By Gaurav W:
For a long time, I have been discussing this topic with many people. I have realised that today’s generation, especially those who get their jobs at the age of 20-22, are more interested in easy money. The first thing after applying for a savings account to get their salaries in, would be applying for a credit card. The next would be a personal loan, then a vehicle loan, then a house loan and so on. We are so used to ‘easy money’ that we are not very sure of alternative means of getting money.
Why is it that there isn’t enough education about savings and investments in our schools and colleges?
Let us compare very basic products here: personal loan and mutual fund. We all know what a personal loan is. This is an unsecured loan which a person with a good credit history or working in a good company can easily get. The average value of a personal loan availed ranges anywhere between INR 3 and 6 lakh. There are all sizes of personal loans available in the market with interest rates charged from 12.5-19.5% per annum. These loans are available for a tenure of 1 to 5 years.
A mutual fund is a fund created by an asset management company to invest in different instruments on behalf of investors. If there are 10 people, and they each want to invest Rs. 1,000 but are not sure where, they would give their money to an eleventh person who is a sound investor and this person, for a fee, invests the total Rs. 10,000 from all 10 people, to generate consistent returns. The returns are distributed to the investors.
There are three kinds of mutual funds. Debt mutual funds invest in debt instruments like government bonds, corporate bonds etc. Equity funds invest in equity markets and the third kind is a balanced fund which is a combination of debt and equity fund. The returns from mutual funds range between 8 and 30 percent annually.
Let us understand something with an example.
Let us call our character Mr. A. A has completed his bachelors degree and he has landed a job paying him Rs. 30,000 per month. If he avails a personal loan of Rs. 3 lakh for 3 years at an interest rate of 15%, he ends up paying an EMI of Rs. 10,400 and the total interest paid by him to the bank at the end of the tenure would be Rs. 74,386.
Instead, if A would have started a mutual fund investment, what would have happened? He would have paid Rs. 7,000 every month for 36 months and if he would have earned 15% annually, he would have saved about Rs. 3,15,808. He would have actually paid Rs. 2,52,000. Which means that he makes a saving of Rs. 1,22,386 in paying the EMI and he still saves Rs. 15,808 more than the loan amount availed. Hence, there is a total savings of Rs. 1,38,194 over 3 years, which is Rs. 3838 per month.
If a mutual fund is invested in with the same Rs. 10,400 paid as EMI, Mr. A would save Rs. 4,69,201 at the end of 3 years.
One of my friends argued that I would take a personal loan only if I have an emergency but I know for sure that many people avail the loan to either convert their credit card debt to a personal loan, to go for holidays or to buy expensive electronic gadgets. I have seen lot of people buying expensive phones and laptops on EMIs, without knowing about the interest that they would end up paying.
Saving is a habit which needs to be inculcated in children early on, and only then they would appreciate it’s importance when they start earning. While easy credit is readily available, investment options are also easily available. One should identify the risk-taking ability and go with the right investment product at the right time.