Recently a billboard advertisement caught the attention of many financial planners and mutual fund industry executives. The advertisement by Sobha Developers compared a monthly investment in mutual funds to equated monthly instalments (EMIs) towards a one-bedroom house. On the other side, Franklin Templeton Mutual Fund-in a blog-compared systematic investment plans (SIPs) in a mutual fund to a good EMI. Both SIPs and EMIs are regular payouts. But don't get confused: a regular monthly investment can be called an instalment but a regular payment that services the interest on a loan, cannot be a substitute for investment.
Differences
The end result, in both cases, is asset creation through regular payouts. You can buy equity (or bonds or exchange traded funds) through mutual funds. With an SIP, you can invest in them every month. Your investment can generate value either through capital gains or the accumulated interest that gets added to the scheme's net asset value. As the scheme's net asset value grows, you can redeem units to realise gains.
The SIP can thus get compared to an EMI, which is also a regular payment towards an asset such as a house. In theory, you pay EMIs and after a few years you can decide to sell and realise the asset's value.
This is where the similarity ends. If you sell the house before the loan period is over, you have to repay the remaining loan and can't keep the total sale value. If you sell after the loan tenure, you would have paid a lot more than the house's value, as most of the EMI goes to pay the interest and compounding of interest inflates the costs. An EMI of Rs25,000 could mean a loan of around Rs27 lakh for 20 years at 9.5% per annum. At the end of 20 years, total interest payment will amount to Rs33,40,210. This is more than the cost of the house itself.
Comparison
Today, SIP is a well recognised term, however, a few years ago it was EMIs which were popular. Therefore, while it's unusual for property developers to compare EMIs with SIPs, fund houses have done this in the past. A blog by Franklin Templeton Investments says that rather than repaying a loan through a monthly payment, it is better to have a good EMI that is an SIP investment.
Asset managers use various communication techniques to demystify mutual funds, this comparison is part of that effort. IDFC Mutual Fund has a snakes and ladder investing game that focuses on demystifying concepts like asset allocation. Their family-oriented commercials encourage SIPs over EMIs. The idea is to explain concepts that otherwise may not be easy to relate to, especially for someone who hasn't had much experience with mutual funds.
Birla Sun Life Asset Management's attempt at a comic book series around concepts of saving and investing and a series of commercials that compared everyday events-like cooking and eating biryani or a diabetic drinking tea-to investing in mutual funds, Tata Mutual Fund's Suppandi meets Professor Simply Simple, and SBI Mutual Fund's chirpy Fund's Guru are just a few examples of how fund houses are trying to get people to identify with products through everyday activities.
In arrangement with HT Syndication | MINT
This article was originally published on November 01, 2016.
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