Jayaraman, 50 years, has two children, one daughter and one son. Lakshmi, his 21-year-old daughter, is seeking admission in a foreign university to pursue her Master’s. The total cost is approximately Rs.25 lakh. Fifteen years ago Jayaraman had invested Rs.10 lakh in a vacant plot of 1,200 sq.ft. in his endeavour to secure his children’s education and other related requirements. Currently he is busy arranging the required funds by pledging his family’s accumulated gold jewellery, breaking his half-created retirement corpus and also taking an education loan.
His daughter, not too happy with this development, asked her father why he is not selling the plot and raising funds. Jayaraman said that if he sells now it would fetch him about Rs.75 lakh. But he is not willing to do so because the locality in which he has invested is growing and selling now would put him into loss.
Lakshmi, not too convinced about the rationale, was wondering what would have been the right strategy for her father to have avoided taking a loan, pledging gold and removing money from the savings account despite having a solid investment by way of a property.
As a father Jayaraman was doing the right thing by educating his daughter and exposing her to best of the learning. But as an investor he had failed.
Not the right strat egyBeing cash-wise is to ensure that liquidity based on future cash flow is planned prudently. No doubt real estate is an all-time favourite investment with moderate risk, but for managing cash flow it may not be the right strategy to invest in this asset class.
Moreover, the investment he had done has grown at 14% p.a. in these 15 years which cannot be termed as spectacular considering it is illiquid and not easy to dispose of and have cash in hand.
Jayaraman may have been right in his decision to invest in a plot, but to depend on it to meet his children’s education-related expenses was wrong. The problem with real estate is that it is not liquid and the annual returns cannot be measured accurately unlike debt or equity related investments and also is not tax friendly. Only when the property is sold can the returns be calculated; and importantly the post-tax returns would be the real rate of return.
From the taxation point of view the long-term capital gains after indexation is taxed at 20% and if one has to save the tax burden he will have to further invest for another three years in capital gain bonds, blocking the funds, which makes this asset class very poor on liquidity and may not be helpful to meet regular cash-flow needs.
While asset classes are being chosen people should weigh all pros and cons of each of the investment opportunities, choose a good asset allocation/asset mix and then plan their investments. Since life is full of unforeseen events, choosing and investing based on specific requirements would be prudent.
