SIP vs EMI – Which One Would You Choose

Introduction

Whenever we begin to think about SIPs and EMIs, there is an instant parallel that is drawn and one can’t help but start listing the pros and cons of one over the other. EMIs have dominated the market over the last few decades, while SIPs have recently been the most preferred form of investment, more so SIPs are touted to be the SMARTER WAY to INVEST!

Before we go into the depth of the discussion, we must first understand the basics:

WHAT ARE SIPs?

SIP or the Systematic Investment Plan is an easy and user-friendly investment method which allows you to invest in the equity market through highly qualified financial institutes making the decisions for you.

In simple words, SIP is nothing but handing over a particular amount of money every month to financial institutions, whose funds managers invest in equities based on their research.

“CONSISTENCY IS THE KEY”, HOW SO?

Whether it is a long-term investment or a short-term investment, the timely deposit of money is of utmost importance for a financially secure future.

All of us are quite aware of the EMI procedures, especially when we invest in properties like housing or real estate. It has now become a part of our habit to deposit our monthly installments on time with alleged discipline.

However, we often tend to overlook the fact when it comes to making a SIP. The situation may be because of our fluctuating tendencies and factors which evolve from our financial insecurities. This makes us disinclined towards the very idea of a SIP.

Any person who has the ability to be dedicated and regular can easily be into SIP investments that too, on a continuous basis. “Consistency is the key to success”, regardless of the field.
Had Sachin Tendulkar not been regular with his practice, would he have scaled the heights that he has? Would investors such as Warren Buffet make it big and come to be known as the Oracle of Omaha?

One time investments or fluctuating process of investments will eventually lead to a great disaster, if not done correctly. Hence, all you have to do to be successful with SIP Investments is, be CONSISTENT.

Every household has its own method for budgeting, the endless quest to find the perfect balance between income and expenditures while ensuring a sizable amount of savings is a formula that hasn’t been cracked yet. However, any wise investor would know that every expenditure cannot be tagged as a total outflow of wealth, let us consider a SIP to be an expenditure, which is fixed, month after month, but this expenditure is one that leads to an ultimate payout! A SIP is a great way to make you learn “how to make money work for you”. Use the magic of the compounding effect, to your advantage. These days, we have numerous ways of splurging our money. At the end of every month, we may not have a lot of money in our bank accounts. To ensure financial discipline, by reducing the amount of money, you can spend, the SIP is a great option. It not only shows young minds the right path for investing their money but also opens up the way to lead a financially disciplined life.

Now that we have understood the basics of a SIP and what is the role of budgeting and consistency in the entire process, we shall begin the comparison :

SIP vs EMI and other forms of investment

Below, we shall list some of the commonly faced problems by investors, and how SIPs are the single investment solution/alternative to these problems:

When observed specifically, the biggest crisis among people is the availability of immediate funding. Most of the people from the young, salaried class do not have sizable amounts at their disposal to invest readily.

• This is undoubtedly a common scenario in today’s day and age, and SIPs do provide a simple solution for this, as one does not need to invest lump sum; instead, one can fix an amount which one can shell out every month and then can directly be withdrawn from the bank, without any human intervention.
• General investments such as Fixed Deposits and other Life Insurance policies may or may not be very beneficial for our lifetime savings planning. However, in the short run and for immediate emergencies, they simply offer no help/assistance to us.

The above forms of investments help us in two different ways :

Firstly, the amount that is invested, is compounded at such a low rate in these schemes, that a payday in the short run is absolutely laughable.

Secondly, these investment schemes do not permit instant withdrawal, hence, one cannot depend on these in crisis.

Again, the solution for this is a SIP, You can invest, earn and withdraw whenever you want, to without any restriction. The amount invested by you at every month interval can be withdrawn anytime.

• Save your taxes – SIP actually helps you to save your taxes under the legal Section 80C, which ultimately contributes to higher profits.
• The market crash affects SIP less than equities. Also, it is inversely proportional to the inflation in the market.
• The dominance of compounding – the longer the time you invest, the greater compound interest comes your way, which increases your actual invested amount.

SIP over EMI (Click here to know more)

Now that we have understood the benefits of a SIP over EMIs and other forms of investment let us consider the following scenario:

• SCENARIO

Let’s assume you want to purchase a home. We shall take a look at how much money you will gain from investing in EMIs for the home, as opposed to investing in SIP and purchasing the home after a few years.

According to various surveys, the EMI rate is around 15% to 20% more when paid through the particular process of the actual amount. So, what you are actually paying, is a certain percentage of your monthly income on the EMI rates, for no valid reason.

Instead, if you would have considered the decision of investing in the SIP, monthly with a certain amount, you could have saved some money, for your dream home. It would have nullified the burden of paying EMI every month.

• CONCLUSION

Therefore, SIPs are indeed the smarter method of investing; the lack of awareness and misinformation regarding them is what defers investors from making the smart choice, as all it requires is a bit of planning and some patience.
A SIP will ensure that you will retire with a decent sum of money. Financial discipline and consistency will help you tide over any economic problem, which you may face. Start your SIP as soon possible, the more the tenure, the higher the returns, you can expect.

An EMI will help you plan only for the short term, while a SIP will do the same, taking your life goals in mind. EMI’s are meant to suck out money from you, while SIP’s, owing to the magical effect of compounding add a lot of money in your account. Choose wisely. Like Deng Xiaoping, the Chinese Economic Liberator once said ‘It’s glorious to be rich’.