If you think I came up with this beautiful one-line liner, you are wrong. I do not have creative brains to come up with something so simple and yet so powerful. In a series of advertisements in a leading business newspaper, Franklin Templeton, a leading asset management company, stressed that Systematic Investment Plan (SIP) is like a good EMI. I see a lot of merit in the argument.
Typically, you associate EMI or Equated monthly installments with repayment of a loan. You make many psychological adjustments when you are paying these EMIs. If you could make similar adjustments for your investments, it will do a world of good to your financial health.
There were many other one-liners in those advertisements.
Is there such a thing as a good EMI?
When will you start your good EMI?
SIP: It’s like a good EMI
A good EMI is a not an installment. It’s an investment
A good EMI goes right into your own pocket.
This is indeed a novel way of looking at Systematic Investment Plans and probably much easier to explain to new investors. Under SIP, you commit to invest a certain amount of money every month (or periodically) in one or more mutual funds.
It’s all in the brain
When you take a loan and commit to long term (or short term) EMIs, you make certain psychological adjustments to your finances.
- Everything comes after EMI.
- Every expense can be compromised but not EMI.
- Whenever you plan to buy something, you do mental calculations to check if you can manage the burden with your existing EMI outgo.
This is exactly how you should think about your Systematic Investment Plans too. Think of SIP as another EMI, which cannot be compromised. You have to pay these installments no matter what. Hence, plan your other expenses around SIP installments (just like you do when you are paying loan EMIs)
It is much easier to maintain investment discipline if you think about SIP investments in this manner.
What is a good EMI?
Any EMI that goes towards creation of an asset is a good EMI. Therefore, home loan EMI is good. However, EMI for personal loans and credit card dues is bad EMI. A car loan EMI can fall somewhere in between depending upon requirements. A car is a depreciating asset. However, sometimes the utility of convenience can be much higher.
An EMI for education loan is a good EMI even though it does not create any tangible asset but adds great value to you.
A good EMI must be affordable too or else you are inviting financial trouble.
When you invest in mutual funds through SIPs, you are gradually creating an asset for yourselves that will help you achieve your financial goals. Never underestimate the power of compounding.
So, think of SIP as EMI and it will be much easier to maintain investment discipline.
Kudos to Franklin Templeton and its creative team for coming up with something so simple and yet exceedingly brilliant!!!
When are you starting your good EMI?
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