Aditya Birla Sun Life AMC Limited

Why SIP is better for your next car

May 03, 2018
5 mins | Views 266

All of us remember our very first car. The first drive was amazing. The way you took care of the car, the first time a scratch occurred and the all the memories. As time passed by, you realized you wanted a bigger car. A larger family, more comfort, and need for advanced features may be among the reasons for buying the next car.

Now, instead of saving and investing for the bigger and better car, we take the loan route to fund our passion. The average individual sells their first car, takes the cash from the sale and makes the downpayment of the new car loan. A bigger car bought with a loan, means a bigger EMI to be paid every month.

Millennial salary earners know exactly how it feels like to see their salary getting credited and then immediately debited by the withdrawals made by the lenders. But what if we told you that there was an easier way out to avoid loans and still buy a bigger car? By doing a SIP for your next car, you not only avoid recurring EMIs but also become the owner of your car from the very first day.

Let us assume that one keeps their first car for seven years. The next car, which is bigger and better, will be bought after seven years. Assuming if you keep Rs 200 a day for the next car, you will save up Rs 6,000 per month. Invest this small sum of money in an equity mutual via the SIP route and you will see magic of compounding happen. The best-performing mutual funds and there are a lot of them, have given modest returns in last seven years. Even assuming that your Rs 6000-a-month SIP gains a modest 12% a year, at the end of seven years you would have earned Rs 8 lakh on a total investment of Rs 5 lakh. You may consult your financial advisor before investing.

A SIP allows you to invest in mutual funds through small and periodic instalments, like a good EMI. With SIP offering the flexibility to invest any amount starting with as little as Rs 1000, all your big dreams may come true with small steps.

At the end of seven years, when you have Rs 8 lakh as corpus from the Rs 6000/month Mutual Fund SIP, it is equivalent to a zero-EMI loan to yourself! By selling off your first car, you can get anywhere between Rs 2-4 lakh depending on the model. So, putting all together you will have a neat sum of Rs 10-12 lakh to buy a bigger car. As you can see, all this money is yours with no monthly debit of EMI from your budget. Unlike an EMI, a SIP gives back more and helps you stay independent.

Unfortunately, most of us do not plan goal-based mutual fund SIPs. Assuming you take loan of Rs 8 lakh to buy the next carat around 8.9% interest rate The EMI for a Rs 8 lakh car loan comes to Rs 12831 taken for a 7-year loan tenure, which is close to a little more than 2 times the SIP instalment of Rs 6000 that you could have invested for 7 years. At the end of the loan tenure, you would have paid the principal of Rs 8 lakh and Rs 2.77 lakh as interest. So, not only do you pay 2 times the SIP amount as loan EMI, you also pay 26% extra as interest on the loan amount! This showcase that SIP is an easier and cost-effective way to fund a bigger car.

Mutual funds SIPs are an excellent financial planning tool that helps you to create wealth, by investing small sums of money every month. When you do this over a period of time, you reduce dependence on loans and can buy an asset like a bigger car with your own money at your own convenience. So, next time you think about buying that swanky SUV, start your car-SIP. It is always advisable to consult your financial advisor before investing.

Happy investing!

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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