EMI vs SIP: Which one would you choose?

If you plan your financial goals and investments wisely through SIP, then you may never have to take loans and service the EMIs.

When you consider taking loan from Bank, you agree upon paying monthly installments with certain interest rates fixed by Bank. Although your immediate desire gets satisfied, you end-up paying up a huge interest to the bank on EMIs over the period.

On the other hand, if you invest the same amount in SIP (Systematic Investment Plan) you may earn a good interest over and above your principal invested. Let’s understand the comparison between EMI and SIP with an example –

Mr. X wants to buy a car today. The details are:

Cost of Car: ₹ 7,00,000

Down Payment: ₹ 2,00,000

Loan: ₹ 5,00,000

Loan Period: 5 years

EMI (at interest 9%): ₹ 10,380

In this case, in 5 years, along with the loan Mr. X has to pay ₹ 1,22,800 interest also which is around 25% of the loan amount.

However, if Mr. X plan in advance and start saving the same amount as EMI, i.e. ₹ 10,380 in an equity mutual fund through SIP, then

SIP amount: ₹ 10,380

Time period: 5 years

Expected Return: 12%

Total corpus after 5 years: ₹ 8,47,731

The cost of car in 5 years (assuming inflation of 4%): ₹ 8,51,657

As you can see, Mr. X can buy the car now from the corpus accumulated through SIP and this amount includes the loan and the down payment both.

We feel that paying a little amount every month for EMI is very convenient. However, this convenience of EMI is very costly and can be avoided with a little planning.

These issues are not there when you plan for all big purchases and invest for the same through SIP. One of the main features of investing in SIP is delayed gratification. Delayed gratification is when you resist a smaller but immediate reward in order to receive a larger and more enduring reward later.