Investing for children: Buy house or opt for MFs?

I reminded Meera that although Karan's parents had a large bungalow in his hometown, professional opportunities had brought them to Mumbai. Their children might behave similarly

I was speaking to Meera and her spouse, Karan, about their financial plan. In their early forties, they had done well professionally. They lived in Mumbai in their own flat. Both their children attended a reputed primary school. Their annual household income was in seven figures, and they maintained a reasonable lifestyle while investing regularly in financial assets.
Their financial investments were already worth a couple of crore, and their monthly Systematic Investment Plans (SIPs) in various mutual funds were around Rs 5 lakh. If they continued their disciplined investment approach for 10 more years, they were likely to achieve their goals of funding their children’s higher education and their retirement.
 

Meera had received Rs 1 crore by liquidating the employee quota shares received from her company. She wanted to invest this windfall as a down payment for a flat worth Rs 3 crore in the same building. The balance could be funded through a home loan.
The Equated Monthly Instalment (EMI) would be paid partly from the rent derived from the flat, and partly by reducing their monthly SIPs and lifestyle expenses. One of their children would eventually use the flat when they grew up and married.
 

Meera had several reasons for her choice. One, they had struggled to buy a home at the start of their careers and wanted to give their children a head start. Two, they would benefit from the appreciation on the full Rs 3 crore investment, even though they would initially fund only Rs 1 crore. Three, the need to pay EMIs would automatically lead to curtailment of some lifestyle expenses.
 

Karan favoured investing the windfall in existing financial assets to retire earlier, their priority goal after ensuring their children’s higher education. He felt the return on a flat in their building was around 7 per cent per annum, having doubled in value over the past 10 years. Taking a home loan at 9 per cent to fund such an asset seemed a losing proposition. He also doubted they could cut their lifestyle expenses. He felt their monthly SIPs would need to shrink more than planned, pushing back their 

retirement goal.
 

They sought my advice. I began by disclosing our conflict of interest: We don’t charge fees on real estate assets but do charge a percentage fee on financial assets, which would increase if they chose not to buy the flat.
 

When I probed further, I realised there was also an unspoken reason for Meera’s preference: she hoped their children would want to stay near them after marriage if the flat was in the same building.
 

I reminded her that Karan’s parents had a large bungalow in his hometown, which they could have stayed in. But professional opportunities had brought them to Mumbai. It was unlikely their children would behave any differently. Besides, they themselves might decide to move to another locality, city, or even country. And if the first child took the flat, how would the second child be satisfied?

If they invested the money in financial assets and had a surplus, they could buy a flat for their children later. “You don’t buy a cow today because you may need milk years later. You make sure you have the money to buy the cow should you require it later,” was my earthy logic to her. This convinced her. Karan had said the same thing. Meera agreed to invest the windfall in financial assets.
 

Truth be told, Meera is not alone in her preference for investing in physical assets like gold and real estate. It is a throwback to another era when these were the only known investment avenues. 
 

Like Meera, I hope many more readers will give up their old baggage and join the new Indian mainstream. Retail investors invest over Rs 20,000 crore in mutual funds every month through the convenient SIP route. If more investors do so, the already strong stream will soon become a mighty river.

(The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta)