Good EMI versus bad EMI – What to choose?
You must have seen that ad on television about “Good EMI versus bad EMI”. You have a choice in front of you to fund your vacation. Of course, the easiest way is to call your bank RM over and fill out the papers for a personal loan. Your bank will not only arrange the loan but also arrange the foreign currency, the multi-currency pre-paid card, enhanced limits on your credit card and a lot more. The challenge is that once you are back from your holiday you have to start servicing the EMIs on your personal loan. So, is there a better option to this instant gratification?
How about doing a little bit of planning for your vacation?
We now move to the good EMI part. In the personal loan instance, you need to start paying the EMI as soon as you return from your holiday. Additionally, in a bid to spoil your family with shopping deals, you must have gone overboard on your credit card. You are putting unnecessary pressure on yourself and your finances. The better option is to opt for good EMIs. The concept of good EMIs works something like this! Since you are taking a personal loan, you are prepared to service the loan anyways. Instead, you can just put off your vacation by a couple of years and start a SIP on a mutual fund right away. This good EMI approach helps you in 3 ways.
- It forces you to save and invest and this can be your template for the future
- You save on expensive personal loans and steep EMI payouts
- You make money work hard and fund the vacation with your own funds
Strange as the idea sounds, this is the approach that you must consider. Let us say, you are planning a holiday trip to the sun-kissed beaches of Mauritius with your wife and your 4 year old daughter. How much would the vacation really cost you?
You estimate that the total fund requirement for the package and a small shopping allowance will be around Rs3 lakhs at current prices. Of course, with early booking and proper discounts, you can get the same price 3 years down the line. If you are planning the holiday in the next 2 to 3 years, you obviously cannot take the risk of equity funds. Here are your options.
|Particulars||Option 1 – Save via liquid funds||Option 2 – Save via debt funds||Option 4 – Save via balanced funds|
|Risk Profile||Very low risk||Low risk||High risk|
|Indicative Yield (%)||6%||9%||12%|
|Corpus in 2 years||Rs.1.78 lakh||Rs.1.85 lakhs||Rs.1.90 lakhs|
|Corpus in 3 years||Rs.2.76 lakhs||Rs.2.90 lakhs||Rs.3.04 lakhs|
Obviously, a 2 year time frame is too short so you must realistically look at a 3-year time frame. Liquid funds are too conservative and balanced funds still carry equity risk. Debt funds give the best combination of returns and low risk. And you get pretty close to your target corpus of Rs3 lakhs for your Mauritian holiday.
Why good EMI scores over bad EMI?
Clearly, planning for your vacation with mutual funds is a better choice. When you take a personal loan, you pay the bank and when you invest in mutual funds the fund pays you. In short, money works hard for you. Even if you have to put off your vacation, you don’t have to come back and worry about EMIs. The beach tan surely feels better now!