Why repaying debt should be a priority over new investments

Below is a verbatim transcript of the interview:

Q: If for example you are a salaried professional what should be your priority should it be debt repayment or should it be fresh investments?

A: This is the bonus season and so lots of people would have some lump-sum cash. For a salaried professional, debt is pretty expensive. The cheapest loan is probably a home loan at 10 percent, which is not cheap, unless it is tax deductible. A loan for a self-occupied house up to Rs 15 lakhs is tax deductible or it is fully tax deductible if it is for a rental house. All other loans are non-tax deductible and expensive. So, for a salaried professional, I would say if one gets a lump-sum amount, it makes sense for one to prepay your loan provided it is not tax deductible.

A very minor exception would be a very old home loan that one might have had at a very low fixed rate. There are people with home loans at fixed rates of 7.25-7.50 percent who were wise enough to take that in 2004-2005. If one has that then it does not make sense to prepay that but otherwise prepayment should always be a priority for a salaried professional when he is getting a lump-sum cash.

Caller Q: I want to invest Rs 8,000 in Systematic Investment Plan (SIP) for my retirement plan? Which SIP will be better for investment?

A: It is great that you are looking at a SIP rather than a lump-sum. Since the tenure over which you want to invest is long and you wanted to invest it for your retirement, depending on your risk profile I would advice one of the two. One is that if your risk profile is relatively conservative, I would advice a Balanced Fund, which would give you 70 percent equity and 30 percent debt.

You could look at any well performing Balanced Fund, ICICI Prudential Balanced Fund or HDFC Prudence Balanced Fund . However, you can have a profile that is little more aggressive, I would say put 90 percent in a largecap equity fund like a Franklin India Bluechip Fund , may be a Franklin India Index Fund , UTI Opportunities Fund and balance 10 percent in Public Provident Fund (PPF). Given the long-term nature of your investment, that should serve to get you a pretty decent nest egg.