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“SIPs eating into luxe car sale: Merc”
This was the caption for a news article published on Nov 2022.
The nutshell of the News article is one of the top Executives of Mercedes Benz, India was pinpointing the fact that the SIP is reducing the disposable income of Indians.
If a person has a surplus of 50K per month, instead of investing in a Mutual Fund, he should be diverting into EMI for his luxury.
Table of Contents
1.)The other side of the story
2.)SIP VS EMI
3.)Insights From Above
4.)Power Of Compounding
5.)Illusion Of Depreciating Assets
6.)Do You Really ‘OWN’ Your Assets?
7.)Debt Trap
8.)Long-Term Value > Short-Term Goals
9.)Conclusion
1. The Other side Of The Story
This news created a huge buzz in social media then. Now, let us look at the other side of the coin. The finance fraternity has a different opinion. The Mutual Fund SIPs wouldn’t hit the sales of the luxury car industry.
Rather, Mutual Fund SIPs will enhance the purchasing power of investors which will generate more potential customers for the luxury car industry. In other words, it would be better to do a SIP investment & build wealth to buy luxury items rather than buying the luxury item on loan & serving it.
2. SIP VS EMI
Let us understand this with the help of a scenario. Let us assume that on Road Price of a car is ₹ 25 Lakhs. A 20% downpayment amounts to ₹ 5 lakhs. The balance would be funded by a loan. The loan amount is ₹ 20 lakhs. The assumed rate of interest is 9.5% & the tenure is 5 years. The EMI would be approx. ₹ 42,000.
| Car On road-Price | 25,00,000 |
| Down Payment | 5,00,000 |
| Loan Amount | 20,00,000 |
| Rate of Interest | 9.50% |
| Tenure | 5 |
| EMI | ₹ 42,004 |
Instead of serving the EMI for the next 5 years, what would be the situation if he divert & invest the same in SIP?
Let us assume that, the EMI – ₹ 42000 is invested monthly in a fund that generates 8% interest per annum. And also, the down payment amounting to ₹ 5 lakhs is invested as the lumpsum amount in the same fund. The accumulated corpus at the end of 5 years is ₹ 38.18 lakhs.
Since you are postponing the purchase of a car, by the time the market price of the car would have increased due to inflation. If it costs ₹ 25 lakhs now, it would cost around ₹ 36.73 lakhs assuming an inflation rate of 8% p.a. So, with your accumulated corpus of ₹ 38 lakhs & odd, you could comfortably buy your dream car.
| Current Market Price | 25,00,000 |
| Future price | 36,73,320 |
| Lump Sum Investment | 5,00,000 |
| SIP | 42,004 |
| Rate of Interest | 8% |
| Tenure | 5 |
| Accumulated Corpus | 38,18,324 |
This analysis clearly shows that the SIPs won’t hit the sales of Luxury car brands. It would increase the capability of buyers (investors) by accumulating wealth in the long run. SIPs will enable the accomplishment of luxury goals.
3. Insights From Above
We would like to highlight some more additional points from what we have discussed earlier,
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- If you buy a car on loan, then the car’s cost may be higher due to additional interest payments. The higher the tenure, the higher the interest payments.
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- A car loan is a debt burden. This may affect your financial flexibility. Any default affects your CIBIL Score.
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- Cars typically depreciate in value over time. By the end of the loan tenure, the value of the car would have depreciated by more than 50%.
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- Investing in SIPs may yield higher returns compared to the interest you pay on an EMI.
4. Power Of Compounding
If you understand the power of compounding better, you would invest rather than pay EMI
Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it. -Albert Einstein
The below picture (Forward Message in social media) depicts the power of compounding in Mutual funds. A man who has savings discipline can enjoy luxury in the future.
Okay, let’s prove the above insights with an example!
5. Illusion Of Depreciating Assets
Consider this scenario: You’re taking out a loan to buy a new car. Let’s assume that it is a car that costs 15 lakhs. You have 5 lakhs cash and go for the balance 10 lakhs going for a loan.
See the calculations below for the lowest interest rate that an Indian bank with a good reputation will offer on a car loan.
Total Loan Amount = ₹10,00,000
Interest Rate = 8%
Loan Tenure = 60 months (or) 5 years.
EMI = ₹20,276.00
I want you to take a look at this too:
The average life of a car = 10-12 years (or) 2,50,000 – 30,00,000 km.
By the end of your loan tenure, the total amount of money you paid will be,
Total amount = ₹5 lakhs + ₹10 lakhs (loan) + ₹2.16 lakhs (Interest) + Repairs + Maintenance + Insurance.
I would say, it would’ve reached the ₹20 lakhs mark.
Insurance companies say, in 5 years, 50% of their value will be depreciated.
Outcome = ₹20 lakhs (money spent) – ₹7.5 lakhs (current value of car)
You have successfully lost ₹12.5 lakhs over a depreciating asset that will be nothing in a few more years.
6. Do You Really ‘OWN’ Your Assets?
Your possessions are not your own. I did indeed say that. If you claim that I am not making any sense, it won’t come as a surprise. Everything is a component of a larger plan that is interconnected from the outset.
Your desire to become wealthy has simply made you believe that you own your asset. As well as the financial institutions that are using it.
7. Debt Trap
Buying a depreciating item by taking a loan will create a debt burden. In the initial stages of the loan, the asset’s value may depreciate faster than the loan’s principal is paid off.
If you have the financial discipline and can save up for the asset without taking a loan, you might avoid paying interest and have more financial flexibility.
You’re on a spending binge to amass riches in your goal to become wealthy. You have acquired everything required to feel wealthy. You are almost there, but you will have to pay for them for the rest of your life. Debt Trap is precisely what prevents you from owning your assets.
8. Long-Term Value > Short-Term Goals
Banks have recently started pushing their services on customers rather than offering them. Because of that, educated individuals are choosing services with too much caution.
In addition, all of the assets’ value will decrease with time (apart from a handful). Additionally, there are no long-term advantages to be found if you look for them. You will be spending money on something that has long since lost its value. Additionally, you will lose it for nothing if you don’t pay your EMI.
9. Conclusion:
The context of the discussion is that buying a depreciating asset (luxury item) funded by a loan will ruin your short-term financial flexibility.
These depreciating assets not only eat your monthly surplus but also involves high maintenance cost. The money used for loan payments could have been invested elsewhere to potentially generate higher returns.
Ultimately, it’s essential to analyze your current financial situation, evaluate your long-term goals, and assess your overall financial picture before making a decision. Consulting with a financial advisor can also provide valuable insights tailored to your specific circumstances.
If you really want to know more about SIP investments and comprehensive financial plans, it is better to consult a professional financial planner than to look out for information on social media sites like Quora, Facebook, Twitter, etc.
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