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Carrying Cost & Sell Decision

 Assume you have decided to sell an investment. Another assumption here is the said investment is a volatile asset – it’s price can go up or down next year. Only thing holding you form taking the plunge -  the price. You have decided upon a price and will not sell until you get it. You have the capacity to hold. Never mind there is a possibility of the asset price going down instead of appreciating. A certain "price fixation"is probably the most unappreciated part of any sell decision. 

But circling back to the quest for realizing a particular “price” - one mostly fails to consider the number which should be key to “hold for the price” or “sell now” decision -  “The Carrying Cost”. Or, in simpler words – the opportunity cost of holding the sale proceeds of a “fluctuating” investment in a fixed return, risk free kind of asset.

Let’s say you own an investment property – debt free. You have decided you will not sell it below INR 1 Crore. And you don’t mind waiting for a year to realize that price.

What is the carrying cost, assuming pre tax risk free yield you can get is 7%. That’s what 1 year treasury bill is paying right now. Going by this, the carrying cost for a year stands at INR 654,206/-. You can effectively sell your property for nearly INR 6.5 Lacs less right now and end up with same amount of money which you would have got a year later.

Off course one can argue the sale may take less time than a year. Yes it can. Converse can also be true. There’s no end to such reasoning – the objective here is to aware of carrying cost of a volatile investment if you are not getting your desired price. That is, when a sell decision has been made and only thing holding the transaction is the price.

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