Here's how systematic investment plans can help you buy a car

As a result of the rising cost of living, ever-increasing expenses, and limited disposable incomes, buying a car has become an expensive affair for many. However, there is a financial instrument that can help you to turn this dream into reality. A systematic investment plan (SIP) in a mutual fund offers a disciplined and flexible approach to achieving major financial goals, such as buying a new car.
In this article, we will delve into what SIPs are and explore how they can help individuals to fulfil their car ownership dreams.

• Table of contents

1. What is an SIP?
2. How to buy your car with a mutual fund SIP investment?
3. Breaking it down
4. How it works?
5. FAQ

What is an SIP?

A systematic Investment Plan (SIP) is an investment strategy offered by mutual funds that allows investors to invest a fixed amount regularly at predetermined intervals. Investors can choose to invest weekly, monthly, or quarterly, depending on their convenience and financial capacity. Thus, SIPs offer a disciplined approach to investing, as they promote regular savings and help individuals avoid the risky temptation of timing the market. Over time, SIPs harness the power of compounding, making them a suitable choice for those seeking long-term wealth creation.

How to buy your car with a mutual fund SIP investment?

Any financial decision, such as taking a loan, comes with associated costs. When it comes to financing a car, it can have a significant impact on your finances. Firstly, a car is a depreciating asset, which means its value starts to decline as soon as you drive it out of the showroom. Secondly, when you borrow money for a car, there is an extra cost involved in the form of the interest rate on the loan. Therefore, it's essential to consider both the cost of the loan and the car's overall price and utility before making a purchase decision.

Breaking it down

To achieve your goal of purchasing a car worth Rs. 20 lakh in five years, you can plan your finances strategically. Instead of burdening yourself with a substantial loan, consider investing your money to grow your savings while managing risk based on your comfort level.
One approach could be building a portfolio consisting of a few funds that align with your financial goals. For a car purchase beyond three years, you can opt for a flexi cap fund.

How it works?

Let's assume you aim to buy your dream car costing Rs. 20 lakhs after a few years and you have the capacity to invest regularly. Here's how you can approach it:
Start investing in aggressive hybrid funds, which typically allocate 65-80% of their corpus in equity and equity-related instruments, while the rest goes into bonds, money-market instruments, etc. This balance can minimize impact on capital when the market corrects while aiming for potential growth when the market goes up.
Based on this expected rate of return (let's assume 10.5%), your investment timeframe (5 years), and a plan to increase your monthly Systematic Investment Plan (SIP) by 10% each year, you can calculate the required monthly savings. In this instance, the monthly SIP for the first year comes out to be around Rs. 22,561.
Therefore, by following this investment strategy and contributing less than Rs. 25,000 per month, you can potentially accumulate approximately Rs. 21.05 lakh in five years, which would allow you to purchase the car of your dreams without taking on a burdensome loan. (This example is for illustrative purpose only)

Conclusion
Systematic investment plans (SIPs) have emerged as a good option for individuals looking to achieve their goals without disrupting other financial obligations. For a middle-class Indian, owning a car might seem like a distant dream, but with SIP investments, it could become an achievable reality. By setting clear financial objectives, staying disciplined in regular investments, and choosing suitable mutual fund schemes, SIPs can empower individuals to inch closer to their dreams, whether it's buying a car, owning a home, or planning for a comfortable retirement.
However, it's essential to remember that mutual fund investments are subject to market risks, and past performance does not guarantee future results. Seeking advice from a financial advisor is always recommended to tailor investments according to one's unique circumstances and goals. So, start SIP investing today and turn your dreams into milestones! .

FAQs:

How much should I invest through a SIP to buy my dream car??

Your required SIP investment relies on several variables, including the cost of the car, the length of the investment, the return on investment, and your risk tolerance. To figure out how much money you should put into your investments, you can utilize online SIP calculators or speak with a financial advisor.

Which mutual fund categories should I invest in using a SIP in order to purchase a car?

Your risk tolerance, investment objectives, and time horizon will all influence the mutual funds that you choose. In accordance with your level of risk tolerance and time horizon for investing, it is advised to combine equities and debt funds in your investments. You can balance your portfolio by investing in different equity and debt classes

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.