Cardless Cash Withdrawl

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Many banks (recently ICICI) have started providing facility to do "card-less cash withdrawal" from ATMs. The idea is similar to fund transfer, except that instead of recipient's account number, you provide his/her mobile number. The bank will generate unique sender code and SMS the receiver code to recipient's mobile number. You call up the recipient and tell your sender code along with amount to withdraw. The recipient can use these codes to withdraw money from ATMs without any ATM card. 

The idea is good, but currently there are several issues

1) Not every ATM of the bank will allow card-less cash withdrawal. It seems banks need to upgrade ATM software to allow this facility. 
2) Inter-bank ATM withdrawal is not available. So you need to withdraw from the same bank ATM. 
3) Every transaction (successful or failed) will cost the sender a fee (Rs 25 for now)
4) There is a upper limit on the amount that can be transferred
5) It requires sender to register for both internet banking and mobile banking
6) Sender needs to register the recipient. I thought a simple mobile number entry should have been good enough.

This is not really a new thing world-wide. Several banks in other countries have some or the other variation of card-less cash withdrawal facility. 

What I would like to see is allowing a limitless self-withdrawal facility with just my mobile phone. Something like this


A card-less self-withdrawal will be really cool and highly useful, since then there is really no need for ATM card ever. 

A better option would be to use bio-metric identification, like this


Real Estate - A bad investment

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Yesterday I met an old friend after a long time (lets call him 'S'). Some four years ago he purchased a flat in Bangalore Sarjapur area for around 70 lakhs. He mentioned that the price of his flat is touching 90-95 lakh now and he was happy with his investment making awesome returns. 

I was not sure, since I have always been wary of Real-Estate true returns. I wrote a post in Nov 2010 questioning the same. So in this case, I did a quick back-of-the-envelope calculation. 

Purchase price of flat = Rs 70 Lakh  year 2010
Down payment = Rs 15 Lakh
Loan Amount = Rs 55 Lakh for 20 years

As per the floating rate of interest, his EMI comes to around Rs 54500 (although due to floating nature, his tenure has changed, but let me not add it). 

Till now he has paid 

54,500 X 48 EMI = 26.16 lakhs + 15 lakh = 41.16 lakhs

Current quoted price = Rs 90 lakh (Assuming he sells at 95 Lakhs, but he wont get entire money, since buyer will deduct the stamp duty, registration charges etc, lets say 5 lakh is deducted). 

Outstanding loan amount = Rs 50.92 Lakh, So his balance earning = 30.08 lakh

This amounts to a loss of 11 lakhs

Even if you include the tax deduction he received on interest and principal payment, it will not be more than 2-3 lakhs, which still puts his investment in red. 

I have not even considered the opportunity cost of the investment money or the builder related issues causing delays and shoddy construction, which will compound this loss to much more. 

A real-estate investment on borrowed money is a really bad deal. 

Whats the solution? My solution is simple

1) Never believe the fact that real-estate prices will keep on increasing. 
2) Instead of buying a house now, invest the EMI amount in recurring deposit. For e.g. if you plan to take a loan of Rs 50 laks today, rather invest Rs 50000 per month in a RD
3) Wait for your RD to be give you more than 50% of your house cost. In this case, in 3-4 years you will have close to 25-30 lakhs
4) Search for a house in the same budget (believe me you will get it even after 4 years), but now you can actually pay half cost of the house by cash. 
5) Take loan for remaining amount (EMI 25K now) and keep saving the remaining 25K in RD
6) In another 3-4 years you will be able to fore-close your loan with the RD.

Let me apply the same to my friend S's investment

So instead of EMI, he puts it in RD, 54500 Rs * 48 = 26.16 lakhs + RD interest = 30 lakhs (post tax). 

Purchase price of flat = Rs 70 Lakh  year 2014 (he can still get a house around 70 lakhs in many good parts of Bangalore)
Down payment = Rs 15 Lakh + 30 Lakh = Rs 45 Lakh
Loan Amount = 25 Lakhs

His now EMI = Rs 24, 792 + he starts another RD of 29708 Rs per month. So in 4-5 years (by 2018) he would have cleared his home-loan. 

The bottom-line in this plan is that you pay very little interest to the bank and hence can make your real-estate investment profitable. 

ESPP and tax implications in India

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Recently I got an email from my company (US listed company) about ESPP program, which allows employees to purchase the company shares at discounted price. I started inquiring about ESPP with fellow colleagues and to my surprise everyone gave a thumbs up, indicating a simple and easy way to make money. 

I have a habit of becoming suspicious whenever it sounds too good to be true. So I started digging further and here are some facts that I came up with. 

What is ESPP?

Conceptually, ESPP is like a deferred-SIP, where you allow small amount to be deducted every month from your salary, during the offer period. Once the period is over, company will use the accumulated money to buy company shares at discounted price and deposit in your brokerage account. 

Lets take a quick example, say you are employee of company XYZ Inc. The ESPP offer period is say 5 Nov 2014 to 5 May 2015. Lets say you applied for ESPP with a deduction amount of 5% (anywhere between 1 - 15%) every month starting November 2014. So on 5th May 2015, your company would have accumulated some money and it will purchase the shares of XYZ in your name. The discount given typically is 15% of lower stock price value of 5 Nov 2014 or 5 May 2015.  

Assume, on 5 Nov 2014 stock price = 5$ and on 5 May 2015 stock price = 7$, you will get the stocks at 15% less of 5$. 

Once the shares are deposited in your account, there are no restrictions and you can either hold them or sell them immediately. 

It looks like a great program on paper with a straight 15% benefit and if the stock goes further up, your earnings will be much higher. 

Where is the problem?

There are two problems associated with ESPP

1) Stock market risks
2) Tax and transaction charges

Let me explain, each one of them. 

Stock Market Risks
Investment in ESPP is similar to investment in stocks & that too of a foreign listed stock. Any investment in stocks is associated with risks, if a stock can go up then as quickly it can come down and wipe your capital. As with investing in Indian stock market, you need to understand the financials and long term growth of your company. How many employees go through the quarterly results or historical financial data of their company? So just being an employee does not mean that your company's stock price will keep growing. Also being employee does not mean you have enough information to understand the future growth story of the company. 

Tax and transaction charges

Indian Income tax laws can also be spoiler here. The first tax that will hit you, is when the company has purchased the stock on your behalf. The 15% discount that you are so happy about, it will be called as perquisite and taxed as per your tax bracket. So being in highest tax bracket (30%), your 15% discount immediately reduces to ~10% straight away.

Also for most employee idea of entering into ESPP program is to sell on the day of vesting (immediately following purchase). So when you sell the shares, assuming you make some gains. This will be short-term capital gains.  There is also some brokerage charges taken by your broker (e-trade etc) which can also put a dent on your gains. 

Since the shares are not listed in India, short-term capital gains are taxed as per your income tax slab. If you held the shares for long-term, then long-term capital gains are taxed at 20% for foreign listed shared. 

I am not even considering the difference in Rs - $ conversion rate between the purchase date and sell date. It could potentially further dent your losses. 

Conclusion

To me, ESPP has too many variables to consider for investment.  I feel that ESPP for short term should be absolutely no-no, since it most probably will result in capital loss (unless your company share price jumped very high during the offer period). If you are very sure of your company's growth over a long period of time, then you may invest for long-term. 

As for me, I am skipping the ESPP altogether and looking to find some gem in the Indian stock market. 

Smart Tips for new parents

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I recently read this wonderful article on Jagoinvestor, but having been gone through this experience, I have my own twists to these tips.

In summary, what they propose for new parents is:
  1. Review your Life Cover
  2. Add the child to Health Insurance
  3. Start RD for school expenses
  4. Update Nominations in various financial products
  5. Register the birth certificate
  6. Start Saving bank account for the newborn
  7. Buy cloths and toys smartly
  8. Don't invest in CHILD plans
  9. Have a 24/7 reachable doctor
  10. Make baby emergency kit
Here is my take on some of these tips

Review you life cover

Yes this is important point, but why wait till your baby is born. If you are first time parents, here is a warning. Once you baby is born, you would have seriously no time and energy to devote to anything other than "mis-managing" everything. I recommend that why not increase the life-cover during pregnancy itself. It will not only save you time later, but you can also plan your premium payments as per you convenience. 

Adding the child to Health Insurance

Another important point, but note that insurers want a birth certificate as a documentary proof for covering the new born. Hence the first thing you need is a birth certificate. I had posted my experience in getting a birth certificate in Bangalore.

Also it is better to check with your insurer if the newborn is covered from day one. Another important aspect is the coverage for vaccination. The vaccination cost with private doctors can range anywhere from 4-5K to 15K (at-least in Bangalore). 

Update Nominations in various financial products

To me this does not make sense. A nominee is just a custodian of the assets and does not have a rights over the assets. Also a minor nominee requires a guardian to sign on behalf of the nominee. So in the event of your death, the actual custodian of your assets will be the guardian on behalf of your baby until the child becomes adult. So why complicate the nominations, better to have either your spouse or parents as nominee. 

Start Saving bank account for the newborn

I do not think it is a good idea. The simple reason is because most banks which allow kid's account requires a minimum monthly balance, which blocks the money. The interest rates offered is below inflation resulting in loss of money. The alternative option that I recommend is to keep counting the money that the child received via gifts and at the end of year deposit the lump-sum amount either in PPF or a MF. This way the money received by the child goes for building a corpus for his/her future. 

Buy cloths and toys smartly

This is a personal choice, but in case you are not averse to using second-hand toys or baby stuff, then I recommend online portals like olx/quikr to find used items. Another interesting options is to rent the toys via rentoys website. I have not personally used it, but it sounds an interesting concept. 

Make baby emergency kit

There are two problems with having an emergency kit

- It needs to be checked from time to time to ensure that used items are refilled
- It needs regular checks for removing expired medicines 

My personal experience is that despite having the required discipline, we could not always maintain the emergency kit. There were always items missing from the kit. A better option is to have a near-by medical store deliver the medicines to your doorsteps in case of emergency. 

An additional tip for those who can maintain the kit is to have a spare kit in your vehicle for emergency purposes. 

Here are some additional tips
  • Invest more in your health and fitness (more important after having kids).  
  • Get a PAN card or Passport for your kid as an identity proof
  • Create a WILL if you don't have
  • Open a PPF in your kid's name and ensure regular investment (no need of a savings account)