Suppose you are well-settled in your job and have about ₹50,000 to spare for investment or expenditure. Would you rather start a systematic investment plan (SIP) in mutual funds with this amount or prefer to buy your dream car, perhaps a Mercedes, by paying equated monthly instalments (EMIs)?
Your reasonable mind would want you to go for SIPs but the one looking for instant gratification may push you to buy a Mercedes. Thankfully, reason seems to prevail in India. According to Santosh Iyer, the sales and marketing head of Mercedes-Benz India, SIPs are the reason why Mercedes sales are going down in India. He will be taking over as MD and CEO of Mercedes India operations from January.
“They (SIPs) are our competitors, I tell my team if you are able to break that (SIP investment) cycle, then exponential growth is a given,” he said in an interview to Times of India.
The comment triggered fire on the social media with most industry stakeholders mocking the Mercedes top honcho for not being in touch with India’s ground reality. For one, people who can really afford Mercedes must be rich enough to buy such a luxury in cash. A larger part of India doesn’t aspire to buy Mercedes. Moreover, the average monthly SIP amount in India hovers around ₹3,000, significantly lower than ₹50,000 SIP that Iyer talked about.
Key takeaway out of Mercedes statement
One shouldn’t shrug off Iyer’s statement as a joke. The fact is the aspiring India may not be buying Mercedes, they are still buying cars worth ₹20-25 lakh with EMIs. If Mercedes’ top honcho is talking about breaking SIP culture to push people to buy the luxury brand, the comparatively lower-end car brands are already doing it with their catchy advertisements to play on aspirations.
According to data from the central bank RBI, the loan outstanding for vehicle loans has increased by 20 per cent year-on-year to ₹4.5 lakh crore as on September 23, 2022 compared to 11 per cent growth between September 2021 and September 2020. This is in contrast to net inflows in active equity schemes for June-September, 2022 which dipped 27 per cent compared to the same period last year.
It means the lumpsum investment in equity mutual funds is coming down. However, SIP inflows are intact which touched a new high crossing ₹13,000 crore in October.
₹50,000 EMI vs ₹50,000 SIP
We have done a few calculations to help you understand the hidden cost of buying a suppose you decide to buy one of the cheapest Mercedes - A-Class Limousine – for ₹42 lakh. You need some lumpsum amount before you apply for the loan. If you pay ₹10 lakh (not a small amount for a larger part of India) as a lump sum and apply for a vehicle loan of ₹32 lakh at 7.5 per cent rate, your EMIs will come in at ₹49,082 for a loan tenure of 7 years.
You’ll be surprised to know you’ll end up paying ₹41.23 lakh including interest for a loan of ₹32 lakh. There will be additional costs such as taxes, insurance premium and petrol.
Let’s look at another data point. If you start an SIP of ₹50,000 in an equity mutual fund giving a humble 10 percent returns, you will collect ₹61 lakh in 7 years against an investable capital of just ₹42 lakh. The longer you continue your SIPs, the larger will be the compounding effect on your returns.
“Isn't slow & steady growth much better (like compounding in investing) than debt-fuelled explosive growth where people borrow to buy depreciating assets? Neither good for customers nor for businesses in the long run. Btw, I hope this is a misquote & is not what it reads,” says Zerodha CEO Nithin Kamath in response to Iyer’s statement.
A debt-fuelled luxury may satisfy you in the short-run, it is not worth it in the long run. Easier said than done. Financial advisors find it hard to instil this financial discipline in people. The fight between humble SIPs and expensive EMIs is on. The MF industry would do well to not take it lightly.
Aprajita Sharma is a freelance journalist and a certified financial planner. She can be reached at @apri_sharma on Twitter and LinkedIn.