The habit of regular saving, however small, can deliver mind-boggling returns which only seems real in the fantasy world.
The great Albert Einstein once said, “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.” Every investor must read this quote at least once a day. The habit of regular saving, however small, can deliver mind-boggling returns which only seems real in the fantasy world.
People are known for their irrational behaviour. This is especially true when it comes to financial decisions. Mr. Latesh Shah is one such investor. He recently bought a swanky new home, a lifelong dream come true. Though he availed a home loan amounting to Rs 25 lakh, he doesn’t mind the EMI of Rs 24,124 per month because of his thriving business. A careful evaluation reveals that Mr. Shah will end up paying a total Rs 5790240 lakh, including Rs 3290240 lakh as interest. It is nerve wracking to pay nearly 50% of the loan amount as interest.
What if a little bit of financial tweaking can help you to recover the entire interest component back? The thought itself is aphrodisiac. Yes, in the hi-tech, rapidly-changing mutual fund landscape, it is possible to recover the interest paid on your home loan EMI. If Mr. Shah invests just a fraction of his EMI in mutual funds through a Systematic Investment Plan (SIP), he can recover the interest which he has paid on his home loan.
Let’s assume Mr Shah invests Rs 2500 through SIP in equity funds. The SIP investment will continue throughout the home loan tenure. Assuming the average annual return of 16% (BSE Sensex has consistently delivered 15% return annually in past 10 years), Mr. Shah’s value of investments after 20 years will be Rs. 4,316,104! Yes, Rs Forty Three Lakh Sixteen Thousand and One hundred four! A fraction of EMI invested can make huge difference, so much so that it is possible to recover 70% of the value paid for purchase of the house.
What is Repo Linked Lending Rate, Home Loan? RLLR meaning, comparison vs MCLR
If you can afford to pay Rs. 24124 as EMI, you certainly can afford to invest a fraction of that EMI which will ensure smooth ride of your financial journey. Many cringe at the thought of investing in equities, but here equities do not mean speculative instruments. Investing in mutual funds is like investing in basket of stocks. The volatile nature of stocks is scary, but the volatility tends to average out in the long run, thus delivering a smooth upward curve as far as returns are concerned.
SIP, thus, is the eighth wonder of the world. It’s hard to believe that a monthly investment of just Rs 500 for 35 years can yield Rs 97 lakh! It’s true, and we are talking about average returns. If real returns are higher, you can only imagine the returns. People equate equities with gambling. Mutual fund industry is highly regulated and boasts of high level of transparency.
The writing is clear on the wall. A little bit of saving channelled into mutual funds through SIP can work wonders for your finance. However, given the vast mutual fund universe, it is always advisable to seek professional help of qualified financial adviser before dabbling in the fluid world of investments.
(By Abhinav Angirish, Founder, Investonline.in)