If you plan your financial goals and investments wisely through SIPs, then you may never have to take consumer durable loans and service the EMIs.
By Vishwajeet Parashar
The festive season has already started in major parts of India and you can find lucrative offers and easy finance options or buying schemes everywhere, be it on e-commerce websites, retail stores or even on the streets. During the festival season, we tend to avail of these offers through Credit Card EMIs, Debit Card EMIs, even if we do not have enough cash available in our account to buy it. Over-dependence on Credit Card or Bank finance schemes for uplifting your lifestyle or making big purchases during festive season leads to a ‘debt trap’ which if mismanaged may become irreversible. Banks resort to aggressive marketing practices and provides easier access to credit cards and consumer durable loans to Gen ‘X’ who are falling prey to these lure of easy money.
EMI or SIP?
When you consider taking consumer durable loan from Bank or through Credit/Debit card EMIs, you agree upon paying monthly installments with certain interest rates fixed by Bank. Although your immediate desire gets satisfied, you end-up paying up a huge interest to the bank on EMIs over the period.
On the other hand, if you think vice-versa and invest the same amount in any of better performing mutual fund schemes through SIP (Systematic Investment Plan) you may earn a good interest over and above your principal invested. SIPs are the best way to enter into the equity market which also gives benefits like Rupee Cost Averaging and disciplined investing. Let’s understand the comparison between EMI and SIP with an example –
In the above chart, there are two scenarios explained. The first one, let’s suppose you plan to buy the latest I-Phone upcoming Diwali which will cost you around 1.2 lacs. You avail any of the Bank’s easy finance schemes for the purchase. If you confirm 36 months EMI which will be at around Rs. 4,160, you will pay around Rs. 1.5 lacs I.e. around Rs. 30,000 as interest, above than the principle paid. On the other hand, rather than buying the latest I-Phone, if you invest the same amount in any better performing mutual fund schemes through SIPs, you may be able to create a corpus of around Rs. 1.75 lacs in next 36 months at an assumed interest rate of 12% per annum.
However, not all types of loans (EMIs) are bad. Leveraging one’s income to acquire a constructive asset is already accepted as a preferred mode. For example, a home loan taken to acquire any real estate property considered as appreciating asset unlike buying a costly mobile phone or car, which is a depreciating asset.
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What to choose?
Systematic Investment Plan (SIPs) is one of the best ways of getting into of equity market by investing in mutual funds for all types of financial goals, be it short term, mid-term or long term. Apart from many benefits that SIPs have, like disciplined investing and Rupee Cost Averaging, it also builds a lumpsum corpus for you over the years without even timing the market. You can link your short term, mid or long term financial goals like buying a new car, Buying new I-Phone etc. and invest accordingly. EMI’s are not just an added burden to your pocket but it also hampers your mental health as your every new spending will lead to the mental calculation to check whether you can manage the burden with your existing EMI outgo.
The EMIs which you pay can be termed as liabilities, on the other hand, money which you invest is your long term wealth which certainly helps you achieve your goal. If you plan your financial goals and investments wisely then you may never have to take consumer durable loans ever in life.
( The author is Senior VP & Group Marketing Head, Bajaj Capital)