How should a young investor deal with a new inheritance?

Shaila Shah has just inherited a house from her deceased grandmother. She lives with her husband and child in Mumbai. She paid a high rent during the first three years of staying in the city, but did not have adequate income to afford a property. Her husband thinks they should sell the property and buy a new one, since the EMI will be lower if a large sum is paid after selling the house. How should Shah deal with her new inheritance?

Young investors like Shah are unlikely to have built a lot of wealth. The inheritance makes her wealthy, but comes with inflexibilities. It will not be possible for her to access parts of the property's value for any need. It is a bulky asset, which can be sold to realise its worth, or can earn a small rental yield. It's usefulness for Shah lies in its ability to help her save more than she did earlier.

Since there is no rental outgo now, Shah can use the savings to build wealth in addition to the new asset. If she builds equity and debt assets with the savings, in a few years, she will have a balanced portfolio that will be more accessible and flexible. So, if she wants to provide for the education of her child, she may not be able to sell the house, but can liquidate the investments she makes from the rental savings.

Selling the house to buy a new one might constrain Shah unless the latter costs the same. Adding an EMI to income at this stage will reduce her ability to save and concentrate her wealth in a house. She will also incur additional costs on stamp duty, registration and fees, besides the interiors of the new house. Shah should use her inheritance to augment her savings, and should take on any other commitment only when her finances are on a firm footing.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre and Arti Bhargava.