Factors to consider when investing additional income

0
Jai was offered an overseas project that requires him to stay overseas for three years. He recently married and sees this position as an opportunity to earn additional income. He thought about how he should invest the surplus he would earn abroad after covering all the major expenses. His friends suggest he buy a house in Delhi, where he is likely to return after his international assignment. His parents believe he should accumulate savings in safe instruments such as bank deposits. His wife thinks they should buy some gold jewelry and invest the rest. What factors should Jai take into account before making his decision?


Jai is still at the very beginning of his career. The additional income that he would derive from his assignment allows him to build up an estate. However, the main consideration should be to ensure the flexibility to use the assets that it will build, according to its needs. The objectives that should guide its choice are the growth of value over time and the liquidity to access funds when needed.

Buying a home in Delhi could be an attractive choice for possible appreciation in value. However, if Jai’s assignment is extended, or if he chooses to work elsewhere, or if his performance translates into more international assignments, the investment in the house may be of little use to him. At a time when career choices require flexibility, home is an inflexible investment. Jai could make a smaller investment in a house, with the explicit intention of selling and releasing the funds if necessary. He should refrain from buying a dream house with his newfound wealth when it is not known whether he would live in that house.

Buying gold would also be a limiting choice, as it can turn out to be an illiquid investment and carry a high emotional price. The choice to have his wife dispose of the jewelry could be expensive and difficult to make. Bank deposits are a safe choice, but do not bring growth in value. I might be better off choosing a mix of investments in the assets on offer, keeping a small investment in a house that he might be willing to sell if needed, a proportion of jewelry to keep the woman happy, and a certain amount in bank deposits and mutual funds to provide immediate liquidity and greater flexibility.

(The content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava, and Labdhi Mehta.)


Source link

Leave A Reply

Your email address will not be published.