EMI vs SIP
Fancying trending gadgets, following the latest fashion fad, spending weekends at fine dining restaurants, attending EDM festivals – sounds relatable?
Millennials or Generation Y, as often referred to, cherish a lifestyle filled with all materialistic pleasures not only to appease themselves but also to maintain the status quo amongst their friends. However, studies have shown that today’s generation is less likely willing to work hard to earn their fancy livelihood. Hence, in this scenario paying more EMI’s (equated monthly instalments) against their monthly savings becomes inevitable.
In today’s world, taking a personal loan, home loan, car loan or education loan has become a cakewalk. Though the young millennials find it easy to fetch a loan given their salary levels, however, they fail to understand how heavily is it burdening their pockets.
If you buy a product or service via EMIs, you have to pay your instalments on a regular basis for a pre-determined time period at a pre-decided interest rate. Hence, you actually end up paying more than the actual price. In case of buying an appreciating asset via EMI, you are still better off as your asset is expected to appreciate in future but if you are paying EMI’s of car loan, you are actually burning a hole in your pocket for a depreciating asset that will give you no value in the future.
Now let’s see the story of two guys – Mr Anaadi and Mr Khilaadi who plan to fulfil their financial dream of buying a house.
Mr Anaadi is earning a decent salary to make ends meet but does not have enough funds to buy himself a house. Hence, he decides to take a housing loan and pay EMIs.
On the other hand, Mr Khilaadi was smart enough to understand the advantage of investing systematically over a period of time to create wealth for long-term use, benefitting from the power of compounding. He invested in mutual funds through SIPs and accumulated the desired amount to build his house.
Illustration:
Condition I: Mr Anaadi takes a home loan of Rs 25 Lacs at 9.35% for 20 years; he will have to pay an EMI of approximately Rs 23,000. Let’s do a simple calculation and you will realize that he is repaying Rs 55.20 lacs for a loan of Rs 25 Lacs.
Condition II: Mr Khilaadi also takes a home loan of Rs 25 Lacs at 9.35% for 20 years; he will have to pay the same EMI of approximately Rs 23,000. But he is smart and knows the benefit of investing in SIPs so he starts a SIP of Rs 5,000 per month in an equity mutual fund. This way, the corpus accumulated in the scheme after 20 years will be approximately Rs 63.79 Lacs, which is more than the outstanding loan of approximately Rs 55.20 Lacs. He will recover all his home loan amount + interest amount and also get the profit of Rs 8,59,775 through SIP.
| Home Loan – Mr Anaadi | Home Loan + Equity SIP – Mr Khilaadi | ||
| Loan Amount | 25,00,000 | Monthly SIP | 5,000 |
| Rate of Interest | 9.35% | Expected CAGR* | 15% |
| Monthly EMI | 23,000 | SIP Tenure | 20 Years |
| Total Payment (20 Years) | 55,20,000 | Value of Maturity | 75,79,775 |
| Towards Interest | 30,20,000 | Total Principal | 12,00,000 |
| Towards Principal | 25,00,000 | Total Expected Return | 63,79,775 |
| Net Gain through SIP* | 8,59,775 | ||
Note: *Net Gain of Mr Khilaadi through SIP
Total expected return from SIP – Total Loan Payment = Net Gain (63,79,775-55,20,000 = 8,59,775)
Conclusion:
So in this way you can recover all your principal and interest and also get some extra profit through SIP. Start a SIP today and invest regularly to meet your financial goals.