Home EMI vs Mutual Fund SIP

Example 1

I recently came across a debate on social media: It goes like this: "If I buy a home for Rs 60 lacs and pay an EMI of Rs 50,000 for 20 years, I would probably earn / save rent of about Rs 25,000 PM, Instead if I invest the same Rs 50,000 on Equity Shares / Mutual Funds, I would accumulate Rs 9 Crores (at CAGR of 18%).

These kind of oversimplified narratives on stock market investments and mutual funds, are mostly misleading and in some cases outright un-ethical. Let us peel the onion and unpack some hidden truths here:

Basic mistake : The projected accumulation of Rs 9 crores, assumed a monthly investment of Rs 50,000, without subtracting the rent paid. Nor did it factor-in the increase in rent (at least 5% per year) over the 20 year period. So if we adjust for both, the projected accumulation after 20 years would be closer to Rs 4 Crores.

What would be the value of Rs 4 Crores in 2040, at today's prices? For example Rs 10,000 could buy 23 grams of gold in the year 2000. Now it can buy only 2.3 grams. Applying the same yard stick, Rs 4 crores in 2040, should be approx. equal to Rs 40 Lacs today.

What is the risk, that I may not get the expected returns, or even worse, lose what I invested in the stock market? Is the certainty-uncertainty probabilities comparable across these two totally different class of assets?

Suppose I start investing in the market, and I need money for something in between, will I sell it? Or let us say I find the stock / fund doing really well, will I be able to resist my temptation to exit when the going is good and book profits? On the other hand, will I ever sell land, house, or gold for ordinary expenses?

Let us say, like any aspirational middle class family, I feel the pinch of expenses being more than the income, will I have the discipline to still invest the same amount in the market month after month? Now compare that with the alternative. Will I will stop paying EMI for my house and lose the house as a result?

When the interest rate on a home loan is 6.5% and the inflation rate is 8% to 10%, what will be the real value of the EMI I am paying, say 10 years from now?

Let us say I buy a land for Rs 20 Lacs and build a house for Rs 40 lacs on it. What will be the value of that property after 20 years. For example, I bought land for Rs 3 lacs and built a Rs 20 lac house in 2005. And that property is now worth Rs 2 crores in 15 years. In 20 years, that is by 2025, let us assume it will be worth Rs 3 Crores. Applying the same yard stick, Rs 60 Lacs independent house that I invest today, should be worth Rs 9 crores in 20 years.

Let us say, my children are smart enough to get 85%-90% in school (but not 99.5%). So instead of shrugging my shoulders that they did not study well, if I have to invest in their future by sending them to a private university how much would that cost in the future? At today's prices it is Rs 40 Lacs for two kids. May be Rs 2 to 4 Crores in 2040. I might have to liquidate my entire market investment to do that. What if I had sold part of my market investments on the way? What if I was not regular in investing every month? For educational loans beyond Rs 5 Lacs, banks expect a collateral. What collateral will I have? Whereas, If I had a property, I will be able to take a mortgage loan at a low interest rate and repay the same before I retire. This would ensure that the property remains in the family, and at the same time, I am able to leverage it for another valuable investment - education of my children.

Let us say my parents already have 2 houses and I already own a house myself. Should I invest another Rs 50,000 EMI on another house? Let us say my parents have lived all their life in a rented house and we have moved from a Tier 2 / Tier 3 town to the city. I am married and my first child is on the way. Should I buy a house of my own? Why is the answer different for these two scenarios?

Every person and every family grows through a pyramid of needs. People who have already reached a certain level in that pyramid, (because of their own income or because of their well to do parents) should not think, that other people who are still climbing the pyramid, ought to have the same outlook towards investments.

Example 2

We saw one example of how an oversimplified narrative could be misleading. Now let us see another example, where it becomes outright un-ethical

This is a case that I came across during one of my talks - "Saving vs Investment What is the difference?" - in a Chennai based BPO

A male employee (aged 30, with a house-wife and school going kid, earning Rs 30,000 PM), approached me after the talk and asked me for my second opinion. He had already been advised by some "expert", to invest Rs 3000 PM in a mutual fund SIP or a portfolio of stocks. He said, his plan is, every time it accumulates to about Rs 1 lac, he will use that savings to fulfil some of his dreams. He was also under the impression that market investments could augment his income from time to time and help him bridge the gap between expenses and income. In a world were corporates were giving very small salary increments every year, he thought investing in the market is a smart way to enhance his income and fulfil his dreams.

I could not agree or disagree with his approach, without knowing more about where he is in his financial journey. So I dug deeper. This is what I found out.

He had still not bought Life Insurance to protect his family. No one told him about low cost Pure Term insurance and how it is cheaper and better than ULIPs.

He sends his child to a low cost matriculation school. No one advised him that a better school for the child is more important than investing in stock markets.

What are the things he need to do, to enhance his skills so that he can grow faster in his career and earn more? Does it require him to invest a bit on his own development? Well, he had never thought about "investment" in this way.

He had not bought any Jewellery for his wife or kid since marriage. And his wife is very upset about it.

Neither he or his parents have a own-house. No one advised him how he should take a land loan and start paying the EMI, thereby forcing himself to save and also create an appreciating asset in that process. He could build a house on it, or sell it and use it as a downpayment for another property, at some future point in time, as and when he can afford the home EMI.

No one told him that a Private University education for his child 10 years from now would probably cost Rs 50 lacs. And the kind of saving instruments he could use for that, so that it is free from financial market risks, appreciates well, forces him to save and also ensures that he won’t sell it for ordinary expenses.

Now tell me, Is it really ethical to advise him to put 100% of his saving capacity in the financial market that is subject to market risks? Something that is easy to discontinue, break and spend? Is it ethical to give him the impression that market investments can augment his income and help him achieve his dreams, which are otherwise difficult to reach in a middle class salaried job?

Why do advisors lack the emotional intelligence and empathy to truly understand their customer’s world?