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A Systematic Investment Plan (SIP) in mutual funds works more for you than an EMI. It's not just us; it's what the numbers say too!

Let’s assume you want to buy a house for Rs. 37.5 lakh. You’ll have to provide 20 per cent of the cost as down-payment. This works out to Rs. 7.5 lakh, and the remaining Rs. 30 lakh is taken as a home loan. Assuming a reasonable interest rate of 10 per cent and a loan tenure of 15 years, the EMI for this loan works out to Rs. 32,238. Then, you have registration costs of the property, which is an average of 20 per cent. Registration adds a further Rs. 7.5 lakh to the cost. The total of the loan payments over the 15-year period is actually Rs. 58 lakh. That brings the total cost of the house to a whopping Rs. 73 lakh (down-payment + loan + registration).

Now let’s see what happens if you commit this EMI amount to mutual funds through an SIP.

You will have to pay rent as you don’t have a house. A rent of Rs. 10,000 a month is a fair assumption for a house of Rs. 37 lakh. So that gives you Rs. 22,238 to invest in a good equity fund with a long-term track record. We assume that the increase in your rent will be taken care of by salary hikes. This apart, there is also the Rs. 7.5 lakh each for the down-payment and registration cost, both of which came from your savings. Let’s say you put that into a balanced fund for proper asset allocation. Let’s see how your money would have fared in both scenarios.

Cost structure
Down payment for home loan Rs. 7.5 lakh
Registration cost Rs. 7.5 lakh
Total EMIs for loan period (principal and interest) Rs. 58 lakh
Total cost of buying a house Rs. 73 lakh
Value and Returns
Scenario Ⅰ
After 15 years, assuming an appreciation of 4 times Rs. 1.56 crore
Yield 7.9%
Scenario Ⅱ
After 15 years, assuming an appreciation of 10 times Rs. 3.75 crore
Yield 16.5%

EMI start Date at 1 Jan 2001, loan period for 15 years

Amount of EMI is Rs 32,238, for a loan of Rs.30 lakh, at 10% interest rate

Portfolio Ⅰ - Franklin India Bluechip & HDFC Balanced
Cost structure
Total SIP Investment in Franklin India BlueChip * Rs. 40.25 lakh
One-time investment in HDFC Balanced Rs. 15 lakh
Total investment cost Rs. 55.25 lakh
Value and Returns
Value of investment after 15 years Rs. 3.71 crore
Yield 18.3%
Portfolio Ⅱ - HDFC Equity & Tata Balanced
Cost structure
Total SIP investment in HDFC Equity* Rs. 40.25 lakh
One-time investment in Tata Balanced Rs. 15 lakh
Total investment cost Rs. 55.25 lakh
Value and Returns
Value of investment after 15 years Rs. 4.28 crore
Yield 19.6%

*Monthly SIP amount of Rs 22,238, start date at January 1,2001, for 15 years

One time investment the equivalent of down payment and registration costs.

Clearly, the SIP had delivered much higher, and that too with a lower investment amount every month (Rs. 10,000 lesser than your EMI as a result of rent)! So, allow your money to really grow in mutual funds. Invest in India's best mutual funds now with your FREE-for-life FundsIndia account.

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