SIP – A Wiser Substitute to EMI

by Vinaya HS on February 23, 2018

in Finance

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The increasing number of loan options, including two-wheeler loans and personal loans, has made it easier for individuals to purchase a house, car, or start a business. Banks and financial institutions offer loans for short to long tenures, which may be repaid in equal monthly installments (EMIs). Considering the hassle-free loan procedure and its quick approval, most individuals choose loan as a convenient option.

However, not many are aware of the fact that an EMI may turn out to be a costly option, especially if it is a personal loan EMI. With an in-depth knowledge and market research, individuals may avoid the additional expense, which is incurred in the form of interest on the loan.

In order to repay the monthly installment, you might have to compromise on other expenses. Since the EMIs cannot be repaid within a short period, you will have to deal with the monthly outflows for a long tenure. Every expense you incur in a month will be calculated according to the EMI you are required to pay. This amount, if invested in an asset, could lead to maximization of your wealth. A systematic investment plan (SIP) in mutual funds may be an ideal alternative to EMIs. With financial discipline, you may ensure a monthly contribution in the scheme, which gives regular returns and has low risk.

Why an SIP is better than EMI

There are a number of reasons why it is better to invest in mutual funds via SIP before instead of applying for a loan at a later stage and paying the EMIs.

EMI is a huge expense

If you are paying an EMI in order to buy an asset which will give you a higher return in the long run, it is a wise choice. This may be for the purchase of a house. Further, if you are paying EMIs for the purchase of a mobile phone or for a car, then it does not make sense because the value of the asset will only decline and you will end up paying a huge sum as interest over and above the principal amount.

SIP helps create wealth

Both SIP and EMI require long-term commitments. In the case of an EMI, if you default in the repayment of the amount, you might lose possession of the asset. Instead, if you commit the same amount and invest in SIP, you will actually end up building a fund for yourself.

SIP generates long-term profits

An investment in real estate will only generate returns in the future. Any other asset will only decline in value with the passage of time. Hence, a loan taken for the purchase of any asset other than a property will show negative returns. On the other hand, mutual fund returns over the years will increase and you may avail of the benefit of compounding interest. With EMI, your outflow will remain constant and there will not be an increase in the long-term returns whereas with an SIP, the returns show an increase in the long term.

EMI remains a fixed monthly outflow

There is no escape from the culture of EMI. It is a debt trap you get yourself into. Once you have committed to pay an EMI, your expenses will be guarded by them. Every decision you make will have to include the aspect of EMIs until the time you have repaid the entire loan amount. This could take more than seven to ten years. Remember, an EMI will only get you an asset; an SIP will help you build a fund to purchase an asset without a debt.

SIP helps save on high interest rates

If you are planning to purchase something in the future, you may start saving early and invest in SIPs. This way, you may avoid a loan and save on the interest payment as well. There is no point complaining about a surge in interest rates; they are not going to fall. There could be a minor adjustment in the same, but not a significant decline. In case of SIPs, you may invest an amount as low as INR 500 and eventually increase the sum. With every investment, your fund will be growing and based on your long-term goals, you will be able to build a corpus. You may easily invest in SIP online and let the fund grow.

Angel Wealth offers a user-friendly mobile application that runs on an ARQ investment engine. The engine is free of human intervention and runs on algorithms that provide personalized investment recommendations to you. Based on your investment criteria, the mobile app will offer recommendations that will help you invest in SIP online and maximize your wealth.

Download the app today and invest anywhere, anytime.

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