EMI VS SIP - Which is the Best Financial Decision

Banks and NBFCs most frequently offer home loans as a form of credit. These long-term loans have lower interest rates than personal or credit card loans. The loan value is frequently in millions of rupees and, in some cases, crores. Still, because buying a new house is so expensive, the EMI consumes a significant portion of the borrower's monthly income. 

Borrowers are often tempted to pay off their mortgage early to become debt-free rather than investing the same money in mutual funds or other long-term wealth-building investments. The EMI vs SIP debate is often a common query that many first-time home loan borrowers have to address. Let us look at various critical factors that you must know to make the right financial decision!

What Is a Systematic Investment Plan (SIP)?

The Systematic Investment Plan (SIP) is an investment option provided by Mutual Funds that enables investors to invest a specified amount in a Mutual Fund scheme regularly, such as once per month or once every three months, as opposed to doing so all at once. The instalment payment is akin to a recurring deposit and could be as small as INR 500 per month. It's convenient since you may automatically direct your bank to deduct the specified monthly amount. 

SIP has grown in popularity among Indian MF investors because it encourages disciplined investing without concern for market volatility or timing. The most excellent approach to entering the world of investments is undoubtedly through the Systematic Investment Plans provided by Mutual Funds.

How does A Systematic Investment Plan function? 

When you invest in a SIP, you put down a set amount of money that enables you to buy a specific number of fund units within a predetermined time frame. If you do this repeatedly, you can invest in the fund at its highs and lows. Making investments can be done without you having time in the market. It's always dangerous to try to time the market since you can end up investing at the wrong time. But when you opt to invest in a SIP, the element of uncertainty is eliminated.

You can choose the term and frequency of your investments after selecting the best SIP and automating your investments. Give your bank standard instructions to withdraw a predetermined amount from your account regularly—monthly, quarterly, etc.—and invest it in a SIP mutual fund of your choice.

Home Loan Vs Sip: 5 Important Aspects to Decide Which Option is Right for You?

1. Go Over Your Fundamental Financial Planning 

Verify that you have addressed your fundamental financial planning. Essential financial planning should include life insurance, health insurance, emergency funds, and other things that could hurt your finances if the unexpected happened. If these necessities are unmet, there is no purpose in considering prepaying a home loan or starting a savings plan.

2. Are You Going To Need Money Soon? 

Why you consider prepaying your mortgage if you will soon require money is an important question everyone must ask themselves. You can execute a straightforward RD or SIP in a short-term mutual fund, depending on when you require money to cover the short-term financial objectives.

3. Desire To Be Debt-Free 

Many financial gurus continually counsel their clients to become debt-free sooner. Many of us even consider becoming debt-free at some point. Prepaying a house loan as and when you have extra cash is preferable if your goal is to pay off debt faster with little to no difference in what you pay compared to what you obtain.

4. Committed To Investing 

Instead of pre-paying their mortgage, many consumers choose to invest in Good Mutual funds through SIP. Instead of following through on this choice, they spend the extra cash on pleasures or lifestyle costs. If you find it challenging to keep to your commitment to invest in mutual funds, consider prepaying your mortgage.

5. Low To Moderate Risk Tolerance, Prepay Your Mortgage 

It is advisable to prepay your mortgage rather than invest in a systematic investment plan (SIP) if your risk tolerance is moderate to low. Depending on your risk tolerance, you can anticipate 7% to 9% or a bit higher returns. The amount paid in interest on the mortgage could be higher, though.

3 Reasons Why Is Sip Investment Better than Home Loan Prepayment

Mutual funds have a reputation for being a solid investment alternative or contributor to an investor's long-term wealth growth. The usual rule of thumb is that better returns come with more extended investment periods. As a result, they have drawn millions of investors over the years. 

Prepaying the mortgage with any extra money may seem like a relief or a way for the borrower to reduce their debt, but let's compare this to the advantages of putting the same money in mutual funds to see which choice is better. Here's putting SIP vs home loan prepayment arguments to rest. 

1. Liquidity

One of the main advantages of a SIP investment plan is liquidity. Depending on the market conditions, investors can enter and exit the funds at any time to profit from their investments and maximise their returns. However, with mutual funds, people may quickly liquidate their investments and use the money for any emergency. If the borrower prepays home loans with the surplus amount, they might be helpless in any emergency.

2. Higher Long-Term Gains 

Mutual funds, particularly equity funds, have repeatedly shown to be a better investment choice than most alternatives like bonds, FDs, ETFs, etc. since they frequently outperform the market's average returns. If investors hold their investments for extended periods, they can earn the highest returns (for example, a minimum of 5 to 7 years). This benefit will be forfeited if the extra money is utilised to pay off the mortgage early.

3. Using Tax Benefits For The Duration Of The Mortgage 

Paying off the mortgage Even though paying EMIs for the whole loan term may appear expensive or burdensome, the benefits from tax savings surpass these costs. Borrowers can significantly reduce their tax obligations by taking advantage of deductions for loan payments. The absolute advantage is more significant than just prepaying the mortgage when these tax benefits are added to the refunds from mutual funds.

Home Loan Vs Sip Calculator

Experts often advise that you preserve at least 20% of your income and limit your liability exposure to no more than 50% to attain financial independence before you are too old to enjoy it. The EMI vs SIP calculator assists you in calculating your anticipated loan EMIs so that you have the freedom to plan your investments systematically and far in advance, especially monthly SIPs. You can further plan your investments with the SIP Loan calculator to have a solid financial life.

Prepaying a mortgage is the superior choice from the average person's perspective because it directly lowers their loan obligations and saves them money on interest payments. Making an objective assessment between prepaying the mortgage and putting the extra money into mutual funds is necessary. 

This objective comparison of EMI vs SIP will aid their knowledge of how investing in mutual funds can provide them with solid returns, increased capital, and tax savings on EMI payments. Real estate investment and its tax implications can be difficult to understand. 

This is why many people approach experts at NoBroker who can guide them in making the most financially sound decisions. Experts at NoBroker are experienced in real estate laws and understand taxation relating to property purchase and sale. If you feel the need to consult one of our experts, please leave a comment below this article or contact NoBroker today!

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