Owning a house or business "OH MY GOD"

After a long time got opportunity to watch a fantastic movie "OH MY GOD". There are certain movies like Munnabhai MBBS, 3idiots, Rang De Basanti, Tare Zameen Par , can shake you inside. It has power to bring in the change required.

Huge success of above movies confirmed that Indian society is ready to appraise the libertarian attitude and the Indian  youth is daring enough to raise the issues of collectivistic problems and is ready to denounce them, to fight against them.

I know this is not a movie review blog, but together with certain other facts shown in the movie "OH MY GOD" a very relevant point related to your financial planning is also been highlighted and that is insuring your HOUSE as well as your BUSINESS.

The biggest asset an individual builds during his life is his own house and business. A small accident can wipe out your earnings of life. How many of us have overlooked at insuring these investments? The requirement of home insurance is overlooked and understated in India.

While owning a house today, what youngsters forget is the protection of their property. The financial institutions providing housing loans ensure that the individual gets himself a home loan protection policy but no one ever bothers to insure the house that is being bought. There are many convenient options available in the market that helps one not only insure the property but also the belongings.

Let's know home insurance

Home insurance plans allow you to protect your house and household items against fire and other perils, such as theft, burglary, accidental breakdowns and so on. If you intend to buy house holders' insurance, you should buy a policy that provides cover for your house as well as contents in it.

Points to remember before buying home insurance

Make sure that you read and understand the policy coverage, exceptions, exclusions in the plan. So that you don't end up like Kanjibhai in the movie. Your cover therefore, should include your house, belongings, liability to others if some mishap occurs and your living exps., if you are forced to stay in rented house. Basically, if a disaster occurs, your policy should help you to rebuild your home and replace its contents.

Take an inventory of your possessions. If you have to file a claim, two things need to be done - prove you own certain items and verify their value. Some insurance companies advise clients to go through their homes with a video camera, walk through each room, and ensure that you have everything you own, recorded.

Always make sure that you update your policy value to cover various assets that you might add to your house as well as taking care of rate of inflation.

Eligibility

Any resident Indian who is owner and/or occupant of the property can purchase a home insurance policy.

Coverage

The covers provided are :

Fire and Allied Perils - Building and Contents , Burglary (optional), Unlike shown in movie you can also take a cover for earthquake by paying additional nominal premium.

Key features

An individual with an independent house or a flat can opt for this benefit and applicable to any residential building.It covers building against risks like Fire,Lightning,Storm, Riots, Strike and Malicious damage.

In city like vadodara an house with construction area of 2500 sq.ft considering construction cost be Rs1000/sq.ft , Total cost Rs.2500000.00 you need to pay an annual premium in the range of 1300 to 1400.

Remember to cover your house for construction cost and not for the value at which you bought, as it also includes cost of land.

So, put your house insurance to be on top priority.

Unravelling NCD's (Non Convertible Debentures)

We as an investor are always tempted by higher returns, specially in a time when interest rates offered on bank FD have move down in the range of 8.5 -9 % without knowing risk associated with it.

Another such wave of offering higher returns on your investment is about to come in the form of NCD's or Non Convertible Debenture. But as we are going to invest our hard earned money we need to know nitty gritty of the instrument.

Let's understand what NCD's are:

Whenever a corporate wants to raise money from public they issue a debt paper which is for a specified period and pays a fixed interest this debt paper are known as debentures . Debentures can be convertible as well as Non convertible.

Convertible Debentures : The Debentures which pays interest at fixed rate and on maturity date are converted to Shares of the company are convertible debentures.

Non Convertible Debentures : The Debentures which pays interest at fixed rate and on maturity returns the  capital amount are NCD.

Even NCD's can be of 2 types :

• Secured Debentures : As an security it is backed by asset of the company and if it fails to pay, the investor holding the debentures can claim it through liquidation of the assets.
• Unsecured Debentures : Contrary to above it is not backed by any security in case company defaults the amount would be paid only if any amount left after paying off for the secured creditors.

Features of NCD

NCD's normally works more or less like company deposits. One advantage of NCD is they are listed on stock exchange and theoretically speaking they provide liquidity.However, there is no active market for NCDs on the wholesale debt market segment of the stock exchanges and their liquidity is low. You might not be able to find a buyer for your NCDs if their trade volumes on bourses are insignificant.

Any Indian company can raise money through NCDs if it has a tangible net worth of at least Rs 4 crore and has been sanctioned loans by banks or financial institutions which is classified as 'standard asset' and not as bad debt.

Companies seeking to raise money through NCDs have to get their issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. NCDs with higher ratings are safer as this means the issuer has the ability to service its debt on time and carries lower default risk.But the rating provided is at the time of issuance and may change during the tenure.

Interest rates on NCD

Normally NCD provides a higher interest rate then the market or Bank FD and comes with long tenure. Best suited for individuals who have  lower risk profile to build their retirement corpus and also for retirees during low interest rate scenario. NCD's come with lot of interest payment options viz; monthly, quarterly, annually and Cumulative. 

Interest rates also depends on rating of the issue. Lower rating means higher interest rate and vice versa.

Taxation

Interest on NCD do not attract TDS, but interest is taxable and is added to income for that year.

Capital Gain :

NCD's are listed on stock exchange and if sold on exchange it is taxed like debt fund. If sold before 1 year,  profit will be added to income and taxed at per tax slab. But any profit made selling after 1 year and before maturity would be taxed as long term capital gain. The applicable tax rate is 10.30% without indexation.

Risk involved 

NCD has some inherent risk. Investor need to check companies financial and end uses of the funds. Checking for rating can help a bit. 

Many a times we have seen that although the issue is secured but is backed by assets which may fluctuate in valuation. Like if we take case of Gold finance company mainly engaged in finance against Gold, comes with  secured NCD's backed by asset (Gold) as guarantee. 

As we know that gold has also become an speculative asset and if there is any major fall in prices of Gold. The company might not be able to recover its loan, due to which loan default rate might increase. It may result in default of NCD payment. Investors would not be able to recover their NCD value inspite of being secured as even after liquidation of asset i.e gold the amount recovered would be much less.

Please consult your financial advisor before investing in any such instrument.

Misleading Advertisment of SBI Bank FD

Be cautious of misleading advertisement published by SBI in all leading news paper showing annualised yield of 17.77% on 5 Year tax saving Fixed deposit.
 

It considers investor to be in the highest tax bracket and also that 80C limit of Rs.100000.00 is not exhausted. It also doesn't consider taxability of interest earned.

PPF is still a better option if you wish to invest for tax saving as the interest earned would by 8.6% (subject to change every year but much better then SBI FD) as compared to tax free interest of above FD i.e 6.39% (9.25 less 30.9% of 9.25%)

Be a Lazy Investor - Saving Interest deregulated

Last week RBI came out with one of the historic decision in Indian banking history by freeing the savings bank rate. It did came out like a Diwali gift from RBI governor.I think every bank account holder would feel delighted with this decision.

Within hours of the Mr.Subbarao's announcement two of the private banks came with an advertisement about increase in Saving interest rate of full page in leading national news paper.

No doubt it will create a big hole in the profitability of some of the big banks balance sheet. But, will it really benefit account holders?

Let us evaluate:

If your average balance in a saving account remain at a level of Rs.1.00 Lac, you would get richer by Rs.166 per month and for balance more then Rs.1.00 Lac additional 50 basis points.

I think for an Lazy investor who holds such big balances in his savings account is not bothered of getting Rs.166.00 or Rs.500 per month. If he would have been really concerned might have shifted his money to Liquid funds offered by mutual funds.

These are the funds favorite with corporates but retail investor were never keen to invest in it. Liquid funds can easily fill in the gap between saving bank account and bank FD's. It gives you return more than saving account (Presently in the range of 8.5 - 9%). The only difference is you can access funds at 1 day notice i.e liquidity is available to you in 1 day instead of instantly in case of Savings account.

From safety perspective although it also bears the tag line "Mutual fund investment are subject to Market read offer document.....". But history of the fund prooves that it is as safe as your savings account the NAV of a liquid fund has never been negative for a single day in its history.(As it invest in the papers of maturiy less then 90 days)

So, as an investor if you are looking at the better returns then Saving bank should shift your surplusses to Liquid funds instead of settling at 4 or 6% of saving account returns. Additional returns can take care of your monthly telephone bills and LPG cost or a weekend with your family.

RETIREMENT - Aish or Without Cash

As an Indian we feel really proud to be one of the youngest country. But, there was time in 80's and 90's when the biggest worry for our country was rising population and because of that reason we started the campaign "Hum do Hamare Do". Today the same worry has become one of the biggest boon for our economy. 

Thanks to one of the report made by Goldmann Sachs way back in 2002 which brought this fact to limelight and resulted in biggest rally in the history of Indian equity market.

India has more than 50% of its population below the age of 25 and more than 65% hovers below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37  for China and 48 for Japan.(source : wikipedia.org)

Population by Age and Sex for India
Year	Age	Both Sexes Population	Male Population	Female Population
2011	Total	1189172906	617039156	572133750
2011	0-4	118325346	62740231	55585115
2011	5-9	117592252	62539569	55052683
2011	10-14	116948795	62170835	54777960
2011	15-19	112247754	59507362	52740392
2011	20-24	105137174	55103535	50033639
2011	25-29	99548997	51787772	47761225
2011	30-34	93102734	48164565	44938169
2011	35-39	86435208	44407222	42027986
2011	40-44	76764881	39235679	37529202
2011	45-49	64989219	33146269	31842950
2011	50-54	54272103	27595085	26677018
2011	55-59	44170733	22361010	21809723

 SOURCE : U.S.Census Bureau, International Data Base.

There is no doubt India is going to be one of the strongest economy inspite of all the global, political or domestic factors.

But while looking at sparkling and shiny picture we forget there is one more fact hidden in the above data, From the above data it is clear that in next 25-30 years almost 50% of our present population would enter retirement.

For an average human being retirement age means to depend rest of his life on retirement corpus created during working span of his life. Just to understand effect of Inflation on our household exps.(inflation@8%) The cost  of present household exps. valued at Rs.25000 per month would become Rs.251000 PER MONTH after 30 years and would be Rs.1175000 PER MONTH  i.e 1.41 CRORE PER YEAR after 50 years. It really seems funny to talk of 50 years. But it is the fact of life for youngsters who are in 25-40 age group and should be eye opener for them to reconsider the amount of funds they might require in retirement age.

 

Future value of Exps. @8% Inflation rate

Post Independence the average age of an Indian was in the range of 50-55 years. But due to improved medical facilities and newer technologies it has gone up to 75-80 years(in urban India) and don't be surprised if it moves up to 95-100 years in next 30 years.

We need to seriously consider our retirement planning at an early age of our carrier or as soon as we realise its need. The biggest factor which can help us in accumulating such a bigger corpus is power of compounding and proper asset allocation.

Illustration: Let us consider that Shahid Kapoor is an young, dynamic IT employee whose age is 30 year. He plans to retire at age of 58 and he considers his expected life to be 90 years. His present household expense is Rs.25000/month and considers it to be same even after the retirement age. He feels inflation pre and post retirement to be 8%.

Now, considering above his house hold expenses at the age of 58 would be Rs.2588132.00/Year and if he manages to get return 2% more then the inflation rate post retirement i.e 10% (Net of Tax). He would need to have a retirement corpus of 6.32 Crore.

Particulars	Amount
Total Monthly Expenses	25,000
Total Annual Expenses	300,000
Inflation	8.00%
Current Age	30
Retirement Age	58
Life Expectancy	90
No. of Years for Retirement	28
Expenses in the First Year of Retirement	2,588,132
Retirement years (life expectancy-retirement age)	32
Inflation during Retirement Years	8.00%
Investment Returns on Retirement Corpus	10.00%
Net Returns	1.85%
Retirement Corpus Required	63,216,858
Deficit (Corpus Required-Assets Utilized)	63,216,858
No of Years for Retirement	28
Expected Investment Returns	15.00%
Lumpsum Funding Required (If Available)	1,262,680
Monthly Investments Required	12,352

It seems to be impossible to accumulate the above amount during the working tenure of 28 years for an average person. But it requires much lesser then the EMI you pay for your Sedan (car) , expecting a return of 15% you require to invest just Rs.12352.00 per month. So delay your purchase of car or house by 3 or 5 years and safeguard your retirement.

As there is no social security system available for citizen of India we need to plan and protect our retirement life ourselves. Many of Central or State government or employees Covered under EPF feel relaxed that their retirement would be taken care of by there EPF account. Just showing below the value of EPF account of Mr.Shahid Kapoor present salary Rs.35000/Month and expects to appreciate 10% YOY.

Sr. No	Particulars	Values
1	Current Age	30
2	Retirement Age	58
3	Monthly Salary (Basic+DA)	35,000
4	Increase in Salary	10.00%
5	Contribution from Salary	12.00%
6	Current EPF Balance	0
7	Rate of Interest	8.50%
8	Value at Retirement	33,559,758

So, the deficit for retirement fund is huge even after considering the EPF maturity.

Although modern medical science has increased the life expectancy but has increased medical expenses substantially.What if someone meets up with some of the critical illness or might result him to be bedridden during his working tenure or Retirement age.

Now a days it's easily noticeable that in every household there is atleast one of the family member who is taking medicines on daily basis.That too 2-5 pills a day.

It is the high time that we should give priority to retirement planning , otherwise it can happen that today we are moving in a luxurious car or living in a bigger house but after retirement might need to move to a smaller house or settle for an economy car or even need to cut down on statutory house hold expenses.

Remember, if planned properly retirement life can be the golden period of our life as these is the only period when we would have ample time and if have sufficient money can do everything which we couldn't do during working span due to job, aspirations or family commitments.

SO PLAN YOUR RETIREMENT TODAY ONLY AND HAVE A GREAT LIFE AHEAD