What is Sub Prime Lending?

Whenever any of the customer visits a bank asking for loan, every bank in India or abroad will ask for certain documents. These might vary from the type of loan to the various institutes. The main idea behind asking for documents is to ascertain the credibility of a customer from his/her credit card transactions or previous loan transactions and guess the background of customer’s financial capability. 

In India for example, if you try to get a home loan, you are asked your salary certificate and other loan details. This will indicate the capability of a customer to repay back the loan and also is an indicator of the amount of risk a bank is taking on that customer. The bank earn by charging interest rate on the loan.

The sub-prime lending came because there are lot of demand for loans in the market and the laws were less strict in terms of whom to give the loan. Hence banks started giving money to customers even with poor credit ratings. This implies that banks took more risk (knowing that the possibility of the repayment is less) as per the history of the customer. This is done, so that banks can charge customers higher interest rates and can get a huge profits. The idea is that even if few percent loans get defaulted, you still can recover the losses by charging those extremely high interests.

Subprime loans can offer an opportunity for borrowers with a less-than-ideal credit record to become a home owner. Borrowers may use this credit to purchase homes, or in the case of a cash-out refinance, finance other forms of spending such as purchasing a car, paying for living expenses, remodeling a home, or even paying down on a high interest credit card.

There was also a lot of fraud involved in this sub-prime lending. Since a bank can charge higher interest and administrative charges on a sub-prime lending, they even started giving such loans to borrowers who were well with their credit history.

Imagine if most of the borrowers start defaulting on the sub-prime loan taken. The lenders would suffer significantly and that is what happened. The financial complexity of how such simple thing can lead to the current US financial crisis is difficult to understand.

Saving Money from 10 Free Softwares

I recently bought a black HP Pavillion desktop for around 30K INR. It came with a “Starter edition” of Microsoft Vista, and lot of pre-installed HP Junk. It is natural being a techie to start surfing for free software for replacing some of the junk that come with Windows and to save money from buying those expensive softwares. Here is a list of softwares that I daily use, some to increase my productivity, some to replace pre-installed softwares and some to save money instead of buying those expensive softwares :

1) K-Meleon Browser : No doubt Internet Explorer is junk and can be harmful in terms of unauthorized scripts or pop ups. So most people recommend Firefox. I love it, but with FF3, is extremely bloated and eats up huge amount of my RAM. I tries Opera and Safari but didn’t like anything. Then I found K-Meleon, which is based on Gecko layout engine. It comes with few useful extensions too. It is fast and have some unique features too. A simple example is switching proxies with one-click. I use different proxies for my home and office, and using K-Meleon, I can switch between them in just one click. Very useful for me. 

2) CClearner : A pretty neat system optimization software. It removes unused files from your system - allowing Windows to run faster and freeing up valuable hard disk space. I have used it without any side effects and it helps me keep Windows stable.

3) Launchy : Launchy is a free windows utility designed to help you forget about your start menu, the icons on your desktop, and even your file manager. A very handy tool, just press Alt-Space and it pops up, type whatever application you want to open say “word” or “vim”, it even shows various options. No need to go through “Start –> Programs” etc. Very productive and time saving and best mouse-free.

4) GNU Image Manipulation : GIMP is a free image manipulation software. It is extremely rich in features and can be very handy for amateurs as well as professionals for imagine retouching or any manipulations of image. It can be used for fun as well as for business purposes. Lot of people feel that it is very clumsy to use, but once you get hang of it, you will love it. You can do extreme makeover using GIMP, as the following example illustrates :

It surely is a replacement for Adobe Photoshop.

5) VLC Media Player : It can replace the default Media Player on Windows and is very versatile. It can almost play everything. It can play various audio and video formats (MPEG-1, MPEG-2, MPEG-4, DivX, mp3, ogg) as well as DVDs, VCDs, and various streaming protocols.

6) Outlook Attachment Remover : If you are stuck with Outlook as I am (although ThunderBird is considered as it’s replacement, for me it botches some of my emails), this free outlook attachment remover is extremely handy, especially if you get lot of attachments in your emails. This became very helpful for my office system too, since it extracts emails from outlook and keeps it in a pre-specified folder and still keeps the link intact in the email. Very very handy.

7) AVG Antivirus : Instead of spending money for Norton/Symantec Antivirus, the same kind of protection can be obtained by installing the free anti-virus software AVG. It provides a really good protection and doen’t consume huge amount of your resources. With Norton, I always had problems that the system runs slower. AVG is super cool and it keeps updating the virus definitions.

8) Office : The worst part of Windows, is that it comes with lot of unnecessary pre-installed products like IE, but it does not come pre-installed with Microsoft Office. You need to pay extra money to get the Office installed. This is where OpenOffice comes into picture. It is as close replacement to MS Office as it can be.

9) PDF Creator : It is a very handy tool, if you frequently write documents and want to share it with everyone. PDF obviously looks better than word documents. Just install the PDF creator and “print” any document to convert it to PDF. Simple!!

10) GNU Cash : If you want to have a software for managing your personal finance or a small business, then don’t go spending those $$ for buying any software. GNU Cash is extremely good and it is free. It uses a double-entry system, which might be confusing at first, but the tutorials are very nice. It will take you just few minutes to install and start going. It will take some time to look into specific features your need, but almost all that is needed is present. I will be doing a full review of the product later in some other post.

Financial Game - Creditability

For my earlier post, I received a comment from RaagvamDutt, telling me about reverse mortgage. I am aware of reverse mortgage and know that it can be handy for old couple with constraint income. It does not contradict my conclusions of the earlier post, rather it compliments it.

• Buy a house at old age, for living in it, and if you income is not sufficient, put the house on reverse mortgage, to earn that extra income and still live in it.

I just downloaded a new financial game called Creditability. It looks to me a pretty interesting game. Here is what the website claims :

Creditability is set in four different environments: university, a shopping precinct, TV studios and a village. The purpose of the game is to successfully complete the various tasks and challenges within each environment, building up knowledge of money, credit and debt.

Here are some screenshots :

                                  

Why NOT to buy a house - II

I received some comments on my earlier post. Jyoti said :

Your post lists all the valid points for "Buying a house after taking home loan at very high interest rate". But one point is missed - taking a house a investment and selling it after making decent profit and in process accumulating some fund.

I did mention this point in my earlier post

If you really had all the time in world to buy a house and sell it after 2-3 years, then I think you should go ahead.

Jyoti pointed out that a house can be helpful for old people who have no one to take care of – Sell the house and live on interest OR put the house on rent.

Well first thing, if you are old with no earning and entirely dependent on your children to support you, then it is for sure that either you really goofed up prioritising your financial goals OR you had blind trust on your children for support. I agree that there are lots of people who fall under this category and this is an important lesson of all of us in our generation.

Let me tackle her options (assuming I am that old person):

1) Put the house on rent

If I put the house on rent, then I too have to live in a rented apartment, unless I have more than one house. I can gain only if my rent is less than my tenant’s :) Simple maths. If I want to do that I have to lower my living standards. For example, if I have a house which can be put on rent for 14K, then to successfully live on that rent, I need to stay in a house with a rent say 4K-5K. If I as flat owner want to charge more rent, so will be my flat owner :) Doesn’t make sense…. (Another option exists, you rent out the flat in a metro and go and stay in your village/small town, but that is my whole point, if you have to do that why not purchase a house in the same village/small town, it wont cost much and you can use the money earned during lifetime in some better investment avenues)

2) Sell the house and live on interest

This is only possible if you earned a handsome while selling. Imagine for example, today you buy a flat in Bangalore costing 25-40 lakhs, when you retire (30 years from now) how much you expect the returns? Keep in mind that when you sell, so many factors can kill your calculations. Imagine the plight of people who bought houses near old airport (in Bangalore) few years back, now with the airport shifting, the prices have come down, and no guarantee that prices will bounce back and to what levels. I was talking to one of my office-mate who works in Fremont (USA). He was telling me about his friend who bought a house in USA few years back and now when he wants to sell he is finding no takers, he is now even willing to have a loss and sell it. Yes, ofcourse you can gain a lot, but basing your entire post-retirement life on this is not a sound idea (unless you have other investments which can take care of that). BTW, we have not factored the amount of money you have invested over the period in home loans (A 40 lakh house post home loan interest can cost you even 60 lakhs or more based on interest rates). And what about the inflation? Say your 60 lakhs house (including interest) sells at 5 crores (just a random number), do you think that would be enough after 30 years?

As an example, my dad started earning Rs 500 per month 40 years back and lived handsomely (he used to say lavishly) despite the fact that out of Rs 500 he used to pay Rs 200 for his brother’s studies. So essentially he stayed lavishly in Rs 300. After 40 years, i.e. now, if you want to stay that lavishly probably you need around Rs 1 Lakh (just a guess) in a metro. Let me lower it to Rs 50000 [post tax]. If you want to be more conservative in your living, you can even live in Rs 25000 [Rent, travel, grocery etc etc assuming no liabilities] That is close to 50 times. So to maintain current living standard you need may be 50 times that you earn per month. So Rs 25K now, would translate to Rs 12.5 lakhs per month (what about inflation causing rupee depreciation). This is the interest you need per month, so you need a whopping Rs 150 lakhs per year as interest with investing Rs 4.4 crore (34 % per annum). I hope my calculation is correct :)

But at any rate assuming at old age and no responsibility exist, just to live at the same standard, you can not do it alone on a house.

Conclusion:

• Buy a house for living in it, at old age.


• Don’t expect your children to stay with you (unless you keep them dependent on you)


• Don’t just buy because everyone is buying, think long term, where you want to settle in your old age. Timing and location are important.


• Buy a house which you can maintain. In old age, it is difficult to spend huge money on maintaining big house. Security is also a concern.


• There are so many investment avenues other than house, think about that. In old age, big house won’t help, but surely the life long memories of your world travel can help. Spend money to enjoy life, and not to get imprisoned by the enormous house loan burden.


• Keep accumulating small portion of money and buy a house when you are in your forties. At that age, your will be at the peak of your responsibilities, you can have your priorities clear.

If you are earning in dollars or have loads of money, then only buying a house makes sense as investment.

Why NOT to buy a house - I

If you are living in Bangalore (or for that matter any Indian urban city), everyone would be telling you to buy a house (in case you haven’t already done). I talked about this earlier.

Last month I met my old friends from IIT-K. Some of them are still unmarried and the priority for them is to change their marital status. For those who are married, they are thinking of either buying a house or already have booked one.

One of my friend ‘S’, is at the stage of becoming father and he recently bought a house worth Rs 40 Lakh in Bangalore. Despite the steep price it is just a 3BHK apartment, and the home loan costs him more than Rs 40K for next 20 years. Recently with the interest rate rise, the tenure increased to 25 years and EMI by Rs 600.

I am not questioning his decision, since it is a personal one, but if we look purely in financial terms, it is a double whammy, an exorbitant EMI outgoing every month and the expenses of fatherhood. It is a different matter that he is very cool about it. But for a paranoid like me, it is like choking yourself.

A 3BHK apartment in say close to your office would not cost more than 15-18K, while the apartment not being in so close to your work location increases the travel cost. With EMI of Rs 40K + Petrol Expenses would be humongous.

Ofcourse there are lots of argument for and against it, let me think through it :

1) Buying a house is like building an asset

Has anyone thought why we want to build an asset? My father worked as professor in a little known town “Indore” for almost 45 years. He started at a meager Salary of Rs 400 per month and reached to Rs 10K after so many years. The pension he receives now is Rs 5K per month. In such a small amount he built two houses, but all his children, no longer want to stay in Indore, since more opportunities exist in other cities. My parents spends most of year with each of us, and hence the two houses he built are of no use to any of us. We sold one and he is earning interest on that amount.

So how does the “asset” helped him? I guess rather it deprived him of the much needed “extra” money he might have used during his younger years.

So for sure, the “asset” can not be for your children. Also I would rather not believe that our children would be “emotionally attached” to the house. Bollywood funda “Es ghar ke saath hamari bachpan ki yaadein judi hai”. I guess, most of their formative student life will be spent in hostels in India or abroad.

2) Buying a house gives you security

This asset takes months to sell off, so in case of emergency, it is of no use as a liquid asset. If you are salaried, then you will rarely come across situation where you would need so much money (Rs 40 Lakh etc) to sell a house (unless some medical emergencies come, but then medical insurance should help rather than the house).

It also cannot give you security if you loose your source of income. The logic people have is that if you loose your job, you don’t have to pay the rent, but don’t you have to pay the EMI? Try not to pay your EMI for 2-3 months and then see the volte-face of the same bank who pestered you into getting that loan. So till the time your loan is over, in next 20 years/25 years, you better not loose your job.

3) Buying a house is like investment

If you have investment in mind while buying a house, then why not stock markets. Everyone agrees that investment in stock market has overshadowed any other form of investments over a long horizon (say 10-15 years). So why not build a corpus based on stock markets. If you really had all the time in world to buy a house and sell it after 2-3 years, then I think you should go ahead. But may be you better do it on a full time basis. This can only help if you buy just before the booming time and then sell if after 2-3 years. With markets saturating in Bangalore, it does not make sense, if at all you want it as an investment, then focus on emerging areas like Mysore, Pune etc.

4) Buy a house now before it is unaffordable

I simply don’t understand this logic. The assumption here is that your salary will never increase. I think many of us came from smaller cities, and because of lucrative money we came, so even many years from now, you will get opportunity and if you grab it you will earn much much higher than you do today. Also if the assumption is that salary will not increase, you anyway cannot survive with a house loan. Interest rates can go up based on many external factors and assuming salary remains same for next 15 years, won’t you be expanding your family, kids & their education etc etc. So I guess the equation remains same, but the perspective of how you look matters. Mumbai is considered saturated in terms of real-estate, but even now you can buy a decent house (after so many years of saturation). I know because my brother recently bought an apartment in Mumbai.

To be continued …

Ha ha !! Best Post !!

I was browsing through some blogs and found Marie’s Blog. Checkout one of the most interesting post. I was ROFLOL.

Another interesting post from her blog. Four Stages of Your LIfe you need to invest.

What is Indemnity?

I am a big fan of Outlook Money, b’coz they explain most of the things in simple terms. If you ever took an insurance you might have came across a word “indemnity”. Most of the us either ignore it or say “What the damn is Indemnity?” and chances are that even your insurance agent is not aware of the meaning.

Outlook Money, explains it in simple words, here is how :

• This applies to non-life insurance policies
• Say, you bought a car insurance. The car costs you Rs 5.5 Lakhs
• The insurance policy will say that it will cover loss due to damages or theft.
• Does that mean that you will get Rs 5.5 Lakhs if the car is stolen at some later date (say after 3 years)

If this would be true, every car owner would be buying a car and either making sure the car gets stolen :) or damage it themselves. Here comes indemnity rule to save the insurance company. What this concept says that

“Compensation paid by insurance company will never be greater than the value of the loss at that time”

Essentially it makes sure that whoever insured the car will never get monetary benefit out of it. Hence the  insurance company is only liable to pay for the value of the car at the time of loss (post depreciation and wear/tear). Interesting !!

Home Loan Trauma, Some Tips

If you had taken a home loan in recent time, you would be an extremely worried person. With rising interest rates, you would be cursing your bank, the Reserve Bank of India, government, even Israel for raising oil prices and what not. Cursing never solves a problem, but a pragmatic rethinking will surely help. Typically when home loans are taken the household budgets are anyway streched to the hilt, so even a small increase will be felt very sharply. Instead of grunting about the root-causes of such a massive increase recently, it would really help if you worry about what your next step should be.

Facts: Interest rates are up and so is inflation. Your home loans outgo is same (without any reduction in the burden) and you also end-up paying more for the daily household items. But your salary is same.

Effects: Your incoming money is same, but your outgoing is increasing, including reduction in your investments. (an 8% return on your fixed deposit, now is earning negative since inflation is going to be around 9%)

What to do? Here are some easy steps for pondering over and including as your action items:

1) Think of those FDs or post-office investments lying around earning negatively, so why not unlock them and pre-pay your home loans. Make sure you recalculate your emergency funds and if there is an excess, use that for prepaying the loan.

2) Think about that huge amount of jwellery your wife accumulated over the period of time, it would make sense to partially liquidate it and use that to reduce your loan burden. This will give you some breather in your cash-flows with reduced home loan outgoings.

3) Re-estimate your insurance needs, if you are under-insured, seriously think of buying term-insurance to cover any unfortunate occurances. If you are over-insured, you can think of reducing few of those unnecessary policies which is eating up your expenses without much value addition.

4) Dont be a miser, but if you are into the habit of going for weekend parties or weekeend travels stop it for just few months. It doesn't cost much for each single party or travels or movies, but colelctively it can offset your increase in home loans.

5) Start a recurring desosit for next 3-4 months and whatever amount is accumulated, use that to prepay your loans.

6) Take out all of your credit-cards including the one your spouse has, keep it inside a locker. If you dont have easy access to credit card, you won't spend. This can help reduce your outgoing on those monthly credit card bills, which never seem to go away. Once you are out of this crunch you can take them out again.

7) Redution of car loans should be given more priority than home loans or education loans. You dont get any tax benefit on car loans and you are not building any asset.

Money Saving Tips

Over the period I have realised that there are lot of places in our daily life where we can save money. I am not advocating being a miser, but avoiding carelessness, does have its own benefit. There are lot of times, when we just spend money because we enjoy, for example, going to flashy restaurant once in a month or purchasing that sexy negliee to impress your wife :) or buying that expensive cellphone.
To me personally, these are definitely NOT wastage of money. It is always a good buy because it gives you happiness or satisfaction. Even though any of these are not assets building but it gives immense pleasure which is why they are worth doing it.
I am not going to talk about stopping such impulsive buying or focussing on building your assets or making your money work. Most of us get into this because of either peer pressure or guilt. For example, in Bangalore everyone is buying a house, despite the fact that they are forking out as high as 50% of their salaries and with increasing interest rates, it is pinching harder. I have realised that the main reason a young couple in 30s want to buy a house is simply peer pressure, since everyone in their circle is buying a house. A house of your own is important but not at the expense of enjoying your life.

Here are some of my money saving tips:

• Keep a box and put whatever change(1-2 Rs, coins etc) lying around into it. It not only helps to save money but also very useful when needed
• Save electricity and water usage. Make this a habit and inculcate in your children. Unless you get that habit, your children wont. It not only saves your money but the environment too.
• Experiment with brands and defy the marketing gurus. Dont be shy to experiment with brands, sometimes the rival brand has a good product and cheap too.
• Buy daily usage items from near-by stores, even if bit costly. The saving of fuel and time of going to large supermarkets will be worth it. Also everyone tends to buy more in super markets than near-by shops.
• Repair your motorcyle/cycles and start using it rather than using car for every small distance you go. It will also save your time during traffic hours.
  
• You dont have to pay exhorbitant money for 1Mbps internet connection, instead opt for 128Kbps/256Kbps, these are also good speeds.
  
• Turn veggie and non-alcoholic for one or two weeks in a month. It is good way to stay healthy too. Boozing/Partying every weekend is not compulsory.
  
• Start exercising daily and brush your teeth twice a day. How does it saves money? It will avoid your medical expenses over long term. It also saves money on life insurance.
  
• Share/Borrow with your friends the DVDs & books, instead of buying/renting. It is a win-win for all and you save money too
• Dont buy softwares unless necessary, spend time in searching for some alternative freeware software.
  
• Be aware of reward points earning on your credit cards. Most people dont bother about it. Some few months back I purchased a full flight tickets just using the accumulated reward points.
• If you can refinance your loan, even if getting a 1% reduction in interest, do it. It will really worth, on cumulative basis.
• If your office provides Sodhexo coupons, use them and dont feel shy to ask even in large restaurants/shopping malls, whether they accept them. It is as good as your currency and its tax free.
• You can save substantial amount simply by paying entire credit card bill before due date. Only use the interest-free period (30days - 45 days) rather than revolving credit. When you make a credit card purchase make sure you can pay it withint 30 days.

Wall Street (1987)

I recently saw the old movie Wall Street (1987).

It is movie by Oliver Stone, a young stock broker Bud Fox (played by Charlie Sheen) who is desperate to succeed. He idolizes Gordon Gekko (played by Michael Douglas) who is a ruthless and legendary Wall Street Player.

The main character is Bud Fox, but Gordon Gekko becomes the ultimate hero, especially with his classic dialogues.

Interestingly, there is a talk of a sequel to Wall Street, called Money Never Sleeps, which will bring back Gordon Gekko.

Here are few of the famous quotes by Gordon Gekko in the movie:

• The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works.
• You see that building over there? I bought it three years ago. My first real estate transaction. I sold it ten months later and made $800,000 profit. It was better than sex. At the time it was all the money in the world. Now it's a day's pay.
• It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or gained its simple transferred from one perception to another.

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.