The article on “SIP eating into luxury car sales” has caused a lot of stir by saying that the growing trend of investing in mutual fund (MF) schemes through Systematic Investment Plan (SIP) is reducing the disposable income of the investors, which in turn is hitting the sale of luxury cars like Mercedes Benz.
However, financial advisors have different opinions. They say that SIPs would enhance the purchasing power of the investors in the long run and would generate more potential customers for luxury cars.
Let’s do some calculations to understand how it will be better for a person to start a SIP to buy a luxury car, rather than buying it on loan and repaying it through EMI.
Let’s take the example of Mercedes C Class (Base model), which costs Rs 65 lakh on road now (Ex-showroom plus Road tax plus insurance).
If a person buys a Mercedes C Class (Base model) by making a downpayment of Rs 10 lakh and an EMI or Rs 1,27,500 for 5 years (including yearly servicing and insurance), the buyer will end up with a cash outflow of Rs 86.5 lakh over this period.
Now assume that the same person – instead of making a downpayment of Rs 10 lakh to buy the Mercedes C Class (Base model) on EMI – invests the amount in an equity oriented MF scheme. If the price of the car increases from the current level of Rs 65 lakh to Rs 86.5 lakh after 5 years, he/she may achieve the target by investing Rs 76,000 per month through SIP in the fund for the next 5 years, assuming that the Sensex continues its performance for the investment period.
So, a person, who can’t spare Rs 1,27,500 per month after making a downpayment of Rs 10 lakh may also accumulate sufficient amount after 5 years by making lump sum investment of Rs 10 lakh and starting a SIP of Rs 76,000 per month – that is Rs 51,500 less than the EMI amount.
If the person invests the EMI amount of Rs 1,27,500 per month through SIP after making the downpayment amount of Rs 10 lakh in lump sum, he/she would end up accumulating over Rs 1.3 crore at the end of the investment period of 5 years, assuming a compound annual growth rate (CAGR) of 15 per cent.
So, SIPs won’t hit the Mercedes car sales, but would increase the demand in the long run, by making more investors capable of buying luxury cars.