Buying a Merc vs SIPs: Chethan Shenoy on how to be in a win-win situation

"Please remember, luxury cars will inflate at a certain rate and I would assume that it will be worth at least a crore of rupees. So if you want to buy a car which is worth Rs 75 lakh today, after five years, the car would be worth Rs 1 crore and therefore you will have to save Rs 1,20,000 per month to buy that car," says Chethan Shenoy, Head of Products, Anand Rathi Wealth Ltd

One headline that is making rounds is that SIP is threatening the sales of Mercedes-Benz in India and we have seen in the past that SIPs are at record high levels. Do you agree with what Mercedes-Benz India management and team is saying?
I think what the Mercedes-Benz India management is saying is that growth in luxury car segment is being capped by people spending money on SIPs. The competition for growth in luxury car sales is coming from the SIP segment and that is the exponential potential of growth in the luxury car segment.

I completely agree with this gentleman. This is a trend that we are definitely seeing among HNIs. There are four things that are happening as far as HNIs are concerned. Number one, the decision making on investments have started happening a lot more mathematically and logically rather than being emotions and narrative driven. So that is the first change that we have seen in the HNI behaviour.

The second change that we have seen in HNI behaviour is that there is a preference for financial assets over physical assets. That is the second change that we have seen in HNI behaviour. The third change that we have seen in HNI behaviour is that they are choosing experience over ownership and the fourth change that we are seeing among HNIs is a preference for financial freedom rather than ownership and security of having physical assets. So, financial freedom has taken the front seat. So these are four changes that we are seeing among HNI behaviour.

Can you help us with the maths for how HNIs can benefit from having a good amount of return when it comes to investing in some financial assets or securities rather than choosing to own a Mercedes or any other luxury cars? How will money grow in the same time period?
It is definitely a dream for most of us to own a German car or a Mercedes for that matter is definitely up there. A few things before I get into the math of it. The SIP numbers are clearly indicating this change in behaviour. It has gone up from over the last seven years and the SIP savings in India moved from Rs 3,500 crore to close to about Rs 13,000 crore – a 3.5 times increase. That trend is clearly showing up in the behaviour of HNIs.

Why is this happening? The math of it is very simple. Even if you are expecting a return of about 12%, in the long term the returns have been 12 to 14% as far as equity is concerned. If you are expecting a return of about 12% on your savings through SIP format and if you are intending to buy a car worth about Rs 75 lakh, I will first give you the mechanism to look at what would be the difference between buying the car today and paying an EMI. If you have to buy a car worth Rs 75 lakh, the bare minimum EMI with an interest of about 8% odd on the car loan for seven years, will turn out to be about Rs 1,17,000-1,18,000 per month.

Against that, if you save that Rs 1,17,000 per month in the form of an SIP, expect that to grow at the rate of about 12%, that amount will come to about Rs 1.5 crore in seven years.

So the difference between the two is in option one, you would have bought the car and after seven years, the value of the car would have depreciated naturally because a car is a depreciating asset. It is not an appreciating asset. So, a car worth Rs 75 lakh after depreciating at the rate of about 10% or so, would be valued at about Rs 35 lakh after seven years. So, on one hand, you have Rs 35 lakh on a Rs 75 lakh car and on the other hand, a SIP of Rs 1,17,000 has become Rs 1.5 crore. That is the math, so to say.

You have been mentioning that owning a German car is a dream but if somebody is planning to own a Mercedes, what should investments look like? How can one make money work for money? How will that work if I want to have a Mercedes in the times ahead? How should my investment journey start?
You have hit the nail exactly where people want to understand: if I want to own a Mercedes or a German car, what is the kind of savings that I need to do? We get this question a lot from HNIs who want to either buy the car or need to plan to buy the car. I will just give a rough math. If one has to buy a car using the same example, while Rs 75 lakh probably is one of the lowest end Mercedes cars that you could buy, a decent, good Mercedes C class car will basically mean you will have to pump in or save for the next five years.

You could start with an SIP of about Rs 1,20,000 per month. If you do a Rs 1,20,000 savings per month for the next five years, you would have about a crore. Why I am giving you the number of a crore instead of Rs 75 lakh is because the car prices will also inflate.

Please remember, luxury cars will inflate at a certain rate and I would assume that it will be worth at least a crore of rupees. So if you want to buy a car which is worth Rs 75 lakh today, after five years, the car would be worth Rs 1 crore and therefore you will have to save Rs 1,20,000 per month to buy that car.