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20 June, 2018 00:05 IST
Financial Planning
EMI's vs SIP's-Which one is better?
Source: IRIS (06-DEC-16)

Today's young generation is completely hypnotized towards latest gadgets, new clothes & accessories to maintain their fancy lifestyle amongst their group. Thanks to the improving Indian economy which is helping youth to fetch decent salary which they usually spend for their status war with peers. Well, this could be the reason,  the majority of today's generation is paying more EMI's if compared to their monthly savings.

In addition to the above, personal loans, home loans, car loan and consumer durable loans are adding burdens to their pockets.

When you take any loan, you sign documents of paying equated monthly installments on the long-term or short-term basis at a certain interest rate which lender/bank charges from you. With this, you make certain psychological adjustments to your finances -

1. You may compromise any other expenses, but you will be bound to pay monthly EMI's

2. Your every new spending will lead to the mental calculation to check whether you can manage the burden with your existing EMI outgo.

On the other hand, Systematic Investment Plan (SIP's) in mutual fund schemes is quite popular investment options because of its consistent performance and ease of monthly contribution which is as low as Rs. 500. One can fulfill his as many quantified financial goals by linking his mutual funds SIPs and contributing the amount based on the calculation.

Which one is good?

In the case of EMI, if you are paying an EMI towards the creation of an asset than it is termed good as your asset will be appreciated although you pay interest on EMI's. Therefore, any EMI paid for home loan repayment is good. EMI paid to repay a car loan, credit card or personal loan is considered to be bad as you end paying huge interest on your principal amount and at the same time value of the goods which you have bought also gets depreciated.

On the other hand, when you invest in mutual funds through SIP's you gradually create an asset for yourself that will help you achieve your financial goals in life with the help of the power of compounding.

What to choose?

Let's suppose, next Diwali you plan to buy a new sofa set for your home costing Rs. 85000 approx. One option you have that you only plan it and at the time when Diwali comes you buy the same by swiping your credit card and convert the repayment into 12 monthly installments. With this, you will end up paying almost Rs. 90,626 approx (Rs. 7552 EMI) at an assumed interest rate of 12%, which could go higher up to 15% depending upon offers from Bank to Bank. But if you plan it and start saving for it pretty advance, let's say 1 year before, you only need a SIP of approx Rs. 6800 per month to accumulate approx Rs. 85000 in 1 year at an assumed & expected rate of return of 10%.


Per Month Amount


Assumed Interest Rate per annum (Assumed)

Total Amount Paid


Rs. 7552





Rs. 6800








Rs. 9024

Above example clearly, explains that if you plan your buying in advance you can actually save a good amount and at the same time it gives you & your family, a sense of security.


Even if you get a bit late on buying the things you need, it is always better to avoid debt trap which slowly pulls you to the stage when you end up taking one more loan to pay your previous loan. Systematic Investment Plan (SIP's) gives you disciplined approach to investment and that too at a very nominal amount to start with. All you need to quantify the amount of thing you are planning to buy, based on that you can plan your SIP's amount.

(Contributed by Vishwajeet Parashar - Senior VP & Group Head - Marketing, Bajaj Capital)

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.

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