Deepa’s Money Tips ” Discipline , very important for Savings ,why?”

Hi ,

 The new year has started on a great positive note . There are many who have come forward asking me for a discussion about their personal finance . They have clearly demonstrated that its time to set aside all  inhibitions and check and audit on what is the current status . The questions which come up might be regular like the ones below , solutions may be varying from individual to individual.

“Are we in the right direction”.

“What are the corrections to bring our finance to the right track”.

“What is the right course of action to be followed in future”.

And the big question “ Where to Save and How much “.

During these interesting conversations , I have observed a few common points . I am sharing in this forum since I know that all of us are sailing in the same boat and these thoughts may have crossed our mind some time .

a)      Every one of us want to save ,might be little or more ,but intent is to save. (Who doesn’t want to ?)

b)      Saving  according to us is, being able to leave a residue from income ,post spending for all our requirements .

c)       There are two hidden personalities within us which control our financial decisions at different times.

1)      When we see an amount accumulating in our regular savings account, our first personality takes over and gives us a sense of satisfaction and security. We treat this as our contingency , and higher the accumulation ,the better is our feeling. 

2)       When the accumulation gets beyond acceptable limits , we now decide that its time to invest our money . But, when we deploy , we want the money to give us the highest returns possible . Our conscience tells us that all this money was sitting idle till now,so we better get things moving quickly. This is similar to the last minute exam preparation where we want to score highest with minimum preparation. This zeal of earning highest return pulls us towards aggressive products or complicated products .We check with friends and colleagues and decide to go ahead with one which gets maximum votes. 

3)      Even when it comes to investing into mutual funds, our concentration is only on equity mutual funds and the ones which generate maximum returns . Do we really take time out to research what are the risk parameters and how to compare funds based on risk and return together? 

The outcome is mismatch of expectations and picking up products which do not match our needs . As a result we have bad experiences and we conclude that its best to stick to our traditional avenues of investing , i.e., FD,Real Estate and Gold and back to square 1.

 Are  we being fair to our money ?Are we not missing out the key link in all the above observations?

 Yes, we are !!

 The root cause of all the above is “ Not Being Disciplined with our money,with our savings and  not being in tune with our real priorities. “ Again , all of us want to be disciplined with savings .Then what goes wrong. Simple, its never on our hit list ( priority list) because its not our emergency item. We are tuned to living in an urgent and important /unimportant square, that unless something is urgent ,we don’t do it.

 Let me share a tip which I follow with my clients which might be of help.

1 . I  first help them identify their responsibilities for which they need to save .

2. Then I identify how much is to be saved .

3.Finally , I help them automate all the savings in such a way that money  flows out of their account before 5^th of every month  into the various baskets of saving . Automation is the best solution to being disciplined with money . If one is able to identify where to save and how much to save, this is the best way to make money work for us.

 One may ask , why should we put our money to use at all in the first place. We are comfortable seeing it lie the way it is  .

 While we may not really want to take the pain , but without our knowledge , inflation is working its way ahead like a rabbit. Find below in the attachment , the CPI ( consumer inflation) figures for last 5 years . What we could purchase for Rs 1 lakh in 2008 , how much do we shell out in every consecutive year . I have also taken an example of a person in 30% tax bracket , saving in FD for these years with an assumed rate of return as 9% . You will observe that if we do not save judiciously , we will end up working harder to preserve the value of our money and contributing more towards living expenses itself. Imagine if we haven’t used even FD as saving mechanism, then what could be the implication !!

So, better late than never , pick up the pace and beat the inflation monster !!

Thanks

Best regards

Deepa

 

 

 

“Deepa’s Money tips “: My exclusive opinion on ‘Real estate vs equity’

Hi , 

 

Wish you a very happy Sankranti . Would like to share another query I received last week  asking my opinion on the Real estate vs equity . 

 

I understand the real estate and stocks are favourite subjects of many . These are very relative topics and opinions are also unique . This calls for a long discussion . So bear with this long mail .

 

Why am I saying they are relative topics :

 

1. one cannot predict what return a particular stock can give , similarly real estate in India is also unpredictable . 

 

2. Information can be obtained about indexes . In stocks , we can check the progress of Index, be it Nifty 50 or Sensex 30 .But that doesnt make it necessary that the stock being purchased belong to the index . So can somebody really compare a stock’s performance with the index. It can be done only if one is purchasing a sensex index fund or nifty etf , which have all the stocks of the index in the same proportion as in the index . 

 

3. With real estate  also, there was index introduced  in 2007 called residex. I am referring 2 links below which you can read through and verify. They are very useful read . This is to do  with property prices and based on real time transactions and data.

 

http://property.magicbricks.com/microsite/buy/propindex/index.html

 

http://www.nhb.org.in/Residex/Data&Graphs.php ( in real estate again comes the  question of sale deed value being different from market value ) however, this graph can indicate the drop in Hyderabad on prices which are relative.

 

http://www.nhb.org.in/Residex/About_Residex.php

 

My Take on this topic :

 

1.Yes stocks generate good returns, provided one is in right stock. To invest in stocks , one should understand the business the company is into , the direction the industry is going to take, the growth prospects and balance sheet  of the company  .

Picking stocks based on a friends recommendation or news channel picks may not pay off . Hence, one should not venture into direct stocks till it is research based. Its better to go for Mutual funds that way which diversify the business risk . If its a large cap stock , it diversifies business risk and industry risk . Which means , the performance of the fund is not dependent on performance or non performance of one stock or one industry segment. The large caps also bounces back faster than other mid or small cap funds. 

Most important thing to remember is that by nature, equity mutual funds perform better when the investment horizon is greater than 5 years. However , people expect them to do better in short term also and leads to mismatch of expectations and downgrading of opinion ,which is wrong according to me. 

 

So , if the discipline is maintained of not withdrawing in panic , time to time monitoring and rebalancing (i.e., profit booking time to time ) , then definitely one can expect a decent return.

 

2. With real estate , my take is that by default there is an assumption real estate does well . But there are various angles to it.

 

a) real estate is an unregulated market , so  what is good for one need not be good for another . for e.g ., if A premium builder is selling his apartment at an sft. price, an independent developer cannot sell an apartment at same price even though he maintains same quality of construction.Its very relative.

 

b) Yes , real estate gives great returns . Practically this is true for plots but not for flats . There is one of my client  who purchased a plot in an area For Rs 800 per sft in 2000 , and today its expecting 20000 Rs per sft .This translates to an annualised return of Rs 28% annually. Imagine , if he had purchased a flat then at 15 lakhs, it can maximum quote 50 lakhs by now . which is an annualised return of 9.7% .People also have option of going for a new flat at 50 lakhs ,rather than purchasing a 13 year old flat . So its incomparable . 

Also , he wouldn’t have a similar gain if he would have invested in a land in undeveloped quarters of the city . So its important to be close to development.

 

c) rentals are added income . But the best yield a rental can give is about 4.5 % in prime areas . If you refer the property index link above and refer page 7 of  it , it will clearly show you the maximum capital gain one can expect and maximum rental yield one can expect  in Hyderabad. Both are much lower compared to equity if compared for a long term . With current high cost of purchase and low rentals , even if a 12000 rent is expected from a 50 lakh flat , its equal to 2.88% yield . Added hassles of turnover of tenants ,maintenance, repairs and upkeep of the flat ,etc.

 

d) Both are different asset classes and shouldn’t be compared . But strategies can be defined. 

In real estate , a proper study can be done on developments coming up in coming 10 years . Land , approved by municipal authorities , like HMDA (municipal approved) plots with LP numbers can be purchased ,which are close to these areas of future developments . That way, lands can be purchased  cheap, HMDA approval will ensure these are free of legal hassles , gated community will ensure security , mid size layout will ensure future saleability . There are people who purchase plots in large ventures like 1000 plots etc , we did that mistake once. But the lesson is that it will be difficult to sell since there is too much supply and less demand . Future developments will ensure capital appreciation . Then Real estate is one of the best options and incomparable .

A mixed bag of all asset classes will anyday payoff than over exposure in one .

 

But if this strategy is not understood correctly and if one assumes any real estate is the same ,and invests into flats , its a myth . 

 

The above is solely my opinion . It may be different from your point of view .

 

Best Regards

Deepa

deepanittala@gmail.com 

Deepa’s Money Tips : “ A Snapshot of year 2013 and a learning for 2014 “

 

Hi ,

The year 2013 comes to a close ,and we look upon a great beginning of the year 2014 . With the start of every year , every one of us have either a small list or a long list of resolutions . 

I also had some resolutions in 2013.Unlike all the previous years where resolutions were made only to be broken , this year came with a difference and determination. I had resolved that:

 1) I will spread awareness about importance of savings and planning finances across 10,000 people this year.

2) That my work will not impact the time I spend with my family .

3) That I will spare some quality time on my hobbies which make me happy .

And  worked towards keeping these promises which I made to myself .

Today I can proudly look back and pat myself for fulfilling all the above resolutions I had made. So the only change I made was to list down the  action steps which can ensure fulfilment , that’s what is planning all about.

• Put things on paper ,
• understand where we are today ,
• devise strategies  ,
• implement the strategy and periodically monitor it ,
• make changes where necessary to bring the plan back to track.

I knew I cannot talk to 10,000 people and there came an idea about writing ,where I have practically  achieved so many views on my blogs, mails and network . I chose to work on flexible timelines and with an entity which believes in balanced work life .I joined a musical group and consciously dedicated time to my hobby . That was about me .

About 2013,this year brought with it very interesting revelations .I held one to one discussions with individuals on taking their life financial plan forward.

 When I asked them , when can one call himself / herself “Wealthy”.

Is it when we cross a threshold income level , or when we buy a premium property or when we have luxurious possessions , or is it when we can spend lavishly?

Interestingly , I got different responses , and I am sure anybody can relate to these . Some of the responses were :

1. When I am debt free and have no burden of liabilities on me.

2. The day  I have income generating assets and I do not have to depend on a paycheck .

3. The day apart from expenses , I can also save prudently.

 They then disclosed to me that in the process of creating wealth , they tried out various options .After trying out all options , they had come to me to achieve the above …

1. They tried investing in the best products they are aware of , and were able to achieve success in saving to some extent . But are not confident that the direction they have taken is right or wrong .
2. They tried purchasing insurance , but realized that its an expensive method of accumulating  post death benefits but when we are living , we don’t see it fulfilling our needs to a large extent . We are talking about longevity and taking care of responsibilities ,which is not strategized for at all .
3. They tried the financial planning templates available online , but never got a chance to take it to execution as there was no personal guidance .

So what is their takeaway  from the financial planning exercise ,which the above couldn’t provide :

A very familiar response I get from most of my clients:

• The Financial Planning exercise gave them a clarity on action steps to be taken.
• A pure mathematical analysis helped them to verify their situation today , corrections to be done and the steps to be taken in future to achieve what they aspired for .
• Most importantly , here was a situation where they had a planner with them who could assist them in analysing the past and implementation and execution of the plan for the future.
• They now have more clarity in where they are heading .

So here comes a day , when I feel gratified for being the reason for many people’s confidence and at the same time ,lisiting down new benchmarks to achieve, creating new resolutions for 2014 .

Are you?

Here’s wishing the best !

Have a great , thoughtful and full of action year 2014 ahead !!!

Best regards

Deepa

deepanittala@gmail.com

9849620066

 

 

 

 

image source : wallpaperswala.com

Deepa’s money tips : Why talk to a Planner ? Some Questions that can get us the Right Answer !!

 

 

image source :businesstoday.intoday.in

Hi ,

 

In one of the sessions I was conducting , we came across a few impromptu questions which were raised either by me or by the participants. The journey of finding answers to these questions was very interesting and enlightening. I received a positive feedback on this session. These might be the doubts which everybody may be having in mind .One may or may not get the opportunity to ask ,so I am sharing these in this forum .

 

During the discussion we had , we identified that any investment should be ideally done to meet a need . A plan helps us to list down the needs. 

 

A need can be :
1. “To give best of education to our children.
2. Meet the necessities of life with available resources ,rather than opting for loans as an alternative .
3.Ensure the goals do not get effected due to loss of income if any untoward incident happens.
4.To maintain our lifestyle after Retirement without compromises and lead an independent life .
5.Upgrade  vehicle 
6.Have  own venture,etc”

Some people then asked me, now that we have identified our needs , and we know we should save towards it ,

 

a)why should I plan?

b)Why is planning critical?

c) Why should I not invest directly ?

d) How can I decide whether I should myself take care of my savings and planning and when exactly to seek professional help?

 

I gave them a very simple technique to get answers to above questions . I gave them a set of questions and told them that if their answer is YES to all the below questions ,then they do not need a PLANNER. If the answer is NO to any of the questions , it means they need to discuss with a planner on that specific area. And if the answer is NO to multiple questions and if the questions are critical to their financial life, then need to seek Professional advice .

 

This is a set prepared exclusively by me. Hope it helps.

 

1.I periodically refer my income, expenses and future needs and confident that I am deriving the right cash flow pattern to save for all needs.

 

2.I know how to factor inflation in my living expenses.

3.In my given monthly surplus, I know exactly how to distribute my investments in the right proportion and arrive at an optimum saving pattern (e.g., how much to invest in equity, FD/Debt products ,Real estate, Gold). In short, I know my risk appetite and can diversify assets accordingly.

4.I know how to manage my loans ,which one to pay off first ,how much to prepay systematically and their tax benefits.

5.I know the tax implications of investing in various asset classes.

6.I know exactly how much coverage to take for an Insurance policy which can replicate my financial responsibilities in my absence.

 

7. I know exactly how much would be the value of my goals , when they come up ( e.g. I know how much Retirement corpus is required to support me through retired life)and how much to save for them.

8.I have the time to effectively manage my finances ,post allocating time to my core job responsibilities and family.

9.I am confident that my current way of planning and investing is in the right focus and direction.

10. I don’t believe that a Professional ,practising personal finance can add any value to my financial life .

The above questions excited them a lot and they were now ready to ask me the last question .

 

Who are financial planners and how are they different from investment managers ?I answered as below :

Financial Planners are trained and certified :

– to analyze your available resources , which is your surplus post expenses ,
– Is a one stop shop for any financial solutions related to investments,taxes,retirement,insurance,etc.
– estimate the value of your goals considering inflation 
– help you strategize a path to achieve the goals in the best way possible .
– Monitor the plan and bring you back to path as and when you take a detour.
– Most importantly, they identify pockets where expenses can be reduced and diverting such money saved in the right direction.

A financial planner is one you can trust will work for your benefit. 

 

P.S: The objective of this mail is to create awareness  on criticality of  financial planning. Its not intended to promote my profession. So one who has understood the criticality can approach any planner and not necessarily me.  I hope this clarifies the intention.

Best Regards
Deepa
deepanittala.wordpress.com

 

Deepa’s Money tips : “What’s the right way to start planning Our Finances”-2

 

Hi,

Through my previous article ,we have understood ,that the best way of initiating our financial planning is to sit and jot down all our future cash flow requirements . What are the proposed expenses for the years to come, the large future financial responsibilities coming up and make decisions which are more optimal and meaningful today.

Once we have done the above , we arrive at the ideal amount we can save now , coming months and years to come . This surplus has lot of work to do .

How many times have we not heard,

a) I don’t believe in saving ,because there is so much volatility in market.

b) I lost big time in shares , and therefore I would like to stay away

c) I believe in living in present , I don’t like to think of future.

I get to hear this very regularly , hence the need to clarify .

a) Planning is not only about investing.

b)Every saving need not be related to market, saving is for our goals, our children,our life .Saving should be done atleast to beat inflation, otherwise our money will only keep eroding.

c)Savings has a pattern which is explained in the pyramid below . When we start planning our finances ,we should first look at securing our base . First things first :

a) Lets set aside a contingency fund for any emergency expenses or expenses more than budgeted.

b) Protect our family and key financial responsibilities against loss of income /income earner’s life by taking sufficient term life insurance cover.

c)Guard the assets that we have already created by preparing a will.

d)Once this is done, and still surplus available, put them in guaranteed return instruments like PPF,VPF,Tax free bonds ,FD’s,RD’s.

e)Still more surplus available, now look at growth options like Large Cap Equity Mutual funds, own house, safe long term real estate avenues.

f) Now all our cash flows are planned and we still have money to play ,we can then look at speculating,stocks ,day trading shares or short term real estate avenues.Any loss here ,will then not pinch us hard ,as we have not compromised with our needs at any point.

Many of us often follow the pyramid,but upside down. So will our finances not tumble down like a cards house? Now,is it easy to answer the above questions ?

The objective of this article is to help one reason that one should use the right product at the right time in a systematic way . Else ,we will only be disappointed with our decisions .

Thanks

Best regards

Deepa

 

Deepa’s Money tips : “What’s the right way to start planning Our Finances”

Hi , 

 

I have been writing for last few months and have received immense support and affection from all of you .But, I am not the only one who is writing ,there is an ocean of information out there . We search for one thing, and we get atleast 200 results . So,its important to realise that : 

 

“Reading gives us the wisdom to take a decision ,but Data helps us to filter the right information and ensures we take right decision”.

 

By reading some of my articles , one would have understood that :

 

1. One should plan to take a term plan instead of an investment based insurance.

2.One should look at tax effective instruments to save  like PPF,VPF,Tax free bonds, FMP’s ,Mutual Funds

3.One should always match the investment products to needs and not just experiment ,etc.

 

But:

1. Is this kind of know -how enough to take the right step towards the right direction? 

2.Can any book or article publish a solution which is specific to one individual?

3. Is it necessary that what works for one person in a particular age and income group works well with another in the same age and income bracket ?

 

Then what can give us the impetus to take the right decision . Obviously , its one’s own data – be it financial,aspirational ,or whatever we look at it as. But it is this unique data ,which helps us to take the right decision , since our data is different from another’s.

 

 Let me simplify this with an example .

 

When we purchase a phone, a gadget , a car , a house or any such personal asset which exceeds our regular household budget , there is a usual pattern we follow . We check what is our income , the regular expenses ,what is our net surplus and whether we can crunch in this EMI into our surplus .

Result , after a few months , if there is an unanticiated huge expense , we start choking . Life looks stressful and we feel burdened due to this decision. Biggest example is the home loan which we generally take.  

 

When I ask people , why are you not saving , why is there no surplus ,comes the instant reply that I am servicing a home loan,car loan,personal loan .But these loans are going to choke us up for 5,10 or 15 years. So, does that mean that we can’t do anything about our other needs which are coming up in future?

 

Where did we go wrong at all , since we have checked our surplus and then only taken up the responsibility? 

 

There is an answer to this . We went wrong in anticipating our cash flow correctly . We should have checked what are our requirements coming up in future. What kind of cash is required to fulfill those needs , like school joining fee 2 years down the line, school fees , parents medical emergency , anything that may come up. While its advisable to do a cash flow analysis of atleast 5 years to ensure we take right decisions, a life cash flow will be even better to take some major impactful decisions .

 

one may question ,How ? 

 

Cash flow is the best way of working backwards. If we know or can anticipate our approximate inflows and outflows in future , we would be in a better position to finalise our budget ,or investments correctly for today . For e.g , it will give us clarity that we should today purchase a house within so much budget , and we will be in a position to pay so much EMI for so many years ,hence its good to go for such and such house which falls in our budget .

 

Does this sound good to our ears ?

 

So , before taking up expenses or savings , please do a cash flow for yourself . That is how Data can provide a solution which is unique to you .

 If it sounds difficult , then delegate it to a financial planner or an expert to do it for you . An effort on this line today , will go a long way in saving one from the financial impact of many wrong decisions in future .

 

Thanks

Best regards

Deepa

 

Many ask me ,”What is role of a Financial Advisor”- Let’s discover !!

Hi,

I came across a very interesting article .Many people ask me what is the difference between a Financial Advisor and one who calls self as investment manager .

I could have chosen to write about the same,but for the benefit of bringing in an independent opinion , I am sending an article from Economic times ,which gives clarity on the role of a Financial advisor.

http://articles.economictimes.indiatimes.com/2011-11-17/news/30410353_1_financial-planning-investment-advice-investment-advisors

Will summarize this through an illustration. One is approaching a Pharmacist when one is ill . One takes a medicine and tries out. It doesn’t work, one takes another medicine . Then finally approaches a doctor,who does a diagnosis , takes corrective action if there was a side effect by wrong medication ,and then gives a course of action to be followed in future . Also , good doctors also suggest a diet which can help in preventive care and avoid future such illness. A good doctor is not loyal to the pharma company which manufactures medicines , or to the medicines. Rather, will look at what will benefit the patient most , by doing an analysis on medicines  available in market, keeping a tab on what are the new innovations happening ,and then suggest the best one which will cure the patient and also ensure it does not cause side effects. Multiple options are used like diet,medicines or some exercises while a pharmacist can only provide medicines . 

Now relate the same to a financial advisor. The financial advisor is a financial doctor taking care of client’s financial life.

Hope that helps and feel free to write to me with any queries to deepanittala@gmail.com

Best Regards

Deepa

“Every Rupee Saved is Rupee Earned “ – Tips on better contingency options -1

 

 

Hi All,

I am back after a short break ,a refreshing vacation ,lots of positive energy and a whole lot of fresh  new ideas. Here we go.There is a very important topic I missed  talking about earlier.

 “Where should the funds for emergency be Parked?”

An emergency fund is called a “Contingency fund “.It is supposed to be easily available to us in cases of emergency .Ideally ,the size of the fund depends on our age . Its generally around 4 months to 6 months of living expenses. Since we do not know when a contingency can arrive , we should hold a portion of our funds in the form of easily available instruments and then only plan to invest our surplus funds further.

As rightly said , India is a country with a very good savings ratio. Every individual , be it in any income group, has an intention to save and tries to do the best . During my conversations , I have realized a common pattern .We know we should save , but maximizing its potential is not their key concern at this stage . Our general tendency is to hold money in our savings accounts . Because that gives us a sense of security .

A savings account pays an interest at a rate ranging from 4% to 7% ( depending on banks).

Then which options are available to individuals ,which can ensure liquidity and at the same time also give us better return than savings?

There are many , and we shall discuss about the first of the lot today. A Home Credit Account .

Introduction :

Most of us would be servicing a home loan . Among home loans , there is a product available which takes the home as mortgage and provides  an overdraft account against it .This is usually called a home credit account.This means ,we get a current account which gives us a withdrawable limit equal to the loan amount sanctioned to us . This account also provides us with a cheque book and ATM card facility , so its as good as any of our accounts .

How does it work :

Whenever we have surplus money , if it was a regular home loan, we would think twice before we use the surplus to prepay the home loan .We assume this amount maybe required in the near future . When we face such a dilemma, a home mortgage account comes to our rescue. We can park the surplus in such account . The home loan interests nowadays are ranging from 10% and above . So ,when we hold the amount  in this account, for the holding period , its treated as though our principal outstanding is lesser .Thereby , in the EMI , lesser interest component gets deducted and more of principal component gets debited .

This on any day is beneficial to us .

Benefits :

1. The money does not get locked in or paid off. Hence its available for withdrawal as and when we need it .
2. Instead of getting a meager interest as in savings account, this accounts helps us to save an equivalent of 10-12% on home loan interest . eg ,Consider  a home credit account of Rs 25 lakhs and we have completely taken disbursal of 25 lakhs @ 11% for 20 yrs  . The EMI is Rs 25805 . The first EMI adjusts Rs 22917 towards interest and 2888 towards Principal . We have a surplus of Rs 2.5 Lakhs and we park in the account for the 1^st month. Then  Rs 20625 goes towards interest  and remaining  Rs 5180 gets adjusted towards Principal. Next month, you have lesser Principal Outstanding and there is a small reduction in interest payment for future months also ,which is again a save.
3. Some of the products like SBI MAX GAIN ,do not charge any additional rate for choosing this option . So, there  also  is no question of additional cost .
4. In today’s age when purchase prices of properties are increasing , inevitably we have to take some portion as loan to buy our dream home. Planning for the home atleast 5 years in advance can help us save a larger sum for down payment and reduce this loan burden . However , whatever loan we are taking , we will stand to benefit if we choose home credit account against a standalone Home Loan.

Note :

The Home Credit account is beneficial in terms of parking surplus funds only post possession of property .During the under construction stage, since the whole amount is not disbursed completely , any amount parked in such an account, may not be allowed to be withdrawn . This depends on terms and conditions of the home loan provider and needs to be studied and comprehended correctly .

Please feel free to write back in case of any queries. It may not be related to this topic ,but  remember that every such query will bring  with it an exchange of new ideas and information .(a win-win for both of us)

Thanks

Best Regards

Deepa

 image source : Quizzle.com

  

“Every Rupee Saved is Rupee Earned”- Apartment as an investment ..(on loan)..rethink!!

Hi,

During my discussions with people day in day out about their hard earned money , the channels they use to deploy the surplus ,we come across an important discussion about real estate . It is a physical /tangible asset and automatically gives us a comfort when we buy a property as an investment . I have found people taking 90% exposure to real estate . Except a contingency fund , as and when there is a surplus ,a property is generally picked up .

 

One main reason for this behavior I found is the tangible nature of the asset. “We believe what we see”. Same as gold.

Second, is an assumption we have that by default, real estate appreciates . We see the value  we purchased at ,and the current value . But more often than not ,we forget the number of years we hold the property for. The right way of checking is the annualised rate of return . 

 

Its my personal opinion that a plot may be a great real estate investment ,if bought at the right kind of place , with all legalities verified and security ensured.But I have been unable to comprehend the benefit of taking an apartment as an investment option , specially if it is picked up on a loan .

 

There is a small attempt I have made to understand this on one of my client’s request .He asked me to check if the investment made by him is good or not.

 

The case history : 

 

A 35 Lakh property is purchased on a loan of Rs 25 lakhs with a 11% interest for 20 years . Now its 5 years old .He gave me 3 scenarios .Selling it in 5,7 and 10 years .I tried to incorporate some details , added the tax benefit he actually gets on the exemption , reduced the excess interest paid out of our pocket from the overall sale value  ,added the rental in one scenario and checked. Didn’t go into further details like repair cost and maintenance. But assuming they are on expense side, they will only reduce the rate of return is what we can infer.I found this exercise interesting and felt this information might help many .

 

While ,I am not too technology savvy ,but I tried to do whatever best I can . If you can work a better methodology of analyzing , please feel free to share . I am always open to learning and incorporating changes . 

 

In the attached file, one portion is the loan amortization schedule . On the right side, I have tried to put in the purchase value , the  interest payments and the close to real gain . I don’t find apartments as an investment option too great ,if we compare the hassle of maintenance , find new tenants ,ensuring timely rents etc .

 

 

Two important learnings :

 

1.An ideal proportion would be an exposure of 40-60% to real estate . This is including a self occupied property. Plots may be a good choice (*conditions apply) but for easy liquidity , regular appreciation and most hassle free ,are paper /financial assets ,be it in any form . Going overboard on one asset class is against the nature of diversification.

 

2. In real estate too, selling a property at the right time is the key to making better return . This being a physical asset, an affinity to the property does not allow us to exercise this option too often . But for best results,if we purchase a property for investment , we better treat it as one. 

 

3. As a return on investment , rentals are nowadays not crossing 4 to 5%  ( I am being too lenient) . Due to increased cost of purchase , the purchase prices have increased, but rentals have not seen a similar hike. Imagine you are trusting a huge sum of money to anybody , and in return are making 4-5% p.a , is it a happy situation ?

 

 

 

 

 

Compare with a tax free bond which is giving you an annual interest payment on 8.5% (All tax free)  .You hold it in demat , and there is still a possibility to sell it before time through secondary market . Else ,by default ,at the end of 10,15,20 yrs ,your principal comes back to you .

Queries and questions are the best way to learn . Please feel free to write back and help me widen my knowledge bank..

 

Thanks

Best regards

Deepa

 

“Every Rupee saved is Rupee Earned ” – Small Steps towards Tax planning -2

 

Hi ,

Continuing further on the topic about “Small Steps towards Tax planning “.

There are certain questions  which some of you have written to me. For the benefit of everybody , would like to share them .I was asked :

1.  “ You always write ,every “decision” has a “financial implication “ , what does it mean and can we get an example “
2. “ How does the choice of product ,impact our financials “
3. And “ What should we do going forward to make better choices “

I believe, if I write to them alone, this information and knowledge may get limited to a few. Hence, I chose to write to all ,so everybody can take a tip out of this and possibly practice .

 In today’s world, everybody is bombarded with so much information and options .People ,have arrived at a certain choice by trial and error and prefer to stick to them .

As a Financial Planner , there are three most important objectives I work on :

With the knowledge , experience and expertise I have gained through my work, I should help and advice my clients to choose options :

1. which are most tax effective
2. Which are not expensive .
3. Which are not against their nature and risk appetite.

Keeping this in mind, I would like to demonstrate the solution to above questions with the help of an example. A general practice with all of us , is that when we accumulate certain surplus in our account , we  move them into fixed deposits to earn better interest .

I am going to consider an alternative to this ,which is called FMP/FTP,i.e.,Fixed Maturity Plans or Fixed Term Plans. These are mutual funds,which invest into Certificate of Deposits and Government Sovereign . Some FMP’s also invest a certain portion into commercial papers issued by Corporates with safe ratings. For  the sake of simplicity in comparison, I am going to compare the FD with FMP (which invests into CD’s and Sovereign alone) of >366 days Maturity.

Assume that we have Rs 10 lakhs with us, and are trying to decide which option to go for .We need the funds coming year for an expense.

(Also attaching an excel ,where changes can be made to the investment amount  and impact verified.)

 

 

The difference is that

1.while FD’s have a good rate of return, They are taxed at Slab of an Individual. A person in 30% slab ends up paying 30% tax.

2.FMP’s give us an option of paying either 10% tax on gain without indexation or 20% with indexation. Indexation is nothing but adjusting inflation to the investment value and understanding what is the real return we made.

In the attached example ,I have considered the cost inflation for 2012-13 and 2013-14(can be verified from below link on cost inflation index chart) . An investment done in 2012-13 for Rs 10 lakhs ,is equivalent to 11.02 lakhs  due to the inflation. The gain we made is only 11.015 lakhs which indicates that our real return is negative 612 Rs . Tax authorities give us the freedom to choose to pay the tax which is least of the two options . So we pay nil taxes and stand to gain approx. Rs 38500 by making this decision.

http://cadiary.org/cost-inflation-index-capital-gain/

So only one decision on a product choice has saved us Rs 38500 which could be deployed further towards our financial responsibilities . This is only an impact of one decision that we take. Imagine if we take such informed decisions every time  and save in a structured manner , the money can benefit us more ,than  sitting in Taxman’s account .

So I have answered the first two questions. Now,to answer the  third question:

 If there is time and expertise available ,please make thoughtful choices when saving money . Do not underestimate the power of even 1% .Lets read and understand all the key points before making decisions and I am sure informed choices always stand to our benefit.

 If there is no time left after attending to our core job responsibilities, one may seek assistance from somebody who has the expertise and knowledge to do the verification on your behalf and guide you to make informed choices .

 Thanks

Best Regards

Deepa