Pay off debt or invest? Here’s how to decide what’s best for your money

As India’s household debt continues to grow, many consumers are faced with a pressing financial question: whether to pay off debt or invest their extra cash?

This dilemma is particularly pertinent in today’s economic backdrop, where issues such as: interest rates, repayment terms and potential investment returns play extremely important roles. That is why it is crucial to first clearly understand the terms and conditions of your debt. Apart from the same the following aspects are also required to be taken into consideration:

First focus on your financial situation

Before making a decision, it’s essential to assess and understand your financial situation thoroughly. In this case it is important to be completely honest with yourself.

Clearly identify any high-interest debts you have, such as credit card balances, pending EMIs or personal loans etc. All such debts should be prioritised for repayment. Not only this, you should also make sure you have an emergency fund in place to cover unexpected and sudden expenses.

For example: If you have credit card debt with an interest rate of 18%, it makes sense to focus on paying that off first. That is why always throw light on clearing out any debt that comes with high repayment terms and conditions and post the same only consider thinking about investing the left over funds. There is no point in continuously carrying high interest debt on your shoulders. As the interest on such debt continues to compound and rise.

What are the investment opportunities in India?

For those considering investments post clearing out high interest debt, India offers several attractive options. Some of them are: Equity mutual funds, gold, corporate bonds, debt mutual funds, senior citizen savings schemes, gold bonds, REITs etc.

Debt mutual funds, for example, have outperformed bank fixed deposits in recent years, with over 200 funds providing higher returns than the 7% offered by SBI. Experts recommend a combination of constant maturity gilt funds and short-term funds for a balanced debt portfolio. Moreover, the Indian government’s focus on infrastructure development, such as the $1.4 trillion National Infrastructure Pipeline, presents opportunities for growth in infrastructure bonds.

Investors hence can take prudent investment calls post proper consultation with a certified financial advisor. SEBI provides for several prominent investment advisors and their details can be obtained through the official website of the regulatory platform.

How to debt repayment and investment?

A balanced approach of managing debt and investment often proves beneficial in such cases. For example: You can consider allocating a portion of your extra cash towards high-interest debt repayment while investing the rest in high growth small cap mutual fund schemes through the direct mode.

Now, this kind of strategic planning allows you to manage debts responsibly while benefiting from potential investment growth. For instance, if you receive an unexpected windfall, use a large part of it to pay off high-interest debts and investing the remainder can significantly boost your financial health.

Future outlook and considerations

In 2025, till now the Indian equity and debt markets present a dynamic landscape shaped by evolving economic trends. The Indian equity market has seen mixed performance in early 2025 due to poor corporate earnings and results along with foreign investor outflows. Now it is a given that long-term prospects remain strong, supported by structural economic strengths. Still, due to high valuations the Indian markets are expected to remain range bound over the short term.

Now it is important to remember that the Union Budget 2025-26 introduced tax reforms to boost demand and retail participation in bonds. The RBI’s $21 billion liquidity infusion aims to stabilise lending and growth. Due to the same, infrastructure and green bonds offer lucrative investment opportunities, with the National Infrastructure Pipeline targeting $1.4 trillion by the end of 2025.

Therefore, to navigate this landscape, investors should assess risk tolerance, understand their total debt obligations, diversify portfolios, speak to investment advisors and align investments in line with their long-term goals and aspirations.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a certified financial advisor before making any investment or debt-related decisions.