Thursday, October 29, 2015

Are you in love with your company???

Recently, I come across portfolio of one of my close relative. It took me by surprise. The portfolio composition was like this :

95% of her portfolio was made up of investment in the company she was working with. Out of it 60% of the shares she accumulated in last 10 years by way of ESOPS. Looking at the bright prospect and growth of the company she bought balance from the market. 

Hardly, she is having any wealth apart from the shares of her own employer.

Now, think of a situation if something goes wrong with the company may be due to political, environmental, global, sectoral or corporate governance issues(We have lot of such examples e.g Kingfisher, JP associates, Satyam computers, Amtek Autu, DLF etc..). Her future will go for a toss. She would be hit by a two edged sword at one end she might loose job due to crisis in the company and at the other end share prices will loose all the gains.

She was very confident and secured for her financial future, but now she realises she is taking a big risk with her and family members future. 

Basic principle of investing is that "Don't put all your eggs in one basket" But it is some thing like putting all eggs in one basket and then taking it bull run festival of spain.

So please do take care and diversify your investment across good companies and across sector according to your need.

Do consult your financial planner, it really helps.

Friday, October 23, 2015

Be wealthy like Warren Buffet by investing just 220 buck per month !!!

We all dream to be wealthy like Warren buffet, rather fact is most of us would have never ever dreamt of being as wealthy as him. But is it that difficult to be as rich as warren buffet.

I tried to evaluate and did certain calculation of what actually made warren buffet one of the wealthiest person in the world.

1) Long term : He never invested money looking at short term. Warren Buffet says -

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.”

2) Start Early : He made his first investment at the age of 11 and still regrets that he started late.

3) Discipline : He has been an investor since he made his first investment.

4) Power of compounding : His biggest friend in wealth creation is power of compounding he compounded his wealth @22% per annum. It is very easy to get return of 50% or may be 100% once in your lifetime, but is very difficult to get return of 22% every year for almost 75 years.

5) Expenses : He still lives in 3 bed room house in omaha bought 57 years back . He drives his own car.Although he owns worlds largest jet company but never flies by a private jet.He also doesn't carry a cell phone. He believes :

" If today you buy things you do not need, soon you will have to sell things you need".

With all the above qualities, let's understand how any of us can create wealth like Mr.Buffet.

Date of Birth : 30/08/1930 

Age : 85 Years 

Started investing : 11 Years 

Investing since : 75 Years 

Present Wealth : 67 Billion US$

Compounded : @22% 

Increase in rate of Investment : @10%

Investment in first year : USD.2682.00

That means if someone starts at age of 11 with just USD.220 per month increasing it 10% every year and compounding it @22% can accumulate such wealth. Is it that difficult?

The toughest task here is to compound your investment@22%/p.a. for such a long period. 

But luckily we have some of the Equity Mutual fund which gave return @24% annualised, during last 20 years of its existence. So even if you are not having stock picking knowledge of Warren Buffet, you have easier way available to be wealthy like him.

Will conclude with one of his best words of wisdom : 

"If you are luckiest 1 percent of humanity, you owe it to the rest of the humanity to think about the other 99%.

You would be surprised to note that his children will not inherit a significant proportion of his wealth, he has pledged 99% of his wealth to charity and already donated US$25.5 Billion.

Thursday, October 15, 2015

A must list, before I die...

We wish all our reader's a healthy and peaceful long life. But we all know we have to die one day.

Have you ever thought why it is only me, who knows about all the investments, deposits, assets and liabilities. May be for convenience we would be accessing bank accounts and password of entire family. But is it not necessary to update atleast one of the family member about it.

Recently a report was published in the news paper that almost 64000 Crore is lying unclaimed in bank, post office, insurance company and EPFO for more then 10 years.

It suggests that there were people who invested this amount and have not passed on details to their heirs, who can claim it.

It take lot of efforts and hard work to earn, save and create wealth. Being Indian parents we always wish that we should pass on our legacy to next generation. But only wish doesn't work.It needs to be planned.

In today's fast moving technological world everything is either stored on our laptop,computer or mobile and have been saved with the password which only we know.

There was a recent case in which a client had updated his spouse about all the investments and name of the files stored in the computer. But when he died and her wife tried to access the details she was surprised to note that computer was locked with an password, which he didn't shared.

Remember in case of sudden death. Family has to bear 2 kind of losses one is emotional and other is financial loss. No one can fill the emotional gap only time can heal it up. But together with it if they have to go through financial problem then it is unbearable, that too when enough resources were planned.

Just assume that YUM DOOT has come to your dream and given you notice of 1 day. I think first thing you would do is provide with all your financial details to your family member.

For your ease trying to put down list of things you must prepare, update and give it to your family members :

  • Will : Prepare a will. It is a simple statement mentioning how you wish your wealth should be distributed to your heirs. It is perceived that it requires lot of legal and technical hassles. But let me tell you that you may create it on a simple piece of paper which needs to be signed by 2 witnesses.

  • Bank account details with login and passwords.

  • E-mail account login and password, only in case there is no confidential details which you have even hided from your family and don't want them to know even after death

  • Laptop and smart phone login/password

  • Debit and credit card pin

  • Nominee : Ensure all you investments have a nominee. Legally nominee is not the owner of the asset but just an authority to receive proceeds. If your one son as nominee and you die without making a will your another son,daughter or even your cousin can challenge it in court.  

  • Details of Saving Bank Account,Locker, Fixed Deposit, Demat, PF, EPF, Insurance (Life and non Life).

  • Details of all your investment like Mutual Fund, Stocks,Physical Gold, Silver, Real Estate.

  • List of outstanding loans.

  • Money given or taken from friends and relatives.

Remember only providing the details will not solve the purpose it needs to be updated at regular interval. Your birth date or anniversay date can be a good reminder to update the list.

Thursday, October 8, 2015

Is home loan prepayment really beneficial ????

I keep on receiving lot of queries as whether one should continue to pay home loan or invest the surplus available.

It would be wrong if I only discuss financial aspect. Apart from financials, lot of other factors, which also needs to be considered.

Trying to cover most of it, with a word of caution and request to consult your financial advisor before taking decision. The right and timely decision can help to reap big benefits out of housing loan.

Request readers to go through complete article to understand benefits, assumptions and other aspect related to it.

1) Financial benefits

Lot of people claims that it is always beneficial to prepay housing loan, some claims it is advisable in earlier years as interest cost is very high.  

From financial benefit point of view IT IS ALWAYS BENEFICIAL TO INVEST THE SURPLUS AS COMPARED TO PREPAYMENT. Let me illustrate you with an example :

Lets assume following:

Case I - Prepayment :

Loan Amt.                                 : Rs.20,00,000
Tenure                                       : 20 Years
Interest                                      : 9.4% (SBI Present rate)
EMI                                            : Rs.18512/Month
Interest payment in 20 yrs.  : Rs.2442931
Capital Repayment in 20 yrs: Rs.2000000
Total Payment                          : Rs.4442931

Let's say you have surplus of Rs.500000 and you prepay so the total amount comes like this:

Interest payment in balance reduced term : Rs. 889323
Capital payment in balance reduced term  : Rs.1500000+500000 (Prepayment)
Total Payment                                                   : Rs.2889323

So the total benefit comes out to be Rs.1553608

Case II- Investing surplus without prepayment :

Let's say surplus amount of Rs.500000.00 is invested in tax free bond of PFC on offer right now @ 7.60% (Assuming annual interest is reinvested at same rate)

The maturity amount of Rs.500000 @7.60% after 20 years would become Rs.2163791

So the net gain by investing the same amount would be (Rs.2163791 - Rs.1679372) = Rs.484419.00. 

Benefit for interest repayment on housing loan during the term (considering 30% tax bracket) : 

2568680-889308 = Rs.1679372 @ 30% = Rs.503811

(Even,if we ignore tax benefit of 80C as in most of the cases it is covered by PPF,EPF and LIC Policies)

So the total benefit works out to be whoopping  (503811+484419) = Rs.988230.00

2) Inflation : Although it look very beneficial at first go, but after taking inflation @6% works out to be equivalent to Rs.3.08 Lacs in present terms. So if you are higher tax bracket benefit is considerable.

3) Assumption : We have assumed investment in tax free bonds which are right now available, But It won't be possible everytime to get such an avenue of tax free investment for 20 year long period. Together with it we have also assumed that the reinvestment of interest amount would also be at the similar rate.

4) TAXATION : As we are aware that there are 2 component to EMI first is Interest and other Capital repayment. 

As per section 24 your income shall be reduced by the amount of interest paid on Home Loan where the loan is taken by for Purchase/Construction/Repair/Renewal/Reconstruction of Residential House. The maximum deduction available for self occupied property is subject to a maximum of Rs.2 Lacs. In case it is not self occupied there is no upper ceiling.

In addition the amount paid as repayment of principal amount of home loan by individual/HUF is allowed as deduction under section 80C. This section also includes amount invested in PPF,EPF,ELSS scheme of Mutual Fund, NSC etc subject to total upper limit of Rs.1.50 Lacs.

So if you prepay your home loan, may be you loose tax benefit against interest part as the interest component would reduce considerably.

5) Funds Requirement : Never deep into your contingency or emergency fund in a hurry to prepay your home loan. You must keep atleast 3 to 6 months of expenses for contingency.

6) Prepay Costlier Debt First : Home loan is the cheapest loan available. So if you have other outstanding consumer, credit card or personal loan. Prepay them first.

7) Defensive investors : If you are a defensive investor then I would advise you to prepay your home loan for any surplus amount because mental peace and health is more important then financial benefit.

8) Retirement Planning : If you have not planned for your retirement yet and you are right now in your 30s or 40s consider investing in Equity mutual funds to build retirement kitty.It may give you much more benefits then shown in illustration. If I consider historical Equity returns of 17% then Rs.5.00 lacs may become almost Rs.1.20 CRORE

9) Nearing your retirement : If you are planning to retire soon, then it is advisable to prepay your housing loan so that you don't have any liability after retirement.

10) Planning to spend surplus : If you are planning to buy some white good or a gadget or a depreciating asset out of surplus then it is advisable to prepay your home loan without any of above consideration.

Please take decision of prepaying or investing the surplus after considering above factor. Remember every penny saved is penny earned.