Thursday, December 11, 2014

Why are Oil Prices Going Down?

The oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now around $60 per barrel

Ok, this is something we haven’t heard of much in the recent past but surprisingly oil prices have been going down for quite some time now. In fact, even our Government has gone ahead and reduced the price of Petrol and Diesel to pass on the price reduction to the common man. So, what caused this? The purpose of this article is to help you understand WHY. I have tried to keep things as simple as possible.

Before we Begin - How Oil Price is Determined

The oil price is partly determined by actual supply and demand, and partly by 
expectation. Demand for energy is closely related to economic activity. It also spikes in the winter in the northern hemisphere, and during summers in countries which use air conditioning. Supply can be affected by weather (which prevents tankers loading) and by geopolitical upsets. If producers think the price is staying high, they invest, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations: if it curbs supply sharply, it can send prices spiking.

So, what is Resulting in this Free-Fall in Oil Prices?

There are actually 5 main reasons why the oil prices are falling.

Reason 1: Low Demand

With rising oil prices, most countries are trying to switch to sources like hydro power or solar. On top of this, most Governments have stopped subsidizing oil prices as a result of which, in spite of the fact that crude oil prices are going down, the actual price of Petrol or Diesel hasn't gone down much.
India is a classic example. India’s Diesel Demand was growing by an average of about 8-10% every year between 2008 and 2012. But, in Jan 2013, our government started cutting the diesel subsidy. As a result, the diesel consumption has actually stopped growing at that rate and demand has come down. Similar is the situation in many other large oil consuming Asian countries like Indonesia, Thailand, Malaysia etc…

Reason 2: Weak Economic Forecast

Though we are not moving toward an actual Recession, the economic growth forecast for the next few years isn’t very bright. The International Monetary Federation – IMF has lowered the Growth Forecast for the European Union to be around the 1% mark for 2015. With a similar situation in many other major markets like the US and Japan, the economy does not look so great.

Reason 3: Libya is back on its feet.

Everyone knows that Libya has been reeling under tremendous political turmoil especially after the Gadaffi situation. However, people did not expect them to recover so quickly. During the turmoil they were able to produce around 200,000 to 300,000 barrels of oil each day. However, they fixed their problems and have gone up above 800,000 barrels a day and the supply of oil in the open market is not a problem any more.

Reason 4: The US Oil Production Boom

Everyone knows that the USA is one of the worlds largest consumer of oil. However, what many people don’t know is that, they have also become the world’s largest oil producer. They are producing more than 1 million barrels of oil daily. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.

Reason 5: Saudi Arabia, Kuwait and other Gulf Countries

It’s a widely known fact that Saudi Arabia and Kuwait are two of the worlds top oil producers. They and a few of their Gulf allies have decided not to sacrifice their own market share to restore the price. Most Gulf Countries can tolerate lower prices because it costs about US$ 5-10 to produce a barrel and they are still selling it at a hefty price in the market. They could curb production sharply to hike the price of oil, but the main benefits would go to countries they don’t like (Example: Iran and Russia). 

Hope you found this article useful...

Saturday, November 29, 2014

The Current State of Real Estate Market in India

Real Estate has always been a preferred avenue of investment for Indians and will most likely continue to be so for the foreseeable future. The Indian Real Estate Market witnessed never before growth during the major part of the last decade and it looks as though things are cooling down. Some feel the market has it its peak while some feel there is a correction on the cards. So, what is the Real State of the Indian Real Estate Market?

You will find out by the end of this article. Shall we get started??

Why this article…

Real Estate Promoters & Builders consider the Non Resident Indians (NRIs) as a lucrative segment and am sure you don’t want me to explain why. Anyways, it is common practice for Builders and Promoters to visit foreign countries with sizeable NRI population (Ex: Singapore, Malaysia, USA, etc.) and conduct road shows. I usually visit such road shows that are held in Singapore and happened to visit one last week. After visiting the most recent road show, something odd really struck me.

The list of promoters that participated in the road-show were very close the same list that visited us just 3-4 months ago. In fact, even the list of projects was the same. If projects flouted by reputable and respectable builders haven’t been sold out for months, I started researching for some data and statistics on the real state of our real estate market. So, here you go…

So, What is the Current State of the Indian Real Estate Market?

The Indian Real Estate Market is at an all-time low. The demand for houses in most of India’s top cities are extremely sluggish and in fact, on a year on year basis the growth or demand for homes has come down by over 20%. Yes, you read it right – Demand is Down by 20%

But, if you thought promoters and builders are reducing their prices to fuel the falling demand, you are definitely mistaken because, the prices of homes have come down by less than 5%. Yes, the prices have come down by an average of 2-3% only.

Did that Surprise You? No wonder, their projects are still unsold and they are advertising the same projects time and again.

Is this the state of just Existing Projects or has it affected New-Launches too?

Actually speaking, the new launches are affected even more because all major cities have witnessed a shocking reduction in about 40% or more in new project launches. In the month of March 2014, I was on the verge of booking a house in Chennai. There were about 3-4 projects that were on the verge of being formally launched and were selling units at a special “Pre-Launch” price. Do you want to make a guess on what is the state of those projects now?

They are still offering the same “Pre-Launch” price and promoting the project as “Will be launched soon!!” and we are almost close to the end of 2014.

I can actually list down those 3-4 projects but it wouldn’t be in my best interest because the promoters may feel I am disparaging their project and sue me…

Did you know that, at the current rate of demand for new homes, it would take at least 2 years or more for all of the currently "In Progress" or "Completed" Residential projects to get sold out... 

So, what is the reason for this Reduction in Demand?

There are many reasons that attribute to this reduction in demand but the 4 main reasons are as follows:

Reason 1: Affordability

The rise in annual income of individuals isn’t going up at the same rate at which property prices are going up. People who were earning 5 lakhs per annum 3 years ago are making about 6-7 lakhs per annum now but properties that were worth 50 lakhs 3 years ago are worth almost 90 lakhs or more now.

Reason 2: Lack of Strict Regulations & Corruption

The Indian Real Estate market is poorly regulated and heavily influenced by corruption. Builders in most cases have extra-deep pockets and buy-off or rather pay-off regulation makers and ensure that property prices don’t come under governmental regulations. If you try to find out the governmental guideline selling price of land/property in any area in India, you will find that it is much lower than the price at which builders are selling their projects. Am I right?

Reason 3: High Interest Rates

India is one of those economies where interest rates are pretty high. Do you know the average rate of home loans in developed nations is much much lower than the rates in India? Paying 10% or more as annual interest rate is unaffordable for most of the salaried class

Reason 4: Black Money

It is widely suspected that the phenomenal growth in the real estate market in India was fueled heavily by Black Money. If I were investing 10 crores of my black money, I wont be bothered much about having to wait for 2 or 3 years to make a 12 crore white income on the investment because that is the main purpose of the investment. If I were investing my hard earned white 10 crores I wouldn't want to wait for 3 years to make 12 crores because that's not good enough. I might as well reduce my profits by 3-5% and make 1.15 crores in one year and finish the deal. Get the picture?

So, Is Buying Property Now – A Good Idea?

There is no single – one size fits all answer to this question. If you are someone who needs a house for you and your family to live in, then the answer is YES. There are many things you must think and consider before you actually buy the house and I had written about it in 2010. I would recommend you read this article: Buying a Home

If you already own a home or you are in no hurry to buy a home right away, then you could wait for a few months to see where this goes. I would recommend you read this first: Is Buying a Second Home an Investment

Most builders would've invested huge sums of money and hence would like to have some kind of returns on their investments and this trend of “Not lowering prices” even though Demand is Low” will come to an end soon. So, if that happens, you can take advantage of that opportunity. Second hand property market always trades at a discount of at least 10% in comparison to fresh property. Think of it this way, what if you invest 50 lakhs of your hard earned money to buy a second home and there is a correction and the value of the house goes down to 40 lakhs, what would you do? 

Better Safe than Sorry…

Happy Investing!!!

Wednesday, November 12, 2014

Your Path to Financial Prosperity – One Step at a Time…

Have you ever wondered, no matter how much money you make, the yearly pay raise, the promotion etc, somehow you always end up with a deficit budget most of the time. Saving money and accumulating wealth can be a challenge no matter how much money is coming home in your paycheck.

The purpose of this article is to help you get your financial habits in order and move towards financial prosperity – One step at a time..

Lets get started, shall we?

Step 1: Know Where Your Money Is Going

It was early 2013, I had recently gotten married and had to get my finances in order because now I have a wife and soon I will have a family of my own. At the end of each month, invariably my bank account was almost empty and I was always left wondering – what the hell is going on. So, as a first step, I decided to track where my money was going.
I picked up an old diary and started noting down the expenses on a daily basis for a month. At the end of the month I had a clear idea of exactly how much I was spending each month and on what. Even the brightest of minds cannot remember every little aspect of our spending habits and it doesn’t hurt to note them down. Use a notepad and pen or use an excel in your laptop or if you have a smartphone, use one of those expense tracking apps.
At the end of the month – review your spendings and identify the areas where you feel you can cut-down.

Every year when we get a pay raise, our spending patters change. The moment our mind senses that we will have more money to burn, we will end up burning all of it and maybe more. So, Unless you identify this unwanted spending category, you will continue to be in deficit up until the point when you either start tracking your expenses or you hit the lottery

Step 2: Know How Much Yow Owe

Kudos on starting on your one step at a time program towards financial prosperity. If you started out with step 1, you will realize exactly where your money is going at the end of the month. If you are someone who goes by the mantra “Cash is King” and does not have any Loans, then you can actually skip this step as well as the next.

If you are like the majority of the population, you will invariably have some loan or the other. Car loan, bike loan, home loan, personal loan, education loan, credit card outstanding etc and etc… The more categories under which you have loans, the more difficult it is to get out of the situation and move towards a loan free or debt free life. Anyways – it is not impossible. All you need is a little discipline and a plan…

Before we work on the plan, sit down, call up your respective loan providing banks and list down the total outstanding amount against each of the loans. Total it up and you are all set for Step 3…

Step 3: Plan for a Debt-Free Future

Being Debt Free is not just a dream – it can be reality. All we got to do is plan. Go back to step 1 where you identified all the categories of spendings where you feel, you could cut-down on. Start right away. By cutting back on unwanted spending, at the end of the month you will have an amount with you that would remain.

Plan A – If you have a lot of Loans:

Put it in a bank account and forget about it. Repeat the exercise each month. Cut-down on unwanted spendings and accumulate as much money as you can, in this account. If you get a pay raise, forget the fact that you have more money to spent. Divert the additional income to this account. By the end of the year, you will definitely have a sizeable amount which you can use to repay all or part of at least one of the loans. Repeat this exercise every month/year and you will be debt free in the next 3-5 years.

Yes, I understand 3-5 years may sound like a long time but think of it this way, if you don’t plan like this, you will most likely take 8 or 10 years to repay the loans. Which one sounds better?

Plan B – If you have lot of Credit Card – Outstanding Debt:

Credit Card debt is like forest fire. Even though the bank only insists that you make the minimum repayment due amount, they will be charging you hefty interests on the whole outstanding amount from the date you swiped to your card up until the date you fully repay it. So, whatever surplus you end up with at the end of the month, use that to repay the credit card outstanding debt ASAP…

Step 4: Build an Emergency Corpus

Gone are the days when both employee and employer were loyal to one another. These days, companies aren’t as loyal to its employees as it used to be. Even at the slightest forecast of lower sales or lower profit, heads start rolling. This is very common in almost all private sector companies across the globe and industries. So, we should be safe. Isnt it?

Start the month with 10% of your salary diverted towards this emergency corpus. If you cannot start with 10% right away, start small – 3% or 5% and then implement step 1, identify unwanted expenses and increase this emergency corpus to 10% every month. Only spend what remains after this 10% contribution.

It might sound like a lot, but trust me, this emergency corpus will go a long way to help us in the unfortunate event of we losing our job. Or maybe one of our loved family members is sick and we need money for medical expenses, this emergency corpus will come in really handy…

Step 5: Invest your savings – Don’t let it stay idle

Money that is left idle in your savings account is probably the biggest financial crimes we can commit. If you followed Step 1 – you could’ve identified the amount or surplus you can save each month (by cutting down expenses + identifying how much money will remain at the end of the month). If you follow step 4 – you will keep a % of your income each month as emergency corpus. So, a smart guy/girl would invest this money – rather than let it stay idle in their account.

Plan A – For the Emergency Corpus: Start out a Recurring Deposit for the amount you wish to set aside. Select duration as 1 year and at the end of 12 months, restart a fresh RD and deposit the maturity proceeds as a Fixed Deposit.

Plan B – For the Monthly Savings: Start out a Mutual Fund SIP for the amount you can afford to save each month. If you want you can choose a full equity fund or something that is balanced between equity and debt. The fund you choose is your choice but remember to select a fund that has equity exposure. Otherwise there wouldn’t be a difference between this and the RD.

Step 6: Plan for a Second Income

Though this is something that wouldn’t be feasible for everyone – right off the start, with a little planning and effort this is quite possible.

Fixed Deposits have monthly or quarterly interest payout options. After a few years’ worth of accumulating the emergency corpus, this corpus can actually make a small but regular income for you. If you have surplus, you can buy an extra house/shop and rent it out to make an extra income. You can also try freelancing like tuition classes to supplement your income.

Don’t start out with hopes of earning thousands each month. Such plans will most likely start off small but as time goes by, there is only one way to go à UP…

A Word of Caution:

Following these 6 steps does not guarantee that you will be a millionaire soon. But, it can guarantee that your finances will get sorted out, your spending pattern will change and you will start saving more than what you are doing now… 

If you get a Bonus at the end of the year (even private co.’s have started giving out bonuses at the end of the year). If something like that happens, don’t splurge all of it. Save at least a part of it (preferably 30% or more) and use the rest to enjoy the fruits of your hard work throughout the past year..

Some Last Words:

Becoming Rich and Financially Prosperous usually requires a lot of effort (Unless you are rich by birth or hit the lottery). A Smart person always knows where his money is going, keeps his debt to the minimum and invests prudently for many years to achieve his/her goal of financial prosperity and independence. Hope you found these tips useful…

Happy Saving Money!!!

Sunday, November 2, 2014

Seven Deadly Investment Mistakes… Watch Out!!

Ok, the title sounds a little crazy or even scary but, hang on with me here. By the end of this article you will know exactly why this article is titled so… 

The main reason we invest is to make more money. As simple as that. Right? 
Did you know that on an average the rich investor makes a lot more money than the normal or common-man investor. Without talking about numbers, just taking the % returns into consideration, the rich investor easily makes about 5-10% or more returns than a regular investor (whose main aim is to one day become rich). So, how come they make much more profits than us?

If you say, the amount they invest, go back and read this previous paragraph, we are talking % returns here and not absolute returns. Now, think why!!! 

They don’t make the common Investment Mistakes that we so easily make. In fact, most of us don’t even realize that we are making this mistake. Anyways, for the rich folk, their investments are handled by professional investment managers (Privileges of Private Banking) and they make sure not to commit these mistakes. Enough of the pep-talk, lets get down to business…

Deadly Mistake No. 1: Portfolio Over-Diversification

Have you ever heard of the old saying “Don’t put all your Eggs in the same basket”? The purpose of Portfolio Diversification is to ensure that we invest across asset classes and don’t stick to a single basket. But, an over-ambitious investor usually ends up over-diversifying his/her portfolio by choosing too many investments. 

Let me give you a simple example. One of our blog readers had emailed me asking if his mutual fund portfolio is good. He was investing Rs. 2000/- as SIP Across about 15 funds. Yes, 15 funds. He was investing 30,000 rupees each month which is sizable investment but if you take a step back – 15 funds make his portfolio over-diversified and very hard to manage. Do you honestly think someone can track the performance of all those 15 funds? We can actually reword Portfolio Over-Diversification as Portfolio Over-Diworsification. 

I suggested that he select 3-4 good funds across various categories like Large Cap, Diversified Equity, Mid-Cap and Small-Cap and invest the money according to his risk appetite. 

Deadly Mistake No. 2: Over Emphasis on Past or Historic Returns 

Have you seen any mutual fund prospectus or advertisement? There is usually a * which says “Past Performance may or may not be sustained in future”. This is because, no one can guarantee the fund returns and even though a fund may have given extra-ordinary returns in the past one or two years, the same may not be possible in future. Unfortunately, most of us go by past returns and end up expecting unreasonable returns. 

Be realistic – just because a fund gave 40% or 50% returns during a bull market, it does not mean that the fund will continue when the market makes a U Turn… 

Deadly Mistake No. 3: Investing Without a Plan

When was the last time you sat down with a pen and paper to analyze a potential investment before you actually put your money in it? Most of us consider Investment as a one-time activity and don’t really put much emphasis on planning. 

You must create a disciplined plan based on mathematical expectancy because anything less is gambling and not investing. Never gamble on rumors, hot tips, stories, future predictions, or an expectation the market will go up. None of these approaches qualifies as a plan despite their widespread use and popular appeal.

Deadly Mistake No. 4: Trusting Experts Blindly 

This is by far the most common and prevailing mistake that almost 99% of investors do. Yes, an expert is someone who knows more about investment, stock markets or any other subject than you. But, does he know more about your personal situation than you? Does he care more about your financial future than you? Would he share your losses if you end up incurring some along with you? 
The answer to these Questions would be a Big No. On top of all this, this so called expert or financial advisor is getting paid to sell investment products to you. So, do you really want to blindly trust such a person? 

The bottom line is your investment advice is coming from sources whose business objectives are focused on their wealth, not yours. Don’t make the mistake of trusting the experts. You should always operate from the assumption that the investment advice you receive is tainted. We all have biases including you and me.

With that being said, I also believe there are many honest, good people doing their absolute best to work with the limited knowledge and conflicting data that make up the investment world. But, we are all human and may make a mistake as easily as anyone else. 

Its your money and your responsibility. I even posted an article titled “Financial Resolution No. 3: I will not blindly trust my Insurance or Investment Advisor” in Jan 2012 because I am a strong believer in the fact that, if you don’t care about your hard earned money, your advisor most likely wont too…

Deadly Mistake No. 5: Excessive Exposure to Risk or Excessive Conservatism

Any investment portfolio must have a combination of instruments that range from fully safe options like Fixed Deposits to risk options like Equity Stocks or Mutual Funds. Excessive exposure to risky choices may result in huge losses and similarly excessive exposure to safe investments may result in low returns. I wrote an article a few weeks back titled “Does My Portfolio Need Equity Investments?” which actually explains why you should diversify across asset classes…

Deadly Mistake No. 6: Holding on to a Loser – In the Hope of Breaking Even

Sometimes, even the best investor makes bad choices. It is all part of the game. A smart investor is one who can own-up to his/her mistake and sell an investment (even if it means incurring a loss) if it was a bad decision. Many of us hold on to such loser stocks or mutual funds in our portfolio in the hope that someday this investment will break-even and you can at least recover whatever you invested. What makes things worse is that, some of us may even end up buying more of this loser to average out our losses. 

If you take a step back and think why we do this – the answer is very simple. Not everyone can accept that they were wrong. A smart investor is one who can actually accept that fact that he/she did a mistake because it is perfectly fine to make a mistake. Holding on to the loser is actually a bigger mistake than actually owning up to our mistake and moving on…

Deadly Mistake No. 7: Mixing Emotions and Investments

Have you ever heard of the saying “Water and Oil – Do Not Mix”? Emotions and Investments are almost the same. Yes, investment is something we must make with our brains and not our hearts. Sometimes our emotions may interfere with our ability to make prudent decisions. So, if you are going through emotional duress (like loss of a loved one) or are basing an investment decision based on emotional motivation (like recommendation by a family member/relative), there is a very high probability that this investment will end up being a loser. 

Never, mix your emotions with investments. Invest only when you are calm and clear. 

Hope you found this article useful...

Happy Investing!!!

Sunday, October 26, 2014

NRI’s Read This – Service Tax on Money Sent to India

Are you an NRI or know a friend or family member who sends money to his/her family every month? Easily 80% or more of NRIs send money regularly to their families and the amount of money that was received by India last year was about 65 billion USD. Yes, 65 billion USD. Anyways, recently there is some speculation that the indian government could bring this remittance of funds from abroad into the list of services that attract service tax. The purpose of this article is to clarify the situation and smash a huge misconception that people may have about this recent development..

How Much Service Tax should I Pay?


Yes, 12.36%. But, before you get scared, this service tax is to be paid on the “Service Charge” or “Fee” that your bank/money transfer agency charges you.

Let me explain…

Every month when I send money, a local bank in Singapore charges me SG$ 5 as service charge. So, whatever money I send, 5 Singapore dollars’ worth rupees will get deducted. For ex: If I send 1000$ today, I should get around Rs. 48,000/- as per today’s exchange rate. But, the bank deducts the fee of $5 which works out to Rs. 240/- from the amount that is credited into my NRE Bank account.

After the introduction of this new service tax rule, an additional Rs. 29.6/- will be deducted by the bank to cover for the service tax. So, in all, Rs. 269.60 will be deducted from the money I am sending and only the remaining gets credited to my NRE Account.

When is this new rule coming into force?

Actually, this part is yet to be cleared by the governmental authorities. In fact, back in 2012, the erstwhile Manmohan Singh led Congress government wanted to introduce this service tax but later retracted. So, in all probabilities, this may get retracted by the current government too…

My Friend was saying 12.36% of the money I send will be taxed. Is it True?

Absolutely NOT.

There are a lot of people who are being scared by people who haven’t understood this new ruling. Yes, when someone says 12.36% service tax, it is natural that we get carried away but this tax is only on the service charge. Almost all banks and remittance services charge a small fee of about 100 rupees or so. This service tax will ONLY be charged on this service fee and not your entire amount. So, as I explained in the calculation above, the impact will be about a few rupees on the amount that eventually gets credited to your account.

No One can charge service tax on the whole amount being sent because India does not have DOUBLE TAXATION. If the money you are sending has been taxed in the country of origin, India WILL NOT ask you to pay Income Tax on it.

Is this Service Tax a Good Idea?

I am not an ardent supporter of such service taxes because a big majority of our NRI population is still working as daily-wage laborers in many foreign countries esp. Gulf. So, even a 50 rupee deduction on the money the send would impact them. I definitely wouldn’t mind paying this 50 bucks as service tax but can the others afford it – I don’t think so.

But, on the flip side, if the government sets any upper/lower threshold for this taxation, we all know what will happen; people who can actually afford to pay this 50 bucks service tax will split up their transfers and try to take advantage of the loop-hole. Sadly we are our worst enemies…

Some Last Words

Though I don’t support such taxes that affect the hard working NRI working class of India, this isn’t as bad as what people project it to be. I checked out a few news websites and even they haven’t clearly explained the impact and there are dozens and dozens of worried people with comments asking how much would be deducted on the amount they send each month. Our politicians and biased media is tweaking this news and creating further confusion.

So, it is my humble request to you. If you are an NRI or have friends/family members who may be impacted by this new service tax ruling, please share this article with them.

Thank you.


Saturday, October 11, 2014

Does My Portfolio Need Equity Investments?

This is a question that every investor has in his/her mind. Many of us stay away from the equity markets because of fear that we might lose money or just because we don’t have the time or the know-how to do so. So, invariably most of us end up investing only in “Safe” investments like PPF or Fixed Deposits. A couple of months back, I even penned down a book titled “Safe Investment Havens of India” which covers all the good safe investment options. Though safe investments offer us the 100% guarantee on our principal and give us decent returns, the burning question is – is it enough?

The purpose of this article is to help you get an Answer to this question..

The Answer:
               For a change, I want to give you an answer to this question right away. Yes, your portfolio needs Equity Investments. You will learn the reason why in the next few paragraphs…

Important Note: Not everyone can afford to have the same % allocation toward equities. Youngsters can afford to have a much higher allocation toward equities than their parents who are on the verge of retirement. I had explained a concept called “Lifestage based Investments” and “Optimal Portfolio Allocation” that outlines how much exposure one should have toward equities based on their age in my book titled “Your Complete Guide to IndianIncome Tax & Retiring as a Crorepati”. You can read a free preview of the book here: “Free Preview

Reason 1: Tax Implications

Income from debt instruments such as fixed deposits has to be added to your taxable income and is taxed as per your tax bracket. If you fall in the 30% bracket, the return earned on your fixed deposit gets lowered by that much.
So, lets say you are in the 30% tax slab, 30% of the interest you earn is effectively paid as income tax. So, a 10% return earning FD is actually giving you only 7% after tax.

Reason 2: Inflation

Before you invest in any instrument it is necessary to consider the 'real returns' generated by the Investment. 'Real returns' is nothing but the rate of returns over and above the inflation.

For example, if your investments generate 6% returns (after taxes) and the rate of inflation is 5%, your real returns would be 1%.

So, in a country like India where Inflation is around the 7% or 8% range most of the time, your fixed deposit (or any other safe investment) usually would generate only 1% or even lower real returns…

Why Inflation is Very Important!!!

You may be wondering why Inflation Rate is so important. If the annual inflation rate is about 6%, anything that costs 100 rupees this year will be costing 106 rupees next year. So, if your investment is not worth at least 106 rupees or more at the end of the year, your investment is effectively eroding in value. It won’t be sufficient to buy the same item that you could’ve purchased this year.
Get the picture?

Some Last Words:

This article is actually outlining the negatives of safe investments. So, does this mean – I should stay away from Safe Investments?

No, definitely Not. The purpose of this article is not to scare you away from safe investments. Safe Investments like Fixed Deposits or PPF should be a part of every investors portfolio. The purpose of this article is to highlight the fact that, by just focusing on safe investments, our returns/profits may not even beat the inflation rate. By including an appropriate % of Equities in your investment, your total portfolio can actually grow at an overall rate that is higher than inflation.

Lastly, you may be wondering, are equity investments tax free? Actually – YES. If you stay invested for at least 1 year or more and transact through a registered stock exchange after paying the Securities Transaction Tax (STT) the profits from equities is fully tax free. Only those profits you earned from shares you sell within 1 year will need to be considered for tax calculations. Same is the case for Equity Mutual Funds.

Happy Investing!!!

Saturday, October 4, 2014

Finally Some Relief for the Indian Tax Payer

Over the past many years as a blogger, there haven’t been many articles that actually made me smile wide while writing. Well, for this one, am smiling from ear to ear because this is great news and a much needed relief to the Indian Tax Payer who is almost always unsure of what is happening..

Did this arouse your curiosity??

The purpose of this article is to help you understand a recent development that would work out as a great boon to every Indian tax payer. Read on to find out more…

So, what is this great news?

A New and Enhanced Tax Website

Yes, you read it right. The Income Tax Department of India has revamped and launched a revamped or should I say an Enhanced version of the Income Tax Website.

Dint We Have a Indian Income Tax Website?

Ha ha, that is a great question. 

Yes, we did have a website but sadly the website was more like a site where you can find info about what is indian income tax, how to calculate taxes and so on. Not much info was available for a tax payer. For ex: If I filed my taxes this month and want to check if the processing is complete, I would have to visit my prayer room and pray hard because only GOD knows the status…

So, what are the features/functions a Tax Payer can do – On this Website?

Most of the online tax related activites can be performed using this new website. They include:
  1. Filing Tax Returns
  2. Review Status of your Tax Return Filing
  3. Apply for a PAN Card
  4. And MORE!!!

The website will also send out notifications, circulars and even intimations to the tax payer. Doesn’t this sound cool?

So, what is this website?

Some Last Words

Dear Friends – This website is newly revamped and is still very very new. So, it might take a few months or even years until the website is fully usable and beneficial to the tax payers. But, personally I feel that this is a good start and a step in the right direction. As an NRI who works in Singapore, the Singapore Tax Portal is exceptional and I cannot explain how useful such a website is. But, honestly speaking the website is more than a decade old and during its initial stages it was definitely not as useful as it is now.

So, this is a good start and lets hope this is a sign of great things to come!!!

Sunday, September 28, 2014

Things To Do – Before Availing a Home Loan

Last Week, a friend of mine here in Singapore was talking to a bank salesman about a home loan. I also happened to join this discussion with the salesman who was representing a leading bank that happens to give home loans for NRI’s from Singapore as well. During this discussion, the gentleman happened to elaborate on many of the eligibility criteria and with a little bit of digging, the rationale behind the same was also touched upon. So, I thought, why not share these details with all of you…

Why this Article is Important

Buying a home is a significant investment for most of us. Not all of us have enough cash in our bank accounts to make a full payment for the house. So, inevitably we end up taking up a home loan which is a 10 years or more financial commitment. Though we think about points like our monthly income before availing this loan, we may miss out on some of the finer aspects of the loan evaluation criteria and this might adversely impact our loan eligibility. So, why miss out on our dream home?

When should I do all this?

This is a very tricky question. You should start thinking about all these aspects of the loan evaluation at least 4-6 months prior to you actually sign-up for the home loan. Finding a good house is a lengthy process and for most of us, we identify a good house only after a few months of search. So, the moment you start thinking about buying a house, you must start thinking and planning for all these aspects…

Step 1 – Review your Credit Report

The first and most important consideration for any Bank is the “Credit Report” of the borrower. In India CIBIL is the entity that offers these credit reports. So, if you apply for a loan (any loan) the first think the bank would do is, request a copy of this report. A few weeks ago, I had written an article titled “Everything You Want to Know About Your CIBIL Credit Score- Explained!!!” which will help you understand what this credit score is and how you can improve it.

Once you have decided that you are going to buy a house, you should purchase your credit report from CIBIL and review it to make sure that your credit score is good. You must also review it to make sure that all the info in the report is correct. If your credit score is at least over the 700 mark (the closer it is to 900 the better) there is a good chance that your loan will get approved.

Note: Purchasing this credit report would cost you Rs. 470/-. Check CIBILs website for more details here: CIBIL - Apply Credit Report

Step 2: Clean up your Existing Loan Commitments

If you are someone who does not have any loans now, you can ignore this step. However, if you have taken a few loans, then you must do this.
It would be a good idea to close-off all (or at least part) of your loan commitments before signing up for the home loan. All banks will deduct your existing loan repayments (EMIs) from your monthly income before calculating your loan eligibility. Plus, the more the number of loans you have, the difficult it would be for you to obtain a loan. So, better close out your loans before the home loan agreement is signed.

Step 3: Review your Bank Balance

Have you spoken to any bank about a home loan? If you had, the bank would’ve asked you to submit at least 6 months of your Bank Statement, from the bank account where your salary is getting credited. (For NRI’s the NRE Account statement is also asked for, over and above your salary account statement from the country where you are employed).
You might be thinking, am giving you my payslip, employment records etc but why am I being asked for my bank statement?
Simple. The bank would like to know your spending habits and also check if you maintain sufficient balance to repay your loans. For ex: If you are availing a loan of 50 lakhs that require you to repay Rs. 60,000/- every month, the bank would like to check if you maintain sufficient balance. Someone who maintains an average of 50,000 rupees or more would have a greater probability of getting this 50 lakh loan in comparison to someone who maintains only 5,000 rupees.

Step 4: Review your Banking Habits

If you are someone who has the habit of timely repayment of bills and dues, you can ignore this step. If you are someone who issues cheques or has monthly EMI deductions from your bank account but, do not maintain sufficient bank balance, you may need to concentrate on this point heavily. Any bounced payment (Cheque/EMI/Bill Payment) would adversely affect your loan eligibility. No bank would grant a loan to a customer who has a history of missed payments. A Bank would expect you to clean up your habits at least over the past 6 months to 1 year so that they can trust you with a loan.

Step 5 – Review your Documents

Most banks request the same kind of documents from its customers for loans. The most important of them would be:

  1. Loan Application (Filled-in with Photographs)
  2. Address Proof (Telephone Bill, Electricity Bill etc.)
  3. Identity Proof (Passport, Driver’s License etc.)
  4. Latest salary slips – At least 3-6 months
  5. Tax Return Filings (Or Form 16) for at least the past 3 years (The more the better)
  6. Bank Statement – At least 6 months

In addition to the above documents, you would also need to submit copies of all property papers that you desire to purchase.

Tip: It is always recommended to verify the property documents available with the seller before entering into an 'agreement to buy'. Generally, banks do not process a loan application without the 'agreement to buy/ sell'. If you are not confident on the property documents, it is always advisable to consult a property lawyer well in advance. The lawyers analyze the chain of the property and help you in making the decision to buy or reject the property. They also help in execution of the sale/purchase transaction.

Some Last Words:

Getting a home loan is a lengthy process and banks would closely scrutinize your application before granting you the loan because it is a huge commitment. If you were a bank and someone is asking you for a 50 lakh loan, wouldn’t you closely evaluate the loan applicants details? The more confident you are, the more comfortable you would be to grant the loan – isn’t it?
So, as a customer, it is our responsibility to make sure that we submit all the necessary artifacts to improve the banks confidence.

Hope this article was useful to you. Happy Availing a Loan!!!

Sunday, September 21, 2014

A New Investors Guide to Mutual Fund Investments…

All of us work really hard and it would be unfair if our money/investments aren’t working as hard as we do. To force our money to work hard, it is inevitable that we consider the stock market. And, if you are novice investor, taking the mutual fund route is the best. So, if you are someone who is new to the stock market as well as Mutual Funds, this article will help you make up make up your mind and decide…

As always, if you feel some more of your Questions are still left unanswered, feel free to sound off in the comments section…

Before We Begin: Why this Article..

A couple of days back, a friend of mine who I have known for almost a decade pinged me. He was hearing a lot about our stock market being in a “Bull Run” Phase and wanted to take advantage of this momentum. He was very new to the stock markets and felt that going the Mutual Fund Route would be the best for him. During the discussion he suggested that, some of the questions he had would be useful to other blog readers who may be sailing in the same boat as he was. So, here we go… 

As a new attempt – this article is structured in a Q & A or Conversational Format between me and my friend.

Rajesh: Hi Anand, Need some advice about stock market investments. I am thinking about Mutual Funds da.
Anand: Hi Rajesh, sure da. Yes, Mutual Funds are the best choice for people like us who are busy with a regular day job and cannot track our investments on a daily basis.
Rajesh: Yes da. What route would you suggest? Do I need a lot of money to start investing in Mutual Funds?
Anand: No da, not required. You can start off with a very small amount.
Rajesh: Is it? What is the Minimum amount da?
Anand: It depends on the mutual fund da. Most funds would accept investments as small as Rs. 500 or Rs. 1000 (This varies from fund to fund) if you commit to Systematic Investment Plans (SIPs). I had written an earlier article about SIPs in April 2012. Click Here…
Rajesh: Oh, must I commit to an SIP?
Anand: Yes da. No matter what the market phase is (Bull or Bear), SIPs are the best choice for people like us because you can start with small amounts, it brings discipline to investments plus it helps us average out our gains/losses by investing every month.
Rajesh: Ok da. I have been going through many stock market websites. Am confused da. What website will give me clear cut ideas?
Anand: What is the bank with which you have a DEMAT Account?
Rajesh: I have XXXXX Bank DEMAT Account da.
Anand: Check their website itself da. Their DEMAT Account is one of the best in the Indian markets.
Rajesh: But, wont they recommend only their mutual funds?
Anand: No da. They CANNOT/WILL NOT. No Demat Account provider can recommend his/her funds only. It is against the laws set forth by SEBI. As a Demat Provider, they are expected to be neutral and put the customers interest in the forefront. So, they will recommend mutual funds from all fund houses (not just theirs)
Rajesh: Oh ok. What fund would you recommend for me?
Anand: It depends on the amount of risk you are willing to take da. How much money are you willing to lose?
Rajesh: What are you asking da? Am investing to make money da not lose.
Anand: No Rajesh. All stock market investments come with an inherent risk. There is always a probability that your investments will go-down in value. For ex: Now the stock market is at never before highs (27000 for Sensex and 8000 for Nifty). If for some reason the market tanks and goes down by 30% there is a chance that your investment will go down by an equivalent % or more as well… That is why I asked you, how much money you are willing to lose/risk.
Rajesh: Ok da. I want to invest in the stock market but don’t want to lose a lot of my money da.
Anand: Fund Classification – By Risk (High to Low)
Thematic/Sector Oriented Funds
Small/Mid-cap Funds
Diversified Equity Funds
 Blue Chip Funds
 Balanced Funds
 Debt Funds
Rajesh: So, what would you recommend for me da?
Anand: The first 3 are extremely risky da. So, I wouldn’t recommend them for you. First tell me how much are you willing to invest each month.
Rajesh: Am thinking around 3000-4000 rupees per month da
Anand: Ok. Whatever is the amount you decide, split it into two and start off SIPs in two different Mutual Funds. Choose one Balanced Fund and one Blue Chip Fund.
Rajesh: Doesn’t a Balanced Fund Invest in the stock market?
Anand: Yes da, they do. But, they invest only around 50% in stock market instruments. The remaining goes into safe investments which means, around 50% of your investment is safe.
Rajesh: What is a Blue Chip fund da?
Anand: Blue Chip is nothing but a fancy term for Large Cap companies. Blue Chips are extremely large and successful companies that have a long history of profits. State Bank of India, Reliance Industries, ONGC, NTPC, ICICI Bank, HDFC Bank etc are some classic examples. There around 100 or so super large companies in our country and these mutual funds predominantly invest on such companies only. Even the ELSS sub category of mutual funds invest only in blue chips
Rajesh: What is the advantage of investing in blue chips?
Anand: Though the price of blue-chip shares may not go out of the roof like a small cap or mid cap company, nor will their price go down as fast as their smaller counterparts. Because of their size and profitability, investors will not panic much and their stock prices will remain stable even during tough times. This does not mean you wont make any losses, but the relative % or probability is lower in comparison to other sized companies.
Rajesh: Ok Da. Tell me two funds – one in blue chip and one in balanced category that I can invest in.
Anand: Sure da… And I gave him a couple of choices… If you are looking for the best mutual funds to invest now, you can check out my book on Indian Income Tax & Retiring as a Crorepati.
Rajesh: Thanks da. Take care.
Anand: Thanks da. You too, take care.

Some Last Words:

You may be wondering, my investment profile is not the same as your friend Rajesh. Yes, you are right. This next paragraph is for you…

Investment Strategy in SIP’s for different Risk Profiles:

Step 1: Decide the amount you wish to Invest. Lets say Rs. 10,000 per month
Step 2: Decide your Risk Profile – Super Aggressive, Aggressive, Moderate, Conservative
Step 3: Select funds according to your profile.
If Super Aggressive – Split your money into 4 and start SIPsas follows:
  1. Two Diversified Equity Fund
  2. One Small Cap or Mid Cap Fund
  3. One Blue Chip Fund
If Aggressive – Split your money into 4 and start SIPs as follows:
  1. One Diversified Equity Fund
  2. One Small Cap or Mid Cap Fund
  3. Two Blue Chip Funds
If Moderate – Split your money into 3 and start SIPs as follows:
  1.  One Diversified Equity Fund
  2.  One Blue Chip Fund
  3.  One Balanced Fund
If Conservative – Split your money into 2 and start SIPs as follows:
  1.  One Blue Chip Fund
  2.  One Balanced Fund
In my book on Indian Income Tax, I have recommended the best mutual funds that you can consider for Investment now. You can choose funds from that list and start off your SIP Portfolio!!!

Happy Investing!!!

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