How equity investing scores over real estate when saving for your child's goals
Posted by: Uma Shashikant on May 28, 2018, 06.48 PM IST
Last week a friend called in panic. Their child had secured admission in a prestigious university, but they were unable to raise the funds needed to complete the admission process. It was one of the many heartbreaking stories we hear about money being stuck in a flat bought as an “investment” and there were no buyers. How do otherwise sensible people land in such a predicament? Many households begin to save and invest seriously after a child is born. Young parents admit that their sense of responsibility and urgency about setting money aside increases with the arrival of a child.
The top three financial goals among Indian savers are: Children’s education, children’s marriage and their own retirement. Many savers take this goal to provide for the child very seriously. So what goes wrong? It is tough for young parents to save large amounts on a consistent basis. The primary problem in a young household is unexpected expenses keep cropping up, even as incomes remain uneven and risky.
There are EMIs to pay for the home and car. There are also developmental expenses for furnishing, repairs, modernisation and upgrades that seem essential. Expenses on holidays, eating out, fashion, entertainment and such are incurred as young people establish themselves in their social circle.
These are real pressures that young households are subject to. Much as they make rules and try to remain sane about spending, there are demands on their income that make it tough to save consistently.
Not that they do not save at all, but many suffer the guilt of not doing enough. They worry about their children’s future, but the struggle to keep up with the routine costs of school, activities, tuitions, coaching, parties, outings and holidays takes its toll.
Setting aside small amounts in a systematic investment plan seems like a good thing to do, but there is always the worry that it might not be enough. Committing a higher amount is difficult given erratic saving patterns, and smaller SIPs seem to be too tiny compared to the large amounts that may be needed to send the child to college.
It is this combination of factors that makes buying property an attractive option. Buying a house, even if it is in a remote suburb, ticks off most of the boxes for a young household. The investment qualifies as being big enough to matter – a house that will be worth many times their current income. The hope that it will cover the cost of higher education is high, as there is a visible and satisfying sense of having bought something that will have a high value in the future.
The loan that is used to buy the property is always guised as a compulsory saving. This is how a home loan is projected by the banker, approved by the elders in the household, acknowledged as a smart move by friends and relatives, and accepted as an easy small charge on the monthly income for the young parents.
No one cares much for the math of how much is being repaid, or whether the same EMI could be saved in financial instruments instead. There is no ring of pride and achievement to a stepped up SIP, compared to a second house in an upcoming suburb that will potentially be worth millions.
Then there are the right embellishments to the decision. There is a tax saving that comes with the loan, which makes it sweeter. There is the pride of ownership and visible envy in the peer group. Then there is the possibility of earning some rent from the property.
A young household thus finds it easy to “invest” in property and satisfy itself that a wise decision has been made. Not everyone who makes this decision earmarks the property for the child. The connection is not direct. But the creation of assets is seen as a very responsible thing to do. The broad sense that all assets will come of use, and a growing asset will help everyone in the household, is satisfying enough to make that decision worthwhile.
It is not as if the young parents are unaware of the benefits of investing in equity shares and equity funds for their children. But the perception of risk is something many do not take help in understanding and dealing with. Some think that unless there is a windfall gain, the investment will not meet their goals; some dislike the ups and downs of the equity market; some find it tough to visualise how money would grow and appreciate; and some cannot bring themselves to invest a sizeable amount that will matter.
It is a harsh thing to say, but for a few who choose equity investing there are far too many young parents who fail to adequately appreciate the power of compounding over time as a powerful tool to fund their children’s future.
Young parents do not short change the future of their children willingly. It is just that they do not realistically evaluate the risks of real estate as an investment option. They fail to take into account the vagaries of the real estate market, the sharp practices, the risks from delayed and failed projects, the issues that arise from oversupply, the perils of choosing a wrong location, the costs of failed promises around development, and the difficulties in realising any profits they may have made.
There are other fortunate young parents, whose ascent in their careers is so spectacular, that by the time their child is ready to go to college, they are earning enough to pay the fee like a regular expense. There are other privileged young parents who have an inheritance to fall back on, and have the support of wealthy grandparents who have left a big enough legacy for the grandchild.
The others need an investment plan that uses a diverse set of assets over a long period of time, chosen carefully and built assiduously. Equity investing lies at the core of this strategy, by sheer virtue of its merit as a long-term growth asset that also enjoys high liquidity. Equity funds offer an efficient and convenient platform to implement such a strategy. It is easy to be tempted into assuming that nothing beats property as an investment choice. But selling either doesnot happen at all, or happens with great distress. Young parents ought to be careful where they put their money to work.