EMI vs SIP: Which one would you choose?


EMI vs SIP: Which one would you choose?

EMIs have made procuring a gadget, car, vacation and home very easy. Even when we do not have the required money to buy something, we can always get it on EMI or get a personal loan which we can pay monthly. We feel that paying a little amount every month for EMI is very convenient. However, this convenience of EMI is very costly and can be avoided with little planning.

For example, Mr. Rakesh wants to buy a car today. The details are:

Cost of Car: Rs. 9,00,000

Down Payment: Rs. 2,00,000

Loan: Rs. 7,00,000

Loan Period: 5 years

EMI (at interest 9%): Rs. 14,531

In this case, in 5 years, along with the loan Mr. Rakesh have to pay Rs. 1,71,851 interest also which is around 25% of the original loan.

However, if Mr. Rakesh plan in advance and start saving the same amount as the EMI, i.e. Rs. 14,531 in an equity mutual fund SIP, then

SIP amount: Rs. 14,531

Time period: 5 years

Return: 15%

Total corpus after 5 years: Rs. 12,54,472

The cost of car in 5 years (assuming inflation 6%): Rs. 12,04,403

As you can see, Mr. Rakesh can buy the car now from the corpus accumulated in the SIP account and this amount includes the loan and the down payment both.

Similarly, this planning can be done for the latest gadgets, such as mobile. These days, we change mobile at least every two years. If you save just Rs. 1,550 per month, then in 2 years you can buy a mobile worth Rs. 40,000 (assuming the rate of return 8%).

EMIs have various disadvantages:

  1. Debt: It results in long term debt for the consumer. It is always good to be debt free a debt is a financial commitment which if not honoured can cause problems.
  2. High amount to be paid: When you take an EMI, you always pay back way higher amount than the cost of the asset. Longer the EMI period, higher the interest amount to be paid.
  3. Opportunity cost: You lose on opportunity cost of the amount of EMI. Let us say you took a loan of 30 lakh to invest in a house. The 25 year EMI at 9% interest is 25,176 Rs.
    If you invest this 25,176 in SIP of an equity mutual fund, then after 25 years, assuming the return of 12%, you will have 4.24 Cr with you.
  4. Control: Once you have an EMI, they have a big decision in your life decisions. They control you. Before any expense or decision like changing job, starting a business of your own, you have to think about the EMI to be paid.

These issues are not there when you do planning for all big purchases and invest for the same through SIP. One of the main features of investing in SIP is delayed gratification. Delayed gratification is when you resist a smaller but immediate reward in order to receive a larger and more enduring reward later.

Plan early through SIP and do not get into the trap of EMI. You can check more benefits of SIP here.


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