. An ELSS stands for “Equity Linked Savings Scheme” and is a type of mutual fund that invests into the stock markets with a hard lock in period of three years. Before you balk at the thought of investing into the markets, do bear in mind that over the long run, they beat traditional asset classes hands down in terms of returns.

The three-year lock in actually works to your advantage by forcing you to look the other way in case markets go awry, which they often do and will continue doing forever! Your annual contribution to an ELSS qualifies for a tax deduction under Section 80C, leading to a potential tax saving of Rs 16,000 as well. An STP stands for a “Systematic Transfer Plan”, which is nothing but a simple automated mechanism of transferring moneys from debt funds to equity funds (or vice versa) on a periodic basis. Instead of investing the entire sum of Rs 50,000 in a market linked instrument such as an ELSS in one shot, it would be a prudent move to divide the amount into a few tranches and execute an STP from a debt fund instead. As a category, ELSS funds have delivered an impressive 16.52 per annualized return over the past five years. Assuming a more mundane growth rate of 12 per cent for a 7-year holding period (ideal for equities), you’ll still wind up with a neat corpus of Rs. 1.1 Lacs in the year 2024, plus the tax savings that you’ll make this year. Axis Long Term Equity Fund, DSP BlackRock Tax Saver and Franklin India Tax Shield are three worthwhile options to consider at this stage.

Smart Move #3: Boost your Insurance Cover
And by that, I mean by purchasing a simple term plan and a health insurance plan. Avoid ULIP’s, traditional life insurance policies, annuities and ‘one time’ premium plans that will compromise your returns and provide you with a sub-standard life cover too, thereby serving no real need. If you’ve got a young family, you could purchase a family floater health insurance plan for Rs 10,000 and up your life cover by around Rs 50 lakhs by spending another Rs 5,000 (bear in mind that these will become annual outgoes). Invest the remaining Rs 35,000 in debt funds with a two-year time horizon, designating this corpus your ‘insurance fund’ of sorts. Better yet, look for a health insurance plan that offers you ‘wellness’ benefits such as a gym membership, and you’ll be killing two birds with one stone.

At the end of each year, pull out another Rs 15,000 from this ‘fund’ towards your annual health and term life premiums. In this way, your little windfall of Rs. 50,000 will suffice for your comprehensive insurance planning needs for the next three years.