In today’s dynamic financial landscape, strategic planning is essential for securing a stable and prosperous future. One powerful approach gaining traction is the combination of home loans with Systematic Investment Plans (SIPs). This dual strategy leverages the long-term growth potential of SIPs alongside the immediate benefits of home ownership, providing a balanced pathway to wealth creation. By simultaneously managing debt and investment, individuals can maximize their financial resources, ensuring both their current needs and future aspirations are met.
This article explores how integrating these two financial instruments can lead to significant advantages for savvy investors.
Let’s understand with an example
Suppose we consider a home loan of ₹40,00,000 at an 8.5% annual interest rate. Mr. X opts for an EMI of ₹39,390 over a tenure of 15 years. In contrast, Mr. Y prefers a lower EMI of ₹32,210 over 25 years, coupled with a SIP of ₹7,180 per month to leverage potential investment returns of approx. 13%. This scenario presents a classic dilemma: whether to prioritize immediate loan repayment or to capitalize on the benefits of long-term investment growth.
To compare the scenarios of Mr. X and Mr. Y, let’s evaluate the financial outcomes for both options.
Scenario 1: Mr. X: ₹39,390 EMI for 15 Years and ₹39,390 SIP for 10 years
Particulars | Monthly Amount (₹) | Total amount (₹) |
|
|
|
EMI paid in 15 years | 39,390 | 70,90,200 |
EMI amount if continued to be invested for next 10 years | 39,390 | 47,26,800 |
Total amount paid |
| 1,18,17,000 |
|
|
|
Market value of Investments at end of 25th year |
| 97,16,751 |
Scenario 2: Mr. Y: ₹32,210 EMI for 25 Years + ₹7,180 SIP 25 years
Particulars | Monthly Amount (₹) | Total amount (₹) |
|
|
|
EMI paid in 25 years | 32,210 | 96,63,000 |
SIP amount to be invested parallely | 7,180 | 21,54,000 |
Total amount paid |
| 1,18,17,000 |
|
|
|
Market value of Investments at end of 25th year |
| 1,63,08,903 |
Scenario 3: Mr. Y: Prepayment of loan in 18th year with ₹32,210 EMI for 18 Years + ₹7,180 SIP 18 years + ₹39,390 SIP for 7 years
Particulars | Monthly Amount (₹) | Total amount (₹) |
|
|
|
EMI paid in 18 years | 32,210 | 69,57,360 |
SIP amount to be invested parallely | 7,180 | 15,50,880 |
Total amount paid in 18 years (A) |
| 85,08,240 |
|
|
|
Market value of Investments at end of 18th year |
| 61,97,979 |
Principal amount of loan pending at end of 18th year |
| 20,33,853 |
Investments after prepaying the loan |
| 41,64,126 |
|
|
|
Amount invested for next 7 years (B) | 39,390 | 33,08,760 |
Total amount paid in 25 years (A+B) |
| 1,18,17,000 |
|
|
|
Market value of investments at end of 25th year |
| 1,52,07,434 |
Analysis:
All three scenarios involve a total financial outlay of ₹1,18,17,000 over the investment period. This provides a consistent basis for comparing the effectiveness of each strategy in terms of wealth accumulation.
Scenario 1 focuses on earlier Loan repayment with higher EMI and keeps the wealth creation part through SIP for the later years. Scenario 2 Balances EMI and SIP throughout the loan period, resulting in the highest final investment value due to the consistent, long-term investment strategy. Scenario 3 combines early loan repayment with SIP contributions with a balance between reducing debt early and maximizing investment growth.
The better option depends on your financial goals and needs:
– Scenario 1 is ideal for those who prefer to focus on substantial investments after completing loan repayments. One can choose Mr. X’s plan, if they already have a wealth corpus and want to save on the interest and total loan payments.
– Scenario 2 highlights the power of consistent long-term investing. One can choose Mr. Y’s plan (2nd scenario) if they prefer a steady and balanced approach for wealth creation.
– Scenario 3 demonstrates the benefits of early loan repayment combined with increased investment contributions. One can choose Mr. Y’s plan (3rd scenario) if they are looking to reduce debt early while maximizing investment growth.
Conclusion:
The strategic combination of home loans and Systematic Investment Plans (SIPs) can serve as a powerful tool for building long-term financial security. This approach allows individuals to enjoy the immediate benefits of home ownership while also systematically growing their investment portfolio. As with any financial strategy, it’s essential to assess your individual circumstances, set realistic goals, and seek professional advice to tailor the approach to your needs. Embracing this holistic method can help achieve a balanced and prosperous financial future.
To understand more on the topic as well as to start investments please feel free to contact us:
Phone: +91-9324609115
E-mail: team@richvikwealth.in
The article is authored by Ms. Varsha Patwa from Team RichVik.