How a SIP works more for you than an EMI?

Nutan Gupta

21 Jun 2017

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.


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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How a SIP works more for you than an EMI?

Nutan Gupta

21 Jun 2017

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.