5 mins read . 23 Nov 2022
You must have heard of the difference between good EMI and bad EMI. OK, let me explain. Let us assume you want to go on a European holiday. Your bank is willing to fund your vacation through a personal loan at the rate of 18% per annum. The idea appears salivating and you can go for your vacation right away. The bank is offering you a 3 year personal loan of Rs8 lakhs and that will result in an EMI of Rs28,922 per month.
Perhaps you can afford this cost, but the question is if there is a smarter way to do it. Now, travelling to Europe is not a necessity, so you can always put it off by 3 years. Here is how it can be worked out. Instead of paying the EMI on loan, you start a MF SIP for 3 years by investing a similar amount.
There are broadly 3 options to consider:
|20,000||7,20,000||Debt Fund (9%)||3 years||Rs.8.29 lakh||Preferred|
|21,000||7,56,000||Liquid Fund (5%)||3 years||Rs.8.17 lakh||Next Best|
|18,000||6,48,000||Equity Fund (14%)||3 years||Rs.8.09 lakh||Higher Risk|
As per the above table, we are putting off the vacation by 3 years. You can argue that costs would go up in 3 years. But, today inflation in Europe is at 11% and hopefully in 3 years, this inflation rate should be much lower. That should compensate for any cost escalations. Let us evaluate these 3 options.
The moral of the story is that if you are planning a European holiday, as well put it off by 3 years and plan it with a debt MF SIP. It brings several advantages. Firstly, the outflow is much lower that what you would be paying as EMI on your personal loan. Secondly you are creating an asset and making money work harder, rather than taking on a liability. Thirdly, you are not negatively impacting your credit score with a personal loan.
If you sum up these 3 factors, there is a strong case to plan your European holiday after 3 years and start planning for it today with a Mutual Fund SIP. You not only have less of debt commitments to worry about, but also make money work harder for you. That is like hitting two birds with one stone!