The Hindu Business Line : <I>No child's play </I>

If you are a parent, you know how a child's mind works — tell your child that she cannot have a particular toy and you can be certain that she'll want just that. Adults are no different. The problem is that sometimes such behaviour can affect our economic well-being. How?

What comes to your mind when you think investments? Next to returns, it is mostly the ability to sell the investment whenever you want to. So, what if you are offered a 20 per cent return on an investment that cannot be withdrawn for 15 years?

If you are a typical investor, chances are you will not take up the offer. Why? Your mind works the same way as that of a child's — take away the right to withdraw money and that becomes the most important factor in your investment decision.

My colleague and I faced such a situation when we were constructing a tax-efficient portfolio for a client. Assume our client pays Rs 10,000 as mortgage — Rs 8,000 towards interest and Rs 2,000 towards principal. We showed him how he could use Rs 2,000 per month to build an equity investment for the next 30 years, pay only Rs 8,000 towards mortgage and yet clear his loan faster! The client was not interested because the investment had a 10-year lock-in. This money comes out of his mortgage payment — money that he anyway will not have to spend on himself. Yet, a 10-year lock-in prevented him from making the investment. Often, decisions such as these lead to a high economic cost. Our client may not invest for retirement till he has paid his mortgage. Retiring wealthy will be a distant dream for him till then.

(The author is based in Toronto, Canada)

More Stories on : Economics | Simple Economics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page