| By Ajit Panicker: Research Based |
Financial well being profile | ||
| Area | Ratio | Recommendation | |
| Liquidity | liquid assets/ monthly expenses | >= 250 %( >=2.5 times of monthly expenses) | |
| Saving | Savings/ Gross income | >=10% | |
| Asset Allocation | Liquid assets / Net worth | >=15% | |
| net investments assets/ Net worth | >=50% | ||
| Foreign investments/ Total investments | >=10% | ||
| Inflation Protection | % change in networth/ rate of inflation | >=2 | |
| %change in investment assets / rate of inflation | >=2 | ||
| Housing expenses | renter's expenses/ gross income | <=30% | |
| homeowner's expenses/ gross income | <=35% | ||
| Insolvency/ Credit | non mortgage debt payments/ after tax income | < 15% reasonable, >=20% danger point | |
| total debt payments/ after tax income | <35% reasonable, >=45% danger point | ||
Tuesday, 11 December 2012
Financial well being profile: Check your Ratios
Financial Ratios, a rough skeleton on which a Client's Financial well being can be projected
Financial planners usually on their way to create a path of financial freedom for their clients, start with the analysis of the current set of investments and the plans which the client has taken. The current financial situation is judged basis their net income and expenses, their debt, their liquid assets, liquidity, solvency, net worth, savings rate etc.Financial ratios are decision making tools which tell you how good or bad your financial health is.
For any financial plan to be made all the above ratios have to be taken into consideration. Let us have a quick look to what they actually mean:
1.Net worth ratio, simply means what is the difference between the total assets you possess and the total liabilities which stand against your name.
Net worth is not only that starting step that directs you to set a financial plan to reach your goals, but helps you to protect your assets via insurance coverage by determining the worth of your assets.
Formula: Net Worth = Total of all your assets – Total of all your liabilities
Thumb rule: Net Worth thumb rule = (Your Age x Gross Annual Income from all sources except inheritances)/10*;
Example: If you're 30 and earn Rs 5 lakhs a year, ideally you should have a net worth equal to or more than Rs 15 lakhs.
2.Savings ratio
The Savings ratio simply tells you how much are you saving monthly. It is not only the proportion of income which is saved, but also a measure of one's risk profile whether you are proactive with investments or not.
Formula: Savings Ratio = Monthly savings / Total monthly Income
Rule of thumb: There is no general rule of thumb as the amount of savings to be made depends upon an individual’s lifecycle stage. As a guideline, it can be taken as 15%-20% of monthly salary. However, the more the better.
Note: A single month savings ratio does not reveal much but taking an average of several monthly savings ratios will be a better indicator of how good or bad you are at saving.
3) Debt to income ratio
This ratio indicates the total monthly income that goes towards paying all your monthly debts (home loan, car loan, personal loan, credit card, consumer durable, gold loan etc) - all outflows towards servicing debt are taken into account here.
Formula: Debt to Income Ratio = Monthly debt payments / Total monthly Income
But just about everyone has debt. The real question how much is too much? That will again depend upon the lifecycle stage of the individual. For example, a man in his early 30s usually would be servicing more debt payments (on account of home loan, auto loan, consumer durable etc) than a person in his 50s who is nearing retirement.
Rule of Thumb: The lower the ratio, the better. The lower this ratio the lesser burden there is on the individual to make payments on his/her debts. High debt to income ratio also means having a low savings rates. It also threatens one’s ability to retire with the desired retirement corpus. General guideline is a ratio of less than 40%.
2 more Debt ratios:
(i) Housing loan outflow Ratio – This is a parallel version of debt-income ratio used by home loan underwriters to scrutinize the creditworthiness of borrowers. You can apply this to assess your monthly housing loan liability against monthly total income.
Formula: (Home loan EMI + loan insurance + property taxes + other relevant payments) / by Total Monthly Income
Rule of Thumb: Housing loan expenses should not exceed 30% of gross monthly income.
(ii) Credit card debt Ratio – On similar lines of housing loan outflow ratio is credit card debt ratio. It is useful to assess credit card debt payments vis a vis total monthly income.
Formula: Monthly credit card debt payments/ Total monthly income
Rule of Thumb: This ratio should be less than 20%. A high ratio could point to excessive use of credit cards.
4) Debt assets to Total assets ratio
This ratio compares total debt assets to total assets to gain a general idea as to the amount of borrowed money being used by you.
Formula: Total debt assets/Total assets
Rule of thumb: A lower ratio is desirable. A low ratio means that you are less dependent on borrowed money.
Saturday, 8 December 2012
E-Gold is recommended over Gold ETF- My recommendation
The reasons for opting e-gold over Gold ETF are good enough, to choose between the two. Investors can invest in gold through ETFs as well through e-gold of national spot exchange.There are some minor differences in ETF and e-gold.
1.Fund managers track gold prices through Net Asset Value (NAV).NAV of Gold ETF is net of liabilities so NAV and returns of different ETFs are different.
2.While in NSEL e-gold investors directly tracks gold prices.
3.NAV of ETFs are inclusive of custodian charges.while NSEL do not charge any holding charges.
4.In e-gold ,investors are directly holding the gold units ,,,while in Gold ETFs gold is actually owned by mutual fund AMCs.
5.Physical delivery in small denominations is possible in e-gold.while in gold ETFs physical delivery depends on sole discretion of ETFs.
6.ETFs may offer delivery for investors holding Gold of higher amount.
7.We can invest in gold ETF only up to 3:30 PM IST as market get closed.while spot market is open till midnight and we can invest in e-gold series till 11:30 PM.Suppose if gold ETF closed with NAV of 2300 (Time : 3:30 pm) and get closed at e-gold at 2330(At 11:30 pm).Then there is a difference of Rs.30 per gram in both the prices.Gold ETF will try to cover up this difference on opening itself.Investors will not get opportunity to get the price in between.
8.In both cases,buy-sell intraday/delivery brokerages are payable which are in general in the range of 0.3 to 1%.
9.E-gold will be taxed like a Physical gold while Gold ETFs are taxed as Non equity mutual fund
From above, we can observe that E-gold has got edge over Gold ETF.
So, it is recommended to to invest in gold via E-gold.
Saturday, 27 October 2012
Why consult your Financial Doctor aka Financial Planner?
Authored by: Ajit Panicker
Financial planning is not only about investment planning. Investment planning is a part which comes under the umbrella of a comprehensive financial planning. People make some common mistakes when taking crucial financial decisions related to their asset building or investment with "return" as the biggest parameter to judge.
Doctors are specialists in their fields of medicine and surgery, so also are other professionals. Similar to them, Financial planners are professionals certified by FPSB Board in India ( FPSB India is a part of FPSB Ltd, USA). They are certified to do financial planning internationally.
Usually, the decisions in a family are taken by the eldest most but in many families it could be liberal to an extent that , opinions are asked. The purpose of taking opinion from elders or those who are experienced is basically because we expect them to have knowledge about those aspects But is it prudent to say that, every eldest member of the family, knows about all the things in this world. No , it is not.
Financial Planners are specialists in their field , who know their job and do comprehensive financial planning.
Therefore you should consult your financial planners , not only before taking any financial decision but to plan you finances , so that your life can be planned.
Few WHY's to consult your Financial Planner:
1. Financial Planner is a super specialist in managing and planning your finances.
2. He is a certified professional, registered under an internationally acclaimed board and examination.
3. He is focused in helping you set your goals and achieve the same on time.
4. He is knowledgeable and recommends you the best plans.
5. He has great interest in the field of financial planning and so keeps himself abreast with the latest in the financial world.
6.He is your Financial doctor, who treats your diseased financial portfolio and wrong decisions.
7. He is unbiased and gives genuine recommendation which are highly useful and advantageous in long term.
8. He is empathetic and understands the "returns" sentiments attached to each asset or investment being made in an asset.
9. He constantly endeavors to keep you happy and free from all financial turmoils or tensions.
Financial planning is not only about investment planning. Investment planning is a part which comes under the umbrella of a comprehensive financial planning. People make some common mistakes when taking crucial financial decisions related to their asset building or investment with "return" as the biggest parameter to judge.
Doctors are specialists in their fields of medicine and surgery, so also are other professionals. Similar to them, Financial planners are professionals certified by FPSB Board in India ( FPSB India is a part of FPSB Ltd, USA). They are certified to do financial planning internationally.
Usually, the decisions in a family are taken by the eldest most but in many families it could be liberal to an extent that , opinions are asked. The purpose of taking opinion from elders or those who are experienced is basically because we expect them to have knowledge about those aspects But is it prudent to say that, every eldest member of the family, knows about all the things in this world. No , it is not.
Financial Planners are specialists in their field , who know their job and do comprehensive financial planning.
Therefore you should consult your financial planners , not only before taking any financial decision but to plan you finances , so that your life can be planned.
Few WHY's to consult your Financial Planner:
1. Financial Planner is a super specialist in managing and planning your finances.
2. He is a certified professional, registered under an internationally acclaimed board and examination.
3. He is focused in helping you set your goals and achieve the same on time.
4. He is knowledgeable and recommends you the best plans.
5. He has great interest in the field of financial planning and so keeps himself abreast with the latest in the financial world.
6.He is your Financial doctor, who treats your diseased financial portfolio and wrong decisions.
7. He is unbiased and gives genuine recommendation which are highly useful and advantageous in long term.
8. He is empathetic and understands the "returns" sentiments attached to each asset or investment being made in an asset.
9. He constantly endeavors to keep you happy and free from all financial turmoils or tensions.
Monday, 18 June 2012
A Financial Plan creates a path to your Financial Freedom
A financial plan is a road map, of sorts − as clear and accurate as possible − that can help you determine:
- Where you’re situated financially
- The direction you should be heading
- What it might take to reach your destination
After all, you wouldn’t set off on a journey through a strange land without some kind of help − a map, a compass, even a guide.
It’s never too late to plan
Regardless of how near or far you may be from retirement, it’s never too late to create a financial plan.
The future is too important − and many people make poor financial decisions because they don’t know where they are or if they’re headed in the right direction.
What a plan should include
A financial plan can be either loosely structured or highly detailed, based on your individual needs. Written on a legal pad or imported onto a spreadsheet. With either approach, your financial plan should be a true picture of your current financial health and a realistic view of your goals (short-term, intermediate and long-term).
To be useful, it also should be updated as your needs and life situation changes and reviewed at least annually.
More than a list of investments
A realistic financial plan is not simply a list of your investments.
Investing may be a major part, but a comprehensive plan also should address such things as insurance, debt, cash flow management and estate planning and the seemingly mundane, as well − taxes, inflation, investment expenses, etc.
The investment professional as guide
Sound overwhelming?
Your investment professional can help you create a comprehensive financial plan and − just as importantly − work with you to keep it updated as your lifestyle, conditions and objectives change.
Getting started on your plan
Here are 10 things to consider or questions to answer as you prepare your financial plan:
- Your goals. Where do you want to be − and expect to be − in 10, 20, 30 years? Remember that you may be living in retirement longer than you think.
- An estimate of your longevity. There’s a 50-50 chance that at least one partner from a couple in their 60s today will live to age 95, so be optimistic.
- Your wages, debt payments and living/household expenses and other budget items. You’ll need to figure out how much you can afford to contribute to your plan.
- A list of your assets. Take stock of, well, stocks, bonds and other pieces of your investment portfolio, as well as savings accounts, retirement plans and the equity in your home.
- The kind of lifestyle you have now and what will you want or need later on. How will you be able to pay for the lifestyle you want?
- Your current savings plan. How much money are you saving now? Where is it going − savings account, Roth IRA, etc. Is it enough to help fund your future? And at what point do you expect to start using your savings for living expenses.
- Your level of investment risk − now and in the future. Are you comfortable with the investment risk you’re taking with your investments? Or does it need to change to better reflect your own situation or the state of the economy?
- Take a hard look at what income you may have in retirement. Research your Social Security benefits and look into any dividend, pension or other income.
- An estate plan. More than a will, an estate plan can ease the burden on your loved ones, ensure your assets are distributed as you wish, reduce taxes and plan your own personal and health care.
- An emergency fund. How would you pay for an unexpected event − flooded basement, extended illness, job loss, etc.?
Saturday, 16 June 2012
Eurozone crisis may affect Indian banks
Though Indian banks' exposure to the troubled eurozone is negligible, funding pressure could impact them, according to the Economic Survey 2011-12.
"The recent regulatory prescriptions for European banks have raised fears of deleveraging. Indian banks are not expected to bear any direct impact on account of their negligible exposure to the troubled zone," according to the survey tabled by Finance Minister Pranab Mukherjee.
The scope for countercyclical financial policy could be explored in financial regulations in order to minimise negative impact of accumulated financial risks, it said.
This will go a long way in providing needed stability to the financial system, it added.
The survey noted sovereign risk concerns, particularly in the euro area, affected financial markets for the greater part of the year, with the contagion of Greece's sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.
Despite the demanding operational environment, it said, the Indian banking sector demonstrated continued revival from the peripheral spill over effects of the recent global financial turmoil.
Highlighting the importance of financial inclusion in the financial sector, the Survey said it is seen as an important determinant of economic growth.
Banks need to take into account various behavioural and motivational attributes of potential consumers for a financial inclusion strategy to succeed, it said.
Besides, it said, access to financial products is constrained by lack of awareness, unaffordable products, high transaction costs, and products which are not customised and are of low quality.
A major challenge in the times ahead would be to meet financing requirements, particularly of the unorganised sector and the self-employed in the micro and small business sector, it said.
"The recent regulatory prescriptions for European banks have raised fears of deleveraging. Indian banks are not expected to bear any direct impact on account of their negligible exposure to the troubled zone," according to the survey tabled by Finance Minister Pranab Mukherjee.
The scope for countercyclical financial policy could be explored in financial regulations in order to minimise negative impact of accumulated financial risks, it said.
This will go a long way in providing needed stability to the financial system, it added.
The survey noted sovereign risk concerns, particularly in the euro area, affected financial markets for the greater part of the year, with the contagion of Greece's sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.
Despite the demanding operational environment, it said, the Indian banking sector demonstrated continued revival from the peripheral spill over effects of the recent global financial turmoil.
Highlighting the importance of financial inclusion in the financial sector, the Survey said it is seen as an important determinant of economic growth.
Banks need to take into account various behavioural and motivational attributes of potential consumers for a financial inclusion strategy to succeed, it said.
Besides, it said, access to financial products is constrained by lack of awareness, unaffordable products, high transaction costs, and products which are not customised and are of low quality.
A major challenge in the times ahead would be to meet financing requirements, particularly of the unorganised sector and the self-employed in the micro and small business sector, it said.
CHITTI, the Financial ROBOT , answers you " What is Foreign Direct Investment"
Authored By: Ajit Panicker
Foreign Direct Investment is an investment which is made in a country by company or a group from some other country either by buying out the company from the target country completely or by buying a percentage of it or by expanding its operations into the target country in the line of existing business.
Foreign Direct Investment or FDI, is done in either of the ways:
Foreign Direct Investment is an investment which is made in a country by company or a group from some other country either by buying out the company from the target country completely or by buying a percentage of it or by expanding its operations into the target country in the line of existing business.
Foreign Direct Investment or FDI, is done in either of the ways:
- By incorporating a wholly owned subsidiary or company
- by buying out shares of the company
- by mergers or acquisitions
- through an equity joint venture
According to the Ernst & Young (E&Y)'s 2012 India Attractiveness Survey, investors view India as an attractive investment destination. India stands as the fourth most attractive destination for FDI in the survey's global ranking. Domestic market's high potential driven by an emerging middle class, cost competitiveness and access to a highly qualified workforce are the major factors that has been the magnet force to attract global investors.
But of late, in past few months due to delayed political and economic decisions by the Indian government, there has been an outflow of the foreign investment and together with other factors the investment picture is looking bleak as of now. It is just a passing phase , wherein a number of external, global and internal factors have impacted the country, but there would soon be a turnaround and in next 2 years , the growth story would be right back on the track.
Friday, 15 June 2012
Real Estate Market Attraction: Greater Noida Edition
Edited By: Ajit Panicker
Greater Noida is shaping up as India's smartest city, the National Capital Region’s most modern urban development. And the fastest-developing center of attraction for people from Delhi, Noida, Ghaziabad, Gurgaon and Faridabad.
Greater Noida has emerged as a modern model of farsighted town planning. Availability of basic infrastructure is planned to exceed demand at all stages of development and inter-flowing green spaces, a grid iron pattern of wide roads for an efficient transport system, and a unique integration of industrial, commercial, institutional and residential zones.
There's even an 18-hole, 236-acre PGA-standard golf course designed by renowned-golfer Greg Norman. And an endless supply of unpolluted, fresh air!
Just 35 minutes from Delhi by the state-of-the-art Taj Expressway, Greater Noida boasts of smart differentials:
Privatized power, Smooth and wide road, Abundant clean sweet water. Underground drainage, Unfailing optical fibre-based telephone network, Trade Mart for handicraft promotion, Impeccable law and order
Residential Destination: It is the kind of living in a prime suburban neighbourhood that you've always dreamt of - in your own home with large rooms amidst open spaces that encompass lawns, gardens and a driveway. Also, where you enjoy 24-hour power and water supply and plenty of fresh air. Now, it's within your reach. Just a half-hour drive from Delhi - via the DND Flyway and six-lane expressway to Greater Noida, in an uncongested, pollution-free environment with world-class facilities for better living.
Being developed on 20,000 hectares with wide roads, underground cabling and drainage system, the city offers amenities and infrastructural facilities of international standards. Among them : Reputed Educational Institutions, Shopping Centres, Medical facilities, Aesthetically-developed Theme Parks and Entertainment Complexes- and even a 222 acre international designer Golf Course. You couldn't ask for more!
With an expected population of 3 lakhs up to 2001, 7 lakhs up to 2011 and 12 lakhs up to 2021, Greater Noida City has been designed for planned growth to ensure supply will always exceed demand.
As many as 25,000 plots have already been allotted to various professionals and senior executives. To join this exclusive neighbourhood, you can now buy affordable plots in prime locations of Greater Noida.
Remember, only a city of the future can bring back the lifestyle of the past.
Greater Noida Industrial Development Authority (GNIDA) is the nodal agency responsible for overall development of the Greater Noida City. The GNIDA was established in Jan. 1991 under the UP Industrial Area Development Act, 1976.The Act mandates Planning, Development, Operations & Maintenance and Regulatory functions to a single agency – GNIDA.
Industrial Destination
Ecotech is Greater Noida's exclusive Industrial area where rights of admission are reserved. In fact, polluting industries are prohibited from setting up here. However, for those allowed in, the Authority ensures not just speedy clearances and approvals but also incentives to promote early commissioning of projects. An effective single-table functioning guarantees project clearance within a month and an empowered committee continuously monitors the progress of these projects.
Industrial investment taking place in Greater Noida is now over Rs. 10,000 crores. It has now become one of the favoured locations for good industrial investment specially of multinational investment because of its good infrastructure near Delhi and effective single window system of speedy decision making and clearances.
Industrial investment taking place in Greater Noida is now over Rs. 10,000 crores. It has now become one of the favoured locations for good industrial investment specially of multinational investment because of its good infrastructure near Delhi and effective single window system of speedy decision making and clearances.
Ecotech Exclusives
- Early production incentives in the form of Rs. 50/- per sq. mtr. rebate on land cost if production starts within 18 months of land possession or 24 months of land allotment
- Single-table clearances
- No case pending beyond one month
- Weekly allotment of plots
- Monthly meetings of Udyog Bandhu, a collective forum of all concerned agencies, to troubleshoot entrepreneur related problems on the spot
- Technical Training and Vocational guidance Institutes for adequate supply of skilled and semi skilled work force
- Inland Container Depot to handle storage of goods
- Round-the-clock patrolling by mobile police vans for law and order maintenance
- Adjacent residential township with housing sectors, hospitals, schools, commercial complexes, recreational parks and even a 18-hole Greg Norman Signature PGA Level Golf course on 222 acres.
IT & BIOTECH Destination
Globally, the Information Technology (IT) industry is expected to be the engine for economic growth and social development for a long time to come. The advent of Internet and E-commerce has transformed and revolutionised traditional businesses and is significantly impacting industry, government and the society at large. India is rapidly emerging as one of the top global powerhouses in the IT sector.
The market openings have primarily been identified, by Greater Noida across four broad sectors:
- IT services,
- Software products,
- IT enabled services and
- E-business
These would constitute lucrative opportunities for Indian Companies. In addition to the export market, all of these segments have a domestic market component as well. NASSCOM forecasts revenues of US $87 billion and employment of two million people by the year 2008 by the Indian IT Industry.
- National Capital Region (NCR) ranks no. 3 in terms of the number of software firms companies based in it after Mumbai and Bangalore. In case of the ITES sector, the NCR leads with 20% of the total number of companies located in this region.
- Since the NCR has emerged as a hub for IT industry, Greater Noida could emerge as an IT destination of the future leveraging its proximity to the national capital and availability of quality urban infrastructure including housing.
Thursday, 14 June 2012
Lesson of Sincere Sales Pitch
Authored By: Ajit Panicker
Lesson of Sincere Sales Pitch:
Yesterday, in a coffee shop waiting for my client to arrive, i met a real estate executive. He must be around 25 years old. seeing me wait for my client and scribbling some notes in my diary, he called up an invitation to sit with him and chat. During our talks i realized that this 25 year old has a path to follow to reach his destination. Focused sincerely on his work was carrying two mobiles, a usual phenomenon in metros, to show that you are a busy guy. I asked him why does he need two mobiles, his answer was "sir, i make appointments by calling people, and the day the charge of both my mobiles do not finish during the day, i consider the day , that my work is unfinished.
Impressive", i thought. While talking he understood that i am a financial planner, but he did not make any effort to make link up with me for future business prospecting. it was a soft call on me while i was leaving the table, when he said "why don't you book an apartment, for yourself, when you are doing for others".
I said, we have planned and would soon take up a flat. He was just not pushy and kept a decent sales pitch throughout the conversation, showing interests and knowledge on varied topics.
What i want to share with my fellow financial planners, advisors, working in banks or self employed, to make sincere efforts to reach to your customer.
"Plan your day and the day will unfold according to you"
As you design your presentation, develop both a strong opening and a powerful closing. After your opening, preview your main points and then provide enough specific information to support your message.
The following S-S-S formula helps your listeners retain important information and prompts them to act:
State State your main points clearly and concisely.
Support Provide enough supporting information to address your listeners' needs adequately.
Summarize Summarize each main point of your message.
Lesson of Sincere Sales Pitch:
Yesterday, in a coffee shop waiting for my client to arrive, i met a real estate executive. He must be around 25 years old. seeing me wait for my client and scribbling some notes in my diary, he called up an invitation to sit with him and chat. During our talks i realized that this 25 year old has a path to follow to reach his destination. Focused sincerely on his work was carrying two mobiles, a usual phenomenon in metros, to show that you are a busy guy. I asked him why does he need two mobiles, his answer was "sir, i make appointments by calling people, and the day the charge of both my mobiles do not finish during the day, i consider the day , that my work is unfinished.
Impressive", i thought. While talking he understood that i am a financial planner, but he did not make any effort to make link up with me for future business prospecting. it was a soft call on me while i was leaving the table, when he said "why don't you book an apartment, for yourself, when you are doing for others".
I said, we have planned and would soon take up a flat. He was just not pushy and kept a decent sales pitch throughout the conversation, showing interests and knowledge on varied topics.
What i want to share with my fellow financial planners, advisors, working in banks or self employed, to make sincere efforts to reach to your customer.
"Plan your day and the day will unfold according to you"
As you design your presentation, develop both a strong opening and a powerful closing. After your opening, preview your main points and then provide enough specific information to support your message.
The following S-S-S formula helps your listeners retain important information and prompts them to act:
State State your main points clearly and concisely.
Support Provide enough supporting information to address your listeners' needs adequately.
Summarize Summarize each main point of your message.
Wednesday, 13 June 2012
Real Estate Market Attraction: Delhi Report
Owning a house is every family's dream and if one wishes to own house in delhi NCR, it becomes all the more challenging.
Who doesn’t want to own a property in the city that is the heart of India-Delhi? Almost all who wish to make maximum profit out of property deals invest in the property of Delhi and NCR.
√ It offers countless job opportunities that attracts people
√ The rates of residential as well as commercial property escalates at a constant rate
√ The residential locations have proper basic amenities like electricity, health care, schools, colleges, etc.
√ Lavish lifestyle of the place has also attracted people from all states
√ The shift of various industries from Delhi to its surrounding areas
√ Coming up of various builder projects in Delhi
√ Setting up of schools, Institutions, Hospitals, etc.
√ Advanced transportation facilities
√ Increased demand of rented properties
• Apart from this Metro Rail has been an important factor that has added a charm to Delhi and has taken it a step ahead in the course of development. The property of the areas where the metro route is laid is consistently shooting up.
• Rental property has a great demand that attracts investors.
• The highly lucrative developer projects in NCR have also attracted foreign investors.
•The Recent event of FORMULA-1 racing which was organized last year in Greater Noida, the extension of Noida, which comes under the National Capital Region of Delhi, has shot up the prices of all areas adjoining it.
Real Estate Market Delhi and NCR has something to offer to all sectors of the society. Right from the low income groups, Medium sector to Multi Millionaires, every sector finds suitable accommodation in Delhi.
Who doesn’t want to own a property in the city that is the heart of India-Delhi? Almost all who wish to make maximum profit out of property deals invest in the property of Delhi and NCR.
Why Delhi enjoys a prominent position in the Real Estate market?
√ It is the capital city of India loaded with all that is technologically advanced√ It offers countless job opportunities that attracts people
√ The rates of residential as well as commercial property escalates at a constant rate
√ The residential locations have proper basic amenities like electricity, health care, schools, colleges, etc.
√ Lavish lifestyle of the place has also attracted people from all states
How has NCR gained prominence?
NCR or the national capital region includes Gurgaon, Faridabad,
Noida, Ghaziabad, etc. NCR has developed at a rocket speed in the last
two decades. What has brought about this growth?√ The shift of various industries from Delhi to its surrounding areas
√ Coming up of various builder projects in Delhi
√ Setting up of schools, Institutions, Hospitals, etc.
√ Advanced transportation facilities
√ Increased demand of rented properties
New attractions in the Real Estate market in Delhi:
• The 2010 Commonwealth Games has transformed the face of Delhi and
NCR and thus have brought about a marked hike in the rates of the
property. Roads have been developed, various flyovers have been built
and transportation system has become more efficient.• Apart from this Metro Rail has been an important factor that has added a charm to Delhi and has taken it a step ahead in the course of development. The property of the areas where the metro route is laid is consistently shooting up.
• Rental property has a great demand that attracts investors.
• The highly lucrative developer projects in NCR have also attracted foreign investors.
•The Recent event of FORMULA-1 racing which was organized last year in Greater Noida, the extension of Noida, which comes under the National Capital Region of Delhi, has shot up the prices of all areas adjoining it.
Real Estate Market Delhi and NCR has something to offer to all sectors of the society. Right from the low income groups, Medium sector to Multi Millionaires, every sector finds suitable accommodation in Delhi.
Friday, 11 May 2012
A second house can reduce your tax burden
In 2005, Mitul Vora, a marketing executive
with an auto company, took a Rs 8 lakh loan for 15 years to buy a house
in Gandhidham, Gujarat. Currently, he is paying an EMI of Rs
8,700. However, a year later, Vora switched jobs and shifted to
Ahmedabad.
Instead of renting a place, he bought another house, again through a home loan of Rs 20 lakh for 20 years, for which the EMI is about Rs 20,650. "I could have sold the house at Gandhidham to fund the second purchase, but didn't do so because I'm sure the value of the property will appreciate in a couple of years," says 43-year-old Vora. Instead, he has leased the first house at an annual rent of Rs 84,000.
However, the high interest rates are making it difficult to service both the home loans. "I come under the highest tax bracket and have to pay 30% tax on my income, which makes it difficult to save enough to pay both the EMIs," he adds. What Vora doesn't know is that he can reduce his tax liability if he avails of the deduction on home loans, especially in case of the second house.
Exemption on interest
In case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1 lakh qualifies for deduction under Section 80C, while up to Rs 1.5 lakh of interest paid is taxdeductible under Section 24.
However, in case of a home loan for the second property, only interest payment is eligible for deduction. No tax benefit is available on the principal repayment on the second loan. However, the good part is that there is no limit on the deduction for interest payment on the second loan (see Benefit of buying a second house). This is because the second house has been given out on rent, explains Adhil Shetty, chief operating officer of Bankbazaar.com.
Instead of renting a place, he bought another house, again through a home loan of Rs 20 lakh for 20 years, for which the EMI is about Rs 20,650. "I could have sold the house at Gandhidham to fund the second purchase, but didn't do so because I'm sure the value of the property will appreciate in a couple of years," says 43-year-old Vora. Instead, he has leased the first house at an annual rent of Rs 84,000.
However, the high interest rates are making it difficult to service both the home loans. "I come under the highest tax bracket and have to pay 30% tax on my income, which makes it difficult to save enough to pay both the EMIs," he adds. What Vora doesn't know is that he can reduce his tax liability if he avails of the deduction on home loans, especially in case of the second house.
Exemption on interest
In case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1 lakh qualifies for deduction under Section 80C, while up to Rs 1.5 lakh of interest paid is taxdeductible under Section 24.
However, in case of a home loan for the second property, only interest payment is eligible for deduction. No tax benefit is available on the principal repayment on the second loan. However, the good part is that there is no limit on the deduction for interest payment on the second loan (see Benefit of buying a second house). This is because the second house has been given out on rent, explains Adhil Shetty, chief operating officer of Bankbazaar.com.
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According to Homi Mistry, partner, Deloitte
Haskins & Sells, a property owner can avail of tax benefits on the
interest paid on multiple home loans. "Whether the second house is
purchased purely as an investment option or as a weekend getaway, the
interest paid on a loan taken to buy it is tax-deductible. Since the
interest payment is a large expense, you can add significantly to your
disposable income if you can save on it," says Mistry.
In case the house is yet to be constructed, 20% of the total interest paid during the preconstruction period is also allowed as tax deduction. This is available for five years from the time the construction is complete till you get possession. Deductions allowed on income from second home Even if the second house is lying vacant, the Income Tax Department will consider that it has a rental value. The notional or deemed income (see How income is computed) will be added to your taxable income. Sonu Iyer, tax partner, Ernst & Young, says, "A buyer can deduct expenses, such as municipal or property taxes actually paid, from the deemed income. Other than this, 30% of the net annual value, which is the difference between the rental income and municipal taxes, is also allowed as deduction. In case the house is rented out, 30% of the actual rent can be deducted from the taxable income, apart from deductions for local and municipal taxes." After deducting such expenses from the income that you earn from the property, if you incur a loss, you have the option to set it off as follows: . The current year's loss will first be set off against any other income from property. . It can also be set off against other incomes, such as that from salary, business or profession and capital gains, earned in the current year. . If your balance continues to be in the red, you can carry forward the loss for up to eight years. However, the amount that is carried forward is only allowed to be set off against the income that is earned from a house.
How to save on taxes
If you own several houses, you can choose one as your primary residence. The income from this property will be treated as nil and exempt from tax, even if you have actually rented it out. It is for this house that the limit of Rs 1.5 lakh applies for deduction on loan interest. The entire interest on the loan taken for the other house, the income from which is taxable, can be deducted from your income. This applies to any number of nonexempt houses that you may own. So, to maximise your savings, consider the house with the highest loan as the non-exempt one. However, make sure that the interest payment on this loan is higher than the principal-cum-interest payment on the other loan. Additionally, if you give your second house on rent for more than 300 days in a year, it will not be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh.
If any of the houses is
sold after three years, the profit will be taxable as long-term capital
gains. However, there are beneficial provisions under which this gain is
exempt from tax. So if you invest the money to construct a house within
three years or buy another house within two years, your income will be
tax-exempt.
However, the exemption is reversed and the amount taxed as capital gain if the new property is sold within three years of being constructed/purchased. This will be considered a short-term gain and taxed according to your slab rates. You can also save tax if you invest the profit in a special bank account under the capital gain account scheme. A similar exemption is available for investments of up to Rs 50 lakh in bonds, which are redeemable after three years. This investment should be made within six months of the sale. |
How to get your home loan rate lowered
When Delhi-based Mahendra Gupta opened the
recent letter from the housing finance company, there was both good and
bad news for him. The dismal bit of information was that the 20-year home loan
he had been repaying since 2008 still had 22 years to go.
Despite four years of regular repayments, the loan tenure had been extended because of the rise in the home loan rate from 10.25% in 2008 to 13% now.
The good news was that Gupta's lender was ready to convert the loan to a lower rate if he paid a one-time conversion fee. He paid Rs 7,300 and got the interest rate lowered to 10.5%. "My loan tenure came down from 272 months to 166 months. It was a straight gain of almost nine years," gushes the 35-year-old.
Gupta can consider himself lucky. Not every lender offers its customers this option. Worse, very few keep their customers updated about changes in interest rates or how they impact their repayment schedules.
Most banks just go by the wording of the loan agreement, which says the lender can increase the rate and accordingly extend the repayment tenure. If the term cannot be extended, the bank raises the EMI amount or asks the borrower to pay a lump sum.
Be a proactive borrower
You need to be proactive about your loan repayment and check the interest rate you are being charged. When the base rate was introduced, home loan customers thought they would get more transparent deals from their lenders.
Despite four years of regular repayments, the loan tenure had been extended because of the rise in the home loan rate from 10.25% in 2008 to 13% now.
The good news was that Gupta's lender was ready to convert the loan to a lower rate if he paid a one-time conversion fee. He paid Rs 7,300 and got the interest rate lowered to 10.5%. "My loan tenure came down from 272 months to 166 months. It was a straight gain of almost nine years," gushes the 35-year-old.
Gupta can consider himself lucky. Not every lender offers its customers this option. Worse, very few keep their customers updated about changes in interest rates or how they impact their repayment schedules.
Most banks just go by the wording of the loan agreement, which says the lender can increase the rate and accordingly extend the repayment tenure. If the term cannot be extended, the bank raises the EMI amount or asks the borrower to pay a lump sum.
Be a proactive borrower
You need to be proactive about your loan repayment and check the interest rate you are being charged. When the base rate was introduced, home loan customers thought they would get more transparent deals from their lenders.
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However, many
banks continue to discriminate between old and new customers, charging
the existing ones a higher rate than that being offered to new
borrowers.
If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers.
Don't assume your bank will not listen to your request. A slowdown in growth and intense competition in the housing finance sector have pushed banks to the wall.
Home loan growth slowed down from 15% in 2010-11 to 12.1% in 2011-12.
More importantly, the RBI has abolished the prepayment penalty levied by banks and housing finance companies. So, shifting to another bank is not as costly as it used to be.
"The RBI move has boosted borrowers' ability to negotiate," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.
Banks are willing to negotiate, especially if the borrower has a good repayment history. If a bank refuses to budge, a mild threat of shifting the loan to another lender can work wonders.
"There are instances where banks have offered to cut rates when the clients expressed their intention to transfer the loan to another bank," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.
If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers.
Don't assume your bank will not listen to your request. A slowdown in growth and intense competition in the housing finance sector have pushed banks to the wall.
Home loan growth slowed down from 15% in 2010-11 to 12.1% in 2011-12.
More importantly, the RBI has abolished the prepayment penalty levied by banks and housing finance companies. So, shifting to another bank is not as costly as it used to be.
"The RBI move has boosted borrowers' ability to negotiate," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.
Banks are willing to negotiate, especially if the borrower has a good repayment history. If a bank refuses to budge, a mild threat of shifting the loan to another lender can work wonders.
"There are instances where banks have offered to cut rates when the clients expressed their intention to transfer the loan to another bank," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.
Balance
tenure is crucial
Keep the remaining term of your loan in mind when you sit at the negotiating table. When Gupta got his interest rate converted to 10.5% from the earlier 13%, his tenure of 22 years and 8 months was cut down by 8 years and 10 months. Remember that if your loan has less than 10 years to go, the benefit may not be as spectacular. As the table shows, the benefit progressively reduces if your balance tenure is lesser.
A 1.5 percentage point cut in the rate will shave off nearly five years from a 20-year loan, but it will reduce the tenure by just 1 month if the loan has only five years to go. Since you are paying a conversion fee upfront, the change may not lead to any significant gain. Go for it only if the reduction is at least 2 percentage points and your loan has more than 10 years to go.
Keep the remaining term of your loan in mind when you sit at the negotiating table. When Gupta got his interest rate converted to 10.5% from the earlier 13%, his tenure of 22 years and 8 months was cut down by 8 years and 10 months. Remember that if your loan has less than 10 years to go, the benefit may not be as spectacular. As the table shows, the benefit progressively reduces if your balance tenure is lesser.
A 1.5 percentage point cut in the rate will shave off nearly five years from a 20-year loan, but it will reduce the tenure by just 1 month if the loan has only five years to go. Since you are paying a conversion fee upfront, the change may not lead to any significant gain. Go for it only if the reduction is at least 2 percentage points and your loan has more than 10 years to go.
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Cut the tenure, not the EMI
When the interest rate on your loan is lowered, don't make the mistake of reducing the EMI. It's a tempting thought because it eases the pressure on your monthly budget.
However, lower EMIs mean longer tenures and higher interest costs. Instead, bring down the tenure of the loan. "Our standard advice is to avoid reducing the EMI amount. As far as possible, one should opt for cutting down the loan tenure," says Patel.
Only if you genuinely find it difficult to pay the EMI, should you opt for a lower instalment.
This is especially true of individuals who have taken a large home loan on the basis of a projected income, but have not got the kind of pay hikes they expected.
Also, double-income families, where one spouse has lost a job or stopped working, may find this option useful.
Besides, you should check if the new rate that is being offered to you is linked to the base rate of the bank. Make sure it is not a promotional rate that is being offered to new customers. Banks offer low rates to attract customers but hike the rate after 2-3 years. Since home loan tenures are typically 10-15 years, don't go by just the short-term benefit offered on the loan. The loan agreement should clearly specify the spread between this rate and the bank's base rate.
The cost of change
Don't think you can opt for a new and lesser interest rate for free. This conversion entails a minor cost, with banks charging 0.5-1.5% of the outstanding amount (see graphic). It is also a fairly straightforward procedure, which can be completed with one visit to the bank branch.
When the interest rate on your loan is lowered, don't make the mistake of reducing the EMI. It's a tempting thought because it eases the pressure on your monthly budget.
However, lower EMIs mean longer tenures and higher interest costs. Instead, bring down the tenure of the loan. "Our standard advice is to avoid reducing the EMI amount. As far as possible, one should opt for cutting down the loan tenure," says Patel.
Only if you genuinely find it difficult to pay the EMI, should you opt for a lower instalment.
This is especially true of individuals who have taken a large home loan on the basis of a projected income, but have not got the kind of pay hikes they expected.
Also, double-income families, where one spouse has lost a job or stopped working, may find this option useful.
Besides, you should check if the new rate that is being offered to you is linked to the base rate of the bank. Make sure it is not a promotional rate that is being offered to new customers. Banks offer low rates to attract customers but hike the rate after 2-3 years. Since home loan tenures are typically 10-15 years, don't go by just the short-term benefit offered on the loan. The loan agreement should clearly specify the spread between this rate and the bank's base rate.
The cost of change
Don't think you can opt for a new and lesser interest rate for free. This conversion entails a minor cost, with banks charging 0.5-1.5% of the outstanding amount (see graphic). It is also a fairly straightforward procedure, which can be completed with one visit to the bank branch.
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However, switching to a new bank is a lot costlier and requires more paperwork. Even if your previous lender does not levy a prepayment penalty, the new lender will demand 0.5-1.5% as processing charges. There is also the convenience aspect. You will have to go through the entire process of submitting documents-proofs of income and identity, and PAN card, etc. Therefore, do a cost-benefit analysis before deciding to convert or switch to another lender.
Five tips for Credit Card Beginners
It's thrilling to get your first shiny plastic card and the sense of freedom that comes with it. But tagging along with these feelings is responsibility, something you need to learn before you begin swiping your card. It might be tempting to just flourish your card everywhere, but there are a few lessons you must adhere to if you don't want to end up in a debt trap. Here are some points to keep in mind.
Stick to a budget:
When you carry only cash, you can't spend more than what you have. Unfortunately, the convenience of a credit card could be your financial downfall as you may end up spending more than what you can afford. So, keep a monthly limit for your expenses and stick to it. Every time you swipe your card, you receive an alert on your mobile phone (this is why it's a good idea to register your phone number with your credit card account), and this can help you keep a check on your card budget.
Always pay the full amount on time:
You will receive a monthly statement telling you how much you need to pay. Ensure that you pay the full amount on time or you will be charged a late fee. Don't be tempted to pay only the minimum amount due and roll over the balance to the next month. You'll be charged a high interest rate, usually 1.5-3.5% a month, on the amount that you rollover and this will inflate your bill for the next month, making it much harder to pay the bloated bill. Preferably, pay your bill through Net banking as you will be charged about Rs 100 if you pay through cash at the bank.
Don't increase your credit limit:
When the bank offers you a card, it will set a credit limit based on your income. You may want to enhance this limit to fund more expensive purchases. But avoid doing so for a year, at least not till you're more confident about how to use your card. Though the bank will be willing to raise the limit, you still have to pay from what you earn, don't you? So, unless there's a substantial increase in your salary, stick to a low credit limit.
Avoid cash advances:
Don't use your credit card to take a cash advance from the bank or at an ATM. One, you will be charged a one-time transaction fee which could be as high as 3% of the advance. Secondly, you will have to pay a high interest rate on the money, and this interest will begin to accrue immediately. Only take this route in case of an emergency.
Secure your card:
Don't provide your credit card information to anybody, especially the CVV number at the back of the card. Don't let anybody else use the card as you are responsible for all the charges on the bill. When you give your card to be swiped, keep a check that the salesperson does so properly and that there is no chance of skimming, that is, your card information being stored somewhere else. When using it online, ensure that it is a secure and trusted website. Keep track of your usage and compare records when you receive your monthly statement.
Why it's important to scan your health policy
Sushil Jain, 75, has a major grouse
against his health insurer of almost two decades. "I've made only one
claim so far, in February 1999, for the surgery of my lower spine," he
says. "I have been in perfect health since then. In fact, I have not
been to a doctor in the past 15 years. Yet, at the time of renewal, the
company insists on treating this as a preexisting illness and has turned
down my request to increase the value of insurance cover," he adds.
Another policyholder, Mumbai-based DP Jambusaria, is peeved with his insurer for introducing new exclusions in his policy at the time of renewal. "They have limited the amount payable for a cataract surgery to Rs 24,000," he says.
Jain and Jambusaria are not alone. The widespread discontent among policyholders has been underscored by the series of consumer court verdicts against health insurers. "The most common disputes relate to preexisting diseases, suppression of facts, and insistence of the insurance company to lodge a claim within 7-30 days of discharge," says consumer activist Jehangir Gai.
Another policyholder, Mumbai-based DP Jambusaria, is peeved with his insurer for introducing new exclusions in his policy at the time of renewal. "They have limited the amount payable for a cataract surgery to Rs 24,000," he says.
Jain and Jambusaria are not alone. The widespread discontent among policyholders has been underscored by the series of consumer court verdicts against health insurers. "The most common disputes relate to preexisting diseases, suppression of facts, and insistence of the insurance company to lodge a claim within 7-30 days of discharge," says consumer activist Jehangir Gai.
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Such complaints are so common that the Insurance Regulatory and Development Authority ( Irda) had to issue an advisory last year, asking insurers to refrain from repudiating claims on flimsy grounds. The regulator has also directed industry lobbies, CII and Ficci, to work on guidelines that are aimed at simplifying policy terms and conditions. However, buyers too need to understand these while buying or renewing policies to avoid nasty surprises later on.
Pre-existing illnesses
"The confusion over pre-existing diseases and time-bound exclusions can be attributed to misleading promises by the adviser during the pre-sale process or failure on the part of buyers to understand the policy's terms," says SS Gopalarathnam, MD of Chola MS. Pre-existing diseases are the ailments for which you may have undergone treatment up to 48 months before buying the policy. Insurers are not under any obligation to honour such claims until a prespecified period is over. Some insurers, however, use this clause as a tool to deny claims. "If you have diabetes or hypertension, claims for other illnesses are rejected on the pretext that they have risen as a complication in these problems," says Gai.
So, it will serve you well to go through
the list of pre-existing diseases and the duration for which they are
not covered.
Exclusions
You also need to study the exclusions while buying the policy. These include the treatment procedures and ancillary expenses that the insurer will not pay for. For instance, claims related to pregnancy, dental treatment, outpatient department expenses and cost of external aids like pacemakers and wheelchairs, are not entertained in many policies.
Sub-limits
Sub-limits refer to the ceiling on room rent, surgeon's fee, operation theatre charges, etc, within the overall cover amount. "You need to be wary of policies that have sublimits on charges, such as doctor's fee and daycare procedure expense. Also, keep an eye on the limits for various treatments, wherein the amount you can claim for a particular surgery is capped," says Divya Gandhi, head, general insurance and principal officer Emkay Insurance Brokers.
Exclusions
You also need to study the exclusions while buying the policy. These include the treatment procedures and ancillary expenses that the insurer will not pay for. For instance, claims related to pregnancy, dental treatment, outpatient department expenses and cost of external aids like pacemakers and wheelchairs, are not entertained in many policies.
Sub-limits
Sub-limits refer to the ceiling on room rent, surgeon's fee, operation theatre charges, etc, within the overall cover amount. "You need to be wary of policies that have sublimits on charges, such as doctor's fee and daycare procedure expense. Also, keep an eye on the limits for various treatments, wherein the amount you can claim for a particular surgery is capped," says Divya Gandhi, head, general insurance and principal officer Emkay Insurance Brokers.
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Now, however, some private insurers have eliminated these internal ceilings completely. "If a policy's cover is Rs 5 lakh and the claim amounts to Rs 3 lakh, policyholders tend to assume that the entire claim will be disbursed. However, due to restrictions on, say, room rent, the admissible claim could work out to only Rs 1.5 lakh. This can lead to disputes, so we have done away with the sub-limits," explains Gaurav Garg, MD and CEO, Tata-AIG General Insurance.
Suppression of facts
Often, claims are rejected on the ground that expenses were related to a pre-existing condition that was not disclosed at the time of issuing the policy. "Minor and common ailments, which are completely curable, need not be disclosed while buying a policy. Yet, insurance companies reject claims stating that these were not revealed while applying for the policy," adds Gai.
To avoid rejection on this ground, make sure that you list out all your medical problems while filling up the form.
Claim loading
While insurers have the right to revise their premium rates every year, this cannot be done arbitrarily. Insurance companies have to follow the claim loading structure mentioned in the policy document. So, ensure that your policy clearly spells out this framework before you buy it.
Renewability
Health insurers have never been enthusiastic about renewing policies of senior citizens or those with a history of making huge claims. However, they are bound by regulations to renew policies irrespective of the claims made. In fact, all products that are yet to be launched will have to offer lifelong renewability. "A policyholder must not permit the insurer to unilaterally change the terms and conditions without his consent. Renewal of policy cannot be considered a fresh contract; it's an extension of the original contract for another year. So the policy has to be renewed on identical terms and conditions," says Gai.
Wednesday, 2 May 2012
Invest while you are in debt
Authored By: Ajit Panicker
"When you are in debt, why should you invest, there is no need". This is what we say to ourselves when we are in debt, with the loans taken from banks to purchase our own house or cars we buy or consumer durable items we purchase.
Most of us think like this, and this is even logical. Why should you pay unnecessary interests when you are already in debts?
Let us take a situation where a family of four with husband , wife and their two kids stay together. Both husband and wife are working and the children are going to school. They have recently taken a home loan and a car which they purchased three years back. many household items are also financed by various financing companies.
Both husband and wife earn handsomely, but still this kind of debts are still there, the reason being , that they want to live a better life and banks and financial institutions being there to provide such credit facilities.
Now what i think, are they not investing for their retirement or for their children's future, they must be.
What i need to understand is that are they DOING INVESTMENTS while being in DEBT.?
Yes they are, and this is what almost all of us do, barring a few.
In this situation what should be done is , the individual should analyze what is the total debt, which he has taken, and what is the interest he is paying on them. He should at the same time calculate what is the total investments he is making and what would be the interest he would earn over a period of time, he has taken that investment for.
After doing both the calculations, present value of money for all the corpus (from the investments made)which would be created after the tenure should be calculated. Then with the debt he has and the interest he is paying on the assets, or items he has purchased and would be paying till the tenure ends, he should calculate the benefit of assset he is having and the appreciation of the assets which would happen over a period of time.
If there is a positive outcome , in the present value of future money and present outflows, then investments should be made regularly.
But if there is a negative outcome, then still, investments in systematic way should be made so as to maintain the discipline of saving and thus not allowing all the earnings either outflowing as interest to banks or debt repayment or expenses for the household.
"When you are in debt, why should you invest, there is no need". This is what we say to ourselves when we are in debt, with the loans taken from banks to purchase our own house or cars we buy or consumer durable items we purchase.
Most of us think like this, and this is even logical. Why should you pay unnecessary interests when you are already in debts?
Let us take a situation where a family of four with husband , wife and their two kids stay together. Both husband and wife are working and the children are going to school. They have recently taken a home loan and a car which they purchased three years back. many household items are also financed by various financing companies.
Both husband and wife earn handsomely, but still this kind of debts are still there, the reason being , that they want to live a better life and banks and financial institutions being there to provide such credit facilities.
Now what i think, are they not investing for their retirement or for their children's future, they must be.
What i need to understand is that are they DOING INVESTMENTS while being in DEBT.?
Yes they are, and this is what almost all of us do, barring a few.
In this situation what should be done is , the individual should analyze what is the total debt, which he has taken, and what is the interest he is paying on them. He should at the same time calculate what is the total investments he is making and what would be the interest he would earn over a period of time, he has taken that investment for.
After doing both the calculations, present value of money for all the corpus (from the investments made)which would be created after the tenure should be calculated. Then with the debt he has and the interest he is paying on the assets, or items he has purchased and would be paying till the tenure ends, he should calculate the benefit of assset he is having and the appreciation of the assets which would happen over a period of time.
If there is a positive outcome , in the present value of future money and present outflows, then investments should be made regularly.
But if there is a negative outcome, then still, investments in systematic way should be made so as to maintain the discipline of saving and thus not allowing all the earnings either outflowing as interest to banks or debt repayment or expenses for the household.
Sunday, 29 April 2012
Difference between Peril and Hazard
Risk is the chance of loss, and peril is the direct cause of the loss. If a house burns down, then fire is the peril. A hazard is anything that either causes or increases the likelihood of a loss. For instance, gas furnaces are a hazard for carbon monoxide poisoning. A physical hazard is a physical condition that increases the possibility of a loss. Thus, smoking is a physical hazard that increases the likelihood of a house fire and illness.
Moral hazards are losses that results from dishonesty. Thus, insurance companies suffer losses because of fraudulent or inflated claims. The American legal system is a moral hazard in that it motivates many people to sue simply for financial profit because of the enormous amount of money that can sometimes be won, and because there is little cost to the plaintiff, even if he loses. A good example is the current asbestos litigation, which has bankrupted many companies, even though very few plaintiffs show any real evidence of disease, and are unlikely to ever develop any disease that can be shown, by the preponderance of the evidence, to have resulted from asbestos exposure. This type of moral hazard is often referred to as legal hazard. Legal hazard can also result from laws or regulations that force insurance companies to cover risks that they would otherwise not cover, such as including coverage for alcoholism in health insurance.
Insurance can be regarded as a morale hazard because it increases the possibility of a loss that results from the insured worrying less about losses. Therefore, they take fewer precautions and may engage in riskier activities—because they have insurance. A good example of morale hazard is when the federal government bails out financial institutions who have made bad decisions. Many financial institutions have taken significant risks in the recent subprime debacle by buying toxic instruments, such as CDOs and mortgage-backed securities based on subprime mortgages that paid high yields, but were extremely risky. The financial institutions have considered themselves too big to fail—in other words, if things started going badly, then the federal government would step in to stop their collapse for fear that the whole financial system will collapse, which is exactly what the federal government did in September, 2008. Freddie Mac and Fannie Mae have both been taken over by the government, and American International Group (AIG) has been propped up by an infusion of $85 billion of taxpayers' money. AIG sold credit default swaps on mortgage-backed securities to buyers, mostly banks, thinking that they could collect the premiums, but would never have to actually to pay for defaults—but if they were wrong, then the government would save them, because otherwise the banks that had bought that credit default protection could also possibly fail. As recent events have demonstrated all too clearly, this federal government "insurance" creates a morale hazard for financial institutions—taxpayers pay the premium, but the big financial institutions, with their overpaid CEOs and managers, receive the benefits!
Distinction Between Moral Hazard And Morale Hazard
The distinction between moral and morale hazard in insurance is one of intention, but in other disciplines, such as banking, the termmoral hazard is used in a more general sense that includes morale hazard. Moral hazard is often applied to a receiver of funds, such as a borrower, and means that there is a risk that the receiver of funds will not use the money as was intended or that they may take unnecessary risks or not be vigilant in reducing risk. This definition includes not only intentional dishonesty, but also a change in behavior that results from using someone else's money, which, in insurance, would be described as morale hazard.