Combining a Systematic Investment Plan (SIP) with your home loan is an exceptional financial strategy! With this foolproof method, by the time your loan is fully repaid, you’ll have earned almost the same amount back in mutual funds. Learn how investing 25% of your EMI in a SIP can help you build a corpus worth crores through the power of compounding and ensure future financial security!
Loans and Investments
Taking out a home loan is a major financial decision, often spanning a long period (15-30 years) and incurring significant interest. However, financial experts advise that it’s essential to continue investing despite the burden of a home loan.
A Systematic Investment Plan (SIP) is a powerful solution to this problem. You can regularly invest a small portion of your home loan EMI, such as 25%, in mutual funds. This method not only builds financial discipline but also gives you the full benefit of compounding in the long run.
Comparison of Home Loan and SIP
Let’s understand how this smart strategy works with a real-life example: Suppose you have taken a home loan of ₹30 lakh at a 9% interest rate for a period of 20 years. Your monthly EMI would be approximately ₹26,992. You can invest approximately 25% of this EMI, or approximately ₹6,750, every month in mutual funds as an SIP.
With this SIP, if you earn an average annual return of 12% over 20 years, your total return would reach approximately ₹62.09 lakh. Over the same period, you would have repaid a total of approximately ₹64.78 lakh to the bank through home loan EMIs. In this way, the amount raised through SIPs is almost equal to the total cost of your home loan, providing you with greater financial security in the future.
Compounding and Discipline
The strategy of combining SIPs with a home loan not only provides an opportunity to grow your wealth but also helps you mentally reduce the interest amount paid on the loan.
Understand the Power of Compounding
Compounding is the magical power that maximizes your returns. In this strategy, since your investment period is as long as 20 years, the effect of compounding is greatest. Financial experts specifically recommend continuing SIP investments for as many years as possible to reap the greatest benefits.
Building Financial Discipline
Starting a regular monthly SIP develops strong financial discipline. Despite the pressure of loan repayments, your investments continue. This way, you can better grow your savings, rather than just repaying the home loan in full.
With this decisive strategy, once your home loan is repaid, you’ll have a substantial corpus in your SIP. This corpus gives you financial strength and provides a good source of funds for your new goals (such as your children’s higher education, a second home, or retirement).