Buying a car or hiring a cab….Find out which is good for your investments.

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In today’s world, taxi-hailing services such as Uber & Ola have made life much simpler. We have all experienced an instance when finding a taxi was often a herculean task with constant rejection from the drivers due to their unwillingness to take you to your destination. To tackle this, people started investing in cars as it provided a much-needed relief from the hassles of public transport. This however drastically changed a few years ago when such companies allowed you to hail a fully air-conditioned car at the touch of your fingertip. Many found this idea revolutionary as all the problems faced while commuting in a regular non- AC taxi were eliminated. Customers didn’t have to bother about finding a parking spot or having to constantly worry about maintenance issues. Convenience aside, availing the services of these companies does deprive you of the psychological satisfaction of owning a car. Many people, including some of us here, face this dilemma and hence coming to the question itself, “Is It better to buy a car or book a cab?”

Consider the story of two friends, Ajay and Raj, both 25 who have well-paying jobs. After a year of consistently giving quality performances, they received a bonus of Rs. 3, 00,000 each. Each month Ajay & Raj have a surplus of Rs. 30, 000 which they have apportioned to meet traveling and other expenses. This, however, is where the similarities end. Ajay, fresh from celebrating the occasion of his big bonus wants to buy a car in order to commute to an office every day. Raj, on the other hand, considers investing in a car unnecessary and prefers traveling by taxi every day. Ajay was convinced that in the long run his friend Raj would end up spending a lot more due to the regular outflows on a daily basis and believed that the money spent on his car would be evenly spread through the life of it. He immediately purchases a car by using the entire bonus amount to make the down payment and avails a car loan of Rs. 500000 payable through EMI’s in the next 7 years. Raj, however, invests his entire bonus in mutual funds.

Using this story we have tried to ascertain the monthly costs incurred by both of them after Ajay purchases his car.

Mr. Ajay

Amount

Bonus Received

300000

Available Surplus for Travelling

30000

Cost of New Car

800000

Down Payment

300000

Loan Amount  Taken

500000

Duration of Loan

7 Years

EMI Payments

8500 approx.

Fuel, Maintenance & Insurance Costs (p.m)

9500

Available Investible Surplus (Post Expenses)

12000

Mr. Raj

Amount

Bonus Received

300000

Available Surplus for Travelling

30000

Base Fare for hiring

50

Per minute cost

1.5

Per km cost

8.4

Kms Travelled per day

60

Total cost incurred per day

644

Total cost incurred p.m (approx.)

13000

Available Investible Surplus (Post Expenses)

17000

 

Through the above illustration, we can see that Raj saves Rs. 18000 per month while Ajay saves Rs. 6000 lesser at Rs.12000 per month. Both the friends invest their surplus in a Mid-Cap fund through SIPs. It is to be noted that apart from saving more, Raj also invests the bonus of Rs. 300000 which he received whereas Ajay decided to use that amount for the down payment on his car. The graph below demonstrates that, at the end of 7 years, Mr. Raj has a significantly higher amount available to him. The higher returns made by Raj were as a result of investing the entire amount of bonus received and also set aside a higher amount each month as compared to Ajay. Ajay, on the other hand, will have to dispose of the car he bought them. At this point, Raj will not only have enough capital to purchase any car of his choice but can also set aside the surplus for other heavy expenses such as marriage or buying a house.

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With the help of this story, we can come to a conclusion that hiring a cab will be lighter in the pocket, in the long run, allowing you to invest your surplus into Mutual Funds and letting the power of compounding do its magic.

The purpose of this article was not to promote the taxi service companies but to understand the impact of prioritizing and highlight the fact that timing is extremely important. Had Ajay planned ahead not had a vision for the future, he too could have made considerable returns on his savings.

To know more about financial planning click here: Wealthsecure

 *For the purpose of calculations, actual performances of the HDFC Mid-Cap Opportunities Fund was considered.

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