How crude oil affect daily life?

Everyone including people who are apolitical are blaming the UPA government for the spiraling inflation caused mainly due to soaring crude oil prices. For common man the question is "How the prices of crude oil affect his/her daily life?. The first answer that comes up is that prices of petrol will go up. But to really understand the impact of crude oil, there is a need to go little deeper.

Crude oil is the product found by digging into the earth. This is not oil which can be directly used, hence lot of big refineries across the world, refine the crude oil into various products which can be consumed by average person.

This is how refining of crude oil is done. If you look carefully on the right hand side of the picture, all these are the products output from a refinary (one example of refinary is the Reliance's refinary in Jaamnagar near Mumbai).

Crude oil price becomes important since this is the input to refinary and it has to be bought from countries which have the natural resources. This is the main reason the Arabian countries are rich, they entire region have naturally large concentration of crude oil.

Now realize that how these product output of crude oil post refining is used

• Petroleum gas - used for heating, cooking, making plastics
• Naphtha or Ligroin - intermediate that will be further processed to make gasoline
• Gasoline - motor fuel
• Kerosene - fuel for jet engines and tractors; starting material for making other products
• Gas oil or Diesel distillate - used for diesel fuel and heating oil; starting material for making other products
• Lubricating oil - used for motor oil, grease, other lubricants
• Heavy gas or Fuel oil - used for industrial fuel; starting material for making other products
• Residuals - coke, asphalt, tar, waxes; starting material for making other

If this is the case, crude oil price will instantly make the following costly:

1) Cooking gas
2) Petrol/Diesel
3) Plastic
4) Kerosene
5) Industrial Fuel
6) Aviation Fuel
7) Other lubricants

All these will further cause an increase in food products, transportation (for all industries causing significant increase in every single product we use). Consider how this directly increases the cost of most manufactured goods in terms of the plastics used in everything from plastic bags to computer keyboards to dental fillings to the cost of clothing. (Acrlyic and polyester are petroleum products).

Hence essentially crude oil price will directly or indirectly will cause increase in cost of almost everything causing infaltion (that is in talks now a days). No government anywhere can stop the increase of prices in such a scenario. With demand continuously growing, there is no short term solution unless everyone

1) Start reducing their individual usage of energy
2) Start using alternate means of enery (e.g sunlight, bio-waste fuel)

This inflation seriously can erode your earnings & investments in long term.

Comments by Alisa

An interesting comment by Alisa on this post. Just thought it appropriate to bring on the main page :

I certainly agree that profits can be made in the stock market, but it is not an easy task if you want to do it on your own. By doing it on your own, and doing it effectively, you minimize the costs and thereby you can maximize your return on investment. But its going to take diligence, patience, and time. But in the long run, it will be worth it.

Yes, indeed. Investing in stocks is profitable and certainly you need lots of patience. The question is about "personalities". Some people are brought up to be extremely patient with life, others are not. I think our "personalities" too govern the stock market outcome. So to gain from stock market you need to develop a habit to learn from mistakes, be patient and work hard for getting those gains.

I think that the earlier in life one is able to start investing the better. This way you benefit from the principle of compounding and you have time to recover from the impact of any severe losses. As far as actually entering into a buy transaction that would depend on your goals. You can buy when the "stock" is on sale, or if you really feel that the stock is worth it's market value, you can buy it even at a higher price especially if it has a potential to go even higher)

A very important point. To start early is the key, but at-least in India, most of youngsters think of spending rather than investing OR saving and those who are interested in stocks are the ones who think its a way to instant richness. Stock Market should be a way to achieve your long term goals and it needs a lot of diligence.

Yes the stock market definitely means risk and we should try to minimize and guard against loss as much as possible. As I am new to investing I am still learning how to best do this. I think that the more knowledgeable you are about the business you are investing in, the better decisions you can make in this area.

There are so many other types of investments besides stocks and I think it is wise to have some diversity in this area. However, someone who has been in this longer than me and who has had a lot more success says that you should diversify if you are a novice but if you know what you are doing then you should have more in the investment that will bring you the greatest return.

Yes, diversification is advisable to people who want some hedge against their investments. I believe diversification should be based on individual needs.

Lastly, I agree that reading and researching is the key to helping you to be successful. Read books, magazines, newsletters, and listen to audio books, and anything else that will help you to make more informed decisions.

Again, a lot of work, but I think its worth it!

Great points Alisa.

Good Stock Market Blog

Most of the blogs that I have seen, usually provide "buy" or "sell" recommendations. I have never came across a blog which tells a new investor (esp India centric) on how to start investing in stocks.
I just found a good blog. It has an interesting post "Secrets of Successful Investors". Pretty handy.

How & When to invest in stocks?

Everyone have heard about the enormous profits earned by people investing in stock markets. This causes a greed among investors to earn quick bucks. Equities have definitely given biggest returns amongst all other investing avenues. But in India, lot of people have still stayed away from stock market. How & When to start investing in equities?

I have seen first timers getting the advice to go the Mutual Fund route to equity exposure. I do not think it should always be that way. If you are willing to do some hard work, have long term goals and patience then despite being a first-timer, you should seriously think about investing in equity markets. Some tips on how and when to start :

1) There is NO best time to start investing. Rather than waiting for a bear phase or identifying the start of bull phase, invest when you can some cash to spare.

2) Keep in mind that stock market means risk. Dont expect astronomical returns or scamper away on the first hint of losses. Stock market wont give you instant richness, but a disciplined approach can help you achieve your long term goals.

3) Stock markets are just one avenue of investing, dont put all your eggs in this basket.

4) Get a Demat Account as soon as possible and choose a online broker who have minimum charges for transactions. Get aware of various terminologies and ask the broker to provide you a demonstration.

5) Read, Research and Understand before investing. Dont go by the tips from relatives, friends, magazines or websites. If anyone provide you any information about any company cross-check it, look at the history and try to identify a trend.

6) Instead of investing large money in a single chunk, spread your investments in time. You may have 50,000 Rs for investing, but do invest it over many months and across different companies.

7) Most first timer think that they need atleast few thousands of ruppees to start investing. You can start with whatever money you have. The lesser the better since if you gain, you will be thrilled that you started building your portfolio from miniscle amount. If you loose, you wont have much regret over the amount you lost and you will gain valuable experience.

8) Dont be greedy if you gain. It is easier said than done. If you gain, start believing yourself and build confidence but dont overdo it. Gordon Gekko said "Greed is good", but for first timers, it is better to start slowly. Think of this as a marathon than a sprint.

9) Dont care much about short term news report of stock markets going up or down. Stay invested for long term.

10) After getting Demat Account, start reading, researching and upgrading yourself about the terminologies and the way to do research. But dont keep lingering too long. Use a small amount and start investing. Unless your money is involved, you wont learn quickly.

Renting Vs Buying a House Dilemma

I recently read an article in Economic Times. It talked about virtues of buying versus renting a house. Here is a sample calculation done by the author. I fail to understand that why everyone talks about buying a house as biggest thing in your life. In India, parents or peer pressure causes each individual to think on the lines of getting their first house as soon as possible. You finish your education, get married, buy a house, have kids so on and so forth. Some things remain same. Times are changing and so should the needs and priorities.


If you are an individual who has been pressured into buying a house to "build an asset", dont panic. Think really thoroughly before jumping into the buying spree. Here are few questions you can ask yourself before you think of buying a house:


1) Will you be changing the city in few years owing to greater opportunity? If yes, postpone the buying idea.


2) Do you want to settle abroad in coming few years, or you think your spouse might get an opportunity to do that, postpone buying. Everyone now a days wants to settle outside India.


3) Do you or your spouse, wish to pursue higher education (usually MBA), then wait for the house. A higher education can cost a handsome money.


4) Can you really afford the EMI without sacrificing your other needs? There are lot of people (middle class) who want to see the world. You can't do that when you are old and your body doesn't help you. Life is short, enjoy it.


5) Are you thinking of starting your own company? Most of the people don't start companies since they never come out of rat-race. The vicious cycle of adding responsibilities, liabilities and then never able to coming out of it. Think seriously.


Tips:

• There is no major income tax advantage with buying Vs Renting for the salaried.

• Buying a house would imply less money in hand for other needs/enjoyment in life

• Rent will always be less than the EMI you shell for the entire life typically in a metro

• A house is usually an asset for you when you retire and have no income. Then it saves your monthly outgo for rent. But with your old age, there are chances that your children will no longer be in India or in the same city. So why purchase a big house which you cannot maintain.

There are so many better avenues to put your hard earned money and getting much better returns that you can think of putting your money for them for long term. Once you are settled in a city, then you can think of encashing that money for buying a house.


If you still think buying a house makes lot of sense, buy a house in a city where you want to retire and stay for rest of your life.

10 Tips to protect credit card fraud

Tip #1 Put signature on the back panel of the credit card

A merchant has to verify the signature on the back of the card with that on the purchase transaction slip. Some merchants fails to do that, but putting your signature on the back of the credit card can minimize the mis-use.

Tip #2 Do not use your credit card for Online shopping from a public computer

This has been time again mentioned in various magazines/blogs/websites, but it still remain the single most important loophole, which causes significant mis-use of the credit card. To add an extra security measure I always use credit card from my home computer and not even office computer.

Tip #3 Always make sure to use secure http connection. The URL should contain https and seeing that a lock symbol is at the bottom corner of a website.

Tip #4 Mark the CVV number (last three digits at the back of the card) illegible by ink and remember it either in your head or keep it secretly at your home.

Tip#5 If you credit card bank provide some mechanism to create virtual cards (like HDFC's Netbanking OR Axis's eShop Card) use that facility.

Tip#6 Get a credit card issued with a very small limit

With disposable income rising and the mentality of credit card companies to provide exhorbitantly high credit limits (sometimes 2-3 times monthly salary or even more), it is no longer surprising that if you try to get a credit card, the limit would be several lakhs. It will be a big blow if such a high value card is mis-used. I have a citibank credit card with a limit of 20K (this was 5K when I was in IIT as a student). I have consistenly "thwarted" citibank's ploy to increase the credit limit. This credit card is of immense use to me and I mostly use the card for my daily purpose. I dont live in fear since the maximum misuse that can be done is (20K - outstanding balance) at any given time. If you dont have a card, ask the company to issue a card to your non-working spouse OR your child (Not an add-on card).
Another way is to push the company to reduce the credit limit. I have done this for my wife's credit card (whose initial limit was 1 lakh, which I forced the company to reduce it to 20K).

Tip# 7 Register for mobile alerts

All banks and credit card companies will now-a-days sends mobile alerts for any transaction in your account. It helps instantly to know if a misuse happened.

Tip #8 Use the a pre-set limit option (usually it is not advertised or made clear to the customer).
Credit card companies offer a pre-set limit option, where any transaction greater than the preset limit will need bank's authorization. It helps greatly to reduce the misuse.

Tip #9 Keep the bank aware of your changing addresses

This is another of the biggest reason for misuse. Sometimes the credit card user forgets his/her credit limit expiry date. If you have shifted your residence, and bank still has your old address, the new credit card will be automatically send to your old address (most of the times the mobile number has also changed, so bank has no way to intimate you). In last four years, I have shifted four cities and nine houses, each time I make sure to update the address in all banks.

Tip#10 Keep track of your expenses

This is easier said than done. It is so easy to use a credit card and throw the counter slip, so that when monthly statement comes, you will be wondering which are the correct and incorrect expenses. A simple precaution of keeping the old receipts can help you tremendously.

Budget 08 - A populist measure

The budget session gives a good opportunity to start re-blogging. The Finance Minister as expected (due to coming polls) delivered a populist budget. The salaried people have definitely benefited by the budget with:

• Increase in basic exemption limit
• Doubling the slab limits
• Increasing medical insurance limit by adding parent's insurance cover
• Tax Free monthly income from reverse mortgage

The budget allows more income in-hand for a salaried employee along with indirectly opening routes for higher expenditure.

If you are earning in Sikkim state, you benefited the most. FM has removed all tax-liability for individual earning in Sikkim state. This budget has given no heed to the IT-industry (especially export oriented IT companies) and the shining days seems to be over for them.

Loan Calculator

If you have taken a loan and have been paying EMIs, then at some point, you definitely must have wondered about how much loan amount you have paid back (including principal amount and interest). Also sometimes we might want to know what is the percentage of principal and interest a particular EMI is paying back. This information is needed either just out of curiosity or sometimes for tax calculations. It is always difficult to get this information from banks (how much friendly the bank is) on a periodic basis.

I was in the similar situation regarding my education loan (from UBI) and wondering how can I quickly find it out myself. I just found an excel sheet on the internet (don't remember the original source, if you know please let me know), which can be quickly used to find the entire loan tenure EMIs. It is an extremely handy tool. You can download the excel sheet from here.

You just need to enter the "Loan Amount", "Interest Rate", "Loan Period" and "Starting Date"

How to buy apartment in Bangalore - II

Here are some of the terminologies which everyone wanting to own an apartment should be aware of:

• Booking Amount : You see a project and if you like it, just to ensure that your claim gets higher priority you need to pay some money as booking amount to the builder (it runs typically in few thousands to lakh). You get some time to think over the option and to process the loan formalities. You can even cancel the booking getting back your money (minus some administrative charges which can be as high as 50%)

• Deviation : Actual building usually does not fit exactly as per the plan set initially. There is some deviation from the approved plan, which is allowed. Checking whether the deviation is beyond that value is helpful. The deviation can be horizontal or vertical. Different rules apply to each. Usually a 5% deviation is allowed.

• Registration : It is the process of getting the flat in your name after the construction. It is similar to registration of marriages or child birth. There is a good amount of money to be given to the government (and it differs across states).

• VAT + Service Tax : Although there is a talk of service tax being waved for home buyers, but it has still not been effective. These are the government taxes to be paid.

• Super Build Area : A builder usually not only charges you for the area you are going to live, but also charges for common areas like stairs or lifts. This area is charged for all flat buyers and is probably the single most earning point for the builder.

• Carpet Area : This is the actual area which you can use for living. Usually 85-90% of super built up area is carpet area.

• Built up Area : This is the area which is carpet area + area covered by walls etc.

• Cost per square feet : The SFT cost is always about super-built up area. It is misleading in the sense that you are paying the same amount not only for the area you will be using all the time (built up area) but also of the common area (like lift) which you would use very frequently.

• Floor Area Ration (FAR/FSI) : FSI is the ratio of total floor area of a building to the total plot area. This essentially implies out of total plot area, how much is used for construction. A smaller the value, implies large open areas.

• BDA : Bangalore Development Authority, govt body that authorises the construction of buildings in Bangalore. Official WebSite

• BMRDA : Bangalore Metropolitan Region Development Authority, this body approves plots beyond bangalore city limits. Official Website
  

• Pre-Launch Offers : A builder puts advertisements even before he gets the BDA approval (assuming it will be approved either by legal or illegal means). This pre-launch offer is to attract the buyers early enough. The best buy is always during pre-launch offers.

• Home Loan : Taking financial help from banks/financial institutions. Usually 85% of the total cost is approved for loan and the remaining 15% needs to be provided by the buyer. A trick used by builder to get you more than 85% loan is to show the bank a cost higher than what he sells you, so that you get 85% of higher projected value, ensuring you get more than 85% of the actual cost.


• Pre-EMI : EMI is the monthly outgo against any loan that you take. In housing loans, there is a concept of pre-EMI, where the actual EMI starts only after possession, but the builder has already taken money from bank (on your behalf) for construction. Since banks have already given (disbursed) the money, they want a simple interest to be charged till the time you start actual EMI. This is called pre-EMI. It is just an interest payment and it does not reduce your outstanding loan. This is total waste of your money. Sometimes builders are willing to share the pre-EMI on your behalf.

• Floating Interest Rate : The interest rate on the home loans. This is a compounded interest applied annually. It is called floating since the rate at any time depend on the prime lending rate (which in turn depends on so many economic parameters). So the interest rate can go up and down causing variation in the monthly installment to be paid to the bank. It is a huge blow during the rising interest rates. You can opt for fixed interest rate but they are usually higher than floating interest rates.

• Pre-Closure : If you have surplus money, you can close the loan earlier than the stipulated tenure. But banks usually charge some penalty for pre-closure.

• Approval Papers from builders : Parent deed, joint development deed, BDA approval, sanctioned plan, occupancy certificate, commencement certificate, registration of land, khata, tax paid receipts, clearance certificates from govt bodies like Electricity Board, Water and Sewage Board etc etc. These are typically the papers a builder should possess to avoid any legal hassels during the construction and to the buyers afterwards

• Possession Date : The actual date when you become a proud owner of a house

• Grace Period : A buffer of time after Possession date which accommodates any delay on either side.

• Premiums : Some builders, or rather all of them, ask for a premium for corner units or upper floors. In other cities, lower level floors cost more than the higher ones but in Bangalore it’s the other way around. This premium rate is typically 20/- to 50/- per sqft per floor.

How to buy apartment in Bangalore - I

When I came to Bangalore, the first thing that struck me is that everyone is (and literally everyone) is buying either a plot/flat or independent house etc. When you see so many people surrounding you looking out for 'investment opportunities' in housing/real-estate, somehow you are bound to get influenced. I was also caught into this 'rat-race'. The emotion that controls this rampant buying is the same emotion of human beings that plays a crucial role in stock-markets i.e. greed. I have heard so many stories of people buying flats at 15 lakhs few years back and the same flat now said to be costing more than 70 lakhs. The biggest mistake people do while buying a house is "not researching enough". I got into the same trap, but thankfully got out of it just loosing 10 K Rs (cancellation of booking amount).


In these series of posts, I will try to put my experience of "trying" to buy a flat in south bangalore. These tips typically apply for people buying their first house. Some of the general tips/gyaan would be useful for buying across the entire country.

• Fix your budget before seeing any property and stick to it at any cost (very difficult).

• Never think of buying the first house as investment. It should only be considered if you want to live in it.

• Don't think of "tax-benefits" while buying your first house. It only comes into picture when you are buying a house in a city of non-residence. Otherwise the tax-benefits of home loans will be compensated by no HRA benefits.

• I have heard this a lot "Always go for big builders, since that assures less pain", this is a myth. Buying a house is a lot of pain and efforts, it does not matters much whether the builder is big or small. All builders are crooks and are out their to make money
  

• Getting a good house is more luck than anything else. You got to be lucky to get a house without much hassel

• Big brand names do not necessarily mean higher resale value. What matters more is the location and the construction quality.

• Flats do appreciate in value but only up to a certain point. Say the original price is 2000/- per sqft at the time of booking. It might go to 2500/- by the time the construction is over and you register it (2 years). From that point on, the appreciation slows down a bit because it is now a second-hand flat. It might go to 3000/- (5-10 years) if the location is good but that’s generally the limit. After that the wear and tear on the flat bring the value down.

• Also the stories of astronomical price increase is in realty a myth. Imagine a 2BHK flat in say Bannerghatta Road (near IIM) costing 15 lakhs in 2002 (five years before) is now costing 70 lakhs (as per the market rate in the same apartment complex). But is that a real re-sale value of the flat? Do you think there would be any takers of the flat for 70 Lakhs when the same type of flat (in terms of quality/space etc) would cost me around say 30-35 lakhs near the same locality (Meenakshi Temple)? Since the real-estate market is on the upwards, a new buyer would always look at the new projects rather than buying a second hand flat. If the market goes down, then the projected cost of 70 Lakhs would also come down steeply.

• Always go for home-loans from reputed financial institution (even if you are capable of), since that ensures a cross check of documentations obtained by builders. For example, I booked the Ittina Mahavir project in electronic complex, HDFC refuses to give loan to any of the Ittina properties. When we enquired further, we got to know that there are lot of BDA notices against illegal activities from Ittina.

• Read all the documents before signing (even signing the booking form). It is easier said than done, since the marketing department of the builder will ensure that you get engrossed in the sugary talk so much that you believe anything he/she says and sign without reading.

• Go through agreement copy atleast 5 times with your family lawyer it’s almost 25 to 30 points and usually its mostly one sided.

• Make sure that following things have been put into agreement
• Builder will not demand for any other payments other than whatever has been specifically disclosed to the buyer in writing.
• Clear possession date in writing
• To avail housing loan from a bank or a financial institution of buyer choice. Usually they force you to get a loan from private banks

• Go and talk to the last completed project of the builder and talk to the owners.

• You may not be Vaastu believer, but purchase a flat which is vaastu compliance just to ensure its re-sale value.

There are so many things to keep in mind while buying a flat that you need to burn your fingers to actually understand everything. The most important point to keep in mind is not to get awed by the glossy advertisements from the builders (usually there is always some hidden constraints). Also don't ever think that if you dont book a flat now, you will miss the opportunity later. When I wanted to buy a flat in electronic complex, I talked to a friend, who has booked a flat at 2400 per SFT some nine-ten months back. So when I got an offer of 2350 per SFT, I booked it immediately thinking that this is the best buy I could ever get. Now few months down the line, I am seeing offers of 2100 per SFT also. If you do your research properly(which implies a lot of pain), you can get a good bargain even in the most "real-estate saturated pockets" of the city.

Active Vs Passive Investing

There is a very interesting discussion happening on Prem's blog. The moot point is that how much difference in returns one can make between passively investing (not your main livelihood) and actively investing. So if the difference is really huge, does it make sense to switch to active investment leaving your other income streams.

As per my thinking, all the number talk doesn't make sense unless you define "active investment". Do you consider job of a mutual fund manager an active investment? I would say no since he is getting a salary for making all the investment decisions and he is not directly affected by those decisions (of course his reputation will get a toss but he still will get the salary at the month end).

The moot question here is where it is good doing something as a part-time business or full-time business. A full-time business will require

a) Capital
b) Love for the business (termed as passion)
c) Risk-taking ability.

So the ups & downs of business will apply even to "active investing", and there will always be a learning curve. Nothing comes free (as in free beer).

Recurring Deposit

The income-tax filing is over for most of the salaried people and everyone now must have taken a sigh of relief with all the paper-work and headache now gone till the next year. It is really a great pain to collect a lot of money during the Feb-March period for putting it in various tax-saving schemes or paying life-insurance premiums for submitting the I-T proofs. It sometimes drains out almost entirely your salary to 'invest' in all these schemes.

Once you do that you make a promise to yourself that from next year I will save money from the very beginning so as to avoid such hassles, but every year it looks like the same old story. If you are stuck in such a cycle, then I assure you that you are not the only one.

The reason for most people not able to save money every month is because

a) People do not plan tax-saving unless made compulsory at year-end
b) There is no mechanism which automatically deducts certain portion of salary to be kept for year-end tax investments

I have realized that point (a) is very difficult for even the most disciplined financial planner. But there are always schemes which one can opt to materialize point (b). One such scheme is the recurring deposit offered by many banks.

For example UBI offers a recurring deposit at 9% PA for a period of one year. This for me a perfect way to put aside money every month in a non-risky investment earning a decent returns.

Let say I have to invest 1,00,000 Rs every year around Feb in various tax-saving policies. I opened a recurring deposit of 10,000 Rs from May for ten months. So in Feb I don't have to squeeze my other commitments to make way for the tax-saving schemes. It is very easy to time your recurring deposit maturity at the same time you would need funds. You can even open a recurring deposit in the same bank that your salary comes into and ask for a direct debt. This way every month you would have less money to spend, but that automatically will take care of your year end investments.

The same mechanism can be used for any of your short-term needs.

PS: Surprisingly for me, HDFC doesnt have recurring deposit scheme.

Back to Blogging

Life was bit busy for me in recent times and that is why I was away from blogging. The biggest motivation for blogging (any blogger would vouch) is the encouragement given by the readers. It not necessarily be praise all the time even brickbats are welcome. I was especially elated to see Gautam Satpathy putting up some comment here. I have been regular reader of his blog and it is sheer pleasure to read him. Hope I continue blogging and try to improve upon it.

EMI calculation using Excel

I mentioned the formula used to calculate an EMI, but putting values in the formula and calculating it is a cumbersome task. So I did some research in Microsoft Excel and found out that it can done quite easily in excel.

EMI calculation in Excel

Step 1: Open the excel sheet and locate the fx button

Step 2: In the pop-up menu, click on Financial Catergory

Step 3: In the Function Name click 'PMT'

Step 4: A box will appear as shown, fill in the values mentioned and voila you get the EMI.

Interest Component of the EMI

• Just choose the IPMT function instead of PMT

Prinicpal Component of EMI

• Just choose the PPMT function instead of PMT

How EMI is calculated!!

I decided to purchase a house in Banaglore (an extremely tough task) and the first thing that struck me is equated monthly installment or EMI. This is the single most important parameter while taking any kind of loan. This is the amount outgo every month from your personal finances which will cover both the principle as well as interest.

I talked to few people and everyone is bit confused on how EMI is calculated. It is really simple and just few steps would enable you to calculate EMI at your end.

So here is a rather simply formula for calculating EMI.

You would wonder why EMI is called "equated", the reason is that EMI is nothing but loan amount plus total interest divided by loan tenure. If that is the case then why this complicated formula. The reason is because as you keep paying EMI, some portion of EMI goes as interest but some portion goes as principal repayment. So if you pay an EMI of Rs10,000 for a house loan, not the entire Rs 10,000 would go as interest payment, but some portion goes as principal repayment, which essentially reduces the principal on which further interest is calculated. It is extremely important to understand what goes for interest and what goes for principal repayment.

It is very clear (for mathematically inclined) that when Loan Amount goes up, so does the EMI. Similarly if the interest goes up again so does the EMI, but if 'n' (loan tenure) goes up, EMI reduces. A note of caution, a low EMI for longer period does not necessary means a good bargain. A good bargain depends on your requirements as well as the total interest you pay over the entire loan tenure.

Another thing to keep in mind is whether the reduction in loan amount happens on monthly basis or yearly basis. Any loan which reduces the principal on monthly basis should be given preference. A monthly reduction implies less interest payment from next month onwards, definitely a huge savings.

Also usually interest rates comes in flavors of fixed and floating rates. A floating rate changes based on market's prime lending rate (PLR). A fixed rate stays fixed for the tenure of the loan. For a longer period of loan, my personal preference is always fixed interest rate, even if it is 1-2% higher, at least the monthly outgo is fixed, so planning of your outflows can be planned pretty well. I personally think that similar to rupee averaging for mutual funds, the floating rate almost remains same as fixed rate over a long tenure of loan. [The floating rate will go up and down and hence your monthly outgo]. And for short tenure loan, in a high interest regime, go for floating rate, but in a low interest regime choose fixed rate.

How to become Wealthy?

One of the best articles (by Clayton Cramer) I have ever came across. Go ahead read it and learn !!

Online Tax Filing

I recently stumbled upon the website of NSDL (National Securities Depositary Ltd) and got surprised to see the e-payment of taxes.



So clicked the link and found that anyone can pay the taxes online if they have netbanking facility with the mentioned banks.

If you are a salaried employee and have any outstanding tax to be payed, then instead of visiting a nearby bank branch you can directly submit the tax on-line using netbanking.

Dont confuse this tax-filing with return-filing (usually this is a common confusion). This facility is just to submit any extra tax (after TDS) that you are entitled to pay the government. This situation usually occurs (for salaried employee) if he has shifted job within a financial year and has not accounted for previous employer income to the finance department. So when you file the tax return you just need to provide a Challan Identification Number (CIN) obtained while paying the tax online. Pretty neat !!

It is definitely a welcome move from the income tax department.

Mutual Fund Offer Document

"Mutual fund investments are subject to market risks, please read the offer document carefully before investing"

How many times you have heard this or read this in all mutual fund advertisements? Well due to SEBI regulation every mutual fund will flash this warning. I personally think that mutual fund advertisements require a person who can talk at a speed of zillion words per minute before they recruit the guy to read the above statement.

Does anyone really read the offer document? SEBI mandates that as a customer you should read the offer document carefully.

What is an Offer document?

It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. But since it is such a huge document, people rarely read it in entirety.

Key Information Memorandum

So to overcome this distributors usually come up with a KIM. It is shorter than an offer document and provides precious details about the mutual fund. So when you get a KIM, what you should look for as an investor:

Investment Objective

Investment objective will tell you the fund's goal and rationale. This must align with your personal goal and risk profile. For example, you might be looking at a fund which will at the least protect your capital, so reading the investment objective will tell whether a particular fund ensures that.

Asset Allocation

What this essentially gives is the percentage of your funds invested in equity or debts.

Minimum Investment

What is the minimum investment a fund requires. You might be looking at a SIP of Rs100 per month but that might not be available with the particular fund.

Past Performance Data

Although every mutual fund house will keep the warning "PastPerformance is not an indicator of future returns" but that is usually not true. A fund's past performance is a key factor in deciding how a fund will perform. I personally think that everyone should stay away from NFO, since they dont have any past performance.

Every investors must read the historical performance of the fund, and he should be looking at both the long and short-term performance. A fund's performance over a period of time should match with their own investment goals. They must compare the fund performance against that of the benchmark chosen by the fund.

Entry and Exit Loads

This is another most important information, since heavy entry and exit load will eat up into your investment growth. There are also other charges like switching charges or recurring charges or management fees. Over a period of time they can be considerable amount, so be aware of them.

Hope all investors be more aware of the pitfalls of this fantastic investment scheme.

Car dealer tricks

Let me ask you one question, if you have to choose between the following loans for the car which one would you choose:

a) The dealer has a tie-up with various banks who provide you loan at the prevailing rate of 13% for five years and 13.5% for three years. Although it is a huge interest rate (on a reducing interest basis) but its the same across all the dealers of the city. Most banks asks you for a margin amount as a downpayment (something like 10 - 15% of the cost value of the car). The dealer provides you a discount of 10,000 Rs on a particular car model.

OR

b) The dealer has a specific tie-up with a government bank which provides you the same loan amount at 7.75% interest rate for three years. This is almost half of the interest rate in option (a). The dealer does not offer you the discount mentioned in option (a) and all other terms remains same.

Which one you would opt?

Well this is the true fact that came to light when I proceeded with buying a car in the city of Bangalore. I went to the Maruthi showroom (Sagar Motors @ Bannerghatta Road) and inquired about a particular car model. I was told the on-road cost as X Rs. I told them that I want to take up a loan of just Rs 1.4 lakhs and the remaining amount will be as a down-payment in cash (which was way higher than the 10% margin required by most banks). Surprisingly even with so large a cash down-payment there was no special discount. I was told about the exorbitantly high interest rates charged by banks (13% -14%). I went home and talked to few other dealers and everyone came up with the same figures with no additional benefit.

Then one day we got a call from a dealer who said there is a special scheme with UTI bank which will provide loan on an interest of 7.75% for three years. I was ecstatic but was little curious that how could a bank provide me with such a low interest rate when all other banks are charging such higher rates. I asked the details and sure they were providing the loan at aforementioned interest rates, just that the dealer mentioned that he wont give the 10,000 Rs discount for this scheme.

Always do your own EMI calculation

So I got suspicious and decided to calculate the EMI. For a loan of 1.4 L for three years at 7.75% rate of interest the EMI comes out to be Rs 4340, while for a loan of 1.3 L for three years at 13.5%, the EMI comes out to be Rs 4360. In essence both the scheme are more of less the same (just a difference of 720Rs over three years period). It is just a gimmick used by the bank and the dealer to fool the customer with flashing a 7.75% rate of interest. I would suggest do your own calculation everytime.

LIC Credit CardsI

I was rather amused by this news when I saw it on CNBC. A search on Rediff tells the entire story. This in a business jargon is called diversification, when an organization intends to move away from its core business domain. I am not very happy with the news. Looking at the history of LIC, you will notice that

Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

So the basic idea behind LIC is more benign in nature. And somehow I have personally been very wary of credit card companies (Why I hate credit cards or How credit card companies make money) , because their sole aim is to earn money with little care for the customers. So I see this as an evil move for a benign company taking towards becoming a money minded business. This might look like a philosophical and biased logic, but I guess it indicates the threat seen by LIC from the private players. With a 77% share of market, it is till numero uno, but it is facing stiff competition from private players.

I see the credit card move as a step to fight back the competition. Undoubtedly LIC has a strong distribution network, but that is because the name provides a "TRUST" to any customer. The biggest reason is the sovereign guarantee by the government. So a customer wont care much about from whom the policy is being taken and just the LIC name is enough to bring that trust. That is the reason it is still the numero uno insurance provider even amongst the youth. And fortunately it has kept pace with the changing times by being up-to-date with its customer services. The only way I would love LIC credit card if I can gain the same TRUST as LIC Insurance provider. I already have sufferred a lot with the private credit card players and dont want to add the agony with another one, unless LIC can keep its original objectives intact with the credit card business

Conduct business with utmost economy and with the full realization that the moneys belong to the policyholders