Picture this: You just purchased a new house with a home loan. Along with the home loan EMIs (Equated Monthly Instalments), you also dedicatedly contribute towards mutual fund SIPs (Systematic Investment Plans). Under such a scenario, you will be left wondering should you continue with SIPs or not after your EMI payment.
If you are new to the concept of SIP investment, let us tell you what is SIP in brief. The Systematic Investment Plan, or commonly known as SIP is a mutual fund scheme wherein you invest a fixed amount on a periodic basis. Coming back to the topic, we understand your concern as you are shelling out your hard-earned money towards EMI and investing in SIP as well. But generally, it is wise to continue with SIP investment when you have a surplus amount after making your EMI payment.
What you need to remember here is that SIP investments will help you achieve your long-term financial goals with ease. So, before you discontinue your SIP to pay the EMIs, let us understand how a Systematic Investment Plan is beneficial with the help of the following two examples:
Scenario 1:
Let’s assume your new home costs Rs. 37 Lakh. In that case, you will should make a 20 percent down payment from your life long savings. While 20 percent of 37.5 Lakh is Rs. 7.5 Lakh, the remaining 30 Lakh will be taken as a home loan. Based on Rs. 30 Lakh home loan amount, the tenure could be somewhere between 15-20 years (let’s assume it is 15 years in this case) with a 10 percent interest rate. As per the calculations, the total EMI amount for your home loan will be Rs. 32, 238.
As a new buyer, you will also have to pay the registration cost of the property. Due to the cost of registration of the property, an additional amount of Rs. 7.5 Lakh is added to the total cost of the house. So, your total cost of the new house will be Rs. 58 Lakh. After adding the loan interest amount, registration cost, and down payment for the house, the actual cost of your house comes to around Rs. 73 Lakh.
Scenario 2:
Considering the same scenario as above, let’s say that instead of EMI payment, you invest that amount in SIP. So, instead of buying a house, you rent one and pay a monthly rent of Rs. 10,000. The remaining Rs. 22,238 is invested in mutual fund SIPs for the long term.
Based on scenario 1, the investment in your new house is Rs. 73 Lakh with 15 years of home loan to repay. But the investment in SIP for 15 years will be Rs. 55.25 Lakh, which might gain returns up to Rs. 3.71 crore (18.3% return rate) by the end of it. With 15 years of home loan tenure, even if the valuation of your house increases by four times, it will cost you Rs. 1.56 crore (7.9% return rate).
With this comparison between EMIs and SIPs, you can clearly see how SIP provides higher returns as compared to EMIs.
In a nutshell, know that SIPs yield high returns when you stay invested in them for a long time. That way, you will be able to build a substantial corpus over time. To reap maximum benefits from SIP investment, start investing at a young age. This way, you can meet your financial goals, like buying a new house faster. Happy investing!
