Should you increase SIP or Home Loan EMI?
Taking out a home loan and beginning a mutual fund SIP are both examples of personal financial decisions based on individual needs.
By following the SIP route, you can invest monthly starting with a modest sum at regular intervals, resulting in automated accumulation that could lead to long-term fortune. The benefits of taking out a home loan, on the other hand, include helping to pay for your dream home while also saving money on taxes, increasing credit limits, experiencing capital appreciation, and avoiding paying rent. Financial gurus recommend that you boost your SIPs by at least 10% each year. Increase your SIP to benefit from stronger inflation protection, faster goal achievement, and aid in growing your corpus to a larger size.
However, consider the following scenario: you have a home loan and a mutual fund SIP.
Which should you boost in this situation: the EMI on your house loan or the SIP amount?
Based on an exclusive interview with CA Manish P. Hingar, Founder of Fintoo, the spokesperson stated, “A systematic investment plan (SIP) is a technique to invest a defined amount of money monthly in a mutual fund scheme, whereas increasing the house loan EMI means increasing the amount you pay each month to repay your home loan.” Which of the given solutions is better depending on your unique financial condition and ambitions. It is a good idea to assess your present financial condition and whether you are able to handle the additional expenditure of increasing your EMI. You should also examine the interest rate on your home loan as well as the predicted profits on your SIP investment.”
Situation : Increasing Home Loan EMI
If you acquire a home loan of 50 lakhs for a term of 20 years at 8.5% interest per annum, your monthly EMI will be 43,391, and you will pay a total interest of 54,13,897.
Consider increasing your EMI monthly by 5% every year with your annual income increase. This would help you save up to 19.5 lakhs on interest charges and reduce your loan duration by around 7.5 years.
Furthermore, according to income tax rules, you can claim a tax deduction of up to 1.5 lakhs under Section 80C for the principle amount paid in a fiscal year and up to 2 lakhs on the interest amount under Section 24(b) every year.
Situation : Increasing SIP
If you begin a systematic investment plan (SIP) of Rs 40,000 per month in an equity mutual fund for 20 years, assuming a compound annual growth rate (CAGR) of 12%, and you decide to step up your SIP by 5% every year along with an annual increment in your income, then you will be able to create a corpus of Rs 5,49,50,493, which is Rs 3,90,78,835 as potential capital gains on your investment of Rs 1,58,71,658.
Conclusion
The preceding two examples indicate that, despite scaling up your EMI helps you to save interest charges and reduces your loan length but investing in a mutual fund SIP and stepping it up progressively every year develops a big corpus to fulfil your future financial goals. It is critical to analyse the rate of return on investment vs the rate of interest payable on the loan. However, if your primary objective is to save for the long term, such as retirement, investing in a SIP may be a good choice. However, if you want to pay off your house loan as soon as possible, raising your EMI may be a better option.
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