Question

This question requires me to make recommendations to a client on how they can reach their financial goals.

The Clients information is as follows:

Inheritance $38,000,

Goal-

Buy a house that costs $340,000 (wants to have a 20% deposit and $5,000 for legal fees) – so needs $73,000. (in the next 5 years)

Different investment choices to choose:

Cash – savings accounts, high interest accounts

Fixed interest – term deposit, government bonds, corporate bonds

Property – investment property or your own home

Shares – Australian shares, international shares, sector specific shares ((Would not commonly recommend)).

The question is as follows – which strategy (investment choices) need to be selected to reach his goal.

Goal – House deposit ($73,000) (next 5 years)

Recommended strategy:

Advantages of strategy [reasons why]:

Disadvantages of strategy:

Alternatives considered:

Answer 1

I am assuming that this question is for an Indian investing in Indian savings accounts/ Indian fixed deposits etc. I am humbly unaware of the interest rates / features of global markets. Reading the question, I get the impression that this is an Australian specific question, details of which I am not aware of. But by going through the answer, one will get a broad guideline of answering the question.

The client receives today $ 38,000. by the end of five years he needs $ 73,000

Option 1 : Cash - savings accounts - savings accounts in India yield 4%. Over a period of five years, 38000 *4% is the annual interest = $ 1520. Interest over five years = $ 1520*5 = $ 7600. Resulting amount at the end of five years = $7600 + 38000 = $45600. A 100% investment into savings account will not help the client attain his goal. Additionally, this doesnt assume any tax implication of the same.

Option 2: FD interest is at 8%. 38000 *8% = $3040 is the annual interest. Interest over five years = $3040 * 5 = $15200. Resulting amount at the end of five years = 15200+38000 = $53200. A 100% investment in FDs will not help the client attain his goal Additionally this doesnt assume any tax implication of the same.

Option 3: Property - I would not recommend investing in property over a five year horizon, as property can be illiquid, and might result in a sale at the end of five years, at the low end of a cycle. Investing in property requires a longer horizon period.

Option 4: Shares: Assuming a return of 12% on shares = a sum of 38000 would become = 38000* 1.12^5 = 66969. This would not satisfy the client's goal.

Recommended Strategy:

Reduce the house price that the client intends to buy at the end of five years.

Invest in a debt mutual fund that returns 8%, gradually transferring the money over a 2 year period into the share market. A one time investment into the market as in option 4 is not recommended as timing the market is impossible. so treat the lumpsum inheritance as an investment into a debt mutual fund, and gradually move the money into shares.

If at the end of five years, the share market is experiencing a downturn, reconsider the investment of buying a house, and wait for the market to recover.

Market Strategy:

Would recommend investing in diversified equities and to diversify geographically as well, across developed, developing and emerging markets.