First, Neil’s portfolio may be at risk of becoming too heterogeneous with a high proportion of assets. If a large part of revenue Goes towards paying EMI for home loan, very little is left for construction of any other property. If most of Neil’s assets are in the form of assets, he may be compromising his need for liquidity. He should ensure that at least 30% of his Investment Others are in assets that are liquid, easy to use and flexible. They should make them a priority.

Second, if his EMI is more than 50% of his income, Neil runs the risk of default. In a normal family, a good part of the income goes towards essential expenses. In a household with young children, essential needs will probably increase. Rising fees in private schools, fees for coaching and activities and expenditure on excursions are likely to increase. Neil must increase his savings to meet these needs, and to do so he needs a higher monthly surplus. High EMI will hurt the purpose.

Third, the loan will always have a higher cost than the return from the asset, except in the case of property, which can accrue at a higher rate. However, a self-occupied house is not an earning asset, whereas a property such as a car tends to decrease in value. Therefore, Neil’s reasoning about using debt to build wealth may be flawed. He may be replacing his inability to save regularly with expensive loans, which reduce his wealth, and the flexibility to build the wealth he needs.

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