How Much SIP Do You Need to Save for a Car in 3 Years?

Did you ever dream of cruising down the highway with your family in your dream car, only to be shattered by the reality of inflation? You won’t be the first person to have your dreams battle with inflation. Rising prices can be the silent thief that nibbles away your savings.

However, you can turn around the situation in your favour with the help of SIPs. Investing in this way can help you outpace inflation and reach your dream car within your target period (let’s assume 3 years for this article).

How Inflation Affects Car Prices?

Inflation causes a price rise across the country’s economy, including the automobile sector. Each year, the rising cost of vehicles can outpace the average increase in personal income. This may not be solely due to inflation but also due to technological advancements. Regardless, the rising cost can make it harder for an average person to purchase the dream car over time.

Example

Let us assume that the cost of your dream car is ₹10 lakh presently. The average inflation rate in India is 5.5% per annum. This will cause the price to rise to about ₹11.74 lakh in just 3 years. This price rise is calculated solely by applying the effects of inflation. The price may rise further if other factors are considered.

Investing With SIP for the Car

By allowing you to invest in regular intervals, SIPs become one of the convenient ways to build up your car fund. Although investing is often utilised to build generational wealth over the long term, it can also help in achieving short-term goals like purchasing your dream car. Following are a few reasons why choosing SIPs might be the optimal choice for you:

Advantages

Outpacing Inflation

One of the most important factors to consider when planning for your car is the effects of inflation. As discussed above, inflation can be a strong factor that keeps your goals out of reach. Mutual funds (especially index mutual funds) follow the market, so they can help outpace inflation.

Higher Returns

Mutual funds work on the principle of compounding and invest in a wide range of securities (equity, stock, commodities, etc.). These factors work together to provide potentially higher returns than traditional savings avenues.

Disciplined Savings

SIPs are automatic contributions made periodically. They ensure that you save regularly, making it easier to accumulate the needed amount within the target time frame. This ensures that you don’t have to put your dreams aside due to financial constraints.

Affordable

SIPs are accessible to a larger group of people as they can be carried out with amounts as less as ₹500. Investing through SIPs can help you accumulate funds for your goals without stressing your finances.

Also Read More About What is SIP Investment?

Deciding the SIP amount

Selecting the contribution amount to save for your car fund depends upon 3 factors:

1. Price of the Car

Before starting to invest, it is important to establish a measurable goal. In this case, as we are saving for a car, the target price would be the car’s selling price. It is important to note that since we are saving for 3 years, the estimated car price after the term should be the target. Alternatively, you can also choose to select the down payment amount in case you are planning to take a car loan.

2. Expected Rate of Return

This depends on the mutual fund chosen. You can use the historical performance of the mutual fund to derive the expected return. It is also important to check other factors when choosing a mutual fund.

3. Investment Horizon

In this case, we have assumed the horizon to be 3 years. It may vary depending on the car and the urgency of purchasing it.

Once these factors are calculated, you can enter the contribution amount, the expected rate of return, and the investment period in the SIP calculator to calculate the target. You can experiment by changing the 3 inputs and choosing the right equilibrium between them.

Example

Let’s assume that your car will cost ₹11.74 lakh in 3 years. To save ₹11.74 lakh in 3 years, how much should you invest monthly? Assuming an average annual return of 12%, you would need to invest about ₹27,000 per month. This figure will vary based on the actual returns and the types of funds chosen.

Explanation:

Goal: ₹11.74 lakh in 3 years
Annual Interest Rate: 12% (Expected)

The formula used for SIP calculations with compounding is:

Future Value (FV) = P * [ (1 + i)^n – 1 ] * (1 + i) / i

Here,

FV is the Future Value (the total amount at the end of the investment period)
P is the Annual Investment amount (your annual SIP contribution)
i is the annual interest rate
n is the number of investment periods (total years)

(assuming that compounding is done annually)

So, let’s enter the values:

FV = ₹ 11.74 lakh (your target car price)

i = 12% annual interest (as a decimal)

n = 3 years (investment period)

Therefore,

P = ₹ 11.74 lakh * [ 0.12 / ( (1 + 0.12)^3 – 1) ]

P = ₹ 27,000

Using a financial calculator or spreadsheet, you’ll get a monthly investment (P) of approximately ₹ 27,000. Try it out on Angel One’s SIP Calculator.

You can change the parameters according to your convenience. Investing through SIPs can also give you flexibility in your funds. You don’t need to use the entire amount accumulated to buy your car outright.

Instead, you can use a portion of your accumulated corpus for the car’s down payment. The rest of the amount can be paid through EMIs (Equal Monthly Installments) for the loan tenure. In such cases, using Systematic Withdrawal Plans (SWPs) alongside your SIPs may help.

An SWP allows you to systematically withdraw a fixed amount from your accumulated SIP corpus at regular intervals. You can set up an SWP to coincide with your car loan EMIs, ensuring a smooth flow of funds to manage your loan repayments.

SIPs are a powerful tool that can help you turn your dream car into a reality. Remember, investing can help you with not only your long-term goals but your short-term goals as well.

At Angel One, we offer a user-friendly platform to invest in a wide range of mutual funds suitable for your SIP goals. You can also invest in other avenues in case you choose to take a different route to your dream car such as equity, commodity, future and option trading etc. So open a Demat account with Angel One and get investing. Your dream car is waiting for you!