SIP Vs EMI – Which is the best Investment Strategy

Dilemmas are something that is unavoidable when we have 2 options and have to choose one. In this blog post, we are going to look at the biggest dilemma of choosing between EMI and SIP.

While applying loan (EMI) to buy products you often end up paying more than the actual cost.

SIP (In equity mutual funds) is profitable 99.9% of instances as SIP itself an investment. With SIP you can buy depreciating assets at a cheaper price than the actual cost and appreciating assets at less value to be more profitable than what EMI offers.

 SIP Vs EMI - Which is the best Investment Strategy

SIP Vs EMI – Which is the best Investment Strategy

Source: SIP Vs EMI – Which is the best option ? | Perfingyan (Personal Finance Gyan)

There were 2 friends Rohit and Varun, Rohit’s having exposed to financial planning and mutual funds decided to put his money there for investments and Varun wanted to buy him a home via EMI.

Varun bought a house for 40 Lakhs with other charges his total cost came to ₹43 Lakhs. He made 10 lakhs as down payment and for remaining ₹33 Lakhs he availed bank loan at 9.5% interest on an average. For which he pays an EMI of ₹29691 for 20 years.

Cost of the house ₹              40,00,000.00
Stamp duty and registration fees( assumed 7% on Average) ₹                 2,80,000.00
Bank processing fee and MOD etc.., assumed at 0.5% ₹                    20,000.00
Total Cost ₹              43,00,000.00
Down payment ₹              10,00,000.00
Loan taken ₹              33,00,000.00
Home Loan EMI ₹                29,691.00
Interest rate 9.50%
Total Interest paid ₹              38,25,830.00
Total Cost of home ₹              81,25,830.00
Market value of house after 20 years (assuming 9% returns) ₹           2,24,17,644.00

Now let’s look at how Rohit’s investments have generated corpus

House rent per month (Assumed the cost of the house to be 25 times the annual rent paid.)  ₹                    13,500.00
Interest-free advance to homeowner  (5 Months’ rent)  ₹                    67,500.00
Initial investment of 10,00,000 excluding rental advance  ₹                 9,32,500.00
Average return 15%
Monthly SIP  ₹                    16,191.00
Corpus generated after 20 years  ₹           3,81,51,359.96

 

Any hike in house rent will adjust to salary hike of Rohit. It is clearly evident that SIP’s have generated more corpus than home Loan EMI’s.

Also with demonetization and other regulatory measures implemented by current NDA govt has brought the property prices down significantly. Also, real estate may not grow in line with their own historical growth numbers as the government is keen on linking Aadhaar with properties to take down the benomy properties.

Similarly, if you want to buy an iPhone X the cost of it comes around ₹1,00,000 rupees, whereas when the same phone is bought on EMI @13% interest the cost of the iPhone becomes ₹1,07,181 which is 7% higher than the market rate. However if the same was planned for a year and invested in SIP the cost of iPhone would have been just ₹94000 (assuming 12% returns)  which is 6% less than actual cost.

The below table shows the cost of few activities when brought through EMI and SIP.

Items/Activities Original cost Term Cost of Emi Cost of SIP*
Iphone X  ₹                 1,00,000.00  1 Year ₹ 107181 @ 13%  ₹     93,996.00
Europe tour  ₹                 2,50,000.00  3 Years  ₹ 2,94,648 @ 11%  ₹  2,08,908.00
Swift Car  ₹                 6,35,000.00 5 Years ₹7,66,448 @ 8.8%  ₹  4,69,740.00
*Assumed 12% returns for SIP

The above examples clearly prove that if planned better through SIPs, it helps us to save a lot of money when compared to EMIs. The only difference is planning.  When you plan your investment and use it to achieve your investment goal it can help you to save a significant amount when compared with taking a loan and paying EMI’s.

Also Refer : http://fpindia.in/blog/emi-vs-sip-be-controlled-or-take-control/

Tags: SIPvsEMI, SIP, EMI, Mutual Funds, Loan

About Haja

Software Engineer by profession, Author and the Founder of "bench3" you can connect with me on Twitter , Facebook and also on Google+

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    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.

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