You live in a fast World where everything is costly. Your salary is never enough and if you want something in a hurry, you are forced to borrow. Just take a look at the youth in India. The moment they get their salary, its spent in days. Many youth then borrow using their credit cards and buy things on credit. Gone are the days when youth in India had an emergency fund. Today, credit card is the emergency fund.
It's the festival season and shopping is on credit cards. Buy Now, Pay Later is the motto. But there's one problem. If you are one of these youth, you know what I'm speaking about. Credit card charges an interest around 2-3% a month. If you fall behind in payments, you soon fall in the loan trap.
Mutual funds are soon becoming a very hot investment. You and other youth are investing in mutual funds via SIPs, to get returns much higher than inflation. While an investment in mutual funds is great, do you know that mutual fund SIPs can save you from the loan trap?
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It's very easy to get a loan today. You can avail personal loans, credit cards and in the World of fintech, there's P2P and other innovative lending platforms. Many lending platforms encourage youth to take loans, by offering short term instant loans in a jiffy. Clearly, you and other youth are availing loans at high interest, with no idea on how to repay them.
An SIP is not an investment. It's just a method of investing in mutual funds. You invest a fixed sum of money regularly, say once each month or quarter, in a mutual fund scheme of your choice. SIPs are a very good method of investing in mutual funds. You get lesser units of mutual funds when markets are high and more number of units when markets are low.
You average your cost of purchase and if you stay invested in mutual funds for the long term, you enjoy the benefits of the power of compounding or return on return. In mutual funds you reinvest your dividends and buy more units. The value of these units increases with time and you enjoy the compounding benefits.
Keep a count of monthly expenses before you start an SIP. It's not possible to reduce SIP amounts later. The only way to exit is to stop the SIP.
SEE ALSO: How to link mutual funds with Aadhaar?
Reverse EMI in mutual fund is very simple. You choose a mutual fund which is very good for a short term investment. You could choose an equity oriented hybrid fund (balanced fund) which invests 65% of your money in equity (stocks) and the rest in debt (fixed income).
If you stay invested in an equity oriented fund for over a year, long term capital gains are tax free. You also get higher returns than debt funds.
You start an SIP in this mutual fund, where you invest the money equal to an EMI you would be comfortable paying. This is the reverse EMI fund. You keep investing in this fund through SIPs.
If you want to buy a premium smart phone, just check and see how much money is there in the reverse EMI fund. If money is sufficient, withdraw and make the purchase.
An EMI reverse fund is for expenses and not for saving. It's your expense fund.
See also: No Cost EMI
Reverse EMI is an excellent way of buying things you want. If you buy a gadget and pay in EMIs (personal loans and credit cards), you have an interest expenditure around 15-20% a year. If you buy a gadget from the money in the reverse EMI fund, you actually end up with returns of around 7-8%. The differential is around 22-24%. Don't you think reverse EMI fund is a great way of buying things you want? Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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