Is your house really an asset?

If you ask this question to Indians, the answer is an emphatic yes. It is a prevalent notion that buying a house is akin to building an asset. The desire and need to own a home is hard-wired into the Indian psyche. It might be a good idea to pause and think over this question again, Is your house an asset? To answer this question, you need to define what is the meaning of an asset!! But defining asset is not easy since there are numerous definitions - two interesting ones are :

1) An asset is something that you own, where as a liability is something you owe.

2) An asset is something that generates money for you, where as a liability is something that takes away money from you.

The second definition sounds very logical and if you go by this definition, almost anything you own is NOT an asset. This controversial definition was given by Robert Kiyosaki of Rich Dad Poor Dad fame. This definition leads him to conclude that a self-occupied house is not an asset. Watch this interesting video on Youtube :

Robert Kiyosaki explaining that house is a liability!!

I don’t exactly agree with Mr. Kiyosaki even though I am inclined towards not buying a house. I believe that calling house a liability does not change anything apart from turning the traditional thought process on its head. The ultimate goal for buying an house is a) Personal satisfaction of owning a house b) Increase social status.

Indians think of the house purchase as a form of investment, which is incorrect. Let us step back and think about why anyone wants to invest their money? The whole purpose of investment ( be it in stocks, mutual funds, FDs, house or gold etc. ) is to beat the inflation and grow the money. The intention is to increase the financial net-worth so that a person can enjoy life and be mentally peaceful during any emergencies.

So is buying a house an investment? Yes and No. Let me explain this.

You may know of your friends & family who bought a house very cheaply few years back and the current price of the house is quoting much higher. But are they enjoying their current life or are they financially stretched owing to a huge chunk of earning going as EMIs? Is this sacrifice of constraint in present living state worth the investment for future self-owned house? If you are stretched too much today, then your house is definitely a liability.

Another question to ask is, when someone sells a house what happens to the money earned? Assume one of your friend bought a house for 30 Lakhs say five years ago and now it is quoting at 70 Lakhs. If he sells the house today earning a cool profit of 35 Lakhs (minus bank and other miscellaneous expenses). What happens to this 35 Lakhs? The most probable answer is that it is spent on buying another house. Did you know of anyone who sold his house pocketing a huge profit and then spent that money on a foreign trip or paid for medical emergency? In majority of cases once you buy a house, the money invested just remains as a house, you sell this to buy a bigger/better house.

If you think about any other investment, the same does not hold true. Any money earned through stocks or mutual fund immediately goes into some expenses be it for children’s education or buying that big car. But a house remains a house even across generations and the money is locked in that house. So any house bought on a huge loan only turns out to be an asset for the next generation (since they got it for free) and not for the person who bought it. I strongly believe that with nuclear family being the trend and with more globalized world, children will not care about the ancestral house and may not be living in it.

As a fact, most people who buy houses/apartments on huge loans are taking significant risk compared to the returns given by that house during their lifetime. Thus to me it implies that house is a liability.

A rough indication below will indicate that a house bought on loan cost much more than it seems :

• Down payment in cash [the cash gets locked up even before you are living in that house]
• Monthly EMI [Major portion of EMI is interest in initial years]
• Intermediary Fees [if bought through a broker]
• Miscellaneous Fees [e.g. lawyer fees, society fees, loan processing fees for banks]
• Government dues [registration fees, electricity charges, house taxes, VAT/service tax]
• Premium paid for Insurance of house
• Maintenance/upkeep for the house

An important point to note here is that typically the amount of money (interest) you pay during loan tenure to the bank, for taking home loan is approximately same as the principal (~purchase price of house). The worst part is that EMI usually follow the upward trend, as the cost of fund increases for the bank, making the house much more costly to the end-customer.

Hence buying a house may become a liability rather than an asset due to the inability of buyer to identify and understand the risks involved. This is actually true for any investments but for house purchase the stakes are much higher and risks runs much deeper.

Here are some tips to make your house an asset rather than a liability:

• Try to purchase a house which is priced a little less than what you can afford. Keep some buffer rather than stretch your finances.
• Keep a target of 100% ownership in next five years
• Buy a house which is 2-3 years old or new but fully completed. An under-constructed property is certainly more risky & hence inherently costly but it may seem cheaper upfront
• Buy a house when you can afford to pay 30% or more down-payment and plan to pre-pay the loan within 5 years
• Better to buy a house in tier-II city and rent-out the house rather than make it self-occupied in tier-I city. You can save on tax that way and also avail HRA.
• Stay on rent in good locality to enjoy your present life. The rent from your house in Tier-II city should compensate for the expenses incurred on that house.

Some related resources:

Real Estate Bubbles and California's Economic Growth  Part-1, Part-2, Part-3

Buy Vs. Rent calculator Link here

Some old posts from this blog

Link1 : How to buy apartment in Bangalore?

Link2 : Get rich by staying in rented house?

Link3 : Reverse Mortgage doesn’t work in India?

Link4 : Real estate real returns?

Link5 ; Buy Vs. Rent 

Can you afford to loose your job?

This is an interesting question asked by Deepak Shenoy on his blog. I wrote a post on similar lines almost two years back (surviving layoffs), although I could not complete the post. Interestingly cutting expenses is not the advise he wants to give. Here is the quote from his blog

Why aren't you telling me to cut expenses?

I could, and this is advice you will get all over the internet. Cut your expenses, hunker down, don't eat out, sell the car and take public transport, change clothes only every other day and so on. Yes, you can do this. But this is easy preaching. It's not practical because you will do it anyhow, if you have to……

Cutting expenses is temporary and defeating. Sometimes doing so gives you a false sense of security - such as: if I cut this and that, I can survive two years! Yes, but like the joke goes:

Preacher: If you stop drinking, the women, the eating out, sweets, salty and fried things , you'll live to be a hundred!

Patient: But what's the point if I can't do any of them? ("Toh jee ke karunga kya?")

Don't do it unless you absolutely have to.

I dis-agree to some extent. Here are my  comments to his post on this. I know that advise on cutting expenses is spread all over internet. The point is not to cut down everything and live like a sage. It will not be practical, but reducing expenses by certain amount will, not only help financially but also help mentally. I know of folks who go out dinning almost 3-4 times a week, which can be reduced to 1-2 times a week. One of my friend goes out for shopping every weekend. It has become a ritual to him. With a job loss you can skip 1-2 weeks in a month or you can reduce the amount that you used to buy every week. It is all about striking a balance and keeping a certain check on your expenses.

I would rather suggest to act pro-actively instead of re-actively to a job-loss. It is well known that job-loss is going to be very common in coming years. So isn’t it wise to prepare for it pro-actively during the time you have a job rather than to react after a job-loss? Here are some tips to prepare pro-actively while you have a job:

• Keep an emergency fund, but do not dig into it unless it is an emergency.
• Get a  good job-loss insurance if available
• Have a personal family health insurance, since with job-loss your corporate insurance also goes away too
• Do not dig into your PF (question was asked on Deepak’s post), It is necessary to understand the importance of PF, which is for building corpus for post-retirement rather than emptying it for a temporary situation of job-loss
• Continue to develop your professional skills (even if you have 20-30 years of experience)
• Develop some hobby and get deep into it. You will hear numerous examples where hobby gets converted to a business or earn extra income
• Nurture a good network of friends (more specifically in your industry)
• Try to have a work-life balance and spend time on maintaining good health. Illness during job-loss is not going to help you
• Everyone understands the importance of diversifying investments, so for those who are not married it may not be bad idea to think of a similar diversification when you get married. Choose a spouse working in a different industry rather than your own. If you are a software engineer, diversify by marrying a fashion designer or an architect. It will spread the risk of both of you loosing job at the same time.

All of these tips are just common sense. But I will accept that it is easy to preach than to follow them.

Do you have any more suggestions?

India also needs a Plain Writing Act

[Photo by : Casey Cripe]

U.S President Obama made the Plain Writing Act of 2010 as a law on October 13, 2010. India needs a similar law as well. I looked at a random sample of policy wording document [PDF] from Reliance General Insurance for a HealthWise Policy. Here is the “pre-amble” part:

WHEREAS the Insured designated in the Schedule to this Reliance HealthWise Policy having by a proposal and declaration together with any statement, report or other document which shall be the basis of the contract and shall be deemed to be incorporated herein, has applied to Reliance General Insurance Company Limited (hereinafter called “the Company”) for the insurance hereinafter set forth and paid appropriate premium for the period as specified in the Schedule.

NOW THIS POLICY WITNESSETH that subject to the terms, conditions, exclusions and definitions contained herein or endorsed or otherwise expressed hereon the Company, undertakes, that if during the period as specified in the Schedule to this Policy, the Insured/Insured Person shall contract any disease, illness or injury and if such disease, illness or injury shall upon the advice of a duly qualified Medical Practitioner require any such Insured/Insured Person, …blah blah.

It is simply a lot of gobbledygook text making it very difficult for average person to understand, and more so with English not being our primary language. This is prevalent in every government document as well as financial document. The content is not written in the form that an average person would understand. It seems that such language usage is often meant to confuse and divert the reader’s attention.

As an example, the above text can be made much simpler in following manner without loosing any of the context or the meaning:

The insurance contract between insured Mr X and Company is formed based on the proposal and declaration submitted. The insurance contract is based on the appropriate premium paid during the period as mentioned in this document.

The company promises to pay amount Rs Y if the insured person Mr X acquire any disease, illness or injury during the policy period. This amount paid is subject to terms, conditions, exclusion as defined in this document. The company requires that the advice of a duly qualified Medical Practitioner.. blah blah…

Jyoti Sanyal in his book Indlish provides an interesting historical reason behind such officialese language in our official documents. As per him, this type of language originated from babus working for East India Company. Unfortunately Indians adopted this not only in English but also in many regional languages.

The advantages are obvious for having a law for plain writing.  It will

• Make it easy for customers to understand what they are signing
• Bring transparency in the process and deals
• Reduce any mis-selling of products
• Reduce legal actions arising out of confusion between consumers and service providers.

I strongly believe that majority of mis-selling happens due to lack of understanding of the terms and conditions while signing up for any service. Hence such a law will be an important step in protecting consumers from fraudulent service providers. What do you think?

Akshay Tritiya & Gold

[Photo by Mr. eNil] So you must have heard that Akshay Tritiya (or Aakha Teez) is falling on 6th May and it is an auspicious day for buying gold jewellery. It is said that buying gold on this day will bring prosperity and increase in wealth. This belief is so rampant that everyone plans and buys (even if token) gold coins/jewellery on that day which increases the demand and pushes the gold prices to exorbitant levels.

But very few really go and check out the true significance of this belief. Here is some history about Akshay Tritiya and why buying gold is not the true essence of this holy day as per Hindu mythology.

If you remember the Mahabharata, where Pandavas had to be exile in the forests. The eldest Yudhishtra was not happy since he was unable to feed the holy sages that he met during his exile in the forest, so he prayed to Lord Surya. The Akshay Patra (inexhaustible vessel) was given to Pandavas by Lord Surya on the day of Akshay Tritiya. The idea is that the vessel will always be filled with food until the Pandava’s wife Draupadi will eat for the day. Another related mythology story is when Rishi Durvasa visited Pandavas and by that time Draupadi had already eaten the food from Akshay Patra and hence no food remained for the great Rishi Durvasa. Hence Draupadi prayed to Lord Krishna, who came and ate the single grain of rice from the Akshay Patra and announced that He is satisfied with the food. This caused the Durvasa Rishi and his disciples to also feel full-stomach.

So this indicated absolutely no connected with the belief that buying gold on the auspicious day of Akshay Tritiya will make you prosperous. The people twisted the mythological story to indicate that anything you acquire on this day will be inexhaustible similar to Akshay Patra and since the most precious thing to buy is gold, which then will remain inexhaustible. It is exactly the turning the table on its head, since as per my understanding the idea of Akshay Patra is to use it to donate the food to the needy and it still does not exhaust (rather than keeping it to yourself). The idea should be that anything you donate on this day will be inexhaustible, but that is now long forgotten.

This twisted interpretation is especially great for people in the gold business since the demand for gold shoots up artificially. The gold prices in India this Akshay Tritiya is expected to shoot up to Rs 25000 per 10 gram. The only people who are going to gain are the people who do business in gold.

There are lot of interesting gimmicks launched by jewellers to attract the customers during this year. As an example their is a “double protection” scheme which allows customers to book jewellery at a desired gold rate and does not impact your cost if the prices go up. In the event of gold prices going down compared to booking rate, the difference will be paid back. This is good for business but not so good for customers. The problem is the confusion created by the various advertisements on such scheme. Can a customer keep the booking rate lower than that day’s price? Will the labour charges be returned back along with cost of gold if the gold prices go down? What if the particular seller where you booked the gold prices, manipulates the gold price on Akshay Tritiya to ensure that it is higher than what most buyers have booked at? Can a customer cancel the booking without loss if some other jeweller is giving gold price much lower than the shop where customer booked the rate?

My advise for everyone is to not go after such schemes without knowing full details and the risks involved. The gold buying should be just one part of your investment portfolio and should be done in staggered manner to meet investment objectives.

Income Tax Payment through ATM

Times of India reported that “aam aadmi” can now pay the income tax through ATM and this is currently available to the UBI debit card holders.

The bank's debit cards holders will register on the lender's website. This site is in turn linked to the National Securities Depositories Ltd which will help validate the permanent account number (PAN) of individuals and the Tax Deduction Account Number (TAN) provided to taxpayers.

After the registration, a customer can go to a Union Bank ATM and can surf the income tax menu which will display his PAN number and ask for the tax amount that is to be paid along with item-wise details of any other amount the assessee may want to include in the tax payment.

On confirmation, the tax amount will be debited from the customer's account and the ATM will generate a receipt with a special number. After 24 hours, customers can log on to the bank's website, submit the special number and print a challan.

This looks great on paper but implementation will be difficult since for most of the salaried class the tax is already deducted at source. The remaining salaried class who typically gets more than two Form-16s would probably require such a service, but there are too many individual cases which the ATM menu may not be able to handle. The main hassle is in identifying and calculating the balance tax amount rather than paying it at the bank branch. Also, it is yet to be seen whether all UBI ATMs across the country can provide such a service. If not, then with this service, I expect a similar queue outside the ATMs as we currently see in the bank branch.

Also the bigger queues are due to the fact that most people will leave it to the end of deadline for submission of Income Tax, which the ATM facility can not solve. It will another hassle to resolve ATM related issues while submitting income tax (think of the cases today where ATM card insertion does not work or the card gets stuck or money is debited fully but cash delivered is less, so on and so forth). It will be more complicated to resolve issues in such a case.

I guess the intention is noble, but it will mainly depend on the execution and should be extended to all bank ATMs.

Visa and MasterCard Killer–Rupay

Photo by roujo

TOI reports that India will soon have it’s own payment processing firm called Rupay competing with Visa and Mastercard payment processing firms.

After almost two years of planning, the National Payments Corporation has at last finalised the proposed unique India Card which once commercially launched would be an domestic alternative to the global real-time payment processing firms like Visa andMasterCard.

"We have finalised name of the proposed card as Rupay at our board meeting here today. We have also finalised the logo for the same," a senior official of the RBI-set up National Payments Corporation of India (NPCI), told PTI this evening. The official sought not to be named.

NPCI is an umbrella institution for all the retail payment systems in India. I could not find any information about Rupay on the NPCI website, but given the statistics of the transactions that it handles is pretty impressive. It also gives a list of Payment systems worldwide, which is interesting to know.

The advantages of Rupay should be really good especially in lowering the transaction charges for using debit/credit card at merchant sites. As of now, all the banks which issue credit or debit cards to the end-user for transactions at various merchants in India or abroad has to tie up with Visa or Mastercard. The transaction is routed through the infrastructure owned by Visa/Mastercard not situated within the country. This implies substantial cost to the banks as well as merchants which are passed on to the end customer. Rupay will eliminate majority of this cost.

The interchange cost for transaction settlement paid by Indian banks to Visa/Mastercard is close to Rs 500 crore in one year and most of these transactions are purely domestic transactions. Rupay would reduce this cost substantially and can still connect to the Visa/Mastercard for international transactions.

The plan is great, but it needs solid execution, since any Rupay based system has to develop the necessary infrastructure to handle the millions of transactions that happen in India. Also security is a big concern and Rupay need to scale up quickly to the level of Visa/Mastercard to ensure transactions in secure manner with less chances of fraud. In case of Visa/Mastercard they push the security solutions based on their standard up-gradation worldwide. So Rupay system need to match that as be as agile in upgrading to latest security infrastructure as happens globally. It is also a challenge to incentivise the already existing merchants to sign up for the Rupay system. Ofcourse cost advantage will help but security will be the key. NCPI has loads of work to do on that front.

The NCPI is also working on utilizing the Aadhaar developed by UIDAI (headed by Nandan Nilekani) and will be developing a proof of concepts through a MicroATM. This is interesting since it brings the lowest strata of society into high-technology banking transactions.

Guest Post – Stock Market Investment Post Retirement

This is a guest post from  Mr. Ramalingam K.

Most Retirees feel great getting a bulk sum as provident fund and gratuity, and wish they knew a magician, who could spin their money 2 to 3 times in just 5 years, in addition to ensuring a regular return for their day to day expenses. It is true we all want it to keep up with the inflation rate in the market. I know of no such magicians, and it is practically not possible to multiply your money 2 to 3 times in just 5 years. But I definitely know of smart investment planning and investment advisors that could help you to beat inflation.

A step by step look at your considerations to come out with smart calculated investment decisions:

• Post-retirement, you know that you would no longer earn a regular income and would have to stay on your savings, provident fund, gratuity, and other benefits that have been given to you. You would definitely want more good returns on your investments, but your appetite for risk is low, for you would not want to lose your precious savings. So you would prefer to shift your portfolio of investment from risky ones to safer ones like fixed deposits in banks and good rated companies.
• However your need for more income, capital gains to keep up with inflation, and rates of interest on fixed deposits decreasing each year may make you puzzled about coping up with the increased financial needs. You, as a senior citizen are lucky to be getting additional interest, however taxes leave you with not much more. However you are not prepared to subject your savings to the volatile bullish and bearish trends of the share market of over-confidence and pessimism.
• You retire at 60, considering 5% is the rate of inflation annually, with life span as 85, and spending Rs.20000 per month, you would require a retirement corpus of Rs.42,00,000 if the return rate was 8%, while you would require Rs.47,00,000 if the return rate was only 7%.  I am sure you would invest smart, reducing your retirement corpus by 10.5% by just investing for 1% more return.
• It is true that stocks and shares gave an annual compounded return of 17 to 18% in the last 15 years, with long term stocks giving a compounded returns of about 15 to 18% annually. However you have not appetite for risky and volatile investments, and may want to play safe with low or moderate risk to capital and in not putting all your eggs in one basket or to divide your risk.
• After your retirement you would do best to follow the advice of financial experts and invest no more than 10 to 20% of your retirement corpus in shares and stocks. A novice to the share market, or lack of time, inclination or shrewdness may not prove right to deal in the share market, and most financial advisors advice senior citizens to invest in mutual funds. These companies have experienced fund managers and researchers with in-depth knowledge of various industries and valuation principles and also offer diversified investment options in shares in companies, debt instruments and government securities.
• The choice of retirees should be to invest in big cap funds, funds investing in huge paid-up capital companies, while mid cap funds suit those who do not mind medium risk-taking. However small cap funds, invested mostly in start-up companies are to be avoided, being highly volatile in nature.
• Time plays a vital role in investment in mutual funds, and a good investment advisor would advice you appropriately. The best option for senior citizens would be to first invest a lump sum in a debt based funds that promise good, safe and regular return. This could be followed up by a systematic investment/transfer plan of investing or transferring through ECS regularly a fixed amount for units of a mutual fund. This definitely proves beneficial to take advantage of the volatility of the market, as buying different number of units each month helps to spread the risk also.

A Final Thought:
However your smart calculated investment choice of mutual funds requires evaluating every 3 to 6 months. This would help switching between mutual funds at the right time. My last but most important advice again especially to senior citizens is never go in for stock trading in a big way without proper knowledge and inclination and lose due to volatility of stock and share market.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in)

The post has been formatted before posting, but the contents have been unchanged. The views expressed are those of the author only. This post also appears on moneybol.com.

How to deal with two or more Form-16s?

People do not leave organizations but they leave their managers.

This is a oft quoted reason for most people, who leave one job and join another. In a growing economy like India, the opportunities are galore causing the  employees to leave the jobs very frequently. It is very common to plan/think about new work, new peers or managers, new location and higher salary when a person switches a job, but rarely the income tax implications are thought about!!

When you leave a job and join another, it is a good idea to plan, for the income tax implications and to deal with two or more Form-16 that you will receive for filing the IT return.

The Form 16 is certificate under section 203 of the Income-tax Act, 1961 for tax deducted at source from income chargeable under the head “Salaries”. The Form-16 (or Form 16AA for consultants) is required by the the Income Tax authorities to verify and calculate your income tax liabilities.

It is mandatory for all companies as per IT-Act section 203 to provide for Form-16 to all employees on the payroll, although in some cases there have been lapses by employers in providing it on time to the employee.

What happens when you switch the job in the financial year(April – March)?

Assume that a person worked in a company A from starting of financial year (April) till say September of that year and then moves to another company B. In such a scenario, company A will provide a Form-16 as well the company B will also provide a separate Form-16 to the employee. The person has to use both the Form-16 for filing the IT return.

What is the issue in having multiple Form-16?

The problem is that some people fail to provide the previous employer income to their current employer. So in our example, if the employee joining company B, did not provide the income earning during his tenure at company A, he would have to shell out money while filing the IT return.

Most people do not understand this calculation and thinks that they have been robbed due to excessive tax deduction. The reality is that they earned more money in the year and have paid less taxes.

Let us take a practical example. This is how the income tax can bite you when you least expect it during the IT return filing:

The problem is that since the person did not declared his earlier income from Company A to Company B, both the organizations considered the six months income as the full financial year income and deducted the tax based on this partial salary. The person is also happy since he is getting more in-hand money due to less tax burden. The reality will be hit when the calculation is done based on both the Form-16 to determine the entire financial year income. When that happens (sometime in month of June), the person has to shell out a good chunk of tax and pay it in lump sum to the tax authorities. Hence it is extremely important to declare the earlier income to your current employer since it will ensure that you don’t get the shock while filing IT returns.

If a person is not able to receive the Form-16 from his previous employer, he/she should ensure that Form 12B is submitted to the current employer to account for the entire financial year income to avoid paying tax in lump-sum. When the previous employment income is declared, it will be adjusted in the per month tax deduction leaving you with zero liability during IT-filing.

Get Rich by staying in a rented house !

I was reading Ranjan’s post and it got me thinking again about the real returns of real estate and the arguments against owning a house. I have been not in favour of buying a house and my opinion is still the same.

The problem with real-estate investment is that there are multitude of factors like notional gains, emotional trauma, significant risk exposure and various hidden costs that clouds the real picture, causing the confusion about returns. One of the points that I liked from Ranjan’s post is

If you calculate the IRR for an investment in property, you also need to factor in the maintenance costs and the rent you receive. Often a 3 times increase turns out to be a 6% return on investments.

This is significant to note since most of the times, the friends and family that boast of exceptional earnings on investing in real-estate, is just notional.

In the current scenario, I feel that real-estate is definitely not a good investment and a person can become more rich if he stays in a rented house.

• A person buys a house depending upon the level of his income. A person earning higher amount tends to buy a higher priced house and vice versa. Hence there is some correlation between the increase in income levels and the increase in house prices. This also implies that house prices are definitely not going to increase all the time, since incomes are not going to increase all the time. But there are various reasons that house prices can go down even when demand is high. Also there are articles which provide an indication that real-estate prices can drop. If we look at rental prices, they have not gone up proportional to the house prices and hence owning a house is getting costlier every year but not renting the house.
• When one considers the ratio of EMI/Rent for a similar house, it is very clear that  the minimum ration could be still 4:1 while in some cases it could be as high as 100:1 depending on the location and the built up of the house. This implies that EMIs are always significantly higher than rents. If the remaining amount (EMI-rent) that is saved on EMI (by renting the house) is put into conservative bonds/stocks/gold, they can give significant returns compared to owning the house. So renting could make you richer if the surplus amount is invested in other asset classes which have given better returns than real estate over long period.
• When renting a house a low maintenance charges needs to be given to the house owner apart from rent, but when you own a house, a person’s outgo is not only EMI but other expenses like taxes, insurance, maintenance etc and if this can also be invested in other asset class, wealth can be grown many fold over longer durations.
• When the interest rates rises or real estate prices come down, the EMI seldom comes down (it rather increases) but rents will definitely come down. If you own a house, the outgo remains high in all real-estate cycles. Also the EMI pinches the most since majority of the portion is towards the payment of interest component of home loan, whereas a person living on rent can again invest the additional surplus if the rent decreases.
• A home loan increases the risk appetite of a person tremendously and hence restricts the person to pursue options to increase his income. I know of many friends who could not move to another city, take up another job or start their business simply because of the home-loan EMI. But a person living in rented house can simply move to a better job in another city or move to a smaller rented house before starting a business.
• If a person buys a house, the choice of house/neighbourhood will depend on his income level, but when a person rents a house, at a much lower outgo, he/she can stay in a much better house with better quality of life. This is especially true in metro locations where better locality commands a huge price of house but the rents are still affordable. For example, in Bangalore if your EMI is around 20K per month [house ~ 25L], the only house you could buy is in a lower-middle class locality (or far away places from city), whereas with a rent of 20K you can take up a house in the really posh locality. 
• There are other factors which are never accounted like emotional trauma in purchasing a house (most of the builders are not keeping their promises). The house possession is being delayed, the quality of construction is not up to the mark and in certain cases their is a straight cheating by builders who simply run-away taking the money. A person on rent simply changes the house if he/she doesn't like the current place.

Although government is doing its bit by planning to have a real-estate regulator but I do not think that it can change the real-estate landscape significantly in coming years. It is important to invest in real-estate as a means to diversifying your risk but don’t follow the herd. It is very important to set out priorities and understand your risk appetite. It is a myth that if you don’t buy today, you will miss out on the game and hence don’t fall for it. Only buy when you really need it and buy only, what you can afford without compromising your lifestyle or other priorities in life. I have not invested in real-estate and do not intend to do in next ten years.

Read out this interesting blog post by Manish as well.

Should You Buy Home Loan Protection Plan

I was having a discussion about whether to buy a Home Loan Protection Plan (HLPP) when someone has taken a home loan. The idea of HLPP is very noble, since any person taking a home loan would like to ensure that in the unfortunate event of his/her death, the family can continue living in the house. The HLPP ensures that in case of death of the home loan borrower, the insurance company will pay back the remaining outstanding loan amount to the bank.

What is HLPP and why it is needed?

It is well known that buying a house is the most important financial decision taken during one’s life. I would rather defer the buying of a house to mid-40s but at any stage of your life if you decide to take the plunge of buying a house, typically by availing a home loan, you need to worry about HLPP.  If the house is bought through home-loan it increases the risk profile since the person owes money to the bank. In essence, a person creates a huge liability by taking home loan and in case of an unfortunate death of the borrower, if the survivors can not pay the EMIs, then the bank has the right to sell the house to recover the loan amount.

This is the reason most housing finance companies will try to sell a protection plan (HLPP) to the home loan borrower.

A home loan protection plan is one whereby in the event of your death or disability resulting in loss of income, a sum of money will be made available towards the repayment of your loan. This ensures that your family or dependants do not have to worry about the loan repayment and your home will not be taken away by the bank.

How does HLPP works?

Let us take an example of a person taking home loan of Rs 20 L for the tenure of 10 years at say 12% interest, then the EMI calculated would be Rs 22021 per month. Let us assume that the borrower is paying the EMI regularly for next 10 years and now the outstanding loan amount is Rs 15 L. If the borrower dies after 10 years, the HLPP insurance will pay back the outstanding loan amount (Rs 15 L) to the bank. This is exactly similar to a term insurance plan except that the life cover will be equivalent to the outstanding home loan amount as per home repayment schedule (shown below).

Is HLPP same as Home Owner Insurance/Home Content Insurance?

The HLPP is fundamentally different than a House Owner Insurance or a Home Content Insurance. A Home Owner Insurance is insurance for the house (building structure) you have purchased (under construction or built) and provides protection against the risks to property such as fire, riot, flood or any weather damage. There are three types of coverage included in such insurance

• Replacement cost coverage: Cost of replacement of property regardless of appreciation/depreciation
• Actual cash value coverage: Cost of replacement minus depreciation
• Extended replacement coverage: Cost of replacement including the increase in construction costs 

A Home Content Insurance is for the contents of your home. This coverage is for the loss or damage of the valuables inside the home like the electronic and electrical goods, furniture, clothing, jewellery and any other precious contents inside the home. The contents are covered on the market value of the items and in case of a loss the insurance claim is paid on the value of purchasing a similar new item exempting the depreciation value.

I will only talk about the HLPP in this post.

What are the cost of HLPP?

The HLPP costs are similar to the term insurance costs with various premium payment options. The various options as of now offered are:

1) Single premium payment: A single premium is paid while taking the insurance. Also most housing finance companies will try to club this single premium in the home loan amount itself.

2) Equated Monthly Instalments: This is similar to any other term insurance plan with premium payment frequency to be yearly, quarterly or monthly. In most cases this EMI is bundled with the home loan EMI. Some HFC have come up with reducing EMI plans since the sum assured also is reduced progressively.

3) Limited Pay Option: Some HFC provides the option of paying only till a limited duration within the loan tenure. For example, if loan tenure is 15 years, the option would be to pay EMI only till 10th year.

If you use the some home loan protection calculators, the premium amount for a home loan of Rs 20 L for 20 years tenure with age of borrower 30 years comes out to be

• 49160 Rs for Single premium
• 8870 Rs PA for Limited Pay Option [EMI till 13 years] : 115310 Rs Total
• 6946 Rs PA for EMI Option for full tenure : 138920 Rs Total

The cheapest Term Insurance plan for the same Rs 20 L for 20 years with borrower's age 30 years is Rs 3060 per annum and hence total outgo is Rs 61200. [I used this calculator.]

These are just rough figures based on the websites of various companies. But it is clear that the cost of HLPP compared to a pure term insurance is almost the same.

So why HLPP is not a good option?

When cost is not a key deciding factor for choosing an HLPP Vs. Term Insurance plan, then what are the other issues with HLPP? Here are some of the problems:

1) A pure Term insurance cover remains constant for the entire tenure, while after each EMI, the HLPP cover reduces. This is not very helpful since for almost similar cost it is preferable to receive a fixed monetary benefit rather than a reducing one. Isn’t it better, that in the unfortunate death after 10 years, your family should get Rs 20 L (as in Term Plan) instead of a Rs 15 Lakh (as in HLPP) based on reduced outstanding loan.

Some insurance companies claim that they offset this difference by reducing the premium amount over the tenure, but it is important to note that as a person ages, his risk profile goes up and so does the insurance premium. So any offset in premium reduction to take care of reducing sum assured is balanced by increasing premium because of increase in risk profile due to old age. This premium calculation should be clarified with the insurance company before signing for HLPP.

2) It is well known that Interest Rate fluctuation causes a change in the home-loan EMI amount or loan tenure. Typically, rise of just 0.5% of interest rate would increase the EMI term for additional year, however HLPP does not give you insurance cover for those additional year. I could not find it in any documents on the website and hence it is advisable to check this while availing such scheme. Also if the interest rate falls and the period of the loan gets reduced (& if at all the banks pass the benefit to the end customer), then the refund from the insurance premium is minuscule. This  also needs to be clarified before taking up the HLPP.

3) There could be a chance of a home loan foreclosure for some borrowers. If the home loan is taken for a tenure of 15-20 years and over the tenure if the borrower received some surplus money due to variety of reasons, he/she may choose to repay the home loan prior to the tenure. In such a case, the home loan insurance becomes void. But a term plan will continue and provide the additional security.

4) A HLPP may become also void if you try to switch from one Home Loan lender to another, whereas a borrower typically does to get a better deal on home loan interest. If you switch the loan, then you need to buy another HLPP insurance from the other lender.  This should also be clarified before taking up the HLPP plan. A term plan will remain with you and protect you despite any number of switches of loan companies.

Here is the summary of all the points:

It is important to also look at the various charges as well as exclusions and compare with Term plans before going ahead with HLPP. Also it is not mandatory to buy an HLPP while taking a home loan (sometimes mentioned by person you are dealing with). So I would recommend a Term Plan since the benefits far outweigh that of HLPP.

Health Insurance Portability

IRDA in its recent circular approved the portability of health insurance, allowing the customers to carry forward all the benefits of health insurance of previous policy to the new policy with different insurer.  This is really a good news for all of us, since choosing any particular health insurance is anyway an onerous task.

What exactly is portability?

To understand the benefits of portability, it is important to understand “what are the benefits health insurers provide for renewing the policy with same insurer”?

1. Waiting period of pre-existing illness: Most health insurers in India have a waiting period of 2-4 years for inclusion of pre-existing illness. So if you take a policy today, expenses related to any pre-existing illness will not be covered till you continuously renew the policy for next 2-4 years.
2. No claim bonus: Most health insurers offer a no claim bonus of 5-10% (discount) on the premium if you continue with the same insurer and have not made any claim for any medical expenses. Some insurers have introduced this discount on premiums irrespective of claim status.
3. Initial waiting period after policy starts: Most insurers have a waiting period of 1-3 months when the policy comes into force, during which time only the accidental expenses will be covered but no other medical expenses can be covered. This waiting period does not exist if you re-new the policy with the same insurer.
4. Waiting period of coverage of certain exclusions: Some insurers have a waiting period of 2-4 years for specific illness or for senior citizens. As an example, stone in kidney or cataract are excluded for 2-4 years if a senior citizen starts a new health insurance policy.

In essence, these are the benefits of remaining loyal to the same insurance company. In the current scenario, these benefits are lapsed if you try to switch to another insurance company, which is unfair as far as customers are concerned.

Why customers want to switch from one insurer to another?

There are several reasons why a person may want to switch to another insurer:

1. Poor Service Record: This is the most common reason for switching to another insurer.
2. Premium amount saving: Another insurance company may provide higher sum assured at lower premiums than the current insurance company.
3. Specific coverage: The other insurance company may be providing coverage of any specific illness which the current insurance company is not providing. As an example, most personal health insurance policies does not provide cover for maternity expenses but Max Bupa policy provide that cover after a waiting period of 24 months.

So, IRDA plans to ensure that if a customer is not happy with his current insurance provider and wants to switch to another insurance provider, all the benefits accrued for continuing with the current insurance provider will remain intact and can be carry forward to new insurance policy. For example, if your current insurance policy has a waiting period of one year for pre-existing illness and if you switch to a new insurance company with new policy that has a waiting period of two years for pre-existing illness then with portability in place, you only have to waiting period of one year in the new policy for the pre-existing illness coverage. 

Issues with portability

The portability concept is definitely good for disgruntled customers but I think that it does come with some issues:

1. The credit for the waiting period is limited to the sum assured under the previous policy. So for example your existing policy has sum assured at 2 lakhs and if you want to take up new policy of sum assured at 5 Lakhs with a different insurance company, the credit will only be applicable for the 2 Lakhs basis. This calculation can be very confusing for end customers.
2. It will be a huge task for the end customer to find another policy that has all the benefits of his existing policy and some more at the same premium rate to motivate for a switch. For example, if a person wants to switch to insurance company B from insurance company A, say due to lot of paperwork and poor service related to claim settlement, he needs to ensure that insurance company B not only provides good service but also has similar benefits (similar coverage etc) of the policy as provided by company A. If that is not true, there is no point for making the switch.
3. I believe that most insurance companies will close older policies and bring new policies to ensure that they do not loose due to the new portability rules from IRDA. This is because the entire concept of waiting period  came from the fact that companies wanted to retain their existing policy holders. This waiting period is typically useful in cases where the company increases the premium rates but the end customer has no choice to move to another insurance company since otherwise he would loose all the benefits. But with portability, most insurance companies loose this advantage. Hence, I think the policies will be changed. 
4. There would definitely be cases where the current insurance companies will be reluctant to let the customer make a switch and may cause operational delays or may cause policies to expire due to variety of reasons. This may result in increase of complaints. [Similar thing has been observed in mobile number portability]
5. Some insurance companies may try to ask customers to use credit cards to renew their policies. The trick is that in the “Terms and Conditions” section (one of the rarely read part) it could easily add a clause to give the right to the company to renew the policy (say one month before expiry) by charging the credit card automatically. This is typically done by web-hosting companies. This ensures that onus of cancelling the renewal payment lies with the customer who in majority of cases will forget the policy expiry dates.

I do think that portability game will bring some standard into the health policies and it will be easier to compare them but it will also bring some of its own issues.

Succession Certificate–what and how?

I got a nice comment on my earlier post on nominations which mentioned a slight correction in the post about the PPF withdrawal limit of 1 Lakh. The comment mentioned that if the person has a succession certificate then the entire amount will be given to the legal heirs. Let us talk more about this “succession certificate”.

A succession certificate is a document obtained for a deceased person who did not have a will. It contains the list of deceased person’s debts and securities. The problem is that most people think that if the succession certificate is obtained then the person is the rightful owner of the deceased person’s properties, which is not the truth.

A succession certificate allows the person to act exactly similar to how a nominee would act. It gives the authority to the holder for distributing the deceased person’s assets. So how would the person decide to distribute the assets? He has to look at the succession law and based on that he decided to distribute the assets.

The way to obtain the Succession Certificate is to

1. Make an application to the district judge (where the deceased person is residing).
2. The application should contain details about the time of death of the deceased person, the place of his/her residence, details of all the legal heirs, the debt and securities in respect of which the certificate is applied for etc
3. If the district judge is satisfied with the application and accepts the legal ground for entertaining the application, he may assign a hearing date.
4. The court will issue notices to all the concerned parties (typically all legal heirs).
5. A newspaper notice has to be issued apart from the mandatory notice to the respondents. A typical wait period for this notice is 1.5 months from the date of publication.
6. After the hearing, if the district judge decides that the right of Succession Certificate belongs to the applicant, the judge will pass the order to grant the certificate.
7. Once the order is passed, the applicant has to submit judicial stamp papers and court fees as per the court rules.
8. It is important to note that the court fee is a percentage of the value of the asset with a maximum limit. So if the asset value is very high, the court fees could actually be very handsome. (Say for flat of Rs 40 Lakh, the fees could be Rs 75000)
9. It typically takes 3-4 months for the entire procedure to be completed and getting the certificate.
10. Once you have the certificate, you are authenticated to distribute the assets to the legal heirs as per the succession laws.

The succession laws in India are very complicated and are very different based on a person’s religion (for e.g. Hindu Succession Act & Christian Law of Succession).

Disclaimer: Please note that I am not an expert in legal laws and it is advisable to visit a qualified lawyer for any truthful information on such laws before making any legal moves.I do not take any responsibility, if you read this post and act based on it.

Beware of Equity SIPs

SIP or Systematic Investment Plan is very well known for mutual fund investment. The advantages of investing through SIP mode that typically proclaimed are :

• Rupee cost averaging
• Disciplined mode of investment
• SIP methods works irrespective of the current market level

These are great advantages, especially for retail investors. So some brokerage companies have started providing facility to invest in the SIP route for individual stocks. This is “Equity SIP” which is the new buzzword. There are two types of SIP investment allowed:

• Amount based: Fix the amount to be invested at regular intervals
• Quantity based: Fix the quantity of shares to be invested at regular intervals.

This sounds like a great way of investment on the face of it, but is it really that good? Let us try to analyse whether a retail investor will get the same benefit of SIP investment as mutual funds:

1. Rupee cost averaging: The key advantage that is mentioned for SIP investment is that even in volatile markets this is a great tool due to rupee cost averaging. The key to cost averaging is that if market is down, you will get more units and if the market is up, you get a higher portfolio value. This sounds great and it definitely seem to work for individual stocks as well, but the rupee cost averaging can only average out a less volatile stock (which is mostly true for mutual fund due to inherent diversification). If a stock (& for that matter mutual fund) is extremely volatile, then this method may not be able to average out your losses. In essence you need to find a good stock with high growth potential and less volatility to use rupee cost averaging.
2. Disciplined mode of investment: Yes, this method definitely forces investors to shell out money at regular intervals, but it is useful only if over a long period you are increasing your wealth. If you invest regularly in a stock which is sliding down over a long period then definitely it is not a great investment even if you are putting money at regular intervals. In essence you need to find a good stock with high growth potential and less volatility to make disciplined mode of investment.
3. SIP works irrespective of market level: This is true because at lower levels you will get more units and the rupee cost averaging kicks in for mutual funds. This does not apply for individual shares though. Will it really makes sense to invest when you know that the particular share has just tanked to the bottom. Some of the stocks never recover and so will your SIP investments.

If I look carefully, Equity SIPs does not sound as attractive as it is made out to be by the brokerage houses. The brokerage charges for Equity SIPs are same as those for investing directly into shares and hence it does not offer any advantages. So does it mean that retail investor should never look at Equity SIPs? Well not actually, since I feel these are great tool of investment if :

• You invest in exchange traded funds (ETFs) which are passively managed and hence less volatile
• You invest in quality stocks which are strong in fundamentals and currently undervalued
• Brokerage houses start giving additional benefits like lower charges for this disciplined investing

I am using Equity SIPs for Gold ETFs as a long term investment.

How to choose Health Insurance?

When I wanted to buy a health insurance, I was completely baffled by the plethora of choices in the market offering different types of plans. It is an extremely difficult task to really select the medical insurance plan which will satisfy your needs.

There are two kinds of health insurance plans, the one is the traditional mediclaim policies (similar to the policies taken by companies for their employees) which does a reimbursement of any medical expenses incurred, the other way is the critical illness policies offered by life insurance companies which provide a lump sum for any critical illness. I will talk about how to choose the first kind of policy.

Some of the key questions to ask while selecting health insurance:

1) The Annual Limit: What is the annual limit of reimbursement per year. It is a good idea to choose around 3-5 lakhs since the medical costs are going up day by day.

2) Sub-limits : What are the various sub-limits in the policy? The most typically caps are on room-rent, ambulance services, doctor’s fees or diagnostics.

3) Co-payment Clause: Is there any clause of co-payment for certain cases? Some policies have co-payment clause either after certain age limit, some may have the clause of co-payment for kids, some may have this clause for specific treatments.

4) Pre-existing coverage: Does the policy cover the pre-existing illness? Some policies cover it from day one, some cover only after a specific time period (say 2 years).

5) Exclusions: Most policies will have some or the other exclusions. The exclusions come under permanent exclusions or time-period based exclusions. So for example, suicide related expenses are excluded permanently in every medical insurance. But for maternity benefits a policy may have a exclusion only for first 4 years.

It is very difficult to find a single policy which will have all the features and hence it might be a good idea to purchase 2-3 policies with different features to cover all medical possibilities.

Tax Saving Tips

Nothing is certain but death and taxes. The time of the year has come to think about your taxes for the last financial year. If you are a first timer in paying income tax, this guide might be helpful (may be out-dated a bit).

But do you really give a thought while investing for the purpose of tax-saving? The Income Tax law is complicated due to the variety of cases it needs to cover, but even for seasoned professionals certain aspects of Income tax laws are confusing or not knowledgeable. Here are some tips which might be helpful for some extra saving of tax:

1) Get insured but with a caveat: With the new DTC proposal, all life insurance policies whose sum assured is greater than 20 times the annual premium, the maturity proceeds are taxable as normal income. So if you are trying to buy any life insurance policies just to save tax, be aware to have annual premium less than 5% of sum assured. This does not apply to term insurance though, since there is no maturity proceeds.

2) Use losses in stocks to save tax: Short-term capital losses can be set off against both short-term as well as long-term capital gains. This is something most people often miss, especially for salaried employees who do not seem to account the stock losses in the IT-declaration proof submission to the employer.

3) Pay rent to your parents if you stay with them: If you stay in a house owned by your parents (or even spouse) and if their income is not significant (especially true to senior citizen parents), then you can pay them rent which can be used to save against HRA. The person receiving the rent has to pay taxes though if the income exceeds the stipulated amount.

4) Use alternate LTA claims: Typically LTA claims can be taken only once in two years. So if you & your spouse both are working, you can decide to alternately claim the LTA benefit with your respective employers.

5) Give loans to your children: If you give a lump-sum amount to your major children as loan (interest-free), you can avail of the tax-benefit since no income or gift tax is applicable on such a loan. This is similar as giving them a gift, the difference would be that when you gift the ownership of the money gets transferred to your children.

Inflation Index Funds

Inflation is definitely a cause of worry for every individual. If the purchasing power of money keeps getting reduced, then a person will not be able to sustain present living standard, unless his income is increasing proportionately.

Inflation is such a beast that it not only makes your present life difficult, but can ruin your savings/investments for the future. It is to be noted that before May 2005, SEBI prohibited any capital-protected products. But now SEBI, relaxed these rules, allowing issuers to offer funds that provide capital guarantee. Currently there are numerous fund houses marketing such capital guarantee funds, but inflation turns out to be a real beast.

It is no wonder that the “mehangai dayan” song is such a hit.

I am just waiting, when the government or financial institutions will start launching a inflation protection funds. Such inflation-indexed funds are not a novel idea and they definitely exists in other parts of the world. For e.g. Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bonds issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation.

Reserve Bank of India published a paper on inflation-index funds [PDF] in December, indicating that these might become reality soon in India.

It is proposed that we may issue  IIBs wherein the principal is indexed and the coupon is calculated on the indexed principal, as set out in the discussion paper on Capital Indexed Bond issued by the Bank in 2005. 

In simple terms, here is how it works :

Assume the IIB are released with a 10-year bond with 2% interest to be paid semi-annually. It means every six months, interest at 2% will be calculated and paid to the investor. Assume you invested Rs 100 in January. So after six months, the interest needs to be paid. But before the interest is calculated, the principal is adjust to current inflation rate. In this case the principal (Rs 100) is first adjusted for inflation (assume 8%). So the inflation adjusted inflation will be Rs 108. The 2% interest will be calculated on this inflation adjusted  principal thus giving higher returns.

The key benefits of such a investment avenue is that it is risk-free way to beat inflation although the real returns are not very spectacular. It will be a great tool as a portfolio diversification method and specially useful for conservative investors or senior citizens.

EMI Calculation– An Example

I wrote about how EMI is calculated and how to calculate EMI using MS Excel. It is not a big surprise to me that these are often the most viewed posts on my blog. Some of the readers commented on giving an example along with the posts, so here is the post explaining EMI with an example:

Example 1:  Assume that you take a loan of Rs 100,000 at 8.75% per annum rate for a tenure of 10 years. How to calculate the EMI?

  Open the excel sheet and click on fx.

Choose the Financial category and select the PMT function.

In the function arguments, enter the values. In our example, our interest rate is 8.75%, so enter “8.75%/12” The Nper is the tenure in terms of months, in our example it will be 120 months, the Pv is the Loan amount and keep Fv & Type to 0. Press OK.

When you press OK, you will see the result in the selected cell as shown. The EMI is Rs 1253.27 for our example.

What is the interest component of say 10th EMI?

Proceed as in above, but choose the IPMT function rather than the PMT function. The following inputs are required:

The only new input is the Per, which is the EMI for which you want to know interest component. In our example, we want to know the interest component for the 10th EMI, so input as 10. The result is Rs 693.75.

So, when you will pay the 10th EMI of Rs 1253.27, you are paying Rs 693.75 as interest component and remaining for reducing the principal.

What is the principal component of 10th EMI?

It works same as above except that you need to choose the PPMT function rather than PMT function.

If you want to know the principal and interest amount for each of your EMIs, then there are many calculators (excel sheets) available on internet. I like this advanced excel calculator since it takes into account any additional payment made.

Digital Data - an Asset

Our lives are definitely becoming more virtual and hence it is no surprise that when you think of making a will, you also need to consider your digital data as an asset. In simple terms, your will should answer the questions like “Who gets your email id after your death?”

With most of our lives going online, it is important to consider the data accumulated over our life-time as a data which should be either passed on to your legal heirs or totally destroyed. Digital data includes email accounts, social networking accounts, internet banking accounts, online photo albums, blogs and any data residing on your computer.

Why the heck would anyone want any access to your digital data? Why you should care? The reason is exactly the same with respect to your off-line assets like a house. You create a will since you do not want your legal heirs to fight over your assets and there is a good chance that they will fight over your digital data as well. I can easily think of legal fights over getting a dead writer’s un-published work or a ace photographer’s digital album or access to a extremely popular blog (which can be a revenue stream) in the event of a death.

The on-line assets are definitely more complex to come under a single umbrella of legal laws since each on-line website have different policies related to this issue. For example, gmail terms and conditions allows a legal heir to access the account if proof of death is furnished.

I reckon that in future digital data succession will become as crucial as any other offline asset succession and hence making a digital will become absolutely necessary.

When to make your Will?

This is a most difficult topic for most Indian households and oft ignored. I yesterday went to a friend’s place and he had called up a LIC agent to his home. I distinctly recollect that they talked in a very hush’ed tone, because he was discussing about how much money his family will get post his death. It was obvious that discussing death and money together is still taboo in Indian society and hence the same goes with making a will.

I think most people know what is will and it’s importance but still probably I reckon that 90% of Indian household never discuss this topic. I believe majority of Indians die without making any will, causing major dispute among legal heirs post any death.

It is so simple to make a will in India and so important especially with legal recourse taking many years that everyone should definitely have gone through this process. It is important to note that  assigning nominations alone does not help and a will is very important.

So when should a person make a will?

The question is never answered appropriately. As per the Indian Law, any person above 21 years of age can make a legally valid will. But the key point before deciding on making a will is to think about :

1. A sudden death is more probable in today’s fast paced life. So don’t think that you will not die till 80 years of age.
2. If you die intestate (without making will), your legal heirs are not only your spouse/children. Check out this Hindu Succession Act and you would know who all can be your legal heirs.
3. It is foolish to think that your legal heirs love each other and will never fight over your property. This has been found untrue in so many cases.
4. There is no threshold asset value, only above which legal heirs will consider it substantial for fighting.
5. The distribution of assets are done equally by the court of law without considering who is more needy amongst your legal heirs.

I would recommend that you should start thinking of making a will as soon as you get married. You can start with making a will on a simple white paper and asking your friends to act as witnesses. As you grow financially and acquire assets, you could add codicils to your will. If the number of codicils are more than five, then re-write a new will. You can think of registering your will once your assets have reached a substantial amount (you can decide what is substantial).  Where there is a WILL there is a way!!

 

AMFI plugs hole for Third Party scam

When investing in mutual fund schemes, it is very common to call up a broker and issue a cheque to him in the name of fund schemes. The cheque does not necessary be from you, so it could be from your spouse or your friend or as a matter of fact from anybody. The regulatory bodies wouldn’t have thought that this simple flexibility could actually lead to various scams.

Hence, to plug this seemingly innocuous hole in the mutual fund investment mode, AMFI has come up with guide lines to not allow any Third Party cheques[PDF] when investing in mutual fund schemes.

As per guidelines issued by the Association of Mutual Funds in India (AMFI), mutual funds are required to put in place strong processes by November 15, 2010 to ensure that Third-Party payment instruments are not used for mutual fund subscriptions.

So from 15th Nov, you will have to issue cheque from your account when investing in mutual fund in your name. The few exceptions are like parent investing on behalf of minor child or employer on behalf of employee.

But what is the Third Party Scam? It is simply a common case of trusting a middle-man and not doing due diligence. Here is how it works: You ask a broker to suggest a mutual fund scheme, and issues a cheque against that mutual fund scheme. He will fill a form and get your signature, but the problem is not in filling the form or not reading it properly, the actual problem is of trusting the broker. The broker can simply go home, shred the form you filled, then fill another form in his own name and submit the cheque along with the form issues by you. Since mutual fund accepts Third Party cheques, your money is being used by the broker to have scheme in his name. He simply needs to forge the receipt and give it back to you. The broker could simply redeem the money without you noticing anything.

The interesting aspect is that SEBI dis-allowed third party cheque in stock investment few years ago, but it is continued in mutual funds. I believe that AMFI has taken the right step in this direction, thus blocking these Third Party scams.