SIP Vs EMI – Which is the best option?

SIP vs EMI

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.

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.

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

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