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EMI vs SIP

EMI vs SIP

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Fancying trending gadgets, following 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 maintain 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 installments) 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 installments 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 fulfill their financial dream of buying a house.

Mr Anaadi is earning a decent salary to make his ends meet but does not have enough funds to buy himself a house. Hence, he decides to take 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 fund through SIPs and accumulated the desired amount to build his house.

Illustration:

Condition I: Mr Anaadi takes 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 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 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 an SIP of Rs 5,000 per month in 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 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 an SIP today and invest regularly to meet your financial goals.

 

 

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