What is the SIP-EMI combination and how does it work?
Chirag Muni: Sure, combining a Systematic Investment Plan (SIP) with an Equated Monthly Installment (EMI) refers to using the SIP approach to accumulate wealth while paying off loans via EMIs. For example, let’s say you take a loan of ₹50 lakhs at an interest rate of 9% for a tenure of 20 years to buy your dream home. By the end of the loan term, you will have paid ₹58 lakhs just in interest through your EMIs.
However, there’s a way to recover the interest paid or reduce the loan tenure—without any extra out-of-pocket expense. By investing just 10% of your EMI amount in a SIP, you can choose between two effective options:
- Recover the Interest Paid on the Loan:
If you invest 10% of your EMI in an SIP expecting a 14% return, you could accumulate a corpus of ₹65 lakhs, which exceeds the total interest paid on the loan. If you invest 15% of your EMI, the corpus grows to ₹91 lakhs, far more than the interest.- With a 10% SIP contribution, after investing ₹12 lakhs, you’ll make a net gain of ₹53 lakhs, which nearly equals the total interest paid on the loan.
- With a 15% contribution, after investing ₹17 lakhs, you’ll have a net gain of ₹74 lakhs—₹16 lakhs more than the total cost of the loan.
Agencies
- Reduce the Loan Tenure:
By investing 10% of your EMI in a SIP, by the 14th year, your investment corpus will surpass the remaining loan balance. This would allow you to foreclose the loan, effectively cutting your tenure by 30%.
AgenciesThese strategies enable you to either recover the interest paid on your loan or significantly reduce the repayment period—all while growing your wealth through SIP.
Click to watch the full interview here. What role does SIP play in this? Is there any way to close loans earlier using this method?
Chirag Muni: Yes, using a step-up SIP! Your EMI remains fixed each month, but as your income increases, you’ll have more disposable income. By opting for a step-up SIP, you can accelerate your investment growth.
Let’s see what happens to your corpus after 20 years with a 10% step-up:
AgenciesBy incorporating a 10% step-up SIP, you can accumulate a corpus of ₹1.21 crore, equivalent to the total EMI paid (including both principal and interest). With a 15% step-up SIP, your corpus could grow to ₹1.83 crore, significantly exceeding the total amount spent on the loan.
Let’s see how early you can fore-close the loan with 10% step-up:
AgenciesYour investment account will surpass the outstanding loan by the 13th year, which is 18 months earlier than the regular SIP. This allows you to foreclose the loan very early and focus on other financial commitments.
How does it help one achieve financial freedom using this method?
Chirag Muni: You get multiple advantages such as:
Interest Savings: Contributing 10% of your EMI to a SIP helps recover loan costs, with higher contributions leading to greater savings.
Financial Freedom: Foreclosing the loan enables better financial management and allows for investment of disposable income.
Tax Benefits: Investing in ELSS offers deductions up to ₹1.5 lakhs under Section 80C and up to ₹3.5 lakhs for interest paid, totaling potential deductions of ₹5 lakhs, saving over ₹1.5 lakhs for high earners.
Flexibility: You can prepay the loan by the 15th year or continue the SIP for the full tenure to recover interest costs.
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