To fund near-term money goal, should you take loan or redeem investments?

Harsh has been working in a bank for the past five years. He wants to pursue a postgraduate course in management now so that it benefits his career in the future. Harsh has always been careful with his money and has avoided spending too much or getting into any debt. Over the past five years, he has accumulated savings in his Employee Provident Fund, bank deposits, NPS and a PPF account. He is considering using these savings to fund his education, so that he does not have to take a loan at a high interest rate. Harsh believes that he will be able to replace the investments he is using now from the higher income he will probably get after he is employed again. Has Harsh considered all the options and made the right decision on funding his higher education?

Harsh has definitely done well to save money in his first professional stint. For his plans for higher education, he has the option of funding it by either redeeming his existing investments or taking a loan. Avoiding debt is good if the borrowing is being made for consumption. But in this case, the loan will be used to enhance Harsh’s skills, which will help him generate higher income and savings, and create assets in the future. So, he can use his investments, take an education loan, or consider a loan against his current investments.

All the investment options Harsh has chosen are long term, which will grow in value over time. Redeeming them early will reduce this benefit. Some of the products he has chosen are also inflexible in terms of their redemption. Both NPS and PPF cannot be withdrawn within five years of contribution that Harsh has made for this purpose. His choice of investments is poorly aligned to his nearterm goal of funding his education. The bank deposit might be the only efficient option to partly fund his education. He should not touch the rest of his investments.

Taking an education loan might be a good option for Harsh under these circumstances. The loan requires a guarantor, but comes with attractive terms and needs to be repaid only after Harsh completes his education. This means he will be able to repay the loan after he starts earning again. Though the rate of interest will be higher than what he can get if he uses his investments as collateral, by the time he completes his studies, his investments in PPF and NPS may be eligible for a loan. He can then consider restructuring his loans by taking lower cost loans against his investments and pre-paying the higher-cost education loan. An investment portfolio that is not constructed in line with a financial goal can thus be turned around to restructure loans that are taken instead to fund the goal.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.