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Oct 30, 2017 12:36 PM IST | Source:

Planning to buy a car? Here's how to offset EMI outgo through investments

By investing in mutual funds through an SIP you can balance your EMI payment with your investment earning.

Navneet Dubey @navneetdubey91

The new car that you are looking to buy will be your prized possession. However while purchasing the car the two important money questions before you would be – how much down payment can you make and consequently, what would be your loan amount?

Your EMI on the loan amount could be a substantial outgo from your monthly salary bill. However, with a little bit of planning, you can offset your EMI outgo by simultaneously setting aside some amount for investing. We take the example of investing in mutual funds through a systematic investment plan (SIP) to explain how you can balance your expenditure with your investment earning.

The only thing is you would need to have the surplus amount to invest to accomplish the goal effortlessly.

Let us understand how one can plan to off-set their EMIs of a car by doing an SIP through a set of examples.
Particulars (In Rs)Car 1Car 2Car 3
Car price6 Lakh8 Lakh10 Lakh
Down Payment2 Lakh2 Lakh2 Lakh
Loan Amount (a)4 Lakh6 Lakh8 Lakh
7 years EMI (a)6500980013000
Total EMI paid (Approx.)5460008232001092000
7 year Monthly SIP (Approx.)400055007000
Capital Accumulated (Approx.)5960008200001043000
Overall Monthly Outgo (a) + (b)105001530020000
Assumed yearly rate of return15%15%15%
Assumed yearly loan interest rate11%11%11%

The above table shows if you buy a car of worth Rs 6 lakh and make a down payment of Rs 2 lakhs. For a loan amount of Rs 4 lakh, your EMI would work out to Rs 6500 a month, for a 7-year loan. The overall amount you need pay will be Rs 5.46 lakh which includes principal and interest amount where the yearly interest rate is assumed around 11% approximately.

The table also shows if you start a SIP of Rs 4000 for 7 years in mutual funds where you are able to manage the annual returns of up to 15% approximately you will accumulate Rs 5.96 lakh in 7 years.

Therefore, with a total outgo of Rs 10,500 a month (EMI + investment) you will actually set-off your EMI payment by the end of the 7th year. It will not burn a hole in your pocket.

However, the returns are market-linked and volatile in nature which is also not guaranteed. Therefore, the example as mentioned thereon is for illustrative purpose only. One should take help of financial adviser to accomplish one’s financial goal of buying a car where s/he can easily set-off one’s EMI by doing a certain amount of SIP over a particular time period.

tags #investing

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