What isn't your investment?

Your first house, family jewellery, contingency fund shouldn't be linked to any goal

Have you ever considered whether you have become a crorepati after the price of your house rose 50 per cent in two years? Or, whether you have Rs 10 lakh of family jewellery?

Well, both aren’t your investments, as you consume these — if you are living in the house whose value has risen, it isn’t an investment. This is because if you were to sell it, another house would have to be bought. Also, if the property was bought through a home loan and you are paying the equated monthly instalments (EMI), the actual value of the house, for you, would be much less. For instance, if the current property price is Rs 1 crore and the loan due for the property is Rs 50 lakh, you are a lakhpati, not a crorepati.

Similarly, gold jewellery would be used for marriages in the family, or it would be worn on special occasions. You would only sell these in times of distress; that, too, with a view to replace these someday.

In fact, even the income tax department recognises some of these aren’t investments; it doesn’t include these in the wealth tax ambit. For example, your first house doesn’t come under the wealth tax net; residential property other than one house, guesthouses, farmhouses, motor cars, precious metals, including jewellery, gold, aircraft, yachts, boats, urban land and cash of more than Rs 50,000 do. If these exceed Rs 30 lakh, there is a tax of one per cent. When the Direct Taxes Code is implemented, the threshold limit of wealth tax would be raised to Rs 1 crore. Also, additional assets are proposed to be covered.

When planning for the future, a number of items should be excluded. Financial planner Steven Fernandez, says, “While doing financial planning for a person, we do not link the house (the person is living in) or the jewellery or even the contingency fund to any future goal.”

The contingency fund — salary of at least six months in a liquid fund or simple bank deposit — is part of your liquidity ratio. But here, too, the amount cannot be linked to any future goal such as child’s education, travel or retirement planning.

Many other items should be kept out of the list — collectibles such as stamps and coins, as valuing these is difficult.

A second property, mutual funds, stocks, etc, would come under investment, and these are considered while planning for the future. That is why financial planners insist on separate plans for different goals. For instance, if you want to fund your child’s education 10-15 years later, create a different corpus, with equity mutual funds or large-cap stocks. A short-term goal such as travelling abroad in two years has to be adequately funded through investments, primarily in debt schemes, with a part in large-cap schemes.