If you haven’t been living under a rock, you’ve probably heard about the current trending debate on SIPs being the luxury automaker’s main rival in India. The argument is pertinent in the Indian context because there is a much greater emphasis on saving than there is in the west. There aren’t any reliable state-run benefit programs in India like social security, healthcare, Medicare, or Medicaid that can be relied upon. Therefore, Indians have been and continue to follow a multiple-generation saving mindset in order to maintain themselves and provide a better life for the next generation. However, these mental models do evolve with time, and the next few generations are exhibiting a greater preference for first-hand experience over long-term savings.
That being said, lets get our facts right first. While the statement for SIPs over luxury cars was made lets not take it out of context. Mercedes-Benz India has seen a sharp increase in the sales of its high-end vehicles over Rs 1 crore, selling 68% more of them in the first nine months of 2022. On the overall sales growth of the company in 2022 the forecast is a double-digit growth. India has a smaller car market than those of the United States and Europe, despite having a population that is significantly larger. And this is seen across all categories of cars from entry-level to luxury vehicles. So yes, even a minimal shift in rise in disposable income among the Indian masses could lead to a large rise in discretionary expenses or read as vehicle ownership.
The Saving Mindset
Following the pandemic, India’s savings habits underwent a significant change as a result of a bull market in the capital markets and the emergence of apps that make investment information more accessible. Since May, SIP inflows have exceeded the Rs 12,000 crore mark, reaching a record high of Rs 13,040 crore in October. An obvious example of this is the shift in investor mindset brought about by the realization that a luxury car cannot be purchased with an EMI of Rs. 50,000 but can be purchased with a SIP of Rs. 50,000 over a reasonable period of time. It is now widely acknowledged that SIPs can give investors the financial flexibility they require so they can make the purchases they want. All they need to do is give it time. We are witnessing a similar shift in the HNI segment’s saving habits too, they are:
- Retire at 40. Financial freedom is now more desired than before.
- Due to easy access to information, HNIs are kept better informed and take a more active role in their wealth management decisions.
- Compared to physical assets, financial assets are much more sought-after by HNIs.
- HNIs are starting to value experience more than ownership.
Asset Vs Liability
This shift in mind can be attributed to the Wealth Allocation framework, which incorporates the three main goals of a sound wealth management strategy: the need for financial security against risk, the need to combat inflation over time and maintain the same standard of living, and the need to pursue aspirational objectives for increased wealth mobility. Therefore, when it comes to deciding whether to invest in appreciating financial, physical assets versus a depreciating luxury car logic dictates that buying a luxury brand requires ongoing investment. The cost of everything, including insurance, maintenance, and even tips for valets, begins to rise exponentially. To put costs in perspective, consider that for the same price as a C class in Mumbai, one could buy a spacious 2BHK home in the suburbs that could bring in 30K in rental income each month.
While Mercedes is starting to view SIPs as a rival, the truth is that smart investors place a higher value on savings and prudent investments than high-end luxury goods. Lets say an investors has achieved his first two stages in the wealth allocation framework and now is pursuing his aspirational goals. He decides to invest outright in a luxury car that roughly costs Rs. 1 Crore. 4 to 5 years downt he line post depreciation the car loses value and is estimated at Rs. 50 lakhs. Additionally, there are taxes to consider, including a 28% GST rate on automobiles and an additional cess that varies from 1-22% depending on the type of vehicle. The same investment would lose more value if made with borrowed money because of the interest charges incurred over the loan’s term.
If the investor chooses to invest the same corpus in financial assets spread over the next 5 years at a modest 8% returns he can accumulate an approximate Rs. 3.5 crores. With this money saved, the investor has the option of buying multiple luxury vehicles or, if he wants to be prudent, a fleet of mid-range vehicles.
Financial assets outperform investing in luxury goods that depreciate over time and limit one’s ability to amass wealth, even after taxes and inflation-adjusted returns are taken into account. Clearly, investors are better off putting their money in equity mutual funds than buying a luxury cars. SIPs produce wealth and grant you the luxury of choice.