Today’s generation is all about the latest gadgets, accessories, new clothes, and other material things to maintain their fancy and pretentious lifestyle. Owing to the growing and accelerating Indian economy, the youth are able to fetch decent income or salaries which they usually spend for their status war with their peers. This could be one of the reasons why a majority of the youth are so dependent on EMIs or Equated Monthly Instalment to purchase something they can’t afford at the moment. EMIs have made procuring a car, gadget, home, and even vacation very easy. The youth feels that paying a little amount every month for EMI is very convenient. However, this convenience of EMI comes at the expense of emptying your pockets too soon. Fret not, with better planning you can avoid that.
Buying a product or a service via EMIs means that it will pay more than the actual price. However, if you save this sum every month through Systematic Investment Plans (SIP) in mutual funds, you would end up shelling out lesser than the sticker price. Here’s a comparison of the two options.
What is SIP?
SIP is a way to invest in mutual funds, and not an investment product in itself. Under the SIP investment, an investor invests a fixed amount at pre-determined intervals for a specific period. The periodicity of the investments can be daily, weekly, monthly, annually, etc., according to the investor’s convenience.
Which one is good? EMI or SIP?
In case of an EMI, if you pay an EMI towards the creation of an asset then it is termed good as your asset will appreciate in value even though you end up paying interest on EMIs. For instance, EMI paid for home loan repayment is a good option. However, EMI paid to repay a credit card, personal loan, or car loan is often frowned upon as you pay a significant interest on your principal amount. What’s worse, the value of the goods bought also depreciate with time.
Conversely, when you invest in SIP, you gradually create an asset for yourself. This helps you to achieve your financial goals in life with the help of the power of compounding.
Few points to keep in mind
- SIPs do not work for all assets, only discretionary procurements. It does not make sense to wait for a few months to buy a laptop or a fridge.
- Although the EMI option is costlier, you get to use the asset immediately. Sometimes, it is better to buy certain items, like a treadmill or your first car, when you are in need.
- Some expenses like fees for higher education, can’t be postponed. The SIP option is useful only if you had plan well and started saving 2-3 years in advance.
SIP also offer an SIP calculator to help you understand the returns earned on your mutual fund investments. A mutual fund returns calculator is quite easy to use and offered by most fund houses and AMCs (Asset Management Company). Happy investing!