In case of windfall gains, invest in financial instruments that will take care of your future needs and satisfy your long term investment objectives as well.
Let us take the case the director of a private limited company engaged in the textile business, received a bounty in hereditary. He is very keen on buying a new house and a luxury car, apart from investing a small portion in bank fixed deposits. Is it advisable to spend windfall money or invest it for future? There is no stock answer to this question; it all depends on many factors, like your income strata, age, and philosophy in life and so on.
If the person receiving hereditary bounty or any other person who has the capacity for investment can plan to invest, it should be a well defined investment plan which must be devised after considering financial goals and risk profile.
Study the financial risk involved and take factors like your age, income, future plans, etc. Also take into consideration long term monetary commitments, like for instance kidsâ€™ education costs or their marriage expenses. These will have a direct impact on your risk taking abilities. Now, based on these factors, one should work out his investment objective.
If there are any financial matters that need your immediate attention and investment, attend to them first. For instance, if high cost loans are to be paid off as that result in savings. Then check whether your life insurance cover is adequate or not. Also see that you have enough health care insurance cover.
Segregate existing portfolio of investments into various board categories of financial assets like
* Cash, short term deposits;
* Direct equity exposure;
* Mutual funds â€“ debt and equity mutual funds;
* Fixed interest bearing securities â€“ post office schemes, bank deposits, government bonds;
* Precious metals like gold, silver
* Real estate â€“ residential, commercial property, agricultural land
After this exercise, all assets may be put into a risk matrix according to their risk character – low, medium and high risk. Now you are in a fairly good position to determine where to invest your windfall gains in order to maintain the risk levels that you are comfortable with. Make sure that after your investment exercise, your portfolio is consistent with your risk appetite and investment objective.
In general, it is important for you to periodically review your investment portfolio. The periodicity of review could be quarterly, half yearly, or yearly, depending on the composition of your portfolio and investment objective. This will also ensure reinvestment of returns received on maturity of certain financial instruments, like fixed deposits, bonds etc. You can also explore better opportunities available elsewhere like Initial Public Offerings (IPO) of blue-chip companies, tax efficient and high interest rate bearing instruments.
While investing windfall gain, always think about long term monetary needs and accordingly choose investment options. Avoid reckless spending. Investment in assets with very low risk and low returns or extremely high risk and risk returns could be detrimental. To reduce risk, diversify funds across various asset classes and maintain a good blend of high and low risk assets.