Invest or prepay when you have smart home loan?

One of my friend and colleague asked me whether my post on Invest or prepay home loan makes sense for the smart home loans as well. While writing that earlier post, I had this in mind but decided to keep this topic for another blog post, however did not expect this question coming so soon.

Let's first see what are smart home loans, not many would be aware of that. 

• Smart home loans are nothing more than a home loan given to you as an overdraft account with a defined withdrawal power, which is same as the amount of home loan sanctioned based on your re-payment capability, CIBIL score and property evaluations. 
• Max Gain from SBI is the most popular such product in the market. Citi bank has Home Credit, HSBC has Smart home and some other banks also have similar product with different interest rates. 

What are the benefits of smart home loan products?

It allows you to deposit any amount of money in your home loan account. This is different from pre-paying your home loan, it just sits in there and reduces the principal amount for your home loan by that amount and thereby reducing your overall interest liability. 

More on the smart home loans and its features in some other post. Let's come back to our original topic Invest or prepay when you have smart home loan. Answer to this question is little tricky because 

• The kind of liquidity provided to the sum deposited in smart home loan is completely unbeatable, as it's next to cash
• From return perspective, you can consider this sum earning the same interest as your home loan interest, which is actually tax free for you. 

Now, considering these facts, here is my recommendation 

• There are not lot many products in the market that could beat this combination. As some would have interest rate issues and others would have liquidity problems. 
• Hence, you should put your following funds into the smart home loan account: 
• emergency fund and medical fund 
• any money that you have allocated for short to medium term goals (0-5 years) 
• Anything that is allocated for beyond this period should be moved to equity mutual funds as you still have better returns there for that horizon. 

Feel free to post your thoughts and opinions on this topic.