Whenever people ask me ‘I have made this investment (life insurance policy, mutual fund, equity shares, house -does not matter) – should I keep it or should I sell it?

Immediately they tell me the cost….paid Rs. 6L premium for 4 years, bought this house for 73 lakhs, …and now the value of the portfolio is Rs. 21L, ….etc.

To me the information I need to be able to take a decision are very different…let me see:

1. I actually do not care what is your cost! I need to know how this amount will be used in the future. If you are going to surrender a life insurance policy invested wholly in equities, take the money and keep it in a bank FD for 10 years, my suggestion would be to continue the life insurance policy. However if you are planning to surrender the Life policy and invest that money in an index fund for 10 years, it would be to surrender the plan.

2. The premium paid vs. the amount you will get: To me it does not matter – I would not say at all! For e.g. if you have paid for 2 years, the policy will lapse if you do not pay the 3rd premium, so my suggestion would be ..pay the 3rd premium.

3. If you are planning to sell the house in a lousy locality and buy in another (read better) locality, my suggestion would be a ‘sell the house’. If you are trying to rent the house, go abroad and ‘wait’ for the prices to improve, it would be NO. Sell it off immediately. Trying to rent something, because you cannot sell it – is poor strategy.

4. If you require life insurance, first take term insurance, then surrender / even think of surrendering the existing plan. That would be the most sensible way to go about surrendering life insurance plans.

5. If the cost structure is high – the recurring costs – makes sense to get rid of the policy. For example if you have a life insurance where you have paid 40% as commission and other one time charges staying longer does not change it. Such costs are called sunk costs, and it should not affect your staying on in the plan. If it is a shit plan, it is a shit plan, get out.

6. The mistake of BUYING a stupid policy happened long back, do not INCREASE your losses by staying on.

7. If you have invested in a well managed mutual fund, invest more, but CLEARLY if you do not have a 5-7 year view, do not be in equities. I am willing to change it to say 4 years, and change the scheme to a 70:30 balanced fund.

….there are more please take the trouble to understand ‘sunk cost’….most journalists will not mention this word in their ‘hold or surrender’ question. tsk, tsk….

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  1. “If you are trying to rent the house, go abroad and ‘wait’ for the prices to improve, it would be NO. Sell it off immediately. Trying to rent something, because you cannot sell it – is poor strategy.”

    I did not get it. Could you please explain?

  2. @Akram Chotu,

    I guess what Subra is trying to tell is that rental yields in India are very low (typically 2-3%). It is better off selling the house and invest in better yielding avenues.

  3. What if my wife is working and taken an life insurance policy.
    Now she is planning to quit, we are thinking of surrendering the policy.
    Is that fine?

  4. Best book on the subject to overcome sunk cost and other behaviour finance mistakes “why smart people make big money mistakes”.

  5. Dilip, you can surrender the policy of your wife if you are not financially depend on her. It is as simple as that.


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