How a SIP works more for you than an EMI?
21 Jun 2017
Nutan Gupta
New Page 1
With increasing space and time crunch in cities and suburbs, four walls
and a roof for a sound sleep is what a common man yearns for. The want for having
something that is yours is fairly justified. A young investor buys a home for his family
and acquires a vehicle to drive around, mostly covered by a loan with an EMI (Equated
Monthly Installment). But, EMIs are potentially detrimental to one's mental satisfaction.
Also, there are other schemes that provide a much better rate of return than the asset
acquired under an EMI.
One scheme that could work in your favor, more than an EMI does, is the
SIP. SIP (Systematic Investment Planning) is nothing but a specified amount that is
invested in a scheme for a continuous time period, at regular intervals.
Analyzing the Idea
The fundamental here is clear and simple; EMI is negative compounding,
while SIP is positive compounding. For starters, it is to be understood that towards the
end of your loan EMI period (which is usually a few years), you actually end up paying a
significant amount more than what the asset's actual worth was. The difference in between
both these investment systems can be elaborately explained by a simple example.
Let us imagine you have an EMI tenure of 20 years, of which Rs 20,000
is your EMI. Also, assume that the loan amount would be 80% of the house's purchase price
(20% down payment by the buyer), all at an interest rate of 10.5%. Calculating, we see
that the interest payable goes up to Rs 27,90,000. The total payable amount, against the
Rs 20 lakh loan amount, shoots up to a significant Rs 47,90,000. Basically, one is paying
back more than double of what he's borrowing. Taking in all the aspects, assume the value
of the asset 20 years later may be somewhere around 5 times the current value, which would
be Rs 1.25 crore.
In an alternative scenario, you decide to invest your money in SIP. Let
us say you live in a rented flat costing you Rs 9000 rent per month. Comparing with the
provisions above, you would still have Rs 11,000 to invest in a SIP. Assume that the
general inflation rate of 6-7% and the increasing rent is checked by other factors. At an
expected return of 15%, calculations for the period of 20 years showcase the return to be
Rs 1.7 crore. Against the invested Rs 26.4 lakh, your net wealth gain will be Rs 1.4 crore
(excluding rent payment of the rented flat).
|
Asset Bought Through Loan
|
SIP
|
Down Payment
|
Rs 5 lakh
|
-
|
Monthly Installments
|
Rs 20,000
|
Rs 11,000
|
Loan Amount
|
Rs 20,00,000
|
-
|
Rent
|
-
|
Rs 9,000 (with 5% yearly increment)
|
Total Investment
|
Rs 52,90,000
|
Rs 48,75,000 (Including rent payment of
the rented flat)
|
Expected Rate of Return
|
Five times the current value
|
15%
|
Returns After Time Period
|
Rs 1.25 crore
|
Rs 1.7 crore
|
Observed Wealth Gain
|
Rs 72,10,000
|
Rs 1,21,25,000
|
Summing It Up
The table above speaks about SIP and its benefits at a length. The observed wealth gain
does show a huge gap in investment through SIP and asset bought through loans. It would,
hence, seem wiser to be on the more patient side. With a longer term vision, SIPs provide
unmatchable returns, which would further help you once you enter the post-retirement
stage.