BUYING A HOUSE ON EMI? WHY NOT SIP INSTEAD?
There’s a common Hebrew proverb – “He is not a full man who does not own a piece of land”. Almost all Indian citizens are conditioned in a way to at least own one house of their own. Owning a house is one of the most basic human needs. Contrary to previous generations where Indians saved for years to buy their dream house, buyers today prefer possession of the house quite early in life which has been possible owing to easy accessibility of house loans. However, some of the mutual fund experts advise against the practice of availing a house loan or a personal loan to buy a house. They suggest building a savings pool instead to meet their financial needs.
A home loan is probably the biggest financial debt most investors undergo in their lifetime. At the time of availing a house loan or a personal loan, most people stretch their borrowing limit to get a better house and hence are left with the only option of servicing their loans via EMIs (Equated Monthly Instalments). However, with time as their income gradually grows, they are often confronted with the question if to make partial prepayment towards their loan or to invest the surplus in mutual funds. Conventional wisdom often advises getting rid of any kind of debt, as it helps to not only save the interest cost but also provides a sense of financial freedom to investors. So what can you do instead? You can consider to invest in SIP.
What is SIP?
Systematic Investment Plan or SIP, also known as ‘reverse EMI fund’ is a means to invest in mutual funds. Under SIP investments, an investor contributes a fixed amount in periodic intervals towards their desired mutual fund schemes. The investment amount, tenure and the periodicity of the intervals is predetermined before starting an SIP scheme. An investor has the liberty to invest as little as Rs500 per month. SIPs also offer the flexibility to increase (or decrease) or investment amount by fixed percentage or a specified investment amount at regular intervals to meet the growing demands of your lifestyle and also take into account the cost of inflation.
The day your loan amount gets disbursed, start a SIP in your preferred scheme of 0.15% of your loan principal amount. Let’s assume you sign up for a monthly SIP of Rs3,600 in a diversified equity mutual fund. You let the SIP grow for 20 years. Let’s assume a modest return of 12% on your mutual fund investments, then in 20 years, you would have invested an amount of around Rs8.5 lakhs. The valuation of your mutual fund investment would be valued around Rs35 lakhs.
Give your SIPs a chance to grow. Remember the early you start, more would your investments have time to grow. Plus, you can also use an SIP calculator to know the returns on your investments. An SIP return calculator is an excellent device to help you move in the direction of your goals. Happy investing!