Systematic Investment Plans (SIP) vs. Equated Monthly Instalment (EMI)

New investors confuse SIP with EMI. Fixed monthly outflow in both SIP and EMI is the only similarity. SIP is an investment and EMI is an expenditure. EMI is normally for conspicuous consumption like expensive mobile phones, high-end luxury cars, gadgets etc. SIP, on the other hand, is the best form of investment.

Given below is the comparative analysis on SIP vs EMI:

1. Nature of the Scheme: Fixed monthly or quarterly investment in either Equity or debt or Hybrid schemes ( a combination of both debt and equity) is called Systematic Investment Plan or SIP. Investment in SIP can be regularly monitored. Once can stop the SIP outflow, change the tenure of the sip or even increase or decrease the investment in a SIP. An individual who invests in SIP is an Investor.

Whereas in EMI or Equated Monthly investment, is a monthly cash outflow towards a financier, for possessing a product (like TV, CAR, Gadgets etc) or availing a service (like travel financing etc). Monthly outflow in an EMI comprises both interest and principal. Hence an EMI is a loan. An individual who avails a loan and pays EMI is called a debtor.

2. EMI comes with a burden in mind whereas SIP doesn’t: EMI or Equated Monthly Installment is affixed outflow of cash. Normally it cannot be restructured. Rain or shine the money or EMI has to be paid to the financier. Default or delay in payment of EMI leads to penal interest and/or frantic calls from the recovery agents or financier himself. This creates enormous stress on the individual and/or the family. No matter what is the financial position or cash flow situation of the individual or his family, EMI can never be compromised.

In SIP, investments stay intact even if you miss a month or two. In fact, in case of 2 or 3 subsequent ECS bouncing, SIP will cease automatically. Besides a Mutual Fund Co. will not charge anything for ECS or a cheque bouncing.

EMI amount has to be paid on due date whereas SIP can be terminated anytime. Hence, SIP is a stress-free form of creating wealth and EMI is a burden.

3. Investment Discipline:SIP helps to maintain & create investment discipline. It is the best & respectful way to fulfill any financial objective like daughter’s marriage, higher education of your children, buying a house etc. These days, you can buy most of the things you like with the help of an EMI, but this does not normally lead to wealth creation. In the case of financial misfortune like losing a job, EMI can turn out to be a nightmare. More so, if used to finance overseas vacations or expensive cars and gadgets.

EMI’s are useful when you have an urgent requirement for something you cannot afford. Using home ownership is a brilliant example. Systematic Investment Plan as the name suggests is the systematic way to create wealth. Call Mutualfundwala, to know the best mutual fund plans in India and the benefits of SIP.


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