Investment School: 2008-08-10

How to reduce home loan EMI?

In the period of high interest rates,people are now trying to reduce the EMI burden of their respective home loan.One way of reducing the EMI burden is to shift the loan from a higher interest rate to lower interest rate loan.

Of late, there has been a significant 1-2% interest rate diff between private bank home loans and PSU bank home loans. So one way to reduce ur EMI(if you are a private bank customer) is to shift your home loan from private to PSU banks.


Private Bank:

Home Loan Amount : 20 lacs
Home loan Rate : 12%
Tenure : 20 years
EMI : 22000

PSU Bank:

Interest Rate : 10.5%
EMI : 19970

Savings in EMI : 2000

Savings in Total Interest paid for the loan : 4,80,000

Penalty(usually 2% of outstanding loan amount) : 40,000

Processing charge of new home loan (0.5% of loan amount) : 10,000

So Total Savings = 4,80,000 - (50,000) = 4,30,000

The saving of 2000 in EMI can be used for good investment purpose.

So analyze the current rates in the PSU and try to shift your home loan.

As per latest fact,PSUs offer floating home loan rate at 11% while private banks offer at 13%.So you ca then save your money if you act aptly.

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How to save tax?

The various options for saving tax are

1. Five-Year Bank Deposits

Lock-in period: Minimum 5 years
Safety: High
Instrument: Fixed return
Annual return: Depends on market interest rates
Limit: None

2. Public Provident Fund

Lock-in period: 15 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 500 (min) to Rs 70,000 (max) per FY

3. National Savings Certificate

Lock-in period: 6 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 100 onwards. No upper limit

4. LIC premium payment

Non ULIP Policies

Lock-in period: Period of policy
Safety: High
Instrument: Almost Fixed return in terms of annual bonus paid by LIC
Annual return: 6%-10%
Limit: None

ULIP Policy

Lock-in period: 3 years minimum
Safety: Market Dependent
Instrument: Market oriented instrument
Annual return: Inline with market benchmark indices of the policy
Limit: monthly 1000

5. Pension Plans

Mutual Fund Pension Plans

Lock-in period: 3 years minimum
Safety: Market Dependent. It is a balanced fund.
Instrument: Market oriented instrument.
Annual return: Moderate return dependent on market performance.
Limit: monthly 500

Insurance Pension ULIP Plans

Lock-in period: 3 years minimum
Safety: Market Dependent. It is a balanced fund.
Instrument: Market oriented instrument.
Annual return: Moderate return dependent on market performance.
Limit: monthly 1000

6. Mediclaim premium paid upto Rs 20,000 is tax exempted.

7. Conveyance Allowance - Rs 9,600

8. HRA

9. Housing Loan

Principal - Upto 1,00,000

Interest - Upto 1,50,000

Interest on 2nd house loan - Entire Interest paid is tax exempt.

So utilize all the available options and save tax and earn more!

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What to do with MF NFOs?

On an average we saw 2 or 3 NFOs( New Fund Offers) coming up every month last year and the mutual fund agents are there to deceive people by saying that "BY LOWER NAV OF RS.10 U CAN GET MORE NUMBER OF UNITS". Mutual funds are not stocks. THE NAV OF THE FUND DOESNT MATTER. Its the RETURN that matters the most.

Disadvantages of NFOs.

1. You are not sure of the portfolio of the new fund. Only when the fund functions for an year or so , you can get an idea of what kind of stocks does the fund holds.

2. NFOs DONT follow the themes(or) objectives of the fund exactly. Unless there is a unique feature abt the NFO like Gold ETF or RealEstate mutual funds, its not advisable to get into an NFO. Suppose if a theme is a large cap fund, there are n number of good large cap funds already available. So these kind of funds are not very distinct.

3. NFOs are NOT CHEAP. Simply coz the nav is 10 does not mean that NFOs are cheap.

Consider two cases. Suppose if 1,00,000 is invested in two funds for one year.

1. Good track record fund.

NAV - Rs 100
Units - 1000
Return - 50 %

After 1 year, NAV = 150. So market value = 1000*150 = 1,50,000

2. NFO

NAV - Rs 10
Units - 10000
Return - 50 %

After 1 year, NAV =15. So market value = 10000*15 = 1,50,000

As you can see , the NAV doesnt matter, the rate of return matters the most and also the

Probability of existing fund performing better >>> Probablity of NFO performing better and the investor can trust the existing fund keeping in mind its past performance.

DISCLAIMER : The past performance may or may not repeat, but as Sachin in the team gives the indian team psychological strength, a good performing fund in your portfolio will make ur life more secure than an NFO.

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Mutual Fund Pension Plans

In India pension plans are most synchronous with Pension plans that employers provide for their employess. As a component of EPF, EPS (Employer pension scheme) is offered to all organized sector employees by their respective employer. This is roughly around 5% of their monthly basic salary and it earns 8.5% interest on it.

During the retirement period, employees opt for pension and get their monthly pension cheques.Returns of 8.5% in an environment where inflation is 10%+ is not generating any REAL returns. Investors should always look for returns which beat inflation atleast by a 7-8%.

Mutual funds also provide pension plans.These funds come as a debt oriented hybrid funds.The characteristics of these funds are

1. Lock in period of 3 years.

2. Exit load of 3% if withdrawn before the age of 58. This brings in discipline among investors to not to keep meddling with amount dedicated for pension.

3. These qualify for section 80(c) tax benefits. Investment made into pension funds upto 1 lac is tax exempted.For people who don have home loans and are figuring out what to do to fill up 1 lac in 80(c), this can be a very good option where both tax benefits and investment need is also satisfied.

4. UTI and Franklintempleton are the two funds which currently offers pension plans in mutual funds.

5. Past track record of the two funds.Annualized returns since inception as on 13/08/08 for

1. Templeton India Pension Plan(1997 - 2008) - 14.62

2. UTI Retirement Benefit Pension Plan(1994-2008) - 11.18

TIPP is a better choice than UTI's scheme.

So start exploring the pension options in mutual funds and get inflation beating returns from them.

Happy Investing!

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What is expense ratio in a mutal fund?

The expense ratio is the total amount of annual expenses incurred by the fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee. The expense ratios of equity and debt funds differ. Since the expenses of equity funds are more than those of debt-oriented funds, the expense ratio on equity funds is greater.As per the regulations of the Securities and Exchange Board of India (SEBI), a mutual fund can charge a maximum expense of 2.5 per cent (equity funds), 2.25 per cent (debt funds), 1.5 per cent (index funds) and 0.75 per cent (Fund of Funds).A fund with lower expense ratio and good returns is a very good since the cost of the fund will not eat up the returns generated.

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What is Term Insurance?

If you go to a set of life insured people and ask them as to what policy has they acquired, most of them atleast in my friends circle don know even the name of policy, which shows their height of ignorance. The rest will give the very famous answer of "Jeevan Anand" or some other endowment or moneyback policy name.
The concept of Life Insurance is totally misintrepreted in our nation, it is seen as an investment avenue. The main mantra behind life insurance is RISK COVER, which most of us don even cares about here. INSURANCE SHOULD KEPT SEPERATE FROM INVESTMENTS. There are adequate alternate choices for better investments.
If you take a survey among the LIC policy holders, for sure not more than 5% of them would have even heard about TERM INSURANCE. This is the policy from LIC which is a PURE RISK COVER policy in nature. There are only such TWO policies offered by LIC (which shows that even the organisation is willing to sell this policy). The name of the policies are

1.Anmol Jeevan
2. Amulya Jeevan

How different are these plans from the endowment plans?

1. Cheap Premiums for very high sum assured amount. For eg., for a 50,00,000 cover for a indiviual of age 21 for the period of 35 years, the premiuim is as low as Rs.13,350. Whereas in jeevan anand which is a endowment policy, for a sum cover of 5,00,000 itslef, the annual premium is 12660. This clearly explains high cost involved in endowment policies.

2. Theres no payment of sum assured on maturity of the policy. THIS IS THE WAY A LIC POLICY SHOULD OPERATE. You may ask in endowment policies, we get back sum assured plus assured bonus, so whyd shud i waste my premium if i cant get anything back. I will
explain that question pretty elaborately with a good example.

Lets assume a 25 lakh policy for an indiviual of age 21 for a period of 10 years.

Case 1: Amulya jeevan (Term Insurance)

Annual Premium : 5300

Case 2 : Jeevan Anand(Endowment plan)

Annual Premium : 2,82,170

Final amount : Rs 37 lakh.

So Now get the difference between the two premiums.

2,82,170 -5300=2,76,870

Assuming you take a term plan and start a SIP of 23,000(which 2,76,870/12) in reliance vision fund, for 10 years. From the last 10 year track record,

Final Amount : 2,30,30,594 ( 2.3 crores).

2.3 crores Vs 37 lakh speaks for itself. If you are smart enuf of not wasting money in paying hefty premiums, you can become a crorepathi instead.

BUT DON EVER EXPECT A LIC AGENT TO TELL U ABT TERM INSURANCE. You have to get it done from him, coz agents do not get much commission from these policies.

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How to invest across various stages of life?

Age does play an important role in building a portfolio for an indiviual. As you grow you should start realising or start reap in the benefits of your well planned investments.Let us classify the investors broadly into three categories.

Aggressive Youth(21-30)

This is the time when one should have vigour and aggression in investments. The Portfolio should be tilted towards more equity allocation than the debt instruments. Still , onc should plan for his/her retirement right from the first month when he/she receives the pay cheque. Earlier you start better is ur future retired life.

Allocation %age

Equity - 75 %
Debt - 25 %

The Debt instruments can be chosen from PPF,NSC,Pension funds. For Pension funds its better to avoid schemes offered by the insurance companies. There are better schemes available in the MF arena like Templeton India Pension Plan. As your age apporoaches 30, you should gradually shifts ur investments towards a better balanced protfolio of funds.

Responsible Familymen(31-50)

As the number of dependents on you grows up, it make more sense to add more stability to your protfolio by adding more debt/balanced funds. This move also reduces the volatality of the portfolio as a whole.

Allocation %age

Equity - 50-60%
Debt - 40-50 %

The Debt part can comprise of MIP(Monthly Income Plans),Pension Funds,Liquid Funds,FMP(Fixed Maturity plans). The Equity part shud contain less exposure to thematic funds and more allocation to conservative funds like Balanced Funds.

Retired Life (> 50 years)

The best way to enjoy the retired life is to spend the money accumulated over time. Spending not in a lavishin way but in a more satisfying manner. Its easier said than done. ACCUMULATION of wealth is not that easy but once your are tru that harship stage, then you are surely there to enjoy your retired life. Monthly Income Plans are the best way to get constant source of income after your retire. For eg, 1,00,00,000 invested in HDFC Long term MIP will fetch your 60k per month if u had opted for the monthly dividend option. Many can accumualte more than 1 cr in 30 years for sure if planned sensibly in the early stages. You can also park in good equity funds in dividend options. Reliance vision for instance has been constantly giving dividend > 75 % for the last 5 years.

Happy Investing!!!

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Why should one invest in fixed income?

In the period of falling markets, many are now concerned about capital protection and not about sky rocketing returns which was the story an year back.

Fixed income investment instruments provide capital safety and also assurance in returns unlike stock markets.

Scenarios when fixed income investment is needed

1. Need for constant monthly income which is the case for most senior citizens. This can be achieved by post office senior citizen deposit scheme.

2. To meet short to medium term goals(3-5 years). In order to meet a financial commitment 3 years down the line,you need the capital to be safe and also have an assured return over time.In this world of volatile markets, equity investments should be chosen only for periods greater than 5 years.

3.To Rebalance your portfolio. Based on financial needs and risk tolerance, a good balance between equity and debt needs to be maintained.

Thumb Rule : Debt %( One's age) : Equity % (100 - one's age)
Eg : for 25 years old , debt:equity ratio is 25:75

The portfolio rebalancing should be done in a regular basis to meet your risk tolerance.

Fixed Income Instruments

1. Bank Fixed Deposits.
2. Post Office Deposits.
3. FMP mutual funds.

So start reviewing the fixed income component in your portfolio.

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What is arbitrage fund?

Arbitrage Funds are referred as equity-and-derivative funds. The objective of an arbitrage fund is to capitalise on a stock's price difference between the spot market (cash segment) and the derivatives market (futures & options segment). These funds basically generate income by taking advantage of the arbitrage opportunities arising out of the mis-pricing between the two markets (spot and derivative).

If a stock A has a spot price of 100 and future price of 110, then an arbitrage fund manager sells the stock futures at 110 and buys the stock in spot market for Rs 100 and earns Rs 10 for the stock.

Furthermore, on the settlement day of the derivatives segment, the stock prices in both the markets tend to coincide. So, the fund manager will reverse his transaction - buy a contract in the futures market and sell off his equity holdings in the spot markets - and earn more profits.

Arbitrage funds offer better returns than debt or income funds and their earnings become tax-free after a year. However the concern is if the size of the fund is very large, most of the money would be parked in money market instruments.

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