Is home loan killing you? - SIP to rescue

All of us crave to “OWN a HOUSE” and most of us take a Housing Loan to buy our cherished asset-HOME. After the exercise we keep on worrying about repaying the housing loan for around 20 Years. We mull to prepay loan. If you have thought about these even once, we have a solution ......

START A SIP OF 10 % OF YOUR EMI

We analysed the problem and solution is very Simple : SIP of ONLY 10 % of EMI

Housing Loan
Loan Amount Rs 5,000,000
Term years 20
Home loan Rate 10
EMI (approx) Rs 49,050
Total Amount payable(Principal+ Interest) Rs 11,772,000
SIP in Sensex
Tenure 20 years
SIP yield 18%
SIP Amount Rs 5000
Total Sip Maturity Value Rs 10,624,160
Total Amount Invested Rs 1,200,000

Net Gain ( Sip maturity - Interest paid)- Rs 3,852,160

* Sensex Sip return for last 35 years is 18 % p.a

Fixed deposits Vs Debt Mutual Funds

Debt Mutual Funds are one of the best alternatives of fixed deposits

Both debt fund and fixed deposits falls in the category of debt investments and the return from the debt funds is similar to fixed deposits.

Debt Mutual Funds vs. Fixed Deposits

Debt Mutual Funds Fixed Deposits
Rate of Return 7 % p.a. to 12% p.a. 7% p.a. to 10% p.a.
Interest Rate MFs are linked to market and thus returns are variable. The rate of return is fixed for entire tenure.
Flexibility Any amount can be invested or any amount can be redeemed any time from the existing debt fund. nce the amount is invested in fixed deposits, no addition can be made. New FD is to be created for additional.
Liquidity Redemption can be made at any time The premature withdrawn is permissible except in Tax Savings FD’s
Underlying Assets State and Central Govt Bonds, T bills, NCDs etc. N.A.
Guarantee of Principal and Return Theoretically, no, as these funds are market linked and subject to interest rate and credit risks. Historically debt funds have not lost the investment. Yes, up to Rs.1 lakhs through Insurance.

How Post tax benefits of Debt Mutual Funds beats Fixed Deposits?

Pre-Tax Return of fixed deposits and debt mutual funds are almost similar but post-tax returns have material differences. This is because returns from fixed deposits are taxed as per tax slabs of the investor while returns from debt mutual funds are taxed as capital gains or tax slabs.

If the investment horizon is of less than 3 years, then the return from debt mutual funds are termed as short-term capital gain and taxed as per the slab of investor, similar to fixed deposits but if the investment horizon is of 3 years or more than the actual tax benefit of debt mutual fund can be achieved by combing tax rate with indexation.

The table below gives you the complete understanding of the taxation of debt mutual funds and fixed deposits.

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Another tax benefit of opting debt mutual funds over fixed deposits is the deferment of tax. In case of Fixed Deposits, investor has to include the tax in the income every year and pay taxes while in case of debt mutual funds, if no redemption is done, no income is generated therefore no tax becomes payable, this means tax will be payable only when the units of mutual funds are sold.

Have you ever thought that you might be losing your hard money by locking it in fixed deposits?

Instead of multiplying your money, fixed deposits might be eating-up your money. Baffled!!! Let’s see how fixed deposits are not a good investment avenue as most of us thinks.

Real Rate of Return of Fixed Deposits

Fixed deposits offer interest rate ranging from 8.50% to 9.50% for tenure of 1 year.

So, for calculation purpose we take the following figures:

  • Investment Amount: Rs.1 lakh.
  • Interest Rate: 8.50% p.a. to 9.50% p.a.
  • Interest Compounding : Quarterly.
  • Inflation Rate: 7.00%
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Inflation rate indicates the rise in the prices from the base price. Let’s say the product you could have bought for Rs.100 few years back, would cost you Rs.107.5 at present i.e. 7.00% costlier. This inflation rate when combines with the tax rate depletes your return tremendously even to the negative figure.

What is a Systematic Investment Plan?

A Systematic Investment Plan (SIP) is hassle free mode for investing money in mutual funds either Equity or Debt Schemes . It allows you to invest a certain pre-determined amount at a regular interval similar to your old time Piggy Bank which used to inculcate the habit of saving and building wealth for the future.

How does it work?

A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme on a specified Date .You are allocated certain number of units based on the on going market rate (called NAV ) for the day. Every month your money is invested , additional units of the scheme are purchased at the NAV and added to your account( folio). Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Rupee-Cost Averaging

With volatile markets, most investors remain unsure about the best time to invest and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.

Power of Compounding

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.

An Example

If you started investing Rs. 10000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of sensex returns (for last 35 years), it would be worth Rs. 1.84 Cr when you reach 60. However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth , you would have Rs. 11.62 Cr on your 60th birthday - more than SIX TIMES the amount you would have received if you had started ten years later!

All of us want to RETIRE RICH , below we have attached a table on SIP

SIP for No. of years
Amount(in Rs) 5 years 10 years 15 years 20 years 25 years 30 years
1000 101,817 336,528 877,584 2,124,832 5,000,000 11,627,862
5000 509,085 1,682,640 4,387,920 10,624,160 25,000,000 58,139,310
10,000 1,018,170 3,365,280 8,775,840 21,248,320 50,000,000 116,278,620
15,000 1,527,255 5,047,920 13,163,760 31,872,480 75,000,000 174,417,930
20,000 2,036,340 6,730,560 17,551,680 42,496,640 100,000,000 232,557,240
25,000 2,545,425 8,413,200 21,939,600 53,120,800 125,000,000 290,696,550
* SIP returns of sensex for last 35 years taken for calculations i.e 18%

Start Saving EARLY with DISCIPLINE and RETIRE WEALTHY …….