Fin2

How to save on home loan outgo Vidyalaxmi & Preeti R Iyer in Mumbai | December 06, 2005 13:36 IST

Shreya Kshirsagar is a diamond merchant having an average holding of Rs 400,000500,000 in her savings bank account. When she went on a house-hunting spree, her financial advisor suggested that she opt for a home loan, directly linked to her savings bank deposit amount. Shreya paid a visit to her bank, and applied for a loan of Rs 10 lakh (Rs 1 million). The interest cost for she was only on the amount arrived at after deducting the her savings account deposit from the outstanding principal loan amount. This means she had to pay interest on Rs 5 lakh (Rs 500,000) in the first month. ICICI Bank's Money Saver, HSBC's Smart Home, Standard Chartered Bank's Home Saver and Citibank's Home Credit Scheme are the savings account-linked home loan products that offer an alternative to the vanilla home loan products. The floating interest rate on the savings-linked loan offerings is currently 8.25 per cent, except for ICICI Bank which charges 8.00 per cent. On a normal housing loan, customers would pay interest in the range of 7.5-8.00 per cent. The 75 basis points difference would entice you to go in for the vanilla product. But the principal component in the equated monthly installments in the initial years will be larger and, hence, the interest on the larger principal amount will obviously be higher. So, is the savings account-linked housing loan the right option for you. Typically, if you are a customer having a business banking account with one of these banks, and are able to channel all other funds at your disposal into this account, such a product would serve as a viable proposition. So, even if you shell out a higher interest rate of 8-8.25 per cent, vis-a-vis the normal rate of 7.5-8.00 per cent, you still stand to gain because of the lower base of the principal outstanding. You could well end up finishing with a reduction of around 45 per cent of the period taken for repayment and 50 per cent of the interest cost. Obviously, actual interest cost for you will depend on the balance in your savings account. Let us take a close look at what banks have to offer:

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HSBC has capped the minimum and maximum loan sizes at Rs 5 lakh (Rs 500,000) and Rs 1 crore (Rs 10 million). However, for Mumbai and New Delhi, the maximum is fixed at Rs 2 crore (Rs 20 million). ICICI Bank offers loans between Rs 200,000 and 85 per cent of the total property cost. Citibank, on the other hand, loans in the range of Rs 210,000 to Rs 1 crore. You can borrow any amount within these limits, provided the amount to be borrowed is less than 80 per cent of the property value. Following a different route, Standard Chartered Bank offers loans from Rs 50,000 to Rs 15 lakh (Rs 1.5 million) depending on eligibility norms in respect of the borrower.

But are these loan products for you? They clearly cater to the mass affluent and the high networth segment. If you are a typical middle-class customer and sole bread-earner, it could be a daunting task for you to maintain sizeable balances. Do not get flattered by the lesser monthly outgo, never know you may end up paying a higher price for not maintaining a consistent balance. So, go in for it only if you are confident of always maintaining higher balances in your account.

Why you must insure your home loan Vidyalaxmi in Mumbai | December 20, 2005 10:56 IST

You always dream of owning a house. Most of us go ahead and even borrow the required funds to meet our dreams. But, have you ever thought of an unfortunate situation in which you would be unable to pay the outstanding loan amount. You would certainly not want to put the burden of repaying the outstanding loan on your dependent family members. There's help at hand in the form of insurance cover on payment of a small premium. For example, you avail a loan of Rs 15 lakh (Rs 1.5 million). In addition to the equated monthly instalments (EMIs), you can opt to pay an additional premium of Rs 500 to avail of an insurance cover. This cover ensures that the outstanding loan is repaid if the borrower dies during the term of the loan. Banks like State Bank of India and Bank of India offer home loans which take care of uncertainties such as death of the primary borrower.

The life cover is equivalent to the outstanding loan amount as per the original repayment schedule of the loan. It protects the home loan borrower against death due to any reason except suicide in the first year of cover. In the event of death, the insurance company pays the sum assured directly to the Bank. The borrower does not have to undertake any medical examination up to Rs 7.5 lakh (Rs 750,000) for borrowers in the age group of 18 to 60 years and Rs 3 lakh (Rs 300,000) in the age group of 61 to 65 years. The State Bank of India has an arrangement with its insurance arm, SBI Life, to protect its home loan customers. Recently, Dewan Housing Finance Limited also tied up with SBI Life to offer a similar product. Bank of India followed suit by tying up with the leading private life insurance company, ICICI Prudential Life for the same. The cover is basically group insurance negotiated by home loan providers for their borrowers. The mortgage term assurance provides insurance at up to 50 per cent lower rates than an individual policy. There is also a flexibility given to the customers. One can either opt for payment of premium on a monthly basis or for a one-time payment. In the case of one-time payment, the amount is added to the home loan amount and equated monthly instalments are calculated on the total amount. In the case of monthly premium, the amount is added to the loan EMI. The pricing of premium is determined by the borrower's age, the term of the loan and the quantum of loan. The minimum amount of premium is Rs 500. Both individual and joint home loan customers are eligible for life insurance cover for a term between 5-20 years. In case of joint home loan customers, the younger borrower can get life insurance cover at 50 per cent of applicable premium. Borrowers in the age group of 18-60 years are eligible for this cover, and the maximum cover is capped at 71 years. However, to drop a word of caution here. It is a term insurance product. In simple words, a borrower will not get back the premium paid if he/she lives on beyond the loan repayment term. Home loan insurance cover is still a step worth taking for an individual. The amount paid as premium over the term of the loan will aggregate to a meagre sum, but the protection it provides would be huge. If a borrower payers Rs 500 per month over 15 years for the insurance cover, the total premium paid will amount to just Rs 7,500. How to qualify for a home loan December 21, 2005 13:30 IST

Home loan interest rates have inched up in the last few months. This in turn, has affected the loan eligibility for home loan borrowers. Loan eligibility is inversely related to rates. As interest rates rise, loan eligibility becomes stiffer. In such a scenario, some home loan borrowers might have to re-evaluate their options (in terms of loan amount) on account of the new eligibility criteria. We present 5 ways by which individuals can enhance their home loan eligibility. 1) Increasing the loan tenure One very elementary method of enhancing the home loan eligibility is by opting for a higher tenure. This is so because the EMI (equated monthly instalment) per lakh, which an individual has to pay, starts to decline as the tenure increases. The reason being that other factors like interest rate as well as the principal amount remain the same, despite the higher tenure. What changes though, is the net interest outgo, which rises with a rise in tenure. And since the individual is paying a lower EMI now, his 'ability to pay' and therefore his loan eligibility, automatically increase. 2) Repaying other outstanding loans Individuals with outstanding loans like car loans or personal loans may face a problem with loan eligibility; the same might adversely affect their home loan eligibility. Industry standards suggest that existing loans with over 12 unpaid instalments are taken into account while computing the home loan borrower's eligibility. In such a scenario, individuals have the option of prepaying in part/full their existing loans. This will ensure that their eligibility for the home loan purpose is unaffected. For example, if the home loan seeker has an outstanding personal loan, where 16 EMIs remain to be paid, then he can prepay the same and approach the HFC with a clean slate. Alternately, he also has the option of prepaying 5 EMIs thereby ensuring that the existing loan liability doesn't impact his eligibility for the home loan. 3) Clubbing of incomes Another way of increasing loan eligibility is by way of clubbing incomes of spouse/father/mother/son. An illustration will help in understanding things better. Suppose an individual's loan eligibility, based on his income, works out to approximately Rs 1,000,000 for a given set of criteria. But the individual wants a loan worth Rs 20,00,000. Assume that this individual's spouse too is earning a similar annual income. In

such a case, the individual can club his spouse's income along with his own income and then opt for a home loan. The eligibility in this case, will be calculated on the clubbed income of both husband and wife- thereby enhancing the individual's eligibility to the extent of the spouse's income. In our example, the eligibility will now stand doubled at Rs 2,000,000 from Rs 1,000,000 earlier. 4) Step-up loan Individuals can also opt for step-up loans and enhance their loan eligibility. Simply put, a step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced during the rest of the loan tenure. For example, a Rs 1,000,000 home loan at 7.5% for a 20-year tenure would imply paying an EMI of Rs 6,760 the first 2 years and Rs 8,340 for the remaining tenure. HFCs usually consider the lower EMI of the initial years to calculate his loan eligibility. The initial lower EMI helps increase the individual's 'capacity to borrow.' 5) Perks Salaried individuals must ensure that variable sources of income like performance-linked pay among others are taken into consideration while computing their income. This in turn will imply that the loan amounts they are eligible for, stand enhanced as well. As can be seen, there are many ways to increase loan eligibility. However, individuals need to keep in mind that increasing the eligibility can have an impact on their financial planning. For example, if an individual decides to prepay an existing personal loan for the sake of becoming eligible for a higher loan amount, he might be faced with a cash crunch. Hence a detailed scrutiny of one's financial standing is warranted before opting for an inflated home loan. The examples in this note should only be treated as illustrations. Individuals need to work out solutions best suited for their profile after speaking to their home loan consultant and only then consider acting on the options discussed.

Now, pay more for your home loans Rajendra Palande in Mumbai | December 22, 2005 10:07 IST

The resources-starved state governments are latching on to every avenue for boosting revenues. Recent reports talked about Rajasthan government objecting to insurance companies issuing policies at a central location andpaying stamp duty in the state where the policies are printed. The Maharashtra government has now amended the Bombay Stamp Act to levy stamp duty on all loans including those taken by individuals. So home loans, personal loans, consumer durable loans and all other retail loans now attract stamp duty. When you took a housing loan till now, all that you paid as stamp duty is Rs 100. That's when the lender made you sign the loan agreement on a stamp paper of Rs 100. There was no such levy on other loans taken by individuals. All this has changed now in Maharashtra, which accounts for nearly one-third of all loans given by the banking sector. Home loan seekers will now have to pay 0.25 per cent more upfront for loans upto Rs 10 lakh (Rs 1 million) and 0.50 per cent for loans over Rs 10 lakh. For all other retail loans, stamp duty will be 0.25 per cent of the loan amount. Banks are asking the government to reconsider its decision with regard to home loans as the loan seeker also pays a 10 per cent stamp duty on the purchase value of the house. The Article 6 of the Bombay Stamp Act, 1958 provides for agreement relating to deposit of title deeds, which means there shall be an agreement relating to deposit of title deeds which shall attract stamp duty as prescribed. Banks are, however, arguing that it should also be noted that the applicable substantive law for the mortgages of the central government, viz Transfer of Property Act, 1882, recognises and in turn permits creation of mortgage by deposit of title deeds without any requirement of execution of any document for creation of mortgage. Hence, there cannot be any stamp duty on deposit of title deeds. If the state government accepts this argument, then home loan borrowers might be spared of having to incur an additional expenditure. But representations for exempting other loans availed by individuals frompayment of stamp duty might not be exempted.

Cash back? Don't miss the details Preeti R Iyer in Mumbai | November 11, 2005 10:40 IST

Thirty-five year old Shagun Saxena was out shopping at Mumbai's famous shopping arcade, High Street Phoenix. What prompted her to loosen the purse strings a bit more this Diwali was an HSBC hoarding that Shagun saw on her way to the mall, announcing a 10 per cent cash back offer on all purchases made between 15 September and 15 November 2005 in listed categories, which included apparel, jewellery, electronics, consumer durables, et al. What Shagun failed to notice was the maximum cash back limit capped at Rs 1,000. So no matter how much purchases she would make, she would earn cash back only for expenditures undertaken up to Rs 10,000 i.e. 10 per cent. So while Shagun expected a cash back of Rs 4,000 on the Rs 40,000 worth purchases she made, the actual amount that she would get back is only Rs 1,000. So the first lesson before shopping in haste is to understand that the devil is in the details. Blaming the bank is patently unfair. How can you avoid making such a blunder? First of all, try and figure out whether the offer that is advertised on every billboard, newspaper and television channel you come across, is available on the card you hold. Many banks offer this privilege to only selected card-holder categories. Some of them even make it mandatory for card-holders to register themselves via a telephone call for this offer. The other hitch is the limited offer period. Most of these offers are on hold only during the so-called festive season, i.e. till the end of November -mid-December. And then there are hidden costs. Others like Citibank ask customers, wanting to avail of the cash back programme, to apply for a separate cash back card. Anupama Hariharan, for example, never thought what would then happen to the cards she already held while applying afresh for the Citibank Cash Back Card? Even if she stopped spending on them and used only the cash back cards, she had to make annual payments towards maintenance charges on them. Also the cash back offers sometimes can make you purchase much more than what you had originally intended. So availing the cash back can sometimes mean that you end up paying more. Pune-based small-time businessman Aiman Khan wanted to buy his daughter a new set of clothes for Eid. He spotted a beautiful salwar-kurta set for Rs 750, but still didn't buy it. Why? because he wanted one that would cost at least Rs 1,000 to be eligible for the cash back offer.

Private sector ICICI Bank has announced a scheme of 10 per cent cash back for bills paid via the savings bank account between October-December. Seems rewarding at the outset, but a closer look may force you to take a relook. The maximum amount offered as cash-back here is again capped at Rs 1,000, although the scheme also suggests that the maximum amount of cashback paid will be 10 per cent of the total amount of bills paid during each period. So even if you pay bills worth Rs 25,000 expecting to get cash back worth Rs 2,500, you would actually receive only Rs 1,000. In a nutshell, you should check the period of validity on the cash back offer, the minimum and maximum limits and the cards on which the offers are available. So before your banker sends you a new promotional offer, be ready with your questions and queries. Penny wise • • • • • • • •

Check if the card falls under the offer category If one needs to register for earning cash back, via a phone call or an online registration form Should one apply for a new card meant only for cash back Minimum expenditure needed to qualify for the offer Maximum amount one can earn by way of cash back; The period during which the offer is valid Does the offer apply at outlets having point-of-sale terminals, or should the purchases be made only where the card-issuing bank has installed such terminals? The products categories, which are eligible for the offer Should cash back be collected at bank branches, redeem them at the POS outlets, or will the amount get credited automatically in the card-holder's savings account.

Your PC can help you make millions Larissa Fernand | November 11, 2005 12:10 IST

For someone who claims to be an avid stock market trader, Nalin Pasricha is fairly 'chilled out'. By 11am, most traders would already be into the thick of trading, aggressively trying to cut losses or hit home runs.

But you won't catch Nalin with the phone to his ear or eyes glued to his computer screen. On the contrary. He has a fairly flexible agenda interspersed with periodic checking of the market. Does he have a lot of flunkies to do the job? Nope. It's a one-man show. Yet, by the end of the day, he would have completed at least a few crore in volume for himself and his clients. And his returns? An average of over 100 per cent per annum. The number of stocks he would have traded in? A maximum of (just) 30. These chosen few are selected from various sectors and are available for derivatives trading on the National Stock Exchange. How does he manage that? Upfront, Nalin comes clean: "I am not an investor but a trader." A derivatives trader, to be more precise. An investor will think long-term, analyse the fundamentals of the company before taking a buy-and-hold position and then hope to benefit by dividends and compounded business growth leading to a substantial capital gain. A trader is not that far sighted. His rationale: even if a stock continues a gradual upward trend, there is money to be made in the journey. Every climb and descent has potential for returns. You make money when the market is going up or down. If you keep buying and selling at various positions, you would end up continually making (and even losing) money. It is at this juncture that Nalin parts company with other traders. Most are discretionary traders but Nalin is a systematic trader (a rare breed in India). Discretionary trading is subjective. Based on news, market information, research and technical analysis, a decision is made on entry, exit and position size. A systematic trader relies on the decisions generated by his software programme. Based on mathematical relationships and various inputs, the system operates on a set of rules. For instance, a very simple rule put into the system could be: Buy when the PE goes down for three consecutive days and sell when it goes up for five consecutive ones. The system would automatically buy and sell based on these rules.

Does systematic trading work? If past performance is anything to go buy, the answer is a resounding yes! A walk into the past A chartered accountant by profession, Nalin found himself working as an investment banker (a job coveted by others but detested by him) with Jardine Fleming and J P Morgan. One night, a friend in the Navy invited him over for a meal and asked him to verify a trading system that timed the market. The first trade his friend gave him was: Buy RIL on Wednesday, sell on Thursday. Totally flabbergasted and cynical, Nalin did so. It worked. Then he did it with Dr Reddy and a few others. It worked again! Well, almost (there were losses too). Intrigued, he decided to pursue this. Another friend who raked in big bucks just by investing on fundamentals told him he was barking up the wrong tree (he heard this a lot). Partly out of a passion to make money out of this system and partly out of a desire to silence his skeptics, Nalin got cracking (at the cost of putting his career in investment banking on the line). Starting 2002, Nalin spent a year (unemployed and avoiding skeptics) focussed solely on research, study of quantitative analysis, mathematics, statistics and computer programming to come up with a system. He purchased NeuroShell Trader for over Rs 100,000 and Wealth-Lab Developer for around Rs 25,000. Both were software trading development platforms to help launch his product. Not making much of a headway, he almost gave up. Thanks to a stranger-than-fiction coincidence, he came across a paper authored by Xavier Gabaix, then assistant professor of economics at Massachusetts Institute of Technology, and a few physicists. The paper, published in Nature (May 15, 2003), claimed that just as it was possible to determine an earthquake, it was possible to determine the direction of the market. The essence of the paper was that the artificial world (stock market) follows a similar pattern to that found in the natural world. So though the stock market is characterised by a fair amount of randomness, at the end of the day, a pattern emerges that matches powerlaw (mathematical relationships between the frequency of large and small events) patterns found empirically in data from systems such as earthquakes. Totally fired up, he once again tried his hand at it. This time, he came up with a product which he called Seismo (in honour of the above paper which set him down this path).

He then spent months back testing the system. His software combines trend following and anticipatory systems. So if the market is on a rise, the system goes long and if it is sliding downward, it goes short. This way, it follows the trend. Simultaneously, it also predicts the direction of the market with advanced mathematical computations. But here too, the predictions are just for a few days, not long term. The rules his software follows are based on a variety of inputs such as price trend of the stock, volumes traded, interest rates and data from the derivatives market. Though he has been trading using other systems for the past three years, his product Seismo - was ready by August 2003. Every evening, he looks at this software and sees the recommendations on each stock. By 10 am the next morning, he places the trades. Where's the catch? Nalin has been trading in such a way for the past three years. Which brings us to the perennial question asked of traders: How has he fared in a prolonged bear market? In a bull run, everyone and his aunt, would have made money. But the test of a savvy trader is how much of dust he manages to kick up when the bears are doing a jig on Dalal Street. Nalin has not had the experience of systematic trading in a bear run so all we have to go by is how he has traded with sharp corrections. May 17, 2004 As news of NDA's (National Democratic Alliance) defeat began doing the rounds and Leftist leaders started shooting their mouths off, the stock market fell precipitously. The Sensex fell 842 points during the day and recovered around 300 points. At the end of the day, when the stock market closed for trading, the Sensex had fallen 11.41 per cent or 565 points -- the second biggest fall in the history of the Bombay Stock Exchange. The Nifty opened at 1582 and closed at 1388. That day, when other traders would have lost their shirt (and probably their pants too), Nalin could not wipe the grin off his face. He made a cool 50 per cent profit on his personal portfolio. One of his clients booked profits midway through the day and landed up with a 60 per cent profit. All he did was short sell and leverage. Or rather, his system did so.

October 2005 The market turned volatile and the much talked about, inevitable correction took place. Nifty touched a high of 2699 and a low of 2390 that month. Overall, the market dipped 8.85 per cent. He made a 25 per cent return on his portfolio. Does that mean his software generates phenomenal returns consistently? He himself is quick to refute that claim. Here's how he explains the downside. On an average, around seven months in the year will make money. So, if you invest Rs 10 lakh (Rs 1 million), you should make around Rs 300,000 a month, which will translate into an annual earnings of Rs 21 lakh (Rs 2.1 million). The losses for the balance five months would be around Rs 200,000 per month, which will total to around 10 lakh (2 lakh x 5 months). The net profit per annum on Rs 10 lakh, would be Rs 11 lakh {(Rs 1.1 million) over 100% return}. Nalin also clarifies that a single year may not give an over 100 per cent return, but over a few years, it all averages to that. So who does he trade for? He refers to himself as a prop trader. Nothing to do with real estate; its an abbreviated version of proprietary trader. When a financial firm trades in stocks, bonds, derivatives or commodities with its own money (and not those of its clients and customers) and with the sole aim of making a profit for itself, it is referred to as proprietary trading. Sometimes, they hand over the task to another (like Nalin). He gets a percentage of the profits. His clients are stock brokers, trading companies, corporates and high networth nonresident Indians. Ask him to name a few and he does not oblige - breach of confidentiality, he says. Ask him how much he makes and all you get is a grin in response (a very self satisfying one). Taking into account that he gets 25 per cent of the profits of his clients (no other fee is charged) and the fact that he actually trades for himself, you can just let your imagination figure that out. Not bad at all for someone who spends the better part of his day 'chilling out' and figuring out how to upgrade his system to come up with a version for commodities trading

Want to be a guarantor? Think twice November 14, 2005 13:14 IST

The practice of asking for guarantors for home loans by housing finance companies is slowly on the wane now. However, under certain circumstances, HFCs even today ask for a guarantor to a home loan. In this note we explain the implications of being a guarantor for a home loan and how it affects an individual's home loan eligibility. Simply put, a guarantor is someone who is 'liable to pay' in case the original home loan borrower (i.e. the 'guaranteed') makes a default on his home loan repayments. In such a scenario, the HFC will ask the guarantor to cough up an amount equal to the default. Guarantors therefore need to be very sure about the credibility of the borrower before agreeing to become his guarantor. Becoming a guarantor also affects an individual's 'capacity to borrow' adversely. An illustration will help in understanding things better. Want to be a guarantor? Think twice Table A

Table B

Monthly income (Rs)

40,000

Monthly income (Rs)

40,000

(Assumed) Income available for

20,000

(Assumed) Income available for

20,000

EMI payments (i.e. 50% of Rs 40,000) (Rs) Rate of interest (%) Tenure (Yrs) EMI (Rs) Home loan eligibility (Rs)

EMI payments (i.e. 50% of Rs 40,000) (Rs) 7.50 20 806 2,482,000

Less: Friend's EMI (Rs) (Revised) Income available for EMI payments (Rs) Rate of interest (%) Tenure (Yrs) EMI (Rs) Home loan eligibility (Rs)

8,000 12,000 7.50 20 806 1,489,000

Suppose an individual is earning a monthly income of Rs 40,000. Based on this amount, a certain HFC, say A Ltd, will assume 50 per cent of his income as being available for making EMI payments. In this example, it works out to Rs 20,000 (i.e. 50 per cent of Rs 40,000). Assuming an interest rate of 7.50 per cent for a 20-Yr tenure, the EMI per lakh works out to Rs 806. As table A shows, based on the figures given above, the home loan eligibility works out to approximately Rs 2,482,000. Click here to know your home loan eligibility

Now assume that the individual has stood as a guarantor for a home loan worth Rs 1,000,000 taken by his friend and the EMI on the same is approximately Rs 8,000. The HFC in this case, will work out the home loan eligibility for this individual as shown in table B above. As per table B, the individual's income available for EMI payments remains the same as before i.e. 50 per cent of his monthly income. However, an additional amount of Rs 8,000 is deducted from the said 'income available' by the HFC. By doing so, the HFC safeguards itself against future 'probable liabilities' in case the individual's friend defaults in making his EMI payments. This exercise brings down the individual's income available for his own EMI payments down to Rs 12,000. Other factors remaining the same, the revised home loan eligibility now works out to approximately Rs 1,489,000. So does being a guarantor mean that an individual will not be eligible for a regular loan amount? Not quite. An individual can notify the HFC as well as the borrower (for whom the individual has stood as guarantor) that he wishes to cease being a guarantor to the amount borrowed. The HFC may then ask the borrower to make alternative arrangements for another guarantor. In such an instance, the individual will then be eligible for a regular loan amount, which is in tune with his income. Some figures in the illustrations above have been rounded off for ease of calculations and better understanding for the reader.

How you can be RICH without much risk Sandesh Kirkire | November 15, 2005 06:36 IST

The concept of savings and investments has noticeably changed over the years. The time has come when every individual and prospective investor should realise the significance of these two words and learn to differentiate between them. Evolution of lifestyle and our savings In order to understand the significance of investments today, it is essential to look into our lives and analyse our needs for the present and the future. The situation has changed from the period of our parents and grandparents when they considered their savings would suffice through their lifetime.

Although the core ideas behind savings have remained much the same -- such as emergency needs and social needs -- there has been the introduction of aspiration needs as well. The fact that aspirations have become realisable has furthered this need. • •

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This is evident from the fact that the average age for house owners was 42 years in late nineties as compared to about 34 years now. The aspirations of flying abroad for holidays, maintaining a certain lifestyle, quality education for children and various personal goals have come within the reach of the people. The consumer revolution and the easy availability of loans for almost every purpose have increased the household liabilities many fold. In fact, the average retail liabilities of the country have jumped to above Rs 2 lakh crore (Rs 2 trillion).

The result of this change has been an increased need for money, which at times becomes difficult to be met by simply saving. The savings philosophy too seems to have changed. Earlier savings preceded expenditure while it is now vice-versa. Simple forms of savings in the form of deposits or administered savings are no longer sufficient to meet the ever-increasing requirements of the household. Thus the time has come to save intelligently through the various avenues of investment. It is essential to note that it is no longer sufficient to 'save' -- the need of the day is to 'invest'. India's domestic savings as a percentage of our GDP stand at 28 per cent -- one of the highest in the world. A significant proportion of this savings is in the forms of fixed deposits that fetch an interest below the rate of inflation and are further reduced after taxes. This reflects that we are losing a significant proportion of our savings by allowing inflation to eat into it. The time has come for us to look at investment avenues that can beat inflation and help our money to grow further in order to meet our future requirements. Investments in various forms will enable us to meet inflation and protect our purchasing power along with aiding us to generate a sustained income post retirement. Not investing in equity could mean a higher risk Investments can be regarded as secondary source of income where we allow our money to grow for the future. One of the available investment avenues is equity-related investment, where currently only 2-3% of household savings are invested.

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One of the reasons why there is an under-ownership of Indian households into equity asset class is the availability of assured return investment options. Now with the structural decline in interest rates, the returns are likely to be largely commensurate with the underlying risk. The high return-low risk syndrome will have little place in the fast changing investment landscape in India. Indian investors have been traditionally risk-averse. They need to appreciate that buying into an equity share is buying a part ownership of the company. As there is the case with any business, the gestation period would be longer, say 2-3 years or so. There could be volatility in the intermediate period; however, the returns are worth the wait and the intermittent risk. By not investing in equity investors feel that they are avoiding risk but they may be taking a greater risk since their investments will be unable to cope with inflation and tax.

The figure below clearly highlights that on 20 years CAGR equity as an avenue of investment has outperformed inflation and other significant investment avenues. Ask yourself, "Have your savings grown post-tax, post-inflation?" It has been statistically proven in many markets, including ours, that over time, equity outperforms most asset classes. It helps to think of risk as an opportunity. "Nothing ventured, nothing gained" applies just as much to the stock market as to other aspects of life. The markets have become very volatile and are dominated by wholesale investors. Such wholesale investors do extensive research on all the companies that they invest in. The markets today discount the forward performance in advance and the stock prices merely adjust depending upon the quarterly performance.It, therefore, becomes very difficult for a lay investor to track corporate performance on a continuous basis. It is here that the mutual funds offer adequate diversifications. Mutual funds: A proven investment vehicle Mutual funds allow investors to reap the benefits of a diversified, well researched and an actively managed portfolio, without having to worry about liquidity. In several developed countries, the mutual fund industry is a bigger financial intermediary than even the commercial banks. For example, in the United States, the assets under management are larger than the aggregate bank deposits. The relative size just goes to prove the role of mutual funds in wealth creation for investors at large. In India too we anticipate a higher allocation of household financial savings in securities market, through the professional managers. The power of active funds management

Consider the performance of mutual funds over the last 10 years, as on August 11, 2005. The average returns of the top 5 diversified equity mutual fund schemes is 24.69% CAGR, whereas the BSE Sensex has grown by only 8.66% CAGR. It implies that Rs 100,000 invested in mutual funds 10 years back would have grown to Rs 9.08 lakh, whereas the same amount invested in BSE Sensex companies would have grown to only Rs 2.29 lakh. This is the power of active management of your assets. Systematic Investment Plan: An effective solution The secret of wealth creation through investments lies in disciplined investments and not in being lucky. The performance of equities is affected by the volatility in the market. Market sentiments act as a driver for equity investments pegging them down or pulling them up at times. The mutual fund industry provides a solution to all these aspects in the form of Systematic Investment Plan (SIP). The idea of Systematic Investment Plan consists of providing fixed amounts of investments at regular intervals and in the same scheme. In terms of pattern, it is comparable to paying monthly installments in the form of EMIs (equated monthly instalments) for asset-finance. SIP can be used as an ideal investment avenue to meet the increasing load of liability that has entered the life of Indian consumers today. • • •

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SIPs help make the volatility in the market work in favour of the investor. If the same amount is invested at regular intervals of time, the purchase cost will be averaged out. When the NAV of the scheme is increasing, the average cost of purchase of units will be less in the case of an SIP. In the very opposite situation where the NAV is falling, investments in an SIP will allow the investor to buy more units in the scheme. One of the most significant benefits of SIPs is the advantage of compounding about which Benjamin Franklin had once said "compound interest is the eighth wonder of the world." Finally another advantage of SIP is the available convenience with which an investor can invest in the available schemes. The amount of savings to be invested monthly can be decided at the convenience of the investor.

Early investing has its advantages. Consider the following example: Suppose you start investing in a 35 (age) 45 (age) diversified equity mutual fund through an SIP at age Your monthly investment Rs 5,000 Rs 5,000 You stop investing at age. . . 60 years 60 years Your total contribution Rs 15,00,000 Rs 12,00,000 Assuming compounded annualized returns Rs 137,82,803.88 Rs 66,35,367.20 from the fund of 15%, your savings could grow to. . .

It is evident in the present economic circumstances that inflation is a reality and has to be tackled. Mutual funds, and especially Systematic Investment Plans, may be the ideal mix for an investor to overcome inflationary consequences and further create wealth. Sandesh Kirkire is Chief Executive Officer, Kotak Mahindra Asset Management Co. Ltd. Now, buy insurance policies online S Bridget Leena | October 19, 2005 12:27 IST

If you are a person who enjoys working on the laptop - from home or elsewhere - and loves to get things done with a mouse click, you should opt for online insurance policy. By going online, you would be able to save on the agents' commission on policies like overseas travel insurance and householder policy. Again, you may have been postponing long due car insurance or motorbike insurance, in that case too, just get online, start clicking and benefit from being insured. In India, a large chunk of insurance is sold by agents, largely, and other channels of distribution, and online insurance is yet to make an impact. As far as the online route is concerned, only products that seem simple to people are sold through it. Well if you are sceptical about on the authenticity of insurance products sold online better listen to what K Krishnamoorthy, head - underwriting, Bajaj Allianz General Insurance, has to say. He says it is a secure way of buying an insurance policy, as the insurance company sends a hard copy of the policy you buy at doorsteps. And claims arising out of an online policy are treated exactly in the same manner as those of any insurance product sold by an agent are. ICICI Lombard General Insurance offers VeriSign certification that provides an evidence of its server's authenticity and safeguards you from unauthorised sites and allows the session to be encrypted. This protects confidential information - such as online forms, financial data, net banking information and credit card numbers - from interception and hacking. In case of somebody forgetting to log out from a session, auto logout feature is available to take care of your security. Krishnamoorthy points out that while in the case of an online overseas travel policy and householder product, an individual can save on the commission being paid to the agent,

one cannot expect the same in the case of motor insurance, which is under tariff regime. He, however, says a significant chunk of online policies sold will come from the motor insurance category. Bajaj Allianz, on an average, sells about 50 policies a month through online started a year ago. The product portfolio ranges from motor insurance and overseas travel to householder and pension policy. You can access most general insurance companies via an authenticated login and password. For the convenience of the customer, a 'calculate premium and buy' option is also available which allows him/her to choose how much he/she pays as a premium. General insurance policies must be renewed every year and an automatic reminder provided. After filling in the required details such as name, age and address to buy the policy you have to confirm making the payment. You can choose your payment option from credit card, net banking and bank cheque, as well. For instance, on the ICICI Lombard Insurance website, you can buy an insurance policy in a matter of minutes. The advantages of buying online insurance policy are many. They are speed, convenience and ease, online renewal of policies, online issuance of digitally signed policies, single view of all insurance policies held by an individual, 24x7 access to policy details, regular premium renewal reminders and, finally, the facility for calculating insurance premium. Why you must avoid penny stocks N Mahalakshmi in Mumbai | October 25, 2005 09:58 IST

Most of the stock market investors scout for scrips that can make them rich -- and in quick time. And the get-rich strategy often revolves around buying shares of small companies, which might zoom fast to strike a fortune, rather than buying stocks of blue-chip companies that run established and successful businesses and have made their marks on the bourses, already. In other words, the idea is not to invest in Infosys Technologies but to spot the next Infosys - the next big thing, as they say. Just a couple of such stocks can make you rich and wipe out losses in the rest of your portfolio.

Great strategy. However, the key to this strategy's success is to find out the right company, and is the power to stay put irrespective of any market conditions. But, if you are unlucky, even this approach may not hold water. In the last one month, the BSE Small-cap index has lost 20 per cent -- three times the loss the Sensex has suffered. During the period, the Sensex has fell only 6.21 per cent. Obviously, this only underscores the kind of risks associated with all small-cap stocks. Usually, there are three common grounds that drive penny stock purchase decisions. And all of them are bad reasons to pick penny stocks. Here is why: It's cheap and can appreciate faster: Most people ignore large stocks thinking that there is a limited scope for appreciation in 'high-priced' stocks and they can't own enough of them. So, they would rather buy low-priced stocks and own much more of them. However, the reality is: the absolute value of the share price really does not make any difference to your returns in the ultimate count. Earlier, when stocks were not available in dematerialised form, there were minimum lot sizes for buying stocks, which catapulted certain stocks beyond the reach of small investors. But today, an average investor can buy a blue-chip like Infosys for as little as Rs 2,500. While there is some truth in saying that a stock with the share price of Rs 25 could double much faster than a stock with a share price tag of Rs 2,500, the reverse is also equally possible. My broker told me to buy: Price manipulation is rampant in small stocks. The promoters of a small company often collide with brokers and pump up stock prices hoping that they would be able to hype up the stock and dump it eventually on retail investors. So, it may be risky to base your decision on a broker's advice alone. Similarly, in the process of ramping up stock prices, the promoters may indulge themselves in a lot of publicity stunts and issue announcements stating a revival in business or big new order or a new acquisition etc. They may also cook up their books and show profits after registering years of losses. Investors thus need to differentiate between what is genuine and what is fake. It's not easy to validate many of these details unless you have the resources to do so and are into it full time. *If large FIIs are already investing in it: These days there is a lot of talk about foreign investors entering mid-cap and small-cap stocks. But information like this needs to be examined carefully. The reality is that a number of reputed foreign institutional investors (FIIs) do not buy these stocks for the sake of their own portfolios. Several of them issue participatory notes

to their clients who may be overseas investors linked to the Indian promoters of respective companies. Currently, the disclosures do not capture this distinction. Since it is difficult for most investors to make out which ones of the FII sub-accounts are their own funds and which ones are for unrelated clients, it may not be an indicator of the quality of the stock. Investing in penny stocks is not easy. First, there are very little information on and research works in penny stocks available, In fact, large institutions also refrain from investing in small stocks for want of proper research and analysis. Besides, most penny stocks are either in their formative years or are struggling to survive amid tough financial conditions or bad business environment. To predict a reversal in trend may require insight into the business and understanding about the quality of management and leadership. Another problem is liquidity. If you are stuck, you are stuck indeed. In the past few sessions, several small stocks have been locked up in the lower end of the circuit for many days on the trot. It may not be easy to take corrective action when negative news strikes as the exit window may just be shut by the time you realise. Investing in penny stocks can surely be a get-rich strategy, but it involves a lot of risks, costs and efforts to succeed with penny stocks, which small investors can't afford.

Credit cards: How to be a winner S Bridget Leena in Chennai | October 25, 2005 10:11 IST

Krishnamurthy is a person who hates paying extra on interests, etc, by defaulting, and tries to ensure that he does not lose even a penny in this way by making all payments credit card dues and interests on car and housing loans - on time. Though his colleagues at workplace make fun behind his back of Krishnamurthy's attention to saving every penny, it is Krishnamurthy who has the last laugh as he is considered one of their valuable customers by banks whom they want to retain and not lose to their competitors. Being a bad customer is a losing case in more ways than one in so far as one's relationship with banks -- even in terms of credit cards -- matters. For not only does a delinquent client cough up penalties and earn a tainted image, he also loses out on a clutch of freebies and discounts that are offered to reliable, good

customers. Almost all tech-savvy private sector banks do this by profiling their customers. Puneet Chaddha, senior vice president & head-cards and retail assets, HSBC Bank, says, "We offer our good credit card customers other products such as mortagages, personal loans and discounts at competitive prices and greater usage discounts." Chaddha points out that using technology helps to delineate customers based on their account maintenance, number of transactions made, repayment of loans etc. "No bank wants to lose a good customer and therefore we offer some value-additions," he said. Good customers whose credit card usage is limited, we provide greater encouragement by providing cash back offers and larger discount for them to increase their usage, he adds. One value-addition could be variation of interest rate on unsecured personal loans. Interest, which usually varies between 19 per cent and 20 per cent, could be reduced to the range of 15 per cent to 16 per cent in the case of customers with good track records and hence, good ratings. The senior banker also says in the case of credit cards, high-networth customers, who pay on time, are offered special rewards. There are a variety of special rewards offered by banks, on the strength of their tie-ups with retailers. In the case of credit cards, if a customer does not pay the credit availed of within the permitted 45 to 50-day interest-free period, he or she is charged an interest of around 2.9 per cent varying from bank to bank. Another banking official says banks are increasingly recognising the need to offer incentives and value-additions to encourage good customers' loyalty to them and retain them. He added earlier a good customer was defined by his adherence to the repayment schedule on loans advanced. Now parameters for one to qualify as a good customer are different. They include maintenance of the requisite minimum balance in saving accounts and volumes of ATM transactions, among other things. Your insurance policy sum may not go to nominees! S Bridget Leena in Chennai | October 27, 2005 10:18 IST

A clause in your life cover will ensure that sum assured goes to nominees only and not to debtors, in case of bankruptcy.

Whether you are an entrepreneur or a high networth individual, do you know that unless you take your life insurance under a specific clause under the Married Women's Property Act, in the event of an unfortunate death of the insured, the sum insured may be taken by the creditors of the insured? While the basic objective for anyone to opt for a life insurance policy is that in case of an unforeseen event of death or casualty, the family of the insured is protected from financial difficulties. In consistency with that, the Married Women's Property Act is designed to protect a man's family from creditors who might stake a claim on the proceeds of the life insurance policy that are due to his wife and children. Thus, this act provides better protection for the wife and the children of the insured even if creditors such as banks, money lenders and financial institutions clamour for repayment of their debt. Under no circumstances can the sum insured of a policy be seized by debtors. A senior general manager with Life Insurance Corporation said the sum insured for an HNI/entrepreneur was usually huge, so he must avail of the endorsement of the Married Women's Property Act, as it comes at no extra charge or cost. The awareness among people about this endorsement was almost zero, and it is only agents who recommend this to their customers, he adds. To avail of this provision, the policyholder must fill up a specific form, giving details of trust and, thereby, ensuring that only his wife and/or children (nominees) are entitled to the claim proceeds under the policy. The Act comes into play either at the time of death of the life assured or maturity of the policy. This provision is applicable only to pure life insurance policies, and not on moneyback policies and pension policies. The prerequisite is that the life assured must be a married man and the beneficiary must be his wife and/or children. That the policy should be in force means that premiums should be regularly paid. The policyholder cannot avail of loan once the policy is under the Married Women's Property Act. The LIC GM points out that it is best advised to take this endorsement, considering it at the proposal stage at the time of taking a new policy.

Make money via inter-exchange hedging Vijay Bhambwani | October 11, 2005 11:41 IST

In the previous two pieces (see below for links), I wrote about the virtues of interexchange hedging as a tool to contain risk. Now that the concept has been digested, the most logical question is: How do you make money? We undertake a practical example of crude oil in the commodities market versus BPCL in the equities segment. Earn BIG on inter-exchange hedges 2-step strategy to win in the stock market

• •

Of late, the prices of crude have been diving as can be seen from the Nymex crude chart below. We also understand its implications for refining scrips, which stand to benefit from the fall, barring ONGC, which is likely to lose in case of weaker crude prices. Since we nurse a weak outlook on crude, we initiate a long position on the refining counter to hedge our bets. The payoff graphs indicate that the prices are likely to impact the movement in the securities in an inversely proportionate co-relation. The lower the crude price, the higher the price of BPCL -- not necessarily in an exact proportion. It is this area of non-exact yet inverse movement in prices which is the risk that we are trying to contain in this cross-exchange hedge. REDUCING RISKS Crude short @ 2850 2950 2900 2850 2800 2750

Crude BPCL long BPCL payoff at 415 payoff -100 -50 0 50 100

400 410 420 430 440

-15 -5 5 15 25

To any novice trader, it is clear that one of the two trades must result in profits - even if notional. In the happy event of both the trades resulting in profit, no one is likely to complain. In the event of one of the trades going against us, the real purpose of the inter-exchange hedge comes to the fore. Suppose the short sale in crude is yielding a profit of Rs 50 per barrel. Since we know the contract size of crude is 100 barrels, the profit is Rs 5,000.

If BPCL starts to fall after we buy at Rs 415, we have the envious situation of crude shorts sustaining the loss in BPCL of up to Rs 5,000. The minute we see the price of BPCL falling below a level where the loss exceeds Rs 5,000, we exit both trades and walk away with no profit/no loss. The above modus operandi is to minimise risks and maximise returns. Your stop-loss levels are pre-determined by the profit available in any one trade, and thereafter you know you are playing a zero-loss, infinite profit game. Qualitatively speaking, this type of strategy should attract the maximum percentage of your capital as the degree of safety is the highest. Rather than initiate naked positions, traders would do well to cultivate the 'safety first' habit not just in their driving, but also in their trading regimen. The author is CEO of BSPLindia.com and a Mumbai-based investment consultant. He has exposure to the MCX crude futures mentioned above, the exact quantum may vary from day to day.

Here's how you can save tax September 30, 2005 12:11 IST

The Union Budget 2005 will go down as a significant step towards encouraging individuals to plan their finances better. The step -- bringing parity in terms of both investment limits as well as tax benefits with respect to savings based instruments like life insurance and tax saving mutual funds. This new regime has got a lot of investors thinking on whether they should realign their 'tax saving' investment portfolio in favour of mutual funds. In this article, we work out whether or not such an option is feasible. An endowment policy is a life insurance plan, which covers your life for a predetermined amount, i.e. the sum assured. On maturity of the policy or in case of an eventuality, apart from the sum assured, you also get the accumulated bonuses that have been generated. Life insurance companies are mandated to invest predominantly in debt securities (this is true for regular insurance policies that are distinct from ULIPs). On the other hand, a taxsaving fund is a diversified equity fund. It works like an open-ended diversified equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation. The only difference

between an equity fund and a tax-saving fund is that the latter has a 3-year lock-in and tax benefits under Section 80C. To that end there is a common ground between tax-saving funds and endowment plans in the shape of Section 80C tax benefits. But how do individuals who have already purchased an endowment policy evaluate the option of shifting to tax saving funds? An illustration will help in understanding things better. Endowment plan from ABC Company Ltd Sum assured (Rs) Age (Yrs) Tenure (Yrs) Premium (Rs) Maturity value (Rs)* 1,000,000

30

15

65,070

1,684,000

* Maturity returns have been shown @ 10% as per company illustrations (The above illustration is for an existing life insurance company. The figures may differ across various companies)

Suppose an individual aged 30 years, had bought an endowment policy for a sum assured of Rs 1,000,000 with tenure of 15 years. The annual premium for this plan works out to Rs 65,070. The maturity amount on completion of 15 years for this plan is Rs 1,684,000 (assuming a 10% rate of return as per company illustrations). But if one were to take a closer look at the returns, it is not really 10% (i.e. on Rs 65,070) as shown in the illustration. That is because the returns calculated by the insurance company are actually computed on the amount net of expenses, i.e. after accounting for expenses. The actual returns therefore work out to approximately 6.55%. Now lets assume that the individual wants to surrender his policy and shift his premium money to tax saving funds. If he decides to surrender this policy after say, 5 years, the surrender value works out to Rs 288,778 (assuming a 10% rate of return according to company illustrations). He can invest this money and also shift his balance premium payments to tax saving funds; simultaneously he can cover himself with a term plan. What's in it for you? Surrender Tenure Assumed Maturity value (Rs)* rate of return (%) value (Rs) (Yrs) 288,778

10

10

749,015

*Surrender value is as given in company illustrations, calculated after premiums for 5 years have been paid

If the individual decides to invest the surrender value of Rs 288,778 in tax saving funds for a period of 10 years, assuming a 10% rate of return, he would get Rs 749,015. Term plan from XYZ Company Ltd Sum assured (Rs) Age (Yrs) Tenure (Yrs) Premium (Rs) 1,500,000

35

10

4,350

Since he does not have an insurance cover now, he will also have to buy a term plan. The cost of buying a term plan for the individual, at the age of 35, with a sum assured of Rs 1,500,000 with a 10-year tenure will cost him Rs 4,350 p.a. Investments in tax saving funds Annual investment Tenure Assumed rate Maturity value (Rs) amount (Rs) (Yrs) of return (%) 60,720

10

10

1,064,492

Also assuming that he shifts the remaining yearly premium amount of Rs 60,720 (Rs 65,070 - Rs 4,350) to tax saving funds for the 10-year tenure, he will get Rs 1,064,492. The total maturity value will amount to Rs 1,813,507 (i.e. Rs 749,015 + Rs 1,064,492). That's more than what the individual would have received on maturity of the endowment plan, had he decided to stay put in it. And that's not where the comparison ends. The individual will also stand to benefit by keeping his insurance and investment needs apart. If an eventuality were to occur, the individual's nominees would not only stand to gain the sum assured on the term plan (i.e. Rs 1,500,000) but would also benefit from the amount that had been invested in the taxsaving fund. Investments in tax saving funds can be redeemed after a minimum lock-in period of one year in case of an eventuality to the investor. But the above argument of shifting from an endowment plan to a tax saving fund comes with a few riders attached to it. Individuals need to have a stomach for risk before investing in equity oriented mutual funds. Only if they are able to bear the ups and downs of the stock markets and can stay invested for the entire duration should they consider investing in such funds. The above example was taken as a case study. The actual values shown may differ across various insurance companies and tax saving funds with differing parameters like the age, sum assured and type of insurance plan amongst others. Insurance companies also declare bonuses regularly on their endowment plans. Once a bonus is declared, it becomes mandatory on the part of the insurance company to pay the same to policyholders. As such therefore, there's an element of guarantee attached with bonuses, which is not the case with tax saving funds. Investors could lose heavily in case of a sharp decline in the markets. Individuals therefore, need to keep in mind their risk appetite before zeroing in on any option. Life insurance companies have also realised the importance/promise of market-linked instruments, which in the long run, have the 'potential' to offer better returns as compared

to their debt counterparts. Most of these companies now offer 'Unit Linked Insurance Plans (ULIPs)'. ULIPs are market-linked life insurance plans, which are equipped to simultaneously offer market-linked returns and a life cover. Individuals who have a risk-taking propensity, could consider investing in ULIPs. So does all this mean that endowment plans should be given a miss? Quite the contrary. An endowment plan can act as a safe investment avenue that offers insurance cover. On the other hand, tax saving funds (powered by the presence of equities) can add the muchneeded gusto to your portfolio; while a term plan can cover the individual for a higher sum assured at a lower cost. Individuals should therefore take into consideration various factors like their risk appetite, current portfolio mix and investment objectives while conducting the taxplanning exercise. This will help investors select the suited avenues and build the right tax-planning portfolio. (The above illustrations are those for existing life insurance companies. The figures may differ across various companies) Get started with your retirement planning. Click here! How to get a bigger home loan September 30, 2005 11:51 IST Last Updated: September 30, 2005 12:12 IST

Often, when individuals want to opt for a home loan, they are constrained by the fact that they may not be eligible for the home loan amount they have in mind. This could be because their monthly income does not permit them to opt for such a high amount. Here, we have evaluated how home loan seekers can enhance their eligibility by selecting a higher tenure. Monthly instalment Rate of Tenure EMI per interest (%) lakh (Rs) (Yrs) 8.00

5

2,028

8.00

10

1,214

8.00

15

956

8.00

20

837

To understand how to increase home loan eligibility by increasing the tenure, we need to first look at the monthly instalments table. As the table above shows, assuming an 8% rate of interest, the individual will have to shell out Rs 2,028 per month per lakh as EMI for a 5-year tenure. But as the tenure increases, the EMI per month starts falling. As can be seen, for the same amount of Rs 100,000, the EMI per month has fallen to Rs 837 for a 20-year term. Planning to buy property? Click here! Let us suppose an individual is earning Rs 25,000 per month and wants to opt for a home loan worth Rs 1,500,000 with a tenure of 10 years. Based on his monthly income, a certain housing finance company, A Ltd, will compute his loan eligibility based on his net income; say 55% of his take home salary. This works out to Rs 13,750 (i.e. 55% of Rs 25,000). Based on this figure, A Ltd will then go on to calculate his loan eligibility, which works out to approximately Rs 1,132,000 for a 10-year tenure, assuming an interest rate of 8.00%. But as mentioned earlier, the individual wanted a home loan worth Rs 1,500,000, so Rs 1,132,000 is way below his expectations. Loan eligibility Tenure Rate of EMI/Lakh Loan Individual's (Yrs) Interest (%) (Rs) eligibility (Rs) EMI/month (Rs) 10

8.00

1,214

1,132,000

13,735

15

8.00

956

1,438,000

13,743

17

8.00

899

1,529,000

12,790

Lets see what happens if the individual decides to opt for a higher tenure. If he increases his tenure from 10 years to say, 15 years, his loan eligibility rises to approximately Rs 1,438,000. He will have to increase it by another couple of years, i.e. 17 years, to get the amount of loan that he is looking for. His loan eligibility for a 17-year tenure works out to approximately Rs 1,529,000. A prime reason why the EMI per lakh falls with a rise in tenure is because the original loan amount (of Rs 100,000) as well as the interest rate remains the same. What changes is the net interest outgo, which will increase with a higher tenure. Therefore, as the tenure rises, the EMI per lakh falls leading to an increase in the loan eligibility for individuals. Another advantage that a higher tenure offers to individuals is the choice of prepaying their loan. With increased competition, most HFCs nowadays do not levy charges on home loan borrowers for prepayment.

Individuals therefore, need to bear in mind that if they do their homework right, they stand to benefit from a higher tenure in terms of higher loan eligibility while keeping their EMI the same. Some figures in the illustrations above have been rounded off for ease of calculations and better understanding for the reader. Get started with your retirement planning. Click here!

How borrowing from an HFC helps September 12, 2005 12:18 IST

There are many advantages of buying a house by taking a home loan from a housing finance company. Availing a top-up loan is one such benefit. Existing borrowers can opt for a top-up loan by virtue of the existing home loan to finance their various requirements. Simply put, a top-up loan is a kind of loan given to home loan borrowers over and above their existing home loan. The top-up amount is given at the prevailing home loan rates to the existing home loan borrowers. But there are limits on the amount of the top-up loan. An illustration will help in understanding things better. Top-up loan availability from ABC Company Ltd Less than 1-Yr 1-Yr to 2-Yrs 2-Yrs and above Top-up loan amount

Nil

20%

30%

(Percentages shown above are on the amount of home loan disbursed)

Suppose an individual already has an existing home loan of Rs 1,000,000 from ABC Bank, which he had taken a year ago. He now wants to go for a loan to fund say, his child's marriage. The individual can opt for a top-up loan in such a case. But the top-up would be available to him only after he has completed one year of repayments with ABC Company Ltd. In such a case, he will be eligible for a top-up loan of upto 20 per cent (i.e. Rs 200,000) of the disbursed value of the home loan. The eligibility will go upto 30 per cent in case the individual has completed 2 years or more. Thirty per cent is the upper limit for a topup loan in case of ABC Company. Even if the individual is not a customer of an HFC but wants to go for a top-up loan from it, he has the option to do so by first opting for a balance transfer to the HFC. But the individual needs to have completed at least 6 months with his previous HFC to shift to a new one. If he opts for a top-up loan immediately in this case, then the individual will be eligible for 10 per cent of the value of the balance transferred from the old HFC to the

new one. He will be eligible for a top-up loan of 20 per cent and 30 per cent in case he has completed one year and two years respectively with the new HFC. Home loan details for XYZ Company Ltd Mkt value Actual home Home loan Outstanding of property (Rs) loan amt. (Rs) repaid (Rs) loan amt. (Rs) 1,000,000

900,000

300,000

600,000

The upper limit for a top-up loan may differ across various HFCs. For example a certain HFC has a limit of Rs 500,000 or 70 per cent of the market value of the property minus the loan outstanding, whichever is lower. For example, suppose a borrower has taken a home loan for a new property worth Rs 900,000 (i.e. 90 per cent of the cost of the property which is Rs 1,000,000). He has already repaid Rs 300,000 and therefore, has an outstanding loan amount of Rs 600,000. Top-up loan from XYZ Company Ltd Current mkt value 70% of Loan Top-up loan of property mkt value (Rs) outstanding (Rs) amt (Rs) 1,200,000

840,000

600,000

240,000

Also suppose the market value of the property has gone upto Rs 1,200,000. In such a scenario, he will get a top-up loan of Rs 240,000 (i.e. 70 per cent of 1,200,000 -- loan outstanding of Rs 600,000). Such parameters have to be considered before zeroing in on an HFC. The biggest advantage with a top-up loan is that individuals can use it to fund their personal needs. Looked at differently, a top-up loan can be used in place of a personal loan to finance individuals' needs. Considering the personal loan interest rates, that's quite a useful 'bargain'. Banks generally do not bother about the purpose for which the top-up loan is being taken. Some banks though do ask for a letter stating the purpose for which the loan is being taken. This is to confirm that an individual is not taking the top-up loan for unlawful/illegal, gambling or such other purposes. One disadvantage with a top-up loan though is that tax benefits are not available for such loans unlike those available for a home loan. This is due to the fact that such loans are treated like personal loans and not home loans. Individuals therefore need to evaluate their options well and understand the pros and cons before finalising one.

40, and still don't own a home? Rachna C | September 14, 2005 09:31 IST

Turned 40? Threw a big over-the-hill party only to get depressed the next day? And the main cause of this was that you still don't have a house of your own? Cheer up! Even if realisation of owning your very own home hit you a little later in life, it is not too late. Stop worrying and get cracking. For starters, you still have more than a decade of active working life. So don't waste any more time. Get that home now. 1. Opt for a joint home loan This way, you will be entitled to a higher loan eligibility amount as well as the tax benefits will apply individually to both applicants. Generally, home loan companies ensure that your Equated Monthly Installment is not more than 35% to 40% of your net take home. •

How to get a home renovation loan

Of course, if you are earning very well, they could make an exception and give you a higher amount. Should you club your income with that of your spouse, the amount you are eligible for shoots up. What's more, both of you can avail of the tax benefits separately. Home loan benefits fall under Section 80C and Section 24 of the Income Tax Act. Under Section 80C, the principal repayment you make on your home loan is eligible for income deduction. The limit under Section 80 C is Rs 100,000. Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 150,000. As a result, your taxable income decreases by that amount. Interest payment: The maximum limit of Rs 150,000 on interest paid will apply individually to both of you (ie the total deduction will be limited to Rs 300,000). Principal repayment: The tax benefits on the principal will be shared between the

husband and wife. It falls under Section 80C where the limit is Rs 100,000 for each of you. 2. Try and opt for the shortest possible repayment tenure You end up paying less to the home financier. Generally, all home loan players insist that your home is cleared when you reach the age of 58 (salaried) or 65 (self-employed). So, if you have just turned 40, then you have another 18 years to repay your loan. Vijaya Bank is an exception. You are allowed you to repay your loan up to the ripe old age of 70. •

How borrowing from an HFC helps

The longer the repayment tenure, the smaller the EMI. However, the sooner you repay the loan, the lesser you eventually pay. The total interest outflow increases with the duration of the home loan. Loan amount: Rs 30 lakh (Rs 3 million) Rate of interest: 8% p.a. monthly reducing Tenure: 15 years EMI: 28,670 Total outgoings: 51,60,600 Tenure: 10 years EMI: 36,399 Total outgoings: 43,67,880 By opting for a lower repayment tenure (10 years as against 15 years), you save Rs 792,720. A phenomenal saving by reducing your tenure by five years. It may make your life a little more uncomfortable but in the long run it will pay off. Specially at this point in your life where saving has to be a priority. 3. Prioritise your debt If you are thinking of taking a personal loan for a holiday or a car loan, move forward with caution. Take the home loan and start payments before considering another loan. Only if you can comfortably manage another loan, take it on.

It is advisable that your total debt should never exceed 45% of your net take home. If the home loan touches 40%, then you really don't have much scope for other debt. Remember, you will also have to look at a downpayment since the home loan company will only pay around 80% to 85% of the cost of the home. Also, there is stamp duty, registration and brokerage to be taken into account. •

How to save for old age, with less tax

So prioritise your debt. Keep the home loan as the most important and work out the rest based on the home loan. You must continue saving even if you are servicing a home loan. Retirement is not that far away and you have to diligently save towards it. If you steep yourself in debt, your retirement funds are going to take a beating. 4. Be cautious when dipping into retirement savings To cover up the payments you may end up dipping into your provident fund and Public Provident Fund. A better option would be to sell your shares and mutual fund units. It makes sense to tap into investments to meet your downpayment and other costs. Tapping into your retirement funds like PPF and PF will seriously affect the lumpsum you expect on maturity. If you do tap into it, make sure that you balance it later. Either by investing more into the PPF later or ensure that you do some other investments solely for the purpose of benefiting on retirement. What you can do is that once your EMIs stop, put the same amount into your retirement funds. Let's say your EMI is Rs 12,000. Once your loan is cleared, continue putting this amount into your retirement funds. You would have got used to making this payment so continue. This time, pay yourself. This is assuming that you still have some more years to retirement. If you are going to be servicing this loan till you retire, then try and save simultaneously. Add a small amount every month to your EMI. If your EMI is Rs 12,000, then make it Rs 14,000 with Rs 2,000 going into your retirement kitty. That way, you have the discipline of regularly saving for retirement while simultaneously paying for your home loan. 5. Get your loan insured

Get your home loan insured. In the event of something happening to you, the balance loan amount will not be your family's problem. Home loan insurance takes care of the amount you will owe the home loan financier. Let's say you took a home loan of Rs 10 lakh (Rs 1 million). Let's also assume that after you pay up Rs 200,000 of the principal amount, you die. This means, a balance of Rs 800,000 still has to be paid to the home loan company. This is the amount the insurance company will cough up. This way, your family is not left without a roof over their head; neither do they have the hassle of paying up the EMI. ICICI Bank and ING Vysya offer it free of cost. IDBI Bank (with Birla Sun Life Insurance Ltd), Corporation Bank (with LIC), Union Bank (SBI Life) and HSBC (with Tata AIG Life Insurance Company) are some players that offer it with a premium. If your home financier does not offer it, approach a life insurance company and ask them if they will. But do check the fine print. For instance, for the ICICI Bank loan, the insurance is applicable only if it is death by accident. 6. Opt for a fixed rate loan Whether to go in for a fixed rate or a floating rate is a matter of personal choice for the consumer. It is advisable that you opt for a fixed rate home loan. Over the long term, interest rates will drop. But in the near future, they could rise. You could even take the fixed option for a few years and the flexible option later. But, there will be a fee for switching over. If you opt for a flexible loan, you must also have an appetite for risk and be able to take it in your stride when rates rise. Let's say you opt for a variable interest rate loan. If interest rates rise, you have two options.

Increase the EMI and keep the tenure of the loan constant. Will you be able to financially handle a larger EMI? Or, keep the EMI constant and increase the tenure of the loan. You really cannot afford this if you are planning on closing the loan near retirement. If you are financially comfortable with a higher monthly payment and it will not affect your periodic savings, only then go for a flexible rate loan. Or else, stick to the fixed rate option.

How much tax do you need to pay? September 14, 2005 11:56 IST

Are you confused about taxation? Don't worry there are many who want some clarity on what is the level of tax they have to pay on their investments in shares, mutual funds, real estate, gold, fixed deposits, bonds, and insurance. Here is a primer to help you understand your tax liabilities in various investments. Shares Is there any tax implication on sale of shares? After October 1, 2004, any equity share which has been sold through a recognised stock exchange and on which STT (Securities Transaction Tax) has been paid would be entitled to exemption from Long-Term Capital Gains. Similarly, in case of Short-Term Capital Gain on such shares, the gains shall be taxed only at 10%, plus surcharge and education cess. What is the tax implication of a bonus/rights issue on equity shares? Bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue. The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right. The holding period is reckoned from the date of allotment. Is the dividend income received from investments in shares taxable?

Dividend received from investment in shares is not taxable in the hands of the recipient. The company, distributing the dividend is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient. Mutual funds Are dividends received on mutual fund schemes taxable? Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor. A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared. Long-term debt funds, government securities funds (Gsec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds. Dividends declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets in equities) are tax-free in the hands of investors. There is no dividend distribution tax applicable on these funds. Diversified equity funds, sector funds, balanced funds are examples of equity-oriented funds. Are there any other tax benefits on investments in mutual funds? Yes. Money invested in tax-saving funds (ELSS) would be eligible for deduction under Section 80C. However, the aggregate amount deductible under the said section cannot exceed Rs 100,000. What are the tax implications on sale of mutual funds? Long term capital gains arising from sale of equity-oriented mutual funds is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. Short-term capital gains on equity-oriented funds are chargeable to tax @10% (plus education cess, applicable surcharge). Long-term capital gains on debt-oriented funds are subject to tax @ 20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less. Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor. Fixed deposits & Bonds What are the tax implications of investing in fixed deposits and bonds like 8% Savings (Taxable) Bonds, 2003?

Interest income on fixed deposits and bonds, such as 8% Savings (Taxable) Bonds, 2003, is taxable under the head 'Income from other sources.' The entire income received is taxable. However, an assessee can claim direct expenses incurred to earn that income under the provisions of Section 57(iii). Can investors claim any tax benefits for investments made in fixed deposits/bonds under Section 80C? Similarly, are any benefits available to investors on the interest income? Investments in fixed deposits are not eligible for deductions under Section 80C. Infrastructure bonds qualify as eligible investments under Section 80C. Section 10(15) lists the various securities and bonds on which interest is exempt from tax. Are investments made in these instruments like fixed deposits subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable? Yes, if the interest from such investments exceeds Rs 5,000 in a financial year then TDS is applicable. Can investors avoid TDS; if yes what documents are required to be provided for the same? Investors can avoid TDS by presenting Form 15H, which states that the person does not have a taxable income. Gold Are there any tax implications for investing in gold? No, investing in gold doesn't entail any tax implications. What is the long-term or short-term capital gains liability, arising at the time of sale? Ornaments made of silver, gold, platinum or any other precious metal and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel are treated as capital assets. Hence, a long-term or short-term capital gains liability will arise at the time of sale. Gold or jewellery when held for the period more than 36 months is treated as long-term capital asset. If they are held for period of less than 36 months, then they are treated as short-term capital assets. While calculating capital gains, the assessee is entitled to claim as deduction the cost of acquisition from the sale value. In the case of long-term capital gains, the indexed cost of acquisition is allowed as deduction.

Are investments in gold subject to tax implications under Wealth Tax? Yes, gold falls under the purview of the Wealth Tax Act. The tax is levied on jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver or platinum. Insurance What are the tax benefits available to an individual in respect of premium paid on life insurance policies? Rebate under Section 88 is available in respect of life insurance premium only up to Assessment Year 2005-06. From the Assessment Year 2006-07, life insurance premium paid by an individual qualifies for a deduction under Section 80C of Income Tax Act, 1961. An individual can claim deduction on premium paid for a maximum of Rs 100,000 in each financial year. However, an individual can claim deduction on premium paid on a pension plan for a maximum of Rs 10,000 in each financial year. This forms part of the overall Rs 100,000 limit under Section 80C. Are maturity proceeds on life insurance and pension policies taxable? The maturity proceeds of life insurance policies are not taxable. However, under pension plans, upto one-third of the maturity amount can be withdrawn in cash and the same is treated as tax-free. An annuity has to be purchased with the remaining two-third amount. Pension receipts from the same will be treated as income in the hands of the assessee and taxed accordingly. Can tax benefits be claimed if the premium is paid by an individual on his/her spouse's policy? Tax rebate under Section 88 can be claimed if the premium is paid by an individual on his/her spouse's policy up to Assessment Year 2005-06. From the Assessment Year 200607 life insurance premium paid by an individual on his/her spouse's policy qualifies for a deduction under Section 80C. What are the deductions available in respect of a medical insurance premium? The premium paid for medical insurance qualifies for rebate under Section 80D as follows:

Insurance premium paid or Rs 10,000 whichever is lower. The aforesaid limit is Rs 15,000, where the individual or his spouse or dependant parents or any member of the family (for whom such premium is being paid) is a senior citizen (i.e. one who is resident in India and who is at least 65 yrs of age at any time during the previous year). Real Estate Are there any tax implications of making investments in real estate? There are no tax implications for making investments in real estate. What is long-term/short-term capital gains liability, arising at the time of sale? In case of immovable property being sold within a period of 36 months from the acquisition, the gain arising therefrom would be short-term capital gain and liability for taxation at 30%. In case the immovable property has been held for more than 36 months, the gain would be long-term capital gain and the tax thereon would be at the rate of 20%. The assessee would be entitled to index the cost as per the cost inflation index. If the asset has been purchased prior to April 1, 1981, then the assessee would be entitled to substantiate the cost by the market value as on April 1, 1981 and index the cost thereafter. Long-term capital gain is taxable at a flat rate of 20% (plus surcharge plus education cess) for the Assessment Year 2005-06. How is rental income from one's property treated for the purpose of taxation? Rental income is taxed under the head 'Income from house property.' Deductions are available under Section 23 and Section 24 of the Act. It may be noted that a deduction is available for repairs, whether incurred or not.

How to create wealth September 20, 2005 12:37 IST

Despite all the eulogies paid to women ('better halves,' for one), a vital activity like wealth creation continues to be a male bastion. Strangely, wealth creation is an activity which rarely features on a woman's 'To Do' list.

We believe this mindset needs to change, and change rapidly. Whether you are a working woman or a home-maker, whether you are a part of a family or a single woman, wealth creation is an activity you should be proactively pursuing. Proper planning coupled with sound advice can ensure that wealth creation is well within everyone's reach. In this article, we will deal with asset allocation. 6 steps to financial planning for women

•

Asset allocation, in simple words, is the process of building a portfolio of assets like equities, fixed income instruments, gold and property among others in line with your risk appetite to help you achieve your objectives. Investing in various asset classes provides investors the benefits of diversification. As always, the asset allocation needs to be in line with the investor's risk appetite and her investment objective. •

Simple investing tips for women

Let us take an example to explain the same. Miss Puja is a 27-year-old single woman who has no immediate liabilities to provide for. With age on her side and a reasonably high appetite for taking on risk, equities and equity-related instruments could occupy a substantial portion of the portfolio. On the other hand, we have Miss Jaya who is also 27 years of age, single and with no liabilities on hand; however the differentiating factor is the risk appetite i.e. she has a lower risk appetite. In such a scenario, despite the seemingly similar profiles, Miss Jaya's asset allocation would be quite different from that of Miss Puja. Table 1 below shows possible asset allocations for both Miss Puja and Miss Jaya. Miss Puja vs. Miss Jaya Assets Equities/Equity based investments Fixed income instruments Gold Property Cash

Miss Puja 45% 5% 5% 40% 5%

Miss Jaya 30% 10% 5% 50% 5%

As can be seen above, on account of Miss Jaya's relatively lower risk appetite, the equity component in her portfolio is far lower as compared to that of Miss Puja. Instead fixed income instruments occupy a larger chunk of the allocation. •

How to plan for your child's future

Readers would do well to note that the examples above are purely for an explanatory purpose. The investment advisor has a very significant role to play in aiding investors get the right asset allocation i.e. he should structure the portfolio based on the unique dynamics for each individual, further active monitoring is a key factor as well. Another point to be noted is that the asset allocation undergoes change with passage of time as some of the objectives are achieved and new ones are set. In our case, Miss Puja who was a risk-taker could a few years later (say, at the age of 50 years) have a reasonably different allocation. At that age she is married and has added responsibilities in terms of a family and children. The same in turn could translate into a need for less risky and more stable investments. Miss Puja at 50 years of age Assets Equities/Equity based investments Fixed income instruments Gold Property Cash

Miss Puja 20% 25% 5% 40% 10%

As can be seen from table 2 above, the allocations in equities have been toned down and instead a higher portion is held in fixed income instruments and cash. Now let's take a closer look at some of the areas where investors can invest their monies and try to understand the nuances involved therein as well. 1. Equities Equities (or stocks) are often regarded as the best performing asset class vis-à-vis its peers over longer time frames (i.e. more than 3 years); also much has been written about how they are best equipped to counter inflation. However equity-oriented investments are also capable of exposing investors to the highest degree of volatility and risk. Furthermore successful participation in the equities segment is no cakewalk. There are a number of factors which affect the performance of equities and, studying and understanding all of them on an ongoing basis, is something most retail investors are incapable of doing. Instead the mutual funds route is a far more convenient and feasible method to access the equity markets. Among others, mutual funds offer the benefits of diversification and expert services of a fund manager. •

5 great tips to save for retirement

The investment advisor has to perform an important role in helping investors select the right schemes, monitoring their performance and ensuring that investors make timely investment decisions. Another option available to investors is ULIPs (Unit Linked Insurance Plans); ULIPs combine the benefits of insurance and investments in a single avenue. Unlike conventional insurance products (endowment plans), ULIPs offer investors to choice to decide the asset classes wherein their monies will be invested i.e. they can choose between various combinations equity-debt. On a flipside, investors need to be well-informed of the charges levied on their investments. While initially charges tend to be high (a fact that unscrupulous agents do not disclose), over the life of the policy they tend to even out to reasonable levels. 2. Fixed income instruments As the name suggests fixed income instruments (also referred to as assured return schemes) offer a high degree of certainty in the returns. The time of maturity and amount to be received on maturity are known in advance. Bonds, debentures, fixed deposits, and small savings schemes (National Savings Certificate and Kisan Vikas Patra among others) are some of the variants. Insurance products like endowment plans which offer steady returns (albeit the exact returns may not be known upfront) can also find place in the portfolio. While fixed income instruments pale on the returns parameter vis-à-vis their equity counterparts, they play a very important role by imparting much-needed stability to the portfolio. Another feature worth mentioning is their relatively low risk profile; for investors with a low risk appetite, fixed income instruments should form the mainstay of the portfolio. Fixed income instruments have been dealt with in detail in the article "Get a fix on your assured return schemes". 3. Gold Gold as an asset class has always been a vital commodity for most Indian households. However gold purchases have not necessarily been made from an 'investment perspective;' instead it has found place in the form of ornaments for purposes like usage and religious factors. •

The safest investment plans

There is a need for investors to look beyond these 'emotional reasons' and evaluate gold from the investment perspective.

The price of gold is driven by factors which are broadly speaking different from those that drive the price of other assets such as equities. This results in what is generally seen as a contrarian trend and makes gold a good bet from the diversification perspective. However in the Indian context over the long-term, the performance of gold as an asset class is unlikely to be superior as compared to other asset classes like equities; this should be factored in while adding gold to one's portfolio. 4. Property Provisions for holdings in real estate/property should ideally be made at an early stage in one's lifetime; this is necessary on account of the high costs involved and also the importance of the investment. Once you have a family, the daily expenses tend to rise for the first few years as you settle down. That does not leave much scope for investing. Though the returns from property are only notional, it is good to have the security and comfort of owning one's own home. Real estate funds have recently been launched in India. Despite the fact that they are presently available only to institutional investors and high net worth individuals (HNIs); the same can emerge as a means to invest in the property segment for retail investors in the future. 5. Cash Investors must hold a sufficient amount of their assets in cash i.e. in liquid form; this will help them tide over unplanned expenditures and other contingencies. Also one must remember that equity-oriented investments are made with a long-term perspective and liquidating them to meet any contingency may prove to be a loss-making proposition depending on the market conditions. On the other hand avenues like property and fixed income instruments tend to be intrinsically illiquid. Holdings in cash include amounts held in savings bank accounts, liquid funds and short-term fixed deposits.

Easy loans for your child's MBA Samyukta Bhowmick | September 24, 2005 12:47 IST

The professional market is becoming more and more competitive. Our 600 management programmes nationwide, which graduate approximately 5,000 students a year, are

rendering MBA degree holders a dime a dozen. Apart from one detail -- the programmes themselves cost substantially more than a dime. As do other educational programmes, whether they are a professional or technical graduate degree, a liberal arts undergraduate degree, or a PhD in botany. A management degree at an IIM will cost just under Rs 200,000, but if you're going abroad you can end up spending anywhere between £10,000 a year to $50,000 a year for an MBA or a similar masters. If you're not blessed with parents who can afford to send you to graduate school, or if you're not thrilled about sponging off them, there is still hope. Apart from scholarship programmes offered by bodies such as the British Council and internal financial aid packages individual colleges may offer, banks are also doing their bit to make it easier for you to get a higher education. In 2001, the Indian government, in conjunction with the Reserve Bank and the Indian Bankers' Association, implemented the Comprehensive Educational Loan Scheme. This scheme, based on the premise that everyone should have access to basic education, was designed to help the poor gain access to a primary education, and anyone who aspires to it but cannot afford it, a higher education. It extends to undergraduate as well as graduate degrees, in India as well as abroad. The details of schemes vary from bank to bank, but the umbrella loan scheme means that many features will be common. The amount of the loan, for instance, will usually be up to a maximum of Rs 750,000 for studies within India and Rs 15 lakh (Rs 1.5 million) for studies abroad. (Many banks, however, do offer more -- at the State Bank, for instance, you can borrow up to Rs 20 lakh -- Rs 2 million -- if you're going abroad and HSBC will give you Rs 25 lakh or Rs 2.5 million). The requirements for the loan again, will only deviate minimally from state guidelines. According to the government scheme, to be eligible, a student needs to be an Indian national, already be in possession of an acceptance letter from his or her school, and in the case of Indian universities, have scored a minimum of 60 per cent in the entrance exam. Most banks will adhere to this general guideline, but may ask for additional items such as an approved list of expenses from the school, income tax statements from the student and possibly the parents, and an account of assets and liabilities that they own or owe. The interest rate will normally be level with the prime lending rate of the banks, if the loan is up to Rs 200,000, but be PLR plus 1 per cent over Rs 200,000. Security will only be needed if the loan amount is over Rs 200,000. (Most banks have moved this dividing point from Rs 200,000 up to Rs 400,000). There may be additional caveats: some banks have an age limit, for instance the Oriental Bank of Commerce insists that you be under 45 years of age, and many (though not all,

for instance at the Indian Overseas Bank, if you're over the age of 18, there is no need to have a co-signer) will also insist that the parents or guardians be co-signers. In terms of payback, most banks will give you the equated monthly instalments (EMI) option, slicing what could be a mammoth payback into easier-to-swallow monthly packages. Most banks will also give you time to start hunting around for a job before they expect you to start paying it back. The State Bank, for instance, expects you to start payments either from six months after getting a job, or one year after the completion of your course -- whichever comes first. All in all, the loan schemes banks are offering nowadays are a boon for students. Look out mostly for smaller banks though, for most large private players, such as ICICI, HDFC or Citibank (which has a very comprehensive student loan system in its branches abroad), do not have extensive educational schemes.

Home > Business > Personal Finance Money? Grab that short-term plan Shobhana Subramanian in Mumbai | August 11, 2005 13:04 IST

If you're looking to put away some money for the near term, you should check out shortterm plans (STPs). These plans have on an average delivered returns of over 5 per cent in the last one year and have managed to outperform income and gilt funds on a riskadjusted basis. In fact, over the past three months, these schemes have returned around 6 per cent. Taking advantage of the steepness of the yield curve at the shorter end, fund mangers buying into higher yielding, longer maturity corporate paper, to improve returns. The relatively low volatility of portfolios has been possible because fund managers have generally chosen to stay away from government securities, given the rising interest rates. Observes K Rajagopal, CIO, Reliance Mutual, "Since most of the portfolios have a very low component of government securities, or nothing at all, the volatility, has been contained and the schemes have done consistently better than liquid and floaters." The volatility of most portfolios has, in fact, reduced.

Observes G Ramachandran, head, investment advisory services, ICICI Bank, "The average volatility of STPs has fallen from a peak of 0.4 per cent in January 2005, to 0.31 per cent in June." Also, most fund managers have maintained a low maturity for their respective portfolios. While the average portfolio maturity saw a steady decline till January 2005, since then the maturities have increased gradually to take advantage of higher coupon securities, with marginally higher tenors. In June, there was a sharp increase in the maturity to 1.36 years, since some fund managers believed the outlook for the debt market was improving. The average maturity at the end of June ranged between 430 days and 690 days. The Reliance STP had a maturity of 457 days, while the Templeton STP had a maturity of 677 days. Most fund managers, however, prefer to keep their maturities around 1.25 years. What fund managers have cashed in on is the steepness of the yield curve at the shorter end. The major part of the corpus has been allocated to corporate paper, such as fixed or floating rate bonds, Commercial papers and certificates of deposit, issued by banks. A marginal amount may be parked in bank fixed deposits. While most of the paper would have a maturity of less than two years, fund managers are also parking some of the funds in slightly longer term paper. That's because currently the spread between one-year corporate paper and two or threeyear papers is large. For example, the yield on one-year paper is around 5.85-5.9 per cent, while the yield on two-year paper is 6.3-6.4 per cent. For three years, it is as much as 6.8 per cent. The reason for this is the expectation that interest rates will rise. In fact, many in the money market believe that the central bank will raise the repos rate in October, triggering an increase in rates across the system. Explains Binay Chandgothia, deputy CIO, Principal PNB AMC, which has bought into some of this longer maturity paper, "If the yields in the system move up, the portfolio will not underperform and if yields fall or even remain flat, these higher-yielding papers would give the porfolio a kicker." Says Rajagopal, "At times we buy even three-year paper, but we ensure that the maturity of the portfolio does not go beyond 1.25 years The 1-3 years maturities are delivering the best value and if rates go up we will drop maturities. While most of the money goes into AAA-rated paper, some funds do have an exposure to AA+ and lower rated paper.

Funds have also parked some portion of the portfolio in floating rate instruments, thereby, containing risks. Says Ritesh Jain, fund manager, Kotak AMC, "FRBs are a good hedge because on a normal basis they give a higher current yield of around 6.3 per cent, the coupon is reset every six months and if rates were to rise, one could get the benefit of capital gains. It also makes sense to buy into papers that have an interest reset in October, so one is protected to that extent." Moreover, currently there is good trading potential in paper at the shorter end. Though there is enough supply of paper -- CDs of banks, for instance, are available at around 5.85-5.90 per cent --- there's also a huge corpus of liquid funds that are looking for paper with maturities of less than 12 months. In fact the corpus of liquid funds is almost 15 times that of STPs. Observes Jain, "We buy into 14-month paper and when the maturity is down to less than 12 months we sell them to liquid funds and book the capital gains. The yields may move down but the capital appreciation is high." According to G Ramachandran, STPs remain a good option in the current scenario provided investors are willing to hold on for at least six months. "The running yield on the portfolio has gone up to 6.5 per cent," he observes. Chandgothia confirms that the current yield would range between 6.25 and 6.5 per cent. According to Dheeraj Singh, head, fixed income, Sundaram Mutual, "The flexibility that fund managers enjoy in managing the duration of these schemes, makes them attractive, provided you hold on for at least six months." Singh believes that going forward, one can expect a return of 6.5 to 7 per cent. Adds Rajagopal, "We expect STPs to continue to outperform liquids and floaters in the near term and are recommending them because, regardless of the outlook on interest rates, the volatility would be contained to the minimum." So if you're looking for a slightly better return than that on floaters, STPs may be a good idea even if the expense ratios for the scheme, which are around 65 basis points, are slightly higher than those for floaters and liquids. Tax-saving funds & how to invest August 17, 2005 14:50 IST Last Updated: August 17, 2005 15:42 IST

The Union Budget 2005-06 proved to be a watershed event for tax-savings funds. Hitherto, investments for the purpose of tax deduction (under the erstwhile Section 88) were subject to upper limits. For example the cap on tax-saving funds was placed at Rs 10,000; as a result conventional avenues like the Public Provident Fund (PPF), National Savings Certificate (NSC) and life insurance policies dominated investors' tax-planning kitty. By removing sectoral caps on investments eligible for tax benefits, a level-playing field has been created. Tax-saving funds in their new unbridled avatar look all set to emerge as a strong reckoning force in the tax-saving space. A tax-saving fund (also referred to as Equity-Linked Savings Scheme) is a diversified equity fund that offers tax benefits. However, unlike typical diversified equity funds, they are subject to a mandatory 3-year lock-in period. From the tax-planning standpoint, the biggest advantage offered by tax-saving funds is the opportunity to invest in sync with one's risk appetite. Investments for the purpose of tax-saving are no different from conventional investments and the principle of investing in tune with the risk appetite is equally applicable. Tax-saving funds are similar to diversified equity funds in terms of risk profile, i.e. they are high risk-high return investments. Investors with a flair for instruments of the aforesaid variety would approve of tax-saving funds. Investing in equities should always be conducted with a long-term horizon; it is over this time frame that equities have the potential to truly unlock their value and outperform other comparable assets. Tax-saving funds (courtesy the mandatory lock-in period) propagate this cause. The fund manager is not bothered by factors like the fund's performance over shorter time frames or redemption pressures (which the fund manager of a conventional diversified equity fund is subject to) and can go about doing his job with a long-term perspective. From the investors' perspective, tax-saving funds instill a degree of discipline in the investment activity. Tax-saving funds offer a unique investment proposition since investors are granted the opportunity to invest in a market-linked investment avenue and yet claim tax benefits. Conventionally, the domain of tax-saving instruments has been populated by assured return instruments like PPF and NSC. The higher risk profile in turn also means that taxsaving funds are better equipped to clock superior returns vis-à-vis their assured return counterparts like PPF and NSC. For investors who attach more importance to returns and have the ability to take on higher risk levels, tax-saving funds are the place to be.

Another area where tax-saving funds (despite the 3-year lock in period) score over their counterparts from the tax-saving domain is liquidity. While investments in NSC run over a 6-year time frame; it scores very poorly in terms of liquidity. Premature withdrawals are not permitted except in special circumstances like the investor's death or on order by the court of law. Similarly, the PPF has tenure of 15 years; however premature withdrawals are permitted only from the 7th year based on a preset formula. Having established tax-saving funds' credentials as an efficient device for tax-planning, now let's find out how they score as a pure investment vehicle. For the purpose of this comparison, we shall consider the top performers from the diversified equity funds vis-àvis those from the tax-saving funds segment over a 3-year period. Diversified Equity Funds Diversified Equity Funds

NAV (Rs) 1-Yr (%) 3-Yr (%) SD (%) SR (%)

RELIANCE GROWTH (G)

126.64

55.03

66.41

6.43

0.85

FRANKLIN INDIA PRIMA (G)

121.46

51.28

62.59

6.77

0.75

RELIANCE VISION (G)

88.13

32.85

58.41

6.75

0.64

MAGNUM CONTRA

16.37

60.21

54.88

6.20

0.87

MAGNUM GLOBAL

18.42

78.76

53.17

6.24

0.92

TATA EQUITY OPP. (G)

29.01

26.85

52.79

7.27

0.69

HDFC CAP BUILDER (G)

36.98

44.92

46.30

5.91

0.78

DSP-ML OPP. (G)

25.85

19.23

45.98

6.78

0.61

HDFC TOP 200 (G)

51.97

21.05

45.10

6.50

0.60

UTI VALUE FUND

19.55

20.27

44.61

6.37

0.56

(Source: Credence Analytics. NAV data as on May 06, 2005. Growth over 1-year is compounded annualised) (The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)

Over the 3-year period, leading diversified equity funds have had an impressive run. Funds like Reliance Growth (66.41%), Franklin India Prima (62.59%) and Reliance Vision (58.41%) have outperformed (albeit marginally) their tax-saving funds counterparts, i.e. HDFC Long Term Advantage(58.46%), Magnum Tax Gain (57.86%) and PruICICI Tax Plan (52.91%). However, if the tax benefits acquired by investing in tax-saving funds were to be factored in, the latter can match the returns clocked by diversified equity funds. Tax-Saving Funds Tax-Saving Funds

NAV (Rs) 1-Yr (%) 3-Yr (%) SD (%) SR (%)

HDFC LT ADVANTAGE (G)

50.70

49.48

58.46

5.49

0.84

MAGNUM TAX GAIN

42.95

94.29

57.86

7.11

0.90

PRU ICICI TAX PLAN (G)

49.23

67.45

52.91

7.36

0.72

HDFC TAX SAVER (G)

71.03

63.50

52.42

5.63

0.85

BIRLA EQUITY PLAN

37.96

34.23

50.53

6.66

0.66

TATA TAX SAVING FUND

33.59

25.79

45.57

6.38

0.72

SUNDARAM TAX SAVER

13.61

48.59

44.36

6.11

0.68

PRINCIPAL TAX SAVINGS

38.83

25.22

40.57

5.38

0.72

FRANKLIN INDIA TAX. O (G)

67.30

24.51

38.45

5.66

0.66

UTI EQUITY TAX SAVINGS

18.50

25.20

37.01

5.37

0.66

(Source: Credence Analytics. NAV data as on May 06, 2005. Growth over 1-year is compounded annualised) (The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)

There is very little differentiating tax-saving funds and diversified equity funds when comparisons are made on parameters like Standard Deviation and Sharpe Ratio. Standard Deviation measures the degree of volatility which the fund exposes its investors to; conversely Sharpe Ratio is used to measure the returns delivered by the fund per unit of risk-borne. Even if tax-saving funds were to be considered purely from an investment perspective (i.e. without the tax-planning angle) they emerge as feasible options. Finally we present an investment strategy for investments in tax-saving funds, 1. Your risk appetite should at all times determine the total investments in tax-saving funds. Don't go overboard in the segment simply because of the opportunity to rake in impressive returns at the cost of higher risk. 2. Use the SIP route for investing in tax-saving funds. Not only does it do away with the need for timing markets, it reduces the strain on your wallet at the end of the financial year when most investors conduct their tax-planning exercise. 3. The dividend option can help. Despite the 3-year lock-in period, the dividend option ensures that investors have access to liquidity and the opportunity to capture any gains during the lock-in period. 4. While selecting a tax-saving fund, take into account its performance over longer time frames like 3 years and more. Also monitor how other diversified equity funds from the fund house have performed over longer time frames. Shorter time periods like a 1-year period can be misleading while evaluating a tax-saving fund. This article forms a part of The definitive guide to Mutual Funds (May 2005), a free-todownload online guide from Personalfn. To download the entire guide, click here. How to get a home renovation loan August 19, 2005 12:24 IST

Various types of loans are available with housing finance companies to suit the needs and requirements of different individuals. These offerings are in addition to the basic

home loan for the purpose of buying a house. One such type of loan is a renovation loan. We have evaluated the characteristics of the renovation loan and its utility to individuals. Simply put, a renovation loan is a loan taken to cover the repairs and/or renovation of residential property. It is primarily disbursed to carry out civil work like plumbing or doing up the kitchen or painting of the flat. But a renovation loan cannot be obtained if you wanted to undertake say, furniture work. That is because doing your furniture does not fall under the heading of 'civil work'. For the renovation loan to be sanctioned, a quotation must first be obtained from a qualified civil contractor/engineer/architect. The same must then, be submitted to the HFC for approval. Only after the 'technical department' of the said HFC has approved the quotation will the loan be disbursed. The sanction limit for renovation loans is around 85 per cent of the property cost. This percentage includes the home loan amount as well. For example, the property cost is say, Rs 1,000,000, and the individual has taken a home loan of say, Rs 7,50,000 (i.e. 75 per cent of the property cost). In such a scenario, he will be entitled to another Rs 100,000 as renovation loan. However, some HFCs sanction upto 100 per cent of the property cost in such cases. Renovation loans are sanctioned only after the original property papers are in order and submitted to the HFC. The loan will not be sanctioned without them. Therefore, in such a scenario, in case an individual has an existing housing loan from a particular HFC, then he will have to necessarily opt for a renovation loan from that HFC. This is because the original property papers will be with the HFC which will not be in a position to transfer them to another HFC while the home loan payment is on. Evaluate your options Minimum (%) * Maximum(%) * Home loan rates

8.00

9.00

Renovation loan rates

8.25

9.50

16.50

17.50

Personal loan rates

*The figures given above are for IDBI Bank. They may vary across different HFCs/Banks

Both fixed rate as well as floating rate renovation loans can be availed of. The renovation loan rates are generally higher than that for a home loan. For example, as can be seen from the table, IDBI Bank charges 8.00 per cent on its floating rate home loans and 9.00 per cent on its fixed rate home loans. The rates for renovation loans are around 25-50 basis points higher than those charged on home loans. However, the rate of interest on a renovation loan is lower than that for a personal loan. Personal loans have high interest rates vis-à-vis renovation loans by around 500-700 basis points. Therefore, it makes more sense applying for a renovation loan for your house than applying for a personal loan.

Click here to know more about home loan interest rates Often, HFCs have a minimum floor amount for renovation loans. For example, a certain HFC may have Rs 200,000 as a minimum loan amount while another HFC may have Rs 100,000 as the floor amount. However, HFCs have maintained a flexible tenure that ranges from 1-15 years. However, one aspect that individuals need to be aware of -- tax benefits on renovation loans are available only on the interest portion. This is unlike tax benefits for home loans, which are available on both, principal and the interest component. Therefore, you need to evaluate your options well before finalising an alternative. Personalfn offers research, guides and tools to assist you in planning your finances better. Over 150,000 users have registered for our services. Now, how about you?

Now, save tax by caring for animals Anindita Dey in Mumbai | August 23, 2005 13:17 IST

Mumbai, the financial nerve centre of India, recently faced nature's fury at its peak with rains flooding every part of the city, killing people and animals like never before. While during calamity humans find it tough to carry on but can express their plight and make way somehow, animals become vulnerable to the nature's fury and the filthiest treatment of human creation. The cattlesheds of various dairy firms, which supply to the metro its daily requirement of milk and milk products, have reported death of cattle in hundreds. Easier said than done, but possibly one wise way of handling things could have been to let loose the cattle, which could have found their way through water into some safer place or the other. Here comes the role of various charitable organisations and trusts dedicated specifically to the objective of animal welfare. In fact, a lot of them are there in India. Now, just think of it: can there be a way out so that you can take care of such innocent and vulnerable creatures during your daily hectic schedule in a busy place like Mumbai? Yes, you can do it, and with that get some benefits attached to it, as well. You can take care of animals and for doing so, can get tax benefits on personal income. There are two ways of going about it.

1. First, try and look for charitable organisations -- mutt or trusts that have been set up for the sole purpose of taking care of animals, which may include cattle or birds or any exotic and endangered species. Importantly, such bodies should be registered and certified by the Income-Tax department, enabling them to offer tax exemption. It is because if a donation is made to such an organisation, the latter can give the donor a certificate that will grant the donor tax exemption under Section 80G of Income-Tax Act. The exemption is calculated as a deduction to the total taxable income. However, the exemption sum will be either 50 per cent of the donation amount or a maximum of 10 per cent of the gross income, whichever is less. This means, if somebody donates Rs 50,000 and has a gross income of Rs 1,00,000, he can avail of a personal tax deduction -- as part of tax exemption -- to the tune of 10 per cent of the gross income -- Rs 10,000. 2. Second, look for a charitable body or trust set up for animal welfare in rural areas. Explaining the concept, T P Oswal, a leading tax consultant, said this way of taking care of animals is not new in India. In olden days, believers in Hinduism used to have 'panjrapol,' which is equivalent to cattle station, usually found in the western part of India -- Maharastra, Gujarat and Rajasthan. In ancient time, people would leave their cattle in such stations during famine or flood when they themselves found it difficult to survive. Such a body located in Mount Abu, K P Sanghvi Trust, still exists. It looks after almost 7,500 cows and buffaloes. These bodies in rural areas need to be registered and certified with the central government so that if donations are made to them they could give donors certificates guaranteeing tax exemption to them under Section 35AC of the Income Tax Act. Similar institutions set up for saving animals are also found among the Jain community, and they are called 'Jivdaya.' To summarise, a charitable body or trust you choose to make donation to -- for taking care of animals -- needs either an exemption certificate from Income Tax under Section 80G or from the Central government under Section 35AC for you to avail of the tax exemption benefit. Your altruistic self may decide to donate up to 10 per cent of your gross income for animal care.

The top monthly income plans August 26, 2005 11:53 IST

When was the last time you checked on or invested in the MIP (Monthly Income Plan) segment, for that matter? With equity markets touching record highs, investors' attention seems to be focused solely on the diversified equity funds segment and especially the new fund offers (NFO). As a result, other avenues like balanced funds and MIPs have been given the cold shoulder. In this note, we discuss the performance of MIPs over a 1-year timeframe and determine if there is a case for investing in the segment. Top-performing MIPs Monthly Income Plans

NAV (Rs) 6-Mth

1-Yr

Incep.

Asset Allocation Equity

Debt

PRUICICI INC. MULTIPLIER

11.71 8.46% 18.93% 12.31% 27.89%

72.11%

UTI - MIS - ADVANTAGE

11.87 8.88% 17.53% 10.80% 20.20%

79.80%

HDFC MIP LTP

12.08 7.79% 17.35% 10.97% 25.02%

74.98%

RELIANCE MIP

11.57 8.91% 15.25%

9.47% 16.00%

84.00%

BIRLA MIP WEALTH

11.46 5.62% 15.13% 12.28% 23.42%

76.58%

(Source: Credence Analytics. NAV data as on August 16, 2005. Growth over 1-Yr is compounded annualised. Equity-debt allocations as on July 31, 2005)

Top performers from the MIP segment have clocked impressive performances over the last 12 months. PruICICI Income Multiplier (18.93%) leads the pack followed by UTI MIS Advantage (17.53%) and HDFC MIP LTP (17.35%). Clearly MIPs have proven to be lucrative investments for investors. Rank top-performing MIPs MIPs can make ideal choices for investors with a moderate risk appetite. For example, investors who can't take on the risk levels associated with a diversified equity fund or even a balanced fund can consider making investments in MIPs. The segment first shot to prominence in 2003 when a number of fund houses launched their MIP offerings. They were positioned as products which offered the stability of debt and the power of equity. While this is what MIPs can do in an ideal scenario, the risks associated with the product were almost never conveyed to investors. For example MIPs are expected to provide regular (monthly) income, however the returns are not assured. Sadly unscrupulous distributors and investment advisors never revealed these aspects of MIPs to investors.

This mis-selling coupled with a downturn in the equity markets led to a lot of disillusionment among investors. A noteworthy feature about MIPs is the wide range of options available to investors. MIPs can be segmented based on the equity component in their portfolios; for example conservative MIPs (investing 5%-10% in equities), moderate MIPs (investing 15%-20% in equities) and the aggressive ones (investing 25%-30% of their corpus in equities). Effectively every investor has the option of investing in line with his risk appetite. Another factor which warrants investments in the MIP segment is the limited options available to the low risk investor. The rationalisation process has adversely impacted the small savings segment; also pure debt funds are unlikely to be very attractive investment propositions going forward. MIPs (powered by the presence of an equity component) are equipped to provide the much-needed kicker to investors' portfolios. Interestingly, the limited equity component ensures that the investor doesn't deviate from his risk profile either. The equity markets seem to have hit a purple patch presently and look like they could do no wrong. However investors should block all the 'noise' and refrain from making investments contrary to their risk appetite. This is especially true for investors with a modest risk appetite who feel that they are missing out on the bull run. The solution to this dilemma could lie in MIPs as well. Our advice to investors -- MIPs can add significant value and investors must consider making allocations in line with their risk appetite. Should you buy new or 'resale' property? July 01, 2005 14:05 IST

Home loan disbursements continue to be on the upswing. And with interest rates a far cry from the heady days of 12-13 per cent, borrowers too never had it so good. But the one dilemma that new homebuyers still face is -- do they opt for resale property or do they buy a new home? Here, we have outlined some pros and cons of both resale as well as new property. 1. Home loan term/amount Depending on how old the property is, the loan tenure could vary. Some housing finance companies (HFCs) do not give a home loan for property that is more than 50 years old.

This impacts the tenure of the home loan. For example, an individual, aged 30 years and drawing a salary of Rs 1,000,000 p.a. wants to buy a 40-year-old property. Under normal circumstances, if the property were new, he would have been able to opt for a (maximum) 20-year tenure. But since the said property is 40 years old, and the HFC doesn't offer home loans on properties that are more than 50 years old, his tenure will be limited to a maximum of 10 years (i.e. 50 years-40 years). This will have an adverse impact on the equated monthly instalments (EMIs), which will increase due to a reduction in the tenure. In such cases, buyers may consider changing their decision to buy very old properties. Buyers of new property do not have to face any such difficulties. Another point worth mentioning is the location of the property. If the property is situated in a prime locality, then the amount of home loan, which may be given, can go up to 90% of the cost of property in case of resale property. Whereas, if the property is in a nonprime locality, then it will go down to say, 85%. 2. Property resale value The resale value of an old property will be different from that of a new property. Obviously, older the property, lower will be the resale value. Newer properties command a very good market value compared to properties, which were built, say, 20-30 years ago. The decision to go in for new or resale property will prove to be especially useful to buyers who are buying property as an investment or for those individuals who plan to utilise the tax benefits effectively. This will also be useful to buyers who are currently staying in employer-provided accommodation and plan to buy a house soon. 3. Documents In case of new property, there is relatively less documentation compared to resale property. In case of resale property, there are a lot of issues. For example, the previous agreement (also known as the 'link agreement') is required along with registration and stamp duty receipt, allotment letter (which the seller may not have if he has purchased the house on a loan). If the buyer too opts to purchase the house on loan, then things might get difficult for him without even one of these documents, as his HFC will refuse to grant him a loan. 4. Maintenance This too has to be an important criterion while zeroing in on a property. Usually, older properties have lower maintenance charges as compared to new properties. Part of the

explanation lies in the fact that nowadays, new properties come along with a host of addon benefits like, higher parking charges and higher overall society bills. This is quite unlike many older residential properties. However, we also have to look at the fact that older properties have to spend more on the general maintenance of the building. Recurring costs like painting the society, waterproofing and structural repairs have to be borne by the society (in effect, the society members) at regular intervals. This adds substantially to the financial burden of the individual. Newer properties do not have to incur such repairs in its initial 10-15 years.

Here's how you can be rich! July 01, 2005

My previous article 'Want to be Rich? Read this!' evoked huge reader response. Most people wanted to know how to earn 15 per cent returns for 40 years to amass huge wealth. Unfortunately there is no easy and straight answer to this question. One needs to do proper asset allocation to generate 15 per cent returns over the long term. Proper asset allocation will ensure that in case one investment goes down the other investment will generate good returns to ensure that you get decent returns over the long run. Still there can be few years when you don't generate high returns which can be compensated by few years of extremely high returns. One needs to understand that there is no sure way to generate exact 15 per cent returns every year. Here I will consider a few investment options that give high returns and will take a sample portfolio to explain how asset allocation can be done to get decent returns. Tax saving instruments Now government has allowed to invest up to Rs 100,000 to get tax rebates. It can be used completely before considering any other investment avenue. One can invest in Public Provident Fund, National Savings Certificate, Provident Fund, Tax Saving Mutual Funds, et cetera. Infrastructure bonds can be avoided due to low returns provided by them. Considering that you get tax rebate through these investments, your effective returns go up. Please read article 'Get risk free 60% return! Here's how!'

Equity Stocks may sound very risky to most of the people who try to enter at the peak of the market to make a quick buck. But there is definitely some risk-free way of making money in the stock market without trying to time the market, without applying extra knowledge, without taking undue risk. If it were so simple to make money in stocks, everyone on earth would be rich. The main reason why people lose money in the market is that most of them don't have patience required to ride through down periods of the stock market. Everyone wants to make a quick buck and exit. For people with patience and perseverance to go through the market slowdowns, stocks can provide extremely good returns to beef up overall returns on portfolio. Interested in knowing how attractive returns can be generated from stocks without taking undue risk and without timing stock market. Read 'Everyone ought to and can be rich'. Property Property generates about 12-15 per cent returns over the long term. There can be few years when there is no appreciation in property price and there can be few years when property gives extremely good returns. To generate good returns in property one needs to buy during the down periods in a fast growing locality. The main constraint in property investment is that it requires a huge investment. Fixed deposits Investments can be done in either bank fixed deposits or company fixed deposits. Bank fixed deposits can be done easily and provide good liquidity because it can be broken easily with little penalty. Nowadays, lots of banks provide a 'smartsave' facility where extra money is automatically transferred to fixed deposits providing high returns. If money can be blocked for about one year then fundamentally good companies can be considered for investment. To get more details about company fixed please visit your nearest branch of any financial advisor like Bajaj Capital, et cetera. Cash It is most important part of any investment. You should keep cash for various kinds of expenses for the next 6 months or, at most, put it in fixed deposits. Otherwise you may end up selling any of the previously mentioned investments at the bottom of the market when you should be actually investing more.

The aforementioned investment avenues can be considered for generating 15 per cent returns over the long term. I would like to repeat that these will not necessarily generate exact 15 per cent returns every year. There may be few years when you get just 2 per cent returns and there may be few years when you get 35 per cent returns. But over the long term -- for 15 to 20 years -- it should generate annual return of 15 per cent return. Hereunder I will explain a sample portfolio with conservative expected returns. In the examples below, I assume that one invests Rs 100,000. Expected returns for future are taken from average returns for last 30 years, assuming it should generate similar kind of returns for next 30 years. Investment Avenue Tax Saving Instruments Equity or Diversified Mutual Funds Property Fixed Deposit Cash Total Amount

Amount Invested Expected Return

Total Amount

30,000 (20,000 – PPF 10,000 – Tax Saving MF) 40,000

12% (Details explained in article above) 22% (Annual return from diversified MFs for 30 yrs) 15% (Annual return, rent and appreciation for 30 yrs) 7%

33,600

4%

10,400 115,000

10,000 10,000 (5,000 – Bank FD 5,000 – Company FD) 10,000 100,000

48,800 11,500 10,700

In the above table one has invested Rs 100,000 in various investments and got Rs 115,000 at the year-end. It resulted in generating 15 per cent annual return. One definitely needs to take calculated risk to get above average returns. One should understand the risk involved in various investment avenues. One may change the amount allocated to various investments depending on risk profile. The author works with a software company in Bangalore. The opinions expressed here are personal.

6 reasons why a home loan is refused July 19, 2005 11:09 IST Last Updated: July 19, 2005 11:35 IST

Individuals applying for a home loan get upset when their applications are turned down. Of course, there are reasons for the same, but they are not adequately conveyed to the individual. The agent interacting with the individual needs to be more proactive about it and let the individual know upfront what could go wrong with his home loan application. Here, we take a look at some of the reasons why individuals may be unsuccessful in applying for a home loan. Area of the flat HFCs (housing finance companies) generally have specific norms with respect to a minimum area of the flat. For example, one HFC has a norm of giving a home loan only if the built-up area of the flat is at least 400 square feet. Of course the 'minimum area' prerequisite will vary across HFCs. You need to ensure that your home meets the minimum area requirement while applying for the loan or alternatively look for an HFC that gives a loan that fulfills your criterion. Financial profile of the individual The individual's financial profile is an important consideration for HFCs before they lend money to him. For example, an HFC may require that an individual have a minimum income, of say, Rs 8,000 per month, to qualify for a home loan. In most cases the individual will also need to furnish a guarantor's signature. Many HFCs also decline loans to individuals who do not have a fixed and certain source of income. Another aspect that HFCs scrutinise is the credit history of the individual in terms of bounced cheques and loan defaults to cite a few parameters. Personal profile of the individual HFCs also take into account the personal history of an individual. For example, an HFC will want to look at the number of dependants an individual has before clearing the loan. This is done in order to ascertain the repayment capability of the individual. A higher number of dependants implies lower repayment capacity. Similarly, an HFC will also run a check on his savings habits. This they will do by way of asking for say, the last 6 months' savings account statement from the individual. The balance should be such as to ensure that the individual is able to honour his EMI commitments. Individual's age If the property is co-owned, then the co-owner cannot be a minor. Similarly, the co-owner cannot be above a certain age limit. The age limits have been set to minimise ownership disputes. Also, the age limit will affect the tenure of the home loan in some cases and in effect, the EMIs too.

Lets take an HFC that has an 80-year age limit for the co-applicant. If the applicant is 40 years old and the co-applicant is 70 years old, then the home loan will be sanctioned for a maximum period of 10 years (80 years minus 70 years). Likewise the applicant's retirement age is also considered. For example, if the applicant is 55 years of age and is set to retire at 60 years, then the maximum loan tenure available will be 5 years. Legal/technical discrepancies HFCs are also likely to decline the loan in case of a legal/technical discrepancy. For example, if the title deed to the property is not clear, then a loan will not be granted. Similarly, individuals should be able to produce post-1991 historical agreements (also referred to as link agreements) for the property alongwith the stamp duty receipt and the registration receipt. Age and location of property The age of the property can be important in case of resale. Home loans on resale properties are sanctioned only if they are less than 50 years old. Likewise, certain areas are also marked as being 'negative' in the books of some HFCs. If an individual intends to buy a property in such an area, then he will not be granted a loan by the HFC. Similarly, the property also has to fall within the geographical limits as defined by the HFC for it to sanction the home loan. For example, the geographical limits defined by IDBI Bank for Mumbai are Churchgate-Virar and CST-Kalyan. Of course, there are a few negative areas defined by IDBI Bank, as explained before, which fall within the said geographical limits.

How to buy stocks, carefully July 25, 2005

After reading my previous article, some of my friends suggested that I write about technical analysis and how to make money quickly. There are a lot of people who have made money in the stock market using technical analysis. But I don't understand technical analysis and I am sure most people are like me. However, what I learned from great investors like Warren Buffet and Benjamin Graham is that if you buy shares of good businesses at a fair price with a margin of safety and good management, you can get reasonable returns over the long term.

I want to emphasise 'long-term' -- typically 3-5 years or more. In my previous articles I discussed about the importance of: • • • •

Investing in stocks like you invest in a good business; Ability to buy the stocks at the right price; Integrity of the management; and Staying away from stock tips.

In this article, I want to elaborate on the first point of investing in good businesses with specific examples. What is technical analysis? What are the key things you need to look in a business to invest? A good business to me is a one that I can understand and has a reasonable history of making money for the shareholders. One should clearly understand how the business runs and how the business makes money. If you talk about biotechnology, I don't have a clue about it. I don't know which companies have better research or which companies are going to survive after 10 years. But if you talk to me about Blue Dart courier service or Zee Television or ICICI Bank or UB Group or GSK Consumer (owner of Horlicks, Boost, Viva), I can reasonably say that these companies will still be around after 10 years or more. These companies have significant competitive advantages. So what do I mean by competitive advantage? In plain English, if you imagine that these companies are like kingdoms, then competitive advantage is like a moat (a moat is a deep defensive trench/ditch usually filled with water and probably alligators that surrounds the castle to provide a barrier against attack upon castle ramparts or other fortifications). The bigger the moat, the tougher it is for the enemy to attack the kingdom. An MBA grad would use this fancy term, calling this a 'competitive advantage'. The ability to evaluate moats is very important for the long-term investment returns. Let's see if there are any businesses with that kind of advantage. There are mainly two types of advantages: 1. Cost Advantage: If Company A can make a cell phone for Rs 5,000 and Company B can make a similar cell phone at Rs 3,000, then Company B has a cost advantage of Rs 2,000. This is so because of a number of reasons: volume, supply chain, technical knowhow, raw materials, tax advantages, etc. Most of these advantages are not sustainable unless the company has exclusive rights or some such thing which competitors cannot replicate.

The first company with such advantages that comes to my mind is Tata Steel (Tisco). It has its own ores. When you buy shares of such companies when the industry is down or when every one is shunning the steel industry, like in 1999 or 2000, there is a good chance that you will make reasonable capital appreciation. One good way to understand is to know which companies are still up and around when most of the firms in that industry sector are shutting down. It's only the ones with a strong competitive advantage and cash flow that survive. The challenges in these kind of companies are: a). They should be able to evaluate the competitive advantage b). They should follow the industry cycle closely. Let's take another example and compare SAIL with Tisco. Both are steel companies. I know they are a little different on their products, but while comparing we can still get an overall idea whether Tisco has a cost advantage or not. If you look at gross margins or net margins, you will see that Tisco has better gross margins and net margins compared to SAIL. TISCO

Months Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn % % %

12 31/03/2002 67,079 1,190 68,269 12,713 5,248 4,032 4,623 -2,113 461 2,049 19 10 3.1

12 31/03/2003 87,213 880 88,093 23,020 5,555 3,424 14,921 -2,296 2,502 10,123 26.4 16.8 11.6

12 31/03/2004 107,024 1,592 108,616 34,953 6,251 1,408 28,886 -2,227 9,197 17,462 32.7 31.8 16.3

Net Sales Other income Total revenues Gross profit Depreciation Interest Profit before tax Extraordinary Inc (Exp) Tax Profit after tax Gross profit margin Effective tax rate Net profit margin SAIL Net Sales Other income Total revenues Gross profit Depreciation Interest Profit before tax Extraordinary Inc (Exp) Tax Profit after tax Gross profit margin Effective tax rate

Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn % %

137,011 10,252 147,263 -37 11,559 15,620 -16,964 4,906 105 -12,163 0 -0.6

170,504 5,407 175,911 16,382 11,467 13,340 -3,018 -141 -116 -3,043 9.6 3.8

215,284 6,027 221,311 40,822 11,226 8,994 26,629 -347 1,161 25,121 19 4.4

Net profit margin Source: Equitymaster.com

%

-8.9

-1.8

11.7

2. Brand Advantage (share of mind): Let's take tea. If I were to choose between buying, say, Taj Mahal Tea (Tata Tea) and some street brand tea, I would choose Taj Mahal Tea. I am also even willing to pay a premium up to 20 per cent to buy it. If someone likes Taj Mahal Tea even more than I do, they might pay a much higher premium than 20 per cent. Let's say the company increases tea prices by 10 per cent. There is a good chance that I would still buy the premium tea. A product has a competitive advantage if customers prefer it to others even if the company hikes prices by 10 per cent or more. The other way to look at it is whether you can pass off most of the costs to the customers. If you can and your competitors are unable to do it, then you have a clear competitive advantage. You can see the difference between Jayashree Tea and Tata Tea. You can clearly see how Tata Tea was able to sustain the margins in the last couple of years where tea prices were really low. Tata Tea (Indian operations) Income data Net Sales Other income Total revenues Gross profit Depreciation Interest Profit before tax Extraordinary income Tax Profit after tax Gross profit margin Effective tax rate Net profit margin

Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn Rs mn % % %

2002 7,494 558 8,052 839 217 322 858 97 151 804 11.2 17.6 10.7

2003 7,416 754 8,170 720 227 280 967 34 242 759 9.7 25 10.2

2005/04 211.45 11.59 207.84 3.4

2004/03 177.54 17.24 183.33 4.06

Source Equitymaster.com Jayashree Tea (in Rs crore) Year Sales Income Other Income Expenditure Interest

2004 7,700 769 8,469 831 220 182 1,198 4 293 909 10.8 24.5 11.8

Gross Profit Depreciation Tax PAT Equity OPM (%) GPM (%) NPM (%)

11.8 5.47 0.04 6.29 10.67 1.71 0.1 2.97

7.39 4.8 -0.59 3.18 10.67 -3.26 -5.55 1.79

Source: ICICI Direct I want you folks to think about the airline business. There is a lot of buzz about airlines, their growth rates and IPOs. At least a dozen airlines are going to compete in the next few years. Can you say which companies are going to have a cost advantage or a brand advantage? If you have seen the history of airlines in the United States, collectively they have lost more shareholder money than most other industries. In spite of logging spectacular growth rates in the last 70 years, they have still lost money. I have just talked about things I like to see when I invest in a business. At the same time, I don't want to see a few things in businesses like excessive capital expenditure and companies with high debt. Can you imagine a manager saying, 'Hey, we made Rs 1,000 last year, but can you give Rs 995 so that we can make Rs 1,000 again next year?' As the saying goes, 'You can say a lot about the housewife based on how tidy the house is.' In the same way, you can say a lot about the company based on how they managed their debt. If a company has an excessive debt, I don't want to be a part of it. It is very important to how much debt the company has. And yes, you should always ask these questions before you invest: • • • •

Do you understand these companies? Are they going to be here for another 10 years? Is the stock price reasonable? Is the management honest?

In my next article, I will discuss more about reasonable price and management honesty. The author works as a Finance Manager at a Fortune 500 company. He did his MBA from Washington University at St. Louis and MMS from BITS, Pilani.