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Should you break investments just to buy that car?
Learn the true cost of liquidating your investments for a car purchase and explore balanced approaches that protect your financial future while still getting your dream vehicle.
Key takeaways
- Cars depreciate 20-30% in the first year while good investments appreciate, creating a double financial hit when you liquidate investments for a vehicle.
- Using a balanced 80:20 approach (20% down payment from investments, 80% loan) can help preserve most of your investment growth while acquiring your desired vehicle.
- The total value of all your vehicles should not exceed 50% of your annual income, and your car EMI should not exceed 15% of your monthly take-home pay.
Are you considering redeeming your FDs or selling your mutual fund units to buy that dream car? Hold on and think twice. The new car might seem like a great decision, but your future self may not be so appreciative. Cars depreciate rapidly in India, losing 20-30% of their value even in the first year, whereas good investments appreciate over time.
So, before you make this big decision, you have to balance what you get right now versus what you could potentially lose down the road. Let's dive into smarter ways to acquire the car you desire without damaging your financial future.
The true cost of using investments for a car purchase
When you break your investment to buy a vehicle, you don’t just pay the on-road price, but more than that. Here is what you stand to lose:
Missed growth potential:
Funds withdrawn from investments no longer grow. The ₹15 lakh investment that you withdraw may reach ₹30+ lakh in 10 years considering a 10% annual return.
Tax implications:
Selling equity investments within one year invokes short-term capital gains tax according to your income tax slab rate. Even FDs attract TDS and taxable interest.
Reset investment schedule:
Reconstructing your SIPs and investments takes time, and you lose the compounding power.
Example: Rajat owned ₹12 lakhs invested in mutual funds that grew at the rate of 12% every year. However, he used that money to buy a car rather than taking a loan. Five years down the road, that same ₹12 lakhs would have amassed to approximately ₹21 lakhs had it remained invested. After 5 years, his car is now valued at only ₹5 lakhs. In that bargain, he lost ₹16 lakhs of potential gains.
Better alternatives to consider
Before emptying your investment accounts, try these options:
| Alternative | Pros | Cons |
|---|---|---|
| Car Loan |
|
|
| Save Separately |
|
|
| Partial Withdrawal |
|
|
| Used Car |
|
|
When liquidating makes sense (and when it doesn't)
Not everything is equal. Here's when utilising investments may actually be a good idea:
Makes sense when:
- The investment is solely for the purchase of a vehicle
- You're selling under-performing investments that aren't growing sufficiently
- You have surplus emergency funds in excess of 6 months of expenses
- You can escape high-interest debt altogether
It doesn't make sense when:
- You're draining your emergency fund
- You're selling long-term investments such as PPF or ELSS funds halfway through
- Your investments are doing well (beating inflation easily)
- Reasonably priced loan options are present with decent interest rates
The smart way: The middle path
The ideal tactic isn't necessarily all or nothing. Look at these balanced strategies:
- Use only the interest/returns: If investments yield returns on a periodic basis, apply only these towards the down payment and leave the principal untouched.
- 80:20 strategy: Use 20% of the investments as the down payment and finance the balance of 80% with a loan.
- RD for EMI: Open a Recurring Deposit equal to your potential EMI size for 6-12 months. If you can live with that drain, you're set for a loan.
Financial planners in India typically suggest the following rules of thumb:
- The total value of all your vehicles should not exceed 50% of your annual income
- Your car EMI should not exceed 15% of your monthly take-home pay
- If possible, pay at least 20% as a down payment from separate savings
- Keep in mind the overall cost of ownership, such as fuel, insurance, and maintenance
Think beyond the purchase price
Indian cars come with recurring expenses that surprise new owners:
- Yearly insurance premiums (3-5% of vehicle value)
- Fuel expense (₹5,000-15,000 per month based on usage)
- Maintenance (₹10,000-30,000 annually)
- Parking charges (particularly in metro cities)
- Interest on loan (if taken)
When you buy a car worth ₹10 lakhs, you are not just paying that amount. You have to shell out the above expenses as well. These expenses are usually ignored when thinking only about the purchase decision.
To conclude
Walking the tightrope between living life today and securing tomorrow demands balance. Although that new car smell is alluring, dipping into investments that are creating your future may not always be the best decision.
In most situations, keeping your investments intact while seeking loan options or saving on your own is financially wiser for investors. The actual triumph isn't merely arriving home in a new vehicle—it's doing so while maintaining your money engine in tip-top shape for the long haul ahead.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
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