Saturday, September 24, 2011

Prajna Capital

Prajna Capital


What Are Gilt Funds?

Posted: 23 Sep 2011 09:16 PM PDT

These are mutual fund schemes that invest in government securities (G-Secs), issued by the Reserve Bank of India on behalf of the government. Being sovereign papers, these do not expose investors to credit risk. Conventional debt funds invest in debt instruments across the board, but gilt funds invest only in government bonds. The G-Sec market is largely dominated by institutional investors and gilt funds are an avenue for retail investors to participate in the market.

Who should invest?

These are ideal for those who want more safety for their investments or are risk-averse and, at the same time, are looking for reasonable returns on their money. In the present scenario, fund managers advise investing for medium (3-5 years) to long-term (above 5 years). However, invest in tranches to avoid over-exposure and associated risks. According to mutual fund rating agency, Value Research, medium and long-term gilt funds gave returns of 3.84 per cent for the year ended May 30. In the short-term (less than a year), they have returned 4.18 per cent.

When should you invest?

These are a good option when inflation is near its peak and the RBI is not likely to raise interest rates immediately. There is an inverse relationship between bond prices and interest rates — a fall in interest rates leads to a rise in bond prices and vice versa. Since rates are expected to peak soon, we may see a dip in interest rates in six months. That will be the ideal time to invest in these funds.

Are gilt funds completely risk-free?

No, these don't even assure returns like those offered by bank fixed deposits and savings accounts. Factors such as fiscal deficit and the country's debt burden weigh on the performance of G-Secs and hence, gilt funds. Investment in gilt funds is subject to interest rate risks. When interest rates rise, prices of government securities fall, adversely impacting the performance of gilt funds. Typically, higher the fund's average maturity, higher the volatility. Another disadvantage is that they are highly illiquid. These funds invest in GSecs, which are not actively traded.

What are the applicable charges?

Gilt funds charge an exit load of one per cent if you redeem the units in less than a year.

How are investments taxed?

If you sell the unit in less than a year, the returns are added to your income and taxed according to the slab you fall under (short-term capital gains tax). Long-term capital gains tax is 10 per cent without indexation and 20 per cent with indexation. These are debt funds and not subject to the securities transaction tax.
 

To rent or to buy a home? Is a million dollar question!!

Posted: 23 Sep 2011 10:35 AM PDT

Your financial planner can help you weigh pros and cons of whether you plan to buy home in your current city or hometown

THE two giant real estate deals of residential properties in prime locations in Mumbai and Delhi made to the headlines recently. Yet, with housing prices sky-rocketing post the real estate slump in 2008 properties in cities like Mumbai and Delhi are beyond the reach of the common man.


Many studies reveal that over the last year the property sales in major metros have been stagnant despite the meticulous efforts put in by the real estate developers.

Now, it is not rare to find clients who come to me with the notion that today renting a house is better than buying one.


Buying a house is one of the biggest financial decisions one takes in an entire lifetime and the dilemma of `rent versus buy' continues to perplex many people across salary brackets.

A research conducted by the Center for Economic and Policy Research in Washington, DC estimates that the fair value for a property in any area is equivalent to approximately 15 times a year's rent.

However, one should not adopt one size fits all approach ­ a likely risk if financial decisions are made on hearsay rather than based on your overall financial plan.


The decision should be holistic: The decision about where one has to live is dependent on various factors including lifestyle, personal preferences, proximity to family and friends to list the few. Along with this, one also needs to ascertain the investments required and the funds available to make such a decision.


Understand the location dynamics: How locations/areas are likely to develop is also an important consideration one has to make. In urban areas, with limited space, a large part of the development is taking place beyond the established regions of various cities. While today, these areas might seem to be far, a decade down the line, with development, these could be among the best areas to live.

Try to envision the kind of development possible in an area before you decide to invest your money. If you rent a house, it is relatively easy to shift from an existing location to another if you are not satisfied by the way things turn up near your house.


However, as an owner, it might take time to find the right buyer to sell your property before you can shift.


The risk of home ownership: Some industry analysts are predicting that property prices are likely to correct over the next few years. As a homeowner, one should be able to realise that there exists a risk of property prices declining. If you plan to stay in the house yourself, a drop in prices may not affect you much but if you plan to sell the property at a later stage, then this is an important risk factor to be considered in your financial plan.
Ownership comes with responsibility: When taking a decision to buy, also remember that along with the housing EMI, one has to manage expenses towards maintenance too. Before you decide to buy, it is prudent that you estimate the amount that you are likely to incur on a regular basis.

A financial planner can help you in understanding the various costs that are typically associated with home ownership.

 

Is it investments versus dreams? From a financial view point, you also need to under stand how buying a house will impact your lifestyle. The in creased responsibility and cost of ownership may compel you to limit your travel and shopping splurges. You need to decide for yourself about the willingness to make the adjustments required to buy a house.

Integrating it into your financial plan: While making a decision about rent versus buy, involve your financial planner in the process. Irrespective of whether you plan to buy the house in your current city or in your hometown or plan to live on rent ­ your financial planner can help you adequately weigh the pros and cons in each scenario. Either decision needs to be integrated into your financial plan to ensure that you do not derail other dreams in pursuit of a house.

 

People Close to retirement find it difficult to get loan

Posted: 23 Sep 2011 09:54 AM PDT

Banks need to be convinced about regular income for such loans  

Home loans have tenures of 15-20 years. This could further go up in a rising interest rate scenario, when banks raise the tenure instead of raising the customer's equated monthly instalments (EMIs). Generally, they do not extend the tenure beyond five years over one's retirement age.

They are not averse to offering loans to those close to retirement, or, even retired individuals. Most banks are willing to give such borrowers loans till 70 years of age. However, banks remain cautious about covering liabilities for loans that go beyond one's retirement age. Every case is looked into on an individual basis after assessing the borrower's assets and liabilities statement, besides those of income and expenditure.

Banks also consider a salaried individual's post-retirement benefits such as monthly pension before finalising the repayment structure. Though there is no fixed loan-to-income ratio we insist on, loans are given only after taking into account the borrower's repaying capacity.

The customer has a few years before retiring and is willing to make apart payment from his retirement benefits at the time of retirement, he could continue with lower EMIs till the loan is paid. Such loans will have higher payouts in the initial years. The other option is asking the customer to pay the balance amount at one go at the time of retirement.

In case of salaried individuals, banks ask them to become a joint borrower with either spouse who still has some years before retirement, or children who are salaried and have regular incomes.

Some banks may include the spouse as well as the children's income with that of the borrower.

Going by the Reserve Bank of India's stipulation of a loan to-value ratio of 80:20, banks offer a maximum of 80 per cent of the property's value as loan. The remaining 20 per cent is the margin money the borrower needs to pay the builder upfront. But, when the borrower is on the wrong side of fifty, banks prefer the former to have a higher stake in the property and give only 65-70 per cent of its value.

What would help improve one's eligibility for loans at such times is having collateral like property, gold and other investments that will be considered as a guarantee. This is especially so if the borrower is a self-employed individual. Even for salaried individuals, if the senior citizen plans to remain in active service even after his retirement, his chances of getting the loan would be higher.

Ø       You may be asked to supplement your income with your spouse/children

Ø       You may have to make a lump sum payment with your retirement pension corpus

Ø       Banks will expect you to own higher home equity (35-40 per cent) of the property value

Ø       Showing gold and other investments as collateral will improve eligibility

Joint loans are a bigger liability for the co-borrower

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