EMI Vs SIP Debate: Which Path Aligns with Your Financial Goals?

Many Indians balance dreams of owning a new home with hopes for a secure retirement. The EMI versus mutual fund SIP debate is widespread. India’s retail loans exceed ?50 trillion1, comparable to the country’s total mutual fund assets. However, the immediate effect of EMIs and SIPs on the common man’s wallet is quite the opposite.

EMIs: Building Assets, Shouldering Debt

EMIs as a financing option arrived in the late 1980s and early 1990s. Rising incomes and global exposure spurred consumer aspirations for assets like cars and homes. Instead of focusing on the Maximum Retail Price (MRP) of goods, EMIs caught the public imagination as they made costly items affordable through monthly payments.

Truth be told, EMIs are like the building blocks for big-ticket purchases. But remember, interest adds up, making the final cost of EMI much higher than the initial price. Home loan rates typically range from 8.5% to 9.5% per year, while car loans fall between 9% and 11%. Personal loan interest rates could be over 20% annually.

Also, missing payments can lead to penalties and harm your credit score.

SIPs: Investing for Growth, Cultivating Discipline

SIPs involve regularly investing a fixed amount in mutual funds, akin to planting a money tree. Through compounding, your returns generate more returns over time, while regular investments help smooth out market fluctuations. While returns are not assured, achieving growth is easy with patience and persistence.

Spreading your investments across various mutual funds through SIPs cuts risk and potentially boosts returns. This is, especially, a crucial tactic in volatile markets to safeguard and stabilise your investment portfolio.

In the last decade or so, SIPs in mutual funds have become highly popular. Currently, the Indian mutual fund industry collects more than ?21,000 crores monthly through SIPs. This is a glowing testament to the strong preference for disciplined investing among the 9 crore SIP accounts2.

Returns too have been impressive. SIP returns for large-cap equity funds have generated 14-20% annualised return3. This means a mere ?1,000 monthly SIP over 10 years would result in a total investment of ?1.2 lakh nearly tripling to over ?3.2 lakh.

Why SIP is The Right Choice

SIPs offer a compelling path to wealth creation. SIPs differ from EMIs in their focus on capital appreciation through market-linked investments rather than capital repayment.

The SIP approach capitalises on the power of compounding, where reinvested earnings can yield significant returns over time, potentially exceeding inflation and facilitating robust wealth creation.

SIPs are also incredibly flexible. One can start SIP with just ?100 and increase investment as your income grows. One can stop or pause mutual fund SIPs whenever they want, giving complete freedom over personal finances. SIPs use the highly popular investment strategy called rupee-cost averaging to smoothen out market ups and downs. Buying low and selling high works for SIPs, and this has led to its popularity. EMIs, despite their asset-building ability, can jeopardise borrower’s finances if not handled well, and this is the risk borrowers should be cognisant of.

Source: Livemint Article: “The Rise and Rise of Retail Loans Now Over 50 Trillion”

Sip source - https://www.amfiindia.com/mutual-fund

Source - Valueresearchonline.com, Equity Large Cap Fund Selector.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature