Is there a good investment option for capital growth and safety?

Q) I have savings of around ₹40 lakh and plan to invest it for a five-year period, during which I anticipate periodic withdrawals from this corpus to cover my expenses. My primary concern is capital preservation, with a secondary focus on capital appreciation that exceeds inflation. What is the best investment option and is SBI Small Cap Fund a good choice for this investment?

— Name withheld on request

Considering your requirement for both capital safety and capital appreciation, we recommend building a diversified portfolio with exposure to both debt and equity asset classes. We suggest investing in debt products such as corporate bonds and debt mutual funds for capital preservation. For equity investments, consider equity mutual funds.

Corporate bonds offer an alternative investment option where you can invest in high-quality bonds that potentially provide higher returns than fixed deposits. You can also invest in debt mutual funds in medium term duration that can provide good returns over five years.

Regarding equity mutual funds, we recommend considering large-cap index funds in addition to mid-cap and small-cap funds. mid-cap and small-cap funds is advisable since the investment duration exceeds five years. The SBI Small Cap Fund is a good option for exposure to small-cap stocks.

A loan typically incurs higher costs compared to the potential return on investment from one’s savings. So, should I take a car loan or just buy the vehicle from my savings?

— Name withheld on request

In terms of the budget for a car, we suggest that the monthly expense of insurance, maintenance and car loan (if any) should not exceed 15% of your monthly income. Additionally, your usage pattern is a significant factor to consider. If you frequently use a car, you might consider purchasing a more luxurious model.

If you plan to buy a car without taking a loan, we suggest maintaining a contingency fund equal to approximately six times your monthly expenses.

It is generally advisable to minimize loans for discretionary expenses whenever possible.

I have an outstanding home loan of ₹30 lakh with 15 years remaining on the loan tenure. Should I use my annual bonus and annual income growth to prepay the home loan or make additional investments? What would be advisable, considering the current interest rate scenario?

— Name withheld on request

Having a loan can become an emotional burden and, considering higher interest rates, there is definitely a case to prepay home loans as quickly as possible.

Before making any prepayments, we suggest ensuring that you have a contingency fund of at least six times your monthly expenses.

Additionally, it’s important to evaluate the opportunity cost of your investments and consider the tax benefits of interest and principal repayments. If the return on your investment is higher than the interest cost of the loan and the tax benefits associated with it, it may be more beneficial not to prepay the loan.

Vijay Kuppa is the chief executive officer of InCred Money (formerly Orowealth)