Here, is a brief story why you should invest as in SIPs while you are starting investing in your car loans.
Once upon a time, there was a young man named Rajesh who had just purchased a car on a loan. He was thrilled to have his own vehicle, but was worried about the high interest rate he had to pay on the loan. He knew that he would have to pay a significant amount of interest of 7.5% over the loan tenure, which made him feel uneasy.
One day, while browsing through the internet, John stumbled upon the concept of SIP (Systematic Investment Plan). He learned that by investing a fixed amount of money regularly in mutual funds, he could potentially earn higher returns over the long term, which could help him recover the interest paid on the car loan.
Though he was intrigued by the idea at the first time, he decided to give it a try by investing a fixed amount every month in a mutual fund through SIP. Initially, he was a little hesitant and unsure about the investment, but as time went by, he started to see the benefits of investing through SIP.
After a year, Rajesh’s mutual fund investment had grown by a considerable amount, thanks to the power of compounding. He realized that he had earned more in returns from his investment than he had paid in interest on his car loan. This gave him a sense of satisfaction and relief, knowing that he had made a wise investment decision.
Over the years, Rajesh continued to invest regularly in mutual funds through SIP. He diversified his portfolio, invested in different mutual funds, and gradually increased the amount he invested every month. As a result, he not only recovered the interest paid on his car loan, but also built a substantial corpus of savings that he could use for other financial goals.
Therefore, What did you learn from the story? Investing regularly in mutual funds through SIP, you can potentially earn higher returns that can offset the interest paid on loans.
While there is always a risk involved in investing, a disciplined approach towards investing and a long-term perspective can help you achieve your financial goals and recover the interest paid on loans.
While SIP is not directly related to recovering the interest paid on a car loan or other loans, it can indirectly help in reducing the burden of the interest paid. Here’s how:
- By investing in a mutual fund through SIP, you can potentially earn higher returns than the interest rate on your loan. For example, if your car loan carries an interest rate of 8%, but you are earning a return of 12% on your mutual fund investment, the additional 4% return can be used to offset the interest paid on the loan.
- By investing a fixed amount through SIP regularly, you are setting aside a portion of your income towards investing. This can help you develop a disciplined saving habit and also free up some funds to pay off the loan faster.
- If you have a long-term loan, such as a home loan, you can consider investing in equity mutual funds through SIP. Historically, equity mutual funds have delivered higher returns than fixed income instruments over the long term. By investing in equity mutual funds through SIP, you can potentially earn higher returns and use the proceeds to pay off the loan faster.
| EMI Without SIP | EMI With SIP |
|---|---|
| Cost of Car – Rs.1,000,000 | Cost of Car – Rs.1,000,000 |
| Down Payment (10%) – Rs. 100,000 | Down Payment (10%) – Rs. 100,000 |
| Car loan amount – Rs. 900,000 | Monthly SIP and 1% of loan – Rs. 9,000 |
| Loan interest rate – 9.00% | Total SIP investment over 7 yrs – Rs. 756,000 |
| Loan tenure – 7 yrs | Assumed return on investment amt – 12% |
| EMI/month – Rs. 14,480 | Investment Value – Rs. 1,148,316 |
| Total Interest paid – Rs. 316,334 | Gains from investment – Rs. 392,316 |
It’s important to note that investing in mutual funds through SIP carries a certain amount of risk as the returns are subject to market conditions and can fluctuate. Therefore, it’s important to do proper research and seek professional advice before making any investment decisions. Additionally, it’s important to prioritize paying off debt, such as a car loan, before investing in any financial instruments.
