Five Budget Destinations You could Explore during this Holiday Season

Domestic airfares have gone up dramatically, but that doesn’t mean you can’t think of an overseas sojourn this holiday season. Travelling abroad doesn’t necessarily mean burning a hole in the pocket, say travel experts. Proper planning and right execution can really help you save money as well as a lot of hassles. One of the easiest ways to cut cost is to make the bookings well in advance. “You pay at least 25-30% lower on international air travel. Hence the key to best travel deal is to plan early,” says Noel Swain, EVP, supplier relations, Cleartrip. Most airlines sell tickets at discounted rates 7, 14, or 21 days before the departure dates. 

Secondly, be flexible with your schedule. Flying on weekdays and not on weekends, or even at a different time of the day, can make a substantial difference. If possible, use public transportation in cities rather than taxis. “If you are opting for a cab, check with all major car-rental agencies in the destination city. Make the reservations before you leave home as it is always a guaranteed money saver,” says Pratik Majumder, head of marketing & strategic relations at Yatra.com.
Some budget destinations you could explore this holiday season: 

TURKEY “It is popular for its history, white sand beaches, soaring mountains and its cuisine,” says Majumder. “Starting from exploring history, nature surroundings, adventures, taste of different cuisines to mingling in a new culture, Turkey has attracted tourists for ages. Moreover, the country is famous for the hospitality extended by the localities,” he adds.
Holiday packages to Turkey starts from . 54,000 per person. The exchange rate for the Turkish currency (lira) is 29.8841 Indian rupees. 

Remember: If you are planning to travel in taxis, as in all countries, ask for a rough estimate of the fare before you board. Ask the driver to use the fare meter and check your change carefully. 

THAILAND 
Thailand is popular for its beaches, food, culture and the shopping options it offers for the different age groups. Pattaya and Phuket are very popular destinations among Indians. Travellers can also visit the islands like Coral Island, Ko Phai, Ko Krok and several others by renting a boat. Pattaya Thai Floating Market is a popular place for shopping in Thailand.
The holiday packages to Thailand start from . 22,000 per person. The exchange rate for the Thai currency (baht) is 1.7462 Indian rupees. 

Remember: Laundry is very cheap and you can purchase anything you need over there. So you can pack light. When bargaining, check the price of an item in more than one place. Try and negotiate the price down by 15-20% from the average price. Avoid swiping your credit card for security reasons. 

SRI LANKA Set in the Indian Ocean, the tropical island nation of Sri Lanka has a history dating back to the birth of time. It is a place where the original soul of Buddhism still flourishes and where nature’s beauty remains abundant and unspoilt.
Colombo is popular for Buddhist and Hindu temples, churches, the old Parliament building, the zoo, museums and art galleries. Next to Colombo is the hill capital Kandy, situated 488 meters above the sea level. It’s the most visited place after Colombo. Wasgamuwa National Park is another attraction which has preserved the natural habitat of elephants.
The holiday packages to Sri Lanka start from . 22,000 per person. The exchange rate for the Sri Lankan rupee is 0.4126 Indian rupees.
Remember: Permits are required to take photos at certain sites. Entrance tickets cover charges for photography, recording and parking. Rates are quoted in US dollars. 

KATHMANDU Kathmandu is a hub of ancient temples and shrines, inexhaustible historical and cultural beauty. It offers a bag full of historical facts to all history lovers.
Pashupatinath Temple and Boudhanath are major attractions. The city also offers luxury boutiques, shopping centres, bargain outlets and markets. Nepal is popular for jewellery, statues, handicrafts, pottery (at Bhaktapur) and carved-wooden items (at Patan).
The holiday packages to Kathmandu start from . 10,000 per person. The exchange rate for the Nepali rupees is 0.6255 Indian rupees. 

Remember: “Pick up a free Kathmandu Valley map at the airport. The first thing some visitors notice about Kathmandu is the general lack of street names except for major roads,” adds Majumder of Yatra.com. 

DUBAI It is known as a shoppers’ paradise. Be it gold, cosmetics or branded apparels, Dubai is very popular among shopaholics. Burj Khalifa, the world’s tallest structure, is the latest attraction in the emirate city.
Packages start from . 35,000 per individual. The exchange rate for the dirham is 14.60 Indian rupees. 

Source : Times of India -10/10/2012

RGESS Tax Saving Scheme – Too Complicated !

RGESS or Rajiv Gandhi Equity Saving Scheme is the new tax saving scheme, for saving taxes. This is mainly  for first time equity investors in securities market. The whole idea for introducing the RGESS scheme is to promote an ‘equity culture’ in India as well as widen the  retail investor base in the Indian securities markets. Look at the below video where a discussion is going on RGESS.
Lets us look at some major points which defines RGESS

1. Maximum Investment Limit and Tax Saving

RGESS scheme is available only to those investors whose taxable limit is less than 10 lacs per year; and the maximum limit of investment is Rs 50,000 per year. The tax advantage will be available on only 50% of the amount invested –  which means that tax saving can be done only on upto Rs 25,000. Which means, if you invest Rs 50,000 and belong to 20% tax slab , you will be able to save 20% money on 25,000 (50% of 50,000) – a Rs 5,000/- tax saving.

2. Applies to new Investors Only

The RGESS Scheme is available only for “new investors”; defined as those whose PAN numbers don’t have equity transactions, which means either a person has not opened a demat account ever, or has opened a demat account, but have never invested in equity before the scheme came into effect. The investment can be done throughout the year, and not restricted to a one time investment, so investing Rs 50,000 in one shot or investing Rs 10,000 in 5 shots , both are eligible. But the big confusion is for those investors who already have equity investments through mutual funds, but do not have demat account ?

3. Lock In period of 3 years

This rule is a little messy. There will be 3 year lock in period for this investment. However if an investor wants to, he can collect “profit” part after a year of investment.  So for the entire first year, you cant sell your shares! And after the first year of investment, he can take out the profits if he so chooses. He can sell all his shares if he wants, but he will have to bring back the same amount through some other stock.  After first year, 2 more years of lock in will apply, and in this period, you have to maintain your balance at the end of first year, which should be minimum of the amount on which you claimed income tax or the balance at the end of the 1st year .
So if a person invests Rs 50,00 , and in next one year

Case 1 : His worth is Rs 55,000 , then he can take out 5,000 and after that he has to keep his balance minimum 50,000 (the amount on which tax exemption is claimed), if a person wants, he can sell off his shares totally, but then again has to come back with 50,000 investment in some other or same stock. He can take out the profits part (above 50,000) if he wants in these next 2 yrs

Case 2 : His worth is Rs 25,000 , then in this case, he has to maintain this 25,000 balance in next 2 years. If you are still unclear, Deepak Shenoy has done a better job in explaining this lock in part, in his article on RGESS.

4. Where can you invest for RGESS Scheme?

You can invest in stocks which belong to

• CNX 100
• BSE 100
• IPOs of PSUs whose annual turnover is not less than Rs. 4000 Crore for each of the immediate past three years
• Large Listed PSU’s
• And any ETF , Mutual fund which are listed and traded in stock exchange and whose portfolio includes stocks which are eligible under RGESS

Should you invest in RGESS ?

Personally, I feel that RGESS has too many terms and conditions to follow, and is not that easy to understand for a common man. Especially a new investor who is anyways afraid of markets and his money being lost. The restriction of “can’t not sell at all in first year” is kind of scary, especially for those who are too risk averse.
Another bad point about RGESS is that it’s a once in a life time investment scheme. Once you become eligible for this scheme, for next year you will not be a “new investor” and hence wont be eligible, so its only for the fresh batch of new investors each year. The only positive point is that for those who were anyways going to take plunge in stock markets will get extra benefit of some tax saving and might instill some compulsory discipline of investing (lock in period).
Let us know what do you think about this RGESS Scheme (Rajiv Gandhi Equity Saving Scheme) , and if it interests you. Will it be a hit tax saving scheme or a flop one? What do you thin

Should You Go for Short-term Bond Funds as FD Rates Fall?

Ultra short-term funds score if you need money in 2-6 mths, but bond funds are in a sweet spot now, says Nikhil Walavalkar

    Even as investors wait to see strong cues on the interest rates movement, banks have already slashed interest rates on fixed deposits by 0.25% to 0.75%. Short term rates — represented by the interest rate on certificate of deposits or CDs — are sliding. Interest rate on three-month CDs was 8.4% on September 28, compared with 10.17% on March 30. One-year CDs quoted at 8.98% on September 28, down from 10.15% on March 30. And many money market analysts believe that the rates will start easing even further if the Reserve Bank of India cut policy rates. “We expect RBI to cut policy rates by 50 basis points in this financial year,” says Pankaj Jain, senior fund manager at Principal Mutual Fund. No wonder, many debt investors are totally clueless about what to do. They simply can’t make up their mind whether they should go for short term bond funds or fixed maturity plans or bank fixed deposits. 
WHAT IS YOUR INVESTMENT HORIZON? “Investors looking to park their money for two to six months should consider ultrashort term bond funds,” says Pankaj Jain. Typically, these funds invest in certificate of deposits, commercial papers and other instruments maturing in and around three months. The primary objective of these schemes is safety and liquidity, and returns come in later. Given the attractive yields on three-month instruments, these funds score better than comparable fixed deposits. One can look at schemes that invest in instruments with high credit rating – typically “AAA”. This ensures safety of capital. Ultrashort term bond funds can be better vehicles to park money for couple of reasons. First these schemes invest in papers with maturities of around three months. This ensures that there is not much impact of changes in interest rates, which means not much volatility in returns. Investors can sit peacefully if they are invested in a scheme floated by fund houses with good track record. “The second benefit comes in the form of no exit loads for most of these schemes, which score over bank fixed deposits which typically come with penalties on premature withdrawals,” says Nitin Vyakaranam, founder CEO, Arthayantra, a financial planning services provider.
“For a time horizon of 9 to 12 months, we are recommending short term income funds to investors. They can also benefit from a potential fall in the short term yields due to rate cuts and or improved liquidity leading to capital appreciation,” says Pawan Joseph, national sales head (wealth management), Motilal Oswal Securities. 

Short term bond funds are in a sweet spot now. The current accruals on the instruments maturing within one year are attractive. If the rates come down in the meantime, investors may see some capital appreciation in the form of rise in bond prices. The returns offered by these funds are tax efficient compared to bank fixed deposits. Dividends paid out by these funds attract a dividend distribution tax of 13.52%, whereas the interest earned on fixed deposit is added to your total income and taxed at the marginal rate, which for the highest tax bracket stands at 30.6%. 

For a timeframe of two to six months and nine to twelve months, ultra-short term bond funds and short term bond funds look good, respectively. 

While investing for the short term in an open-ended fixed income mutual fund scheme, you cannot ignore your liquidity needs. “Know the exit load of the schemes before investing, especially in case of short term bond funds. After all it eats into your returns,” says Pankaj Jain. For example, if you are keen to invest for six months but if the scheme has an exit load of 0.5% for exits within nine months, your return will go down by the amount of the exit load deducted by the fund house. Lock your investment in FMPs if you are sure that you won’t require the money in one year and you want to lock in your returns. 

You should invest in the growth option if you are investing in one-year FMPs. Longterm capital gains are taxed at 20.6% on gain post indexation or 10.3% on gain without indexation. Many experts are of the opinion that you get to enjoy tax-free returns due to the persistent inflation. Stick to one-year FMPs launched by reputed fund houses. “Better to avoid 90-days FMPs, given not so attractive yields available,” says a wealth manager. “Though bank fixed deposits have seen some fall in interest rates, investors from lower income groups can still invest in them,” the wealth manager adds. 

A fixed deposit with a nationalised bank carries little default risk. But in many cases investors have to pay a penalty on premature withdrawals. If you are not keen to take any risk and sure of your investment timeframe, bank fixed deposits can be considered. 

Source : The Economic Times - 9/10/2012

Know These Loan Facts Before Going for an Under-construction Property

Vidyalaxmi explains the risks involved in these projects and tells what home buyers can do to reduce their loan burden

    With the festive season just around the corner, prospective house buyers are coming back to the market. Builders too are ready to indulge in some gimmicks to catch these prospective buyers’ attention.
With property prices remaining sky-high and the interest rates yet to ease significantly, many prospective buyers would be tempted to check out under-construction properties for their cheaper price tags. Typically, these under-construction properties quote at least 20% lower than the prevailing rates in a locality. Of course, you can check the properties under construction, but do it with open eyes, because apart from the obvious risk of delay (it could even be indefinite in some cases) in construction, you may also get some other financial hiccups if there are long delays. 

“The last few years have not been kind to real estate developers. Even some reputed builders are forced to divert money from pre-launch projects to the projects nearing completion,” says Shweta Jain, director (residential services) at Cushman & Wakefield. The delayed possession of the house could exert severe financial pressure on the buyer if he has to pay the EMI as well as the rent at the same time. Moreover, if the project gets stuck or even defaults, the homebuyer is still liable to pay the interest and the principal component of the disbursed amount to the bank. If you are taking a housing loan to buy an underconstruction property, here are some points you should always remember. 

EMI PAYMENTS ON SANCTIONED LOAN AMOUNT In an under-construction property, a bank disburses the loan amount in tranches to the builder. However, you may be expected to pay the EMI on the sanctioned loan amount and not the disbursed loan amount. For instance, if you have taken a loan of . 70 lakh and the bank has disbursed only . 20 lakh to the builder, you may have to pay an EMI for the entire . 70 lakh, which is . 67,552 at 10%. “There is a construction risk involved both for the bank as well as the homebuyer. Earlier, banks were promoting pre-EMIs and part-repayment of loans. Now with the increase in risk factors and elongated period of loans, such as 25 years, banks ask for repayment on the whole loan amount,” says Harsh Roongta, CEO, Apnapaisa.com.
It makes financial sense to pay the EMI on the sanctioned loan amount, as the principal component of the home loan will be much higher, which will reduce the tenure of the loan.
“In the above example, the interest component of the EMI is calculated on the disbursed amount. If the borrower starts paying the full EMI from
the first month, the loan will be repaid in 197 month as against 240 months,” adds Roongta.
However, borrowers often invest in an underconstruction project with the intention to stagger the loan repayment. This huge EMI outgo from the first month can also be a strain on the pocket, especially if the borrower is doling out a monthly rent over and above the home loan EMI. The borrower would have been better off buying a ready-to-move-in house. 

HIGHER LIABILITY ON YOU IN CASE OF PROJECT DELAY OR DEFAULT If the project delays or defaults, the liability is on the borrower to pay off the dues. The loan will be settled only after the borrower has paid off the interest and the principal component of the loan amount disbursed to the builder. Hence you should consider the “track record and reputation” of the developer while buying an underconstruction property.
“The risk comes down if the developer is a prominent and trusted one with many timely completed projects and is financially sound to be able to complete and deliver the project without having to rely too much on cash flows generated purely from sales of units in the project,” says Shweta Jain of Cushman & Wakefield.
This has been a growing concern especially since 2008. Even some reputed builders are forced to divert money from pre-launch projects to their projects nearing completion. Hence, if you are borrowing up to 70% of the property value, it is better you opt for a project which is close to completion or a ready-to-movein house. Also, do check if it is already mortgaged with a lender. If the property is already mortgaged with a lender, do insist on a no-objection certificate from the lender before entering into a purchase agreement with the builder. This NOC can act as a good recourse for the home buyer if the developer defaults on his loan. 

NO TAX BENEFITS IN UNDER-CONSTRUCTION PHASE A home loan borrower can claim tax exemption on interest payments up to . 1.5 lakh and another . 1 lakh under Section 80 C towards the principal repayment. However, you cannot seek these tax benefits in the pre-construction phase, even if you have started repaying the housing loan. “The Section 24 of the Income Tax Act states that if a property is still to be constructed, there will not be any deduction on the interest payment all of those years. The interest for the pre-construction period can be availed for deduction in five equal installments from the year the construction is complete,” says Vaibhav Sankla, director, H&R Block India. You can avail the tax benefit at the time of filing your income tax returns.
The Section 80C allows tax benefit for the amount paid towards the stamp duty and the registration process. “However, the tax rebate on principal repayment may not be allowed when the property is under construction,” he adds. If there is a delay in the possession of the property, the tax benefits also get delayed to that extent. 

Source: The Economic Times - 11/10/2012

World’s Simplest Money Management System

Most people have such a fear of (lack of) money that they almost equate money to oxygen.  Cover someone’s mouth and nose and watch how they fight you to get their air back. I came across T. Harv Eker’s Book “The Secrets of the Millionaire Mind” it says “Rich people manage their money well. Poor people mismanage their money well”, I read this & my first reaction was, “As a Financial Planner I know that!” Trouble was I didn’t really know the effective system to manage money. I just thought I did.
If you want to get rich, focus on making, keeping, investing & managing your money. I had been managing my money for years but not in a systematic way, I paid price for the same (by not following any system). This Money management System is very simple to understand & implement. If you want Financial Freedom you got to follow a system for achieving it. As a financial planner people I meet believe managing money will take away their freedom. They hate the idea of Budgeting. They believe managing money will not allow them to be free and enjoy life to the fullest. I have been implementing this “Money Management System” for over a year now & it has given me tremendous freedom in the area of money.
Most of the people I meet say, “I will start managing my money when I have enough money”. As a planner I tell them “if you aren’t managing your money now then you may not have any money to manage in the future”.

The Single biggest difference between financial success and failure is how well you manage or mismanage your money. People mismanage money in different ways (By not having a financial coach in life, by not having a financial Plan in place, by not organizing their finances, by buying ULIPS, by not taking financial Literacy etc etc)
To master money, you must manage money through this effective Money Management System:

• 50-% Necessities Expense account (Your Day to Day Expenses Account)
• 20% Financial Freedom Account (FFA Account only for investments. Never spend only invested)
• 10 % Education Account (Invest in skill development, Personal Development)
• 10 % Long Term Saving for Spending Account.
• 5 % Fun & Joy account (balance out the investing for fun % joy(nurture yourself – fine dining, etc)
• 5 % Give Account (To a lot of people wealth is how much you have. But if you truly want to create wealth, you might want to change that viewpoint. Try thinking of true wealth as how much you give.

- Read about GFactor and Try out JagoInvestor Calculators

A brief Definition of Financial Freedom

You are financially free when your Passive Income (Income from your investments, rental Income etc) is more than your desired lifestyle).To win the money game, the goal is to earn enough passive income to pay for your desired lifestyle. One should design their Financial Plan with a context to achieve financial Freedom. Having a Money Management System is equally important as having a financial. Always remember The real secret of successful wealth management is that your financial future is truly in your hands.

by Manish Chauhan

Happy Navratri & dasra 

Convert your Mutual funds into demat form

by Manish Chauhan

Do you have all your mutual funds investments in different companies and are looking for aggregating them at a common place? If so, there’s some good news for you. Now you can convert all your existing Mutual funds into demat form, which means that you can now have it electronically stored in your demat account, just like shares! Note, that once your mutual funds are in demat form, you can sell them either through stock broker platform (your demat account) or through the normal way of selling it through your Depository participant (like you do, right now.)

Advantages of converting your Mutual funds into demat form ?

1. Centralization : Once you convert mutual funds in demat form, you will then get just a single statement for your holdings. Right now, if you have investments in say 10 AMC’s, you must be getting statements from all those AMC’s. How to choose a good mutual fund
2. Monitoring : Once you have all your mutual funds at one place, you will be able to monitor them better, & you can see the performance at one go. Compare that to when they were at different places; we tend to be lazy to look at all of them and just keep ignoring them.
3. Fast transactions : : If you have all the mutual funds in demat form, you will be able to sell those mutual funds in stock markets whenever you need money. Mutual funds are now, tradable in stock markets, so you can buy and sell them in stock exchange in real-time. If you don’t have them in demat form, selling them would not be as convenient.

Steps to convert your Mutual funds into demat form

a) Obtain and sign DRF : The first step, is to ask your demat provider (like ICICIDirect, Sharekhan, Reliance Money) for a ‘Dematerialization Request Form’ (DRF) for conversion of mutual funds units held in physical form into demat form. Obtain it, duly fill it and sign it. You should be able to find the DRF form at your demat provider website. [DDET Click here to see a Sample DRF form]
[/DDET]

b) Sign all the statement of Accounts from your Mutual Funds : You will have to collect the statements from all the AMC’s which have the mutual funds names which you want to convert, once you have them, you have to sign it. You will get all these statements in your email box most probably. This step is important to make sure you have documentary proof that you own those mutual funds and have their names, so if you have investments in 5 different AMCs, you should collect all 5 statements.
c) Submit and Acknowledgement: Submit the duly filled and signed DRF along with and Account Statement issued by the Mutual Fund House to the Depository Participant. Acknowledgement will be given by the Depository Participant for the document acceptance, subject to verification.[DDET Click Here to see all Important points before submitting a Dematerialization Request]

1. The investor should check with their Depository participants (DPs) for the dematerialization Request Form to convert mutual funds units held in physical form into demat form.
2. The details in the DRF, i.e. Name(s), holding pattern and signature should match with the details as appearing in the account statement.
3. The form is duly filled and signed by all unit holders as per the holding nature and is complete in all aspects.
4. All the schemes as available in a folio are mentioned in the DRF and the unit balances as specified are matching with the closing balances available in the folio. No partial units or selected schemes available in the folio will be accepted for conversion.
5. Units requested for dematerialization should be should be free from credit hold, lien or any other hold. In case any units are under hold for want of credit status, conversion will be processed only after clearance of such hold.
6. Dematerialization request should not be submitted if the units are lien or locked for any Income Tax or other legal purpose.
7. Rejection letter will be sent by the Depository Participants if the documents are not in order, units are under lock, or rejected by the Registrar during the conversion process providing reason thereof.
8. Investors can check with their Depository Participant on the status of the request if no intimation has been received within twenty-one days.
9. No separate confirmation letter will be sent by the Registrar for successful transfer of physical units in demat form.
10. Post dematerialization of units the investors can only transact through the stock exchange platform. They will have to approach their broker for purchase / redemption of units.
11. Physical requests received by the Registrar of DSP BlackRock Mutual Fund for purchase/redemption of units will be rejected.
Source : http://www.dspblackrock.com/services/dematerialisation.asp

[/DDET]
d) Processing : The Depository Participant will process the application for conversion of physical units into electronic form. For this, the DP would sent the request form and Statement of Account to the Asset Management Company (AMC) / Registrar and Transfer Agent (RTA).
e) Confirmation : The AMC / RTA will after due verification, confirm the conversion request sent by your DP and credit the mutual fund units in your demat account.

Selling Mutual funds in Demat form

Note that converting the mutual funds will require you to have a demat account first, so incase you don’t have a demat account , you will not be able to convert them , because unless you have a demat account, how can it be stored . Now once you have converted the mutual funds in demat form , you can sell them through your demat account in stock market , which would attract brokerage as per defined by your Depository participant, however you can also sell your mutual funds through the normal old way where you put a request for sell through a Redemption Form .

Conclusion
This is one of those simple and small steps, towards simplifying your financial life. Once you do this, it can motivate you to take further steps in automating many things which will improve your financial life. Dematerialization of mutual funds will make sure your documentation will improve . Let me know if you plan to do this on comments section .. also lets discuss if anything is not covered in article . Has anyone done this already ?

HAPPY NAVRATRI & DASARA
 

3 type of Investors, which one are you?

by Manish Chauhan

Suppose you have 3 buckets, and you have to put each kind of investor into those buckets!. What would be the criteria you will use? In my experience of dealing with hundreds of readers and dozens of clients till date, I can categorize them in a very interesting manner which shows their knowledge and attitude towards personal finance. I call it “I know” or “I don’t know” model. If you look at all kind of investors, at a broader level, you can put them in 3 categories. Lets see each of them and you can identify which one you fit in.

1. I know that I don’t know

The first category of investors is very basic and large in number. They are not very much familiar to personal finance concepts and how to manage their financial lives and mostly they have no idea on how good or bad their financial lives are.  They are mostly careless in this area and dont give sufficient time to manage their financial life. They take it as it comes. Many a times they are great in their respective fields, may be one of the best performers and very smart in what they do, but when it comes to personal finance or managing their own money, they are clueless. People in this category are aware about the fact that they are not good at personal finance and they need assistance when it comes to recommendations, calculations or any kind of basic planning in area of money. They are lost in this overloaded world of information
.
Most of the salaried class people fall in this category. Software engineers, doctors, media personals, defence-personals and even self-employed. At times people related to finance like CA, CS, MBA finance also fall in this category!, Whats common in each of them is that they are modest enough to realise and accept that they don’t know. If you ask them simple question like “Does term insurance make sense compared to Endowment Policies ?” (read this and this), they would be very confused and might not come to a strong conclusion on their own. They will not have much idea on how to start. Anyways, the point is not wheather they know how to do it or they don’t, the point is, if they are aware about this fact that they know or they don’t! . People in this category get mis-sold by agents and often take wrong decisions because of tricks applied by marketers and often they feel that the other person is smarter and knows better than them. Thats the reason they fall prey. Most of the readers here I think would be falling in this category and they are constantly trying to shift to the 3rd category which we will discuss ! .

2. I don’t know that I don’t know

This is an interesting category. Just like first category, even people in this category dont have much idea or have wrong concepts in area of money, But the main difference in this category is that they are not ready to accept the fact that they do not know things, but they feel that they know enough, and live in their own world with their own understanding which  in reality is incorrect. They have their own way of looking at things and suffer a lot in their financial life because they have no idea what they are doing. They are actually not very smart in personal finance, but they “feel” that they are.
Ironically, some of these people are very smart and intelligent in other areas of life. So much, that intelligence now comes on the way to their financial life. They assume that they know everything very well and are not open to listen to other views and learn from that. They consider personal finance as something which they can excel easily, just because they have been successful in other things in life. After all its just some maths and numbers game, as they feel so ! . Interestingly not just investors but lot of agents and advisors also fall in this category. A lot of misselling which happens is accidental at times and not intentional. These agents/advisors do not have any idea that they are actually misselling. They do it thinking that they are doing a great job. They themselves are not aware that they have missold accidentally, believing in what they were told in their sales-meetings.

Let me give you a personal example, I used to talk a lot about Insurance commission and how insurance agents make huge commissions compared to Mutual funds. At that time I was not aware of the fact that mutual funds commissions are paid on AUM basis. I used to make my own theories based on calculations for some hypothetical examples. I use to argue with many Insurance agents on the commissions structure, some of them told me that even mutual f‌unds have high commissions, but I used to think that they are referring to the high ticket transactions only, and trying to cover themselves. I was in this category because at that time I was not accepting that even mutual funds have AUM linked commissions and I used to just argue with them based on my ignorance. So I didn’t knew some important information and I didn’t knew that I dont know.
In the same way, people in this category do not have proper understanding of basics, but instead of accepting it, they have some other kind of knowledge or wrong knowledge and notions and based on that they mess up their financial life.

3. I know that I know

Last section but a very small one is of people who understand truly what they say and suggest in personal finance. If you ask them some question, they would be very confident in what they tell you. This comes from the confidence, which is result of experience and deep self-learning in personal finance. These people use their mathematical and analytical ability to understand what is right and wrong. You can find many of these people on this blog and our helpline Forum . A lot of people from “I know that I don’t know” category get promoted to “I know that I know” in some months or years.

Try this!. If you ask a question like “Does term insurance make sense compared to Endowment Policies ?” to these people, they would eventually come out with the right answer even if they do not know. They would not need any guidance or very little guidance and they would take this kind of problem as a pure logic based comparison questions and will try to compare both term plan and endowment plan from different points and would come up with a conclusion that Term insurance is the best way of Insuring one’s life and it makes sense to invest the rest money in some other product. Also, if you don’t tell them how much return one can expect in long run, they would still find out somehow how to look at historical returns and equity is less-risky in long run ! . They are like a new-born baby who was not told anything, but they just start doing what needs to be done somehow.

What category are you in and What should you do ?

Which ever category you belong to, your final goal should be to get into 3rd category where you are aware of everything yourself and you can guide even others. To eventually reach 3rd category, you have to do just one thing, whenever you are in conversation or debate with anyone, have an open mind of discussion and be open to accept that you can be wrong and might not have some information. Be ready to learn things from other person. With time you will slowly reach 3rd category .
These 3 categories are not just for personal finance, you can categories people in these categories for any area of life and solution to reach 3rd category is still same what I suggested above. Do you think there can be other categories than these 3 discussed above ?

 Article source : www.jagoinvestor.com

Explore Loan Against Collateral to Raise Money at Softer Rates

Borrowings against shares, gold, property are cheaper than personal loans. Nikhil Walavalkar discusses the pros and cons

    Many of us opt for personal loans — when we can’t (or don’t want to) turn to friends or relatives for a soft loan — to tide over unseen shortfall in funds. Sadly, most of us don’t even consider other options available like loan against assets, shares, gold, property and so on. It is strange considering gold finance companies have been on an overdrive in the last few years. Even moneywise, it makes perfect sense to take a close look at asset-backed loans.
Compared to the interest rate of 16% to 24% on personal loans, loans against assets come much cheaper at 12% to 14.5%. But the problem is you can’t club all these asset-backed loans in one bracket. “Each one of these asset-backed loan has its own advantages and disadvantages. You have to choose one of them only after analysing your needs in detail,” says Satish Mehta, co-founder and director, Credexpert, a credit counselling entity. And the needs could be — the purpose of the loan, documentation requirement, time you have and how much money you want to raise. 

PURPOSE OF THE LOAN Loan against gold and securities work for relatively smaller amounts that you would like to pay off within a short timeframe. For example, if you are keen on a loan to fund your holiday, you may be better off borrowing against gold or securities. But for larger expenditures, like a marriage, loan against property works better. Typically, repayment tenure is longer for a loan against property compared to a loan against gold, which helps fund larger expenditures. For an average individual, market value of movable assets such as gold and securities is generally lower than the market value of the property. Hence in most cases large expenses are funded using loans against property. You can choose to take an overdraft facility against your house, where the bank approves the borrowing limit against a house. If you plan it well, you can use this facility to meet any contingency, too. This works for those who do not have much of free cash flow each month and cannot maintain emergency funds. Though you may not use the overdraft, still you may have to pay the processing fee of around 1% of the overdraft limit. 

DOCUMENTATION REQUIRED Bankers differentiate between loans against movable and easily realisable assets, such as gold and securities, and loans against immovable and illiquid assets, like property. “In case of gold loans, lenders will be keen on ‘know your customer’ requirements than documentation pertaining to loan repayment ability,” says Harsh Roongta, CEO, apanapaisa.com. That is why the repayment ability criterion takes a backseat in loans against gold and securities.
But for a loan against property, the lenders will do the due diligence on the title of property and will also be keen to know the repayment ability of the individual. These make it a long-drawn process, involving a good amount of documentation. Individuals with poor credit history are generally denied loans against property but they are given loan against gold and securities.
“As lenders are sure about the realisable value of the collateral, they are more comfortable offering loans against gold and insurance policies,” says Madan Mohan, chief counsellor, Credit Vidya, a financial literacy and credit counselling entity. 

HOW MUCH TIME DO YOU HAVE? If you do not have much time in hand, it is better to forget loan against property as it may involve couple of weeks, if not more. If you are in a hurry, go for loans against gold and securities. “A loan against gold can be arranged in a couple of hours, whereas a loan against securities may take a couple of days,” says Harsh Roongta. 

THE CONVENIENCE FACTOR The issue with loan against asset is that you get only a fraction of the market value of the asset as loan. In the case of loan against property and other illiquid assets, it is the lower of the two – how much you can afford to repay and permitted fraction of the market value of the assets. Most banks offer up to 70% of the market value of gold and non-bank finance companies offer up to 60% of the market value of gold. In case of loan against shares, a diversified equity portfolio can raise a loan of up to 50% of the market value and in case of a single stock portfolio this loan to value ratio falls to just 40%.
“Price of gold is not as volatile as prices of individual stocks. You may be better off raising money against gold compared to a basket of stocks or mutual fund units,” says Satish Mehta. This is because if the prices of the underlying assets fall, lenders can ask for more assets or simply may choose to liquidate the assets.
If you have taken an overdraft against an asset, banks reassess the value of the asset and the repayment ability of the borrowers at regular intervals. For example, in case of overdraft against property, banks revisit the overdraft facility each year. Property prices have been rising for a long period of time and hence it may not be a risky proposition for both the borrower and the lender.
But the same is not true in case of overdrafts and loans against securities. If the portfolio offered as collateral includes shares, market value may fluctuate widely and banks monitor the ‘market value’ of these assets real time. You may have to answer margin calls in case of extreme volatility. From time to time risk management teams in banks may instruct not to lend against some shares. If your collateral includes such shares, the bank can come back to you asking for some other shares.
nikhil.walavalkar@timesgroup.com 

Planning for Unexpected Expenses – Why it makes sense !

by Manish Chauhan

Have you ever heard someone say something like – “I had planned to buy a car from last 2 yrs and I was saving for it regularly with discipline, but I think I will have to delay my decision because some thing urgent and unexpected cropped up in between! . It happens all the time.”
Here are some more examples of “unexpected expenses”

• My Car Servicing had to be done urgently. I didn’t expect it to break this month
• My brother asked me Rs 1,000 more this month, I had to send that extra money this time which I didn’t plan for.
• My daughter had to see a doctor last week, and now suddenly this month budget’s gone for a toss!
• I was planning to buy Manish’s Book next month, but those awesome reviews forced me to grab my copy from flipkart today itself, I never planned to buy it ! .

95% people don’t plan anything. They just go with the flow. And for the rest 5%, who do any kind of planning; even their planning fails at some point of time because of a very simple and over looked factor in financial life, which is “unexpected expenses” . If you write down all your monthly expenses on a paper, do the total, and keep exactly that much money in your pocket… You can be very sure that you will have a really tight month!  And that must be happening already !

These “unpredictable” expenses are very predictable

It’s because when we make any assumption, our conscious mind can only think about the bigger picture and we never deal with smaller details and mostly never count the uncertainties of life . We never consider that you might have to shell out Rs 2,000 on something which suddenly comes up (it can be anything). Suddenly there can be some trip, some eating out, some medical expense, some expenses related to the kids school etc. By now you must have realized that these unpredictable expenses are very predictable :)
I mean, you can always expect the unexpected. See each month, without fail, some thing or the other always crops up out of nowhere, your planning never fits the target , you are always short of what you were thinking earlier! , Sound familiar? Life is so unpredictable, that it’s a great idea to factor that “unexpectedness” into your planning. When you do your monthly budgeting, have a “Unexpected Event” category too, and allocate some money for that anyways, because it will happen

But its anyways taken care , so why Plan for it ?

If these unexpected events happen a lot in your life, you will agree that the money you need to shell out is not the big issue, rather the real issue is the psychological nonacceptance and your irritation every-time it happens. You have not mentally prepared yourself for those expenses and every time they happen, its like a pinch on your face! You didn’t think about it and now it’s in your life, staring you in the face. To overcome this issue, you need to create that unexpected expenses buffer. Once you’ve done that, you are mentally ready to expect something unexpected and when you need to spend money for it, you know it will come from your “unexpected event” account.
If nothing happens, you can always use up that buffer for your other expenses, its like a  bonus for you. On the similar lines, Ramit Sethi of iwillteachyoutoberich.com talks about the Stupid Mistakes Account, which is for the same concept of planning for unexpected expenses.

 

Keep buffer even in your investments

The same thing applies to your investments also . If you are planning for a goal which is going to come after 6 yrs, better plan for just 5 yrs and keep 1 yrs as buffer. If you are assuming a 12% return , better plan assuming 11% only , and keep 1% as buffer , if your SIP amount needed for a goal is Rs 5,000 , better invest Rs 6,000 instead of Rs 5,000 . This way , the chances of the final outcome fitting into your expectations is much higher!

How EMI’s Principle and Interest breakup is done

by Manish Chauhan

Do you know who to calculate principle and interest part in your home loan’s EMI break up? Do you know how each EMI is distributed to principal and interest repayments? It is extremely important to have this knowledge because a lot of real life decisions like prepaying the loan, opting for the loan tenure and many more such aspects depend on how your EMI is structured.

Basics of Home Loan EMI’s

What happens in a general scenario? Loan is opted for from a Bank and you start paying your EMIs each month as contracted (see this excellent article on how EMI formula is derived). When you pay your EMIs, some part of it goes towards interest and remaining towards principal repayment. So each month you are reducing your loan by some extent and now as your loan have reduced, you will be paying less interest on your next instalment. In the same way, with each passing month, your loan gets paid by some amount and balancing amount keeps on reducing resulting in paying lesser interest month on month and year on year and the day comes when you fully close your loan. Note that your EMI is generally fixed and internally it’s worked out into ‘interest’ and ‘principal’ repayments.

However, even today, a lot of people have no understanding of the idea that in the early years of repaying the loan, interest component is very high as compared to principal repayment. The longer the tenure of the loan, the interest component will be higher than principal payments and also the rate at which the interest part will come down will also be lower, making sure that in the initial years most of the EMIs goes towards ‘Interest’ and not ‘principal’.

Example of EMI payment

Lets say you take a HDC Home Loan of Rs 30 lacs for 20 yrs tenure, your EMI would be Rs 28,950/month. In the first EMI, the interest part would be Rs 25,000 and only Rs 3,950 will be the principal payment, which means out of total hdfc home loan of 30 lacs, only Rs 3,950 will be reduced in the first month and rest Rs 25,000 will go away in interest. Sounds disappointing? What is EMI disease ?
In the same way After 100 payments (8 yrs and 4 months), when you would be paying your 101st EMI of Rs 28,950, the interest part would still be as high as Rs 19,891 and the principal part would be Rs 9,060. Still disappointed? Now let’s fast forward towards the end, let’s take 200th payment. When you make your 200th EMI payment of Rs 28,950; this time your interest part would be very less at Rs 8,349 and principal would be Rs 20,601. So now, with all these examples I gave, you can see how interest part is very high in initial years. Let’s look at it from a different point now!

Just consider this- For the scenario above; If you keep paying your EMI’s for 2 yrs (24 payments), you will pay total of 6.94 lacs (24 x EMI) from your pocket, but your loan would just go down by 1.05 lacs! And your outstanding loan would be still 28.95 lacs. In the same way in 5 yrs even though you pay around 17.37 lacs (60 x EMI), your loan outstanding would be down by just 3.06 lacs and loan outstanding would be just Rs 26.94 lacs.

The chart below shows the breakup of interest and principal payment for each year for a 30 lacs loan for 20 yrs tenure assuming interest @10%. So each bar is broken into two parts, where green bar represents Interest part and orange bar represents principal part. It is clearly visible that how interest forms a major part of overall EMI in initial years and only in the later years principal part becomes high.


Here is the actual breakup of the EMI in numbers

Pre-payment of long tenure loan

A lot of investors opt for 15-20 yrs loan thinking that they will pre-pay the loan in next 4-6 yrs itself because of their salaries will rise or for some other reasons. In these cases, for the initial years they keep paying loan interest only and not a lot towards principal. When they prepay the loan, they end up paying a little lesser amount then original loan amount. Example, if you take a loan of 30 lacs for 20 yrs tenure at 10% p.a. and prepay the loan in 5 yrs itself, you will still end up paying 27 lacs as loan outstanding, even though you have already paid 17 lacs in EMI in last 5 yrs, Pre-payment penalty would be extra! But the positive side is that there might be a good appreciation in the house value itself.

So if you are taking loan for longer duration thinking that you would pre-pay the loan very soon, you need to rethink! This makes sense, once the worth of your house has gone up and there is a decent profit. A better option which I can think of is to pre-pay in small chunks each year along with your EMI’s from the start of the loan payment. It would make sure that you principal goes down in big chunks each month.
If you take short term loans, because of the shorter duration, the bigger chunk of the EMI is actually principal part, hence you can look forward to pre-pay the loan incase you wish to.

Source :http://www.jagoinvestor.com

What your Bank will not tell you about Loan Settlement ? It hurts your Credit Score !

Over 88% of new home loan borrowers in 2011 had a CIBIL score of 750 and above. Do you have a score of 750+ or not ?


So now by default if your CIBIL Score is less than 750, you stand a very low chance of getting any kind of loan to be approved. Most probably your loan application will be rejected. However, today we are going to talk about “Settlement” aspect of Loans. Lets see more!

CIBIL has really made life worse for a lot of people. A lot of people have misused their credit cards or other kind of loans , on top of it outstanding loans piled up so much over time, that they could not pay it off completely. Banks suddenly told them- “Hey, Don’t worry if you can’t pay off your Rs 3 lac outstanding loan, just go for settlement and all you need to pay Rs 60,000. We will send you NOC letter after that”.
Are you one of those who went for Loan settlement months or years back ?

Settlement of Loan is not a solution

A lot of people feel that Settlement of their loan outstanding in case they cant pay it off is a permanent solution to their worries? However, for one and the last time, understand that SETTLEMENT of Loan is just a temporary solution. It’s just a short cut way to get rid of constant reminders from banks and credit recovery agents. Banks do this because they know you are a waste and mostly you will never be able to pay back your 100% dues, so they settle for whatever you can pay! . Atleast they will get something back from you.
This settlement of loan will NOT clear your name in CIBIL report. In fact its a negative sign. It shows that you took loan, happily used it, ballooned it with late charges/interest by not paying on time and finally bank in frustration said - “Fine… Let’s take whatever we can get out of this guy, if we don’t get some part right now, we will not get even a penny later”.

Mak was worried why his name is appearing on CIBIL report as “settled” and his loan application was rejected.

I want to remove my name from Cibil report, I Used to have 2 CC, from HDFC & another from citi bank, I do had personal loan from citi finance, which I settled long 2yrs back for which I have settlement letter as well. Recently when I applied for a Bajaj finance loan for home electronic, It got declined, reason given to me was as my name reflected as a defaulter of Cibil. Please advice me to clear of my name from Cibil.

What Mak has to understand is that Settlement is a negative thing, and banks will report this incident to CIBIL and mind you, your status will be marked as “Settled” for next 7 yrs. So forget about getting any kind of loan from any bank for next 7 yrs at least. Once 7 years passes, then the SETTLED status will be removed , however your credit score by that time will be so low , that you will not get any loan even after that point, unless you work on improving your credit score. Now if your score is low at that point, it will again be very difficult for you to get any kind of loan (because of low score). So ultimately, the final conclusion here is that once you settle your loan, it becomes very very negative thing for you and your future and over the years it will not let you get any kind of loan unless you pay off each and every paisa of your loan.

Loan Settlement is Tempting

Settlement gives you instant gratification. It’s something you really want to go for? Obviously, it gives an impression that all your worries will be taken off by the bank, its shown to people as an “opportunity” by banks. And most of the people fall for it. Swetha is one of those people who is confused about the Settlement of her loan

I have a personal loan and i have defaulted , my loan completes in the month of april the collection guys asked me to settle the loan for half the price of the remaining loan amount which is rs 44000 and he said the NOC will be mailed to within 15-20 days and also can i get a loan again . Please guide should i go for the settlement or payoff the whole amount.

No doubt, once you settle the loan and pay the settlement amount, the banks will not bother you anymore by calling and asking you to pay. They will also send you an NOC that this guy has settled his loan of X amount by paying Y amount (Y<X). But please don’t be mistaken that bank will forget you and is so generous that it will show any mercy on you. Bank will make sure your life is hell after that point. You will not get any kind of loan from that bank plus, they will send this information to CIBIL that this guy was not capable of paying off his full amount and hence we showed mercy on him by settling his loan. Please mark him/her as “SETTLED”.
Unless you pay off each and every penny/paisa of your original loan outstanding, your CIBIL report will show status “Settled” and it’s a very bad sign. Finally let me tell you what CIBIL website has to say about “Written Off” or “Settled” status in CIBIL report.

Given that a CIBIL credit report helps a loan provider ascertain your ability to pay additional debt based on your past performance, a ‘’written off’ or ‘’settled’’ account implies that you have not been able to pay your past dues. Hence, Loan providers may view accounts that are reported as ”written off” or “settled” negatively and this may affect your chances of a future loan approvals. - from cibil website

Conclusion

If you have settled your loan earlier, first check your credit report and see what is your score. If its low (lower than 750) , you will seriously face getting any kind of loan in future, So the only solution is to pay off the loan outstanding. Talk to your bank and pay it off. This will still not improve your score immediately, over next 1-2 yrs , make sure you pay your existing loan/credit card on time and dont mis-use your credit capability. Your score will improve over time.

Source: http://www.jagoinvestor.com

5 difference between stock & mutual funds Investing

When we say Equity, what comes to your mind – Stock or Equity Mutual Fund? While a single stock or a mutual fund both comes under the category of Equity and they are good option for long-term investment and needs periodic review. There are some differences between stock investing and mutual fund investing that is done by a common man. It’s a good idea to know where they differ and in which situation they differ, so that one can take better investing decisions. Let’s look at the main differences

Volatility

When you invest in a single stock or bunch of stocks (3-5 scrips), the change in it’s value is very high. On a given day it can be extremely volatile. It can give you 20% return and sometimes -10% loss also depending on the environment. This can be very exciting and at the same time very disheartening and gives you a feeling that you need to “act fast”. 
Mutual fund on the other hand is not that much volatile by nature, as the diversification is very large and at a time 50-100 stocks are covered. Different kinds of stocks from different sectors and market capitalization are involved in mutual fund and the over all change in value is thus less volatile (other than extreme days).

Return Potential

This is very much in line with the above point but still let’s look at it separately. There are lot of success stories where someone got quick rich by investing in equities directly and it can happen, but those are rare happenings and require lot of work and analysis, patience and belief in what you have picked. If you want superb returns in short time and you believe you can research well, you can go for stock investing directly but then risk is also more.
Mutual funds are known to deliver good returns (not in line with stocks, but still very good). So you can expect handsome returns from mutual funds but not unbelievable like stocks return. This is mainly because the money is diversified across different stocks (read ideas) and chances of all of them becoming a super success in short time is impossible.

Monitoring Required

Stock investing is a personal affair and you are doing it on your own the decision of what to sell and what to buy is on you. Even in case of long-term investing, you might have to keep an eye every quarter or yearly unless you have really spent some good time in picking the good stock. You need to also keep an eye on news and sector specific developments.
Monitoring in mutual funds is relatively low because the job of monitoring is anyways done by the fund manager who is paid SALARY to filter through the fluctuations. He constantly adds and removes the stocks from the portfolio. This can be a positive point, but sometimes it can be a negative point also if there is too much of churning.

SIP Investment

Mutual funds are known for possibility of SIP (monthly investment). SIP in mutual fund works and is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.
However SIP in stocks do not work. Yes, some companies provide you the facility of SIP in stocks, but it’s a terrible concept. There is no diversification and SIP in a particular stock does not make sense because the risk is with single stock. A stock can be in a bad phase for years and decades, whereas in a mutual fund the bad performing stock is weeded out.

Asset Class Restriction

Stocks investing is restricted to Stocks only. You can choose a large cap stock, mid cap stock or small cap stock, but finally it will be equity asset class. However, mutual funds can invest in mix of asset classes. There are equity funds, debt funds, gold funds, Mix of Equity and debt also. To top up, even balanced funds are there which can adjust the asset allocation on its own, so in a way mutual funds are more superior in terms of features compared to a single or bunch or stocks.

Conclusion

Mutual Funds are actually collection of stocks only but just because it’s a group of stocks the characteristics are not very similar to that of stocks. You should be clear about all the points of difference and only after that you should decide whether to invest in Stocks directly or take the Mutual Fund route.

Source : http://www.jagoinvestor.com