Investment Choices: Rs 20 Crore Upfront vs Rs 11 Lakh Monthly

The choice between receiving a large sum of money upfront or more modest installments over time is a critical decision in financial planning. Let us analyze the two options—Rs 20 crore (200 million Indian rupees) upfront versus Rs 11 lakh (1.1 million Indian rupees) every month for 20 years—to understand the implications and factors involved.

Rs 20 Crore Upfront

Receiving Rs 20 crore upfront offers a range of investment opportunities:

Invest in bank deposits, gold, or the stock market Consider lending out the money with a small interest rate and earn income from loans Purchase a property or buy multiple shops Consider constructing a building which can be sold for a good value

Each of these options presents unique benefits but also comes with its own set of risks and requirements in terms of strategic planning and implementation.

Economic Analysis: Time Value of Money

When comparing Rs 20 crore received now versus Rs 24 crore (Rs 11 lakh per month for 20 years) received over time, we need to consider the time value of money. Money loses value over time due to inflation. Here, we use an average inflation rate of 3.5% per year.

Rs 24 Crore in 20 Years:

Using the formula (24 / 10.035^20) 12.06 crore, we find that 24 crore in 20 years is equivalent to only 12.06 crore today. This makes the upfront payment of Rs 20 crore more attractive, assuming an equivalent return from both options.

Tax Implications and Recurring Income

Rs 20 Crore Upfront: If we consider a hypothetical 43% tax rate on the income, Rs 8.6 crore is deducted for tax, leaving 11.4 crore. Without recurring income, there is a higher risk of wasting the money or not fully utilizing it.

Rs 11 Lakh Monthly: Receiving Rs 11 lakh monthly offers a more sustainable cash flow. Assuming a tax rate of 34%, Rs 7.14 lakh is retained monthly. This recurring income can be carefully managed to avoid waste and facilitate long-term financial goals.

Park in Fixed Deposits

If the upfront amount is parked in fixed deposits (FD), it can generate approximately 40 lakh (400 thousand) annually. Post-tax, this results in about 30 lakh (300 thousand) each year. Over the initial years, one might live a comfortable life earning this amount. However, the individual must develop skills in wealth management, eventually generating 15% returns on progressively better assets. Rs 20 crore is substantial for a beginner, and it takes time to fully grasp how to utilize this money effectively.

Concluding Analysis: Time Frame Matters

The better choice depends on the time frame:

If there is no cap on when the Rs 20 crore can be used, then receiving Rs 11 lakh monthly is preferable as it will grow to Rs 21 crore in 16 years and more in the long-term. In a 15-year timeframe, receiving a lump sum can be more beneficial. Beyond 20 years, the monthly installment becomes more advantageous.

Ultimately, careful consideration of financial goals, tax implications, and personal preferences in managing funds over time are essential for making an informed decision.