RaagVamdatt.com

RaagVamdatt.com gets featured in Mumbai Mirror � getting a very positive review

Fri, 06 Nov 2009 09:02:36 +0530

RaagVamdatt.com was recently reviewed in Mumbai Mirror, and received a very positive review

On Nov 2, 2009, Mumbai Mirror reviewed RaagVamdatt.com for its readers � and it is full of praises! In fact, a rating of 4 stars (out of 5) was assigned to the website.

You have always known and trusted RaagVamdatt.com for its practical financial advise in simple-to-follow language. Now, there is an affirmation from yet another main-stream publication.

What exactly has been said?

Here is what Mumbai Mirror has to say about RaagVamdatt.com:

�...breaks down jargon and helps you understand your money better�

�If you are new to the world of finance, or simply need a few pointers in the right direction, here is a site that is bound to help you out.�

�...articles which are always well-researched and well-written�

�Every week, Vamdatt writes a blog post on his site that demystifies one of the many terms encountered in daily financial planning that can perplex the average Joe�

The Negative (and why only 4 stars and not 5!)

Mumbai Mirror did not like the part of site navigation in terms of finding the most popular articles � you needed to scroll all the way down to see the list of most read articles.

I could immediately agree with that view � and assuming that you too would find this a little annoying, I have rearranged the navigation structure. Now, the list of the most popular articles can be found right below the list of categories.

(It's so true that you can't see your own flaws � at times, it needs a third person to point out the issues!)

A big thanks

I sincerely thank Mumbai Mirror for reviewing this website and recommending it to its readers with a very high rating.

You can download the review here, or can visit the webpage �Raag Vamdatt - Financial planning demystified � a weekly blog that breaks down jargon and helps you understand your money better�.

(Coincidentally, this review was published on the same day on which the Hindi edition of RaagVamdatt.com �Aapka Paisa, Aapki Planning� was launched)

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Launching India�s first Hindi website on Personal Finance and Financial Planning

Mon, 02 Nov 2009 09:25:52 +0530

I am delighted, and very proud to launch the Hindi version of �RaagVamdatt.com � Financial Planning Demystified�, called �RaagVamdatt.com � Aapka Paisa, Aapki Planning�. It is India�s first Hindi website on Personal Finance and Financial Planning.

Hello,

I am delighted, and very proud to launch the Hindi version of �RaagVamdatt.com � Financial Planning Demystified� at http://hindi.raagvamdatt.com

The Hindi website is called �RaagVamdatt.com � Aapka Paisa, Aapki Planning�

India�s first Hindi website on Personal Finance and Financial Planning

�RaagVamdatt.com � Aapka Paisa, Aapki Planning� is India�s (and therefore, world�s) first Hindi website on financial planning.

Unfortunately, till now there was no website in Hindi that comprehensively wrote about all matters related to personal finance and financial planning.

Yes, there are websites giving out business news, and there are websites focusing on stocks / equities. But there is no website dedicated to the personal finance space.

�RaagVamdatt.com � Aapka Paisa, Aapki Planning� is my humble attempt at filling this space and providing excellent quality content on financial planning to the Hindi speaking people.

It is my fond hope that you would like the Hindi version as much as you have liked the English version of RaagVamdatt.com

The Content

The Hindi version of RaagVamdatt.com would start with the following features:

Articles
Downloads (forms, sample spreadsheets, etc)
Polls

The functionality would be gradually scaled up, and more features would be added.

Articles

The articles that I write form the dominant portion of the English version of RaagVamdatt.com. This is something of great interest to you, my readers. Therefore, articles would be the first to be offered in the Hindi version.

To begin with, all the articles from RaagVamdatt.com � except for news related articles � are being translated in Hindi, and would be published gradually in about 2 months time. (This would be a total of about 155 articles written in English over a period of 2 years)

Once this is done, all subsequent articles would be published in English and Hindi simultaneously, without any delay.

Downloads

Downloads would be available to registered members of the Hindi website. (This registration is different from the registration for RaagVamdatt.com)

Various spreadsheets used as examples in different articles would be available for download here.

Apart form this, various forms � like income tax return (ITR) forms, provident fund (PF) forms, post office scheme forms, etc. would also be available for download.

Wherever the forms are available in Hindi, I have put Hindi forms for download. If Hindi version of any form is not available, it would be available for download in English.

Polls

The Hindi version would run the same poll as the English version � but in Hindi.

The Translation

Please note that the translation of the articles has not been done using any software or tool (like Google translate). The articles have been hand-translated, so that the meaning of the article is well conveyed even in Hindi � in the same easy-to-understand manner that RaagVamdatt.com is famous for.

The translation has been done by Anumeha, and has been proof-read and edited by me.

Your feedback

Please visit the Hindi version of RaagVamdatt.com at �RaagVamdatt.com � Aapka Paisa, Aapki Planning�, and let me know your opinion about it through your comments below.

Thank you for all your support, and hoping for the same for the Hindi version as well.

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An introduction to Universal Life Policy (ULP) for life insurance

Wed, 28 Oct 2009 09:22:35 +0530

Since IRDA has approved the introduction of ULPs, we can expect a flood of such products in the Indian market. Here is all you need to know about this type of life insurance policies.

There are many types of insurance policies available:

Of course, the best form of insurance is term insurance (check out �Term policy (term insurance) is the best policy�). However, if you have decided to invest in an insurance + investment type of a policy, should you invest in Endowment or a ULIP?

Obviously, both these have their advantages, and disadvantages. However, a Universal Life Policy (ULP) tries to combine the best of endowment plans and ULIPs.

What is Universal Life Policy (ULP)?

The hallmark of a ULP is flexibility. You can change its:

Premium amount
Tenure (also called tenor or duration)
Sum assured

As you can see, none of these benefits are offered by the traditional policies. Thus, a ULP brings something totally new to the market!

Features of a Universal Life Policy (ULP)

Premium can be changed

The amount of premium that you pay for your policy can be changed during the life of the policy. This gives you great flexibility to adapt your insurance policy to your changing incomes.

(Initially in India, the premium amount may not be allowed to be changed. However, you should be able to change the premium paying frequency � between yearly, half yearly, quarterly and monthly � which too gives you some flexibility)

Sum assured (SA) can be changed

Again, this is something that gives you tremendous flexibility. You can change the sum assured depending on the changes in your insurance needs � depending on your income, your dependents, etc.

(Please read �How much is your life worth - How much insurance should you buy?� for more)

Tenure can be changed

Just like the premium and sum assured, the duration of the policy can also be changed midway while the policy is already in force.

No cancellation if premiums discontinued

Even if you stop paying the premiums, the policy would not get cancelled. The policy would be kept alive and in force, although with a reduced sum assured.

No flexibility in investments

Here, a ULP would be more like a traditional endowment plan � you would have no control over the investments. The investment manager of the policy would decide where your money is deployed.

Unlike a ULIP, you would not be able to choose from different options like maximizer (equity focused), balancer (mix of debt and equity), etc.

(Check out �ULIP v/s Endowment Plan for Life Insurance� for more)

No transparency of investments

Again, like endowment plans, you wouldn�t know where your money has been invested, and how much return it has obtained. You would just know the �bonus� declared by the insurance company from time to time.

No fund management charge

Since you would not be specifying where your investment would go, there would be no fund management charge deducted from the premiums. This is a big relief compared to ULIPs!

Universal Life Policy (ULP) in India

So, when can we expect ULPs in India?

Quite soon! The Insurance Regulatory and Development Authority (IRDA) has approved application for offering ULPs by some life insurance companies. So, we can expect them any time now!

The companies that should be launching ULPs initially are Bharti Axa Life Insurance and Max New York Life.

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Cost To Company or CTC salary: Understanding and Calculation

Wed, 21 Oct 2009 08:41:03 +0530

What is Cost to Company or CTC salary? How is it calculated? If your CTC package is so high, why do you get so little in hand? This article explains it all.

Your company offered you a salary of Rs. 6 Lakhs per year. That means you should be getting Rs. 50,000 in hand every month. Even if you consider income tax, you should be getting about Rs. 40,000 in hand.

But you get only Rs. 32,000 in-hand every month! Why? Where did the promised money vanish? Is your company cheating you?

No! It is because the company promised you the salary as Cost to Company, or CTC.

So, what exactly is CTC?

The concept of Cost to Company (CTC)

Simply speaking, CTC is the amount that you cost your company. That is, it is the amount that the company spends � directly or indirectly � because of employing you.

Thus, it is the money given to you (your in-hand component), plus the money spent because of you.

You�ll understand this better while we discuss the various components of your CTC salary, so let�s jump into it right away! We will also use an example parallel to the discussion, so that you can understand the concept of CTC better.

Components of Cost to Company (CTC) Salary

In �Understanding components of your salary�, we saw the various components of your in-hand salary.

These are:

Basic
Dearness Allowance (DA)
Incentives or bonuses
Conveyance allowance
House Rent Allowance (HRA)
Medical allowance
Leave Travel Allowance or Concession (LTA / LTC)
Vehicle Allowance
Telephone / Mobile Phone Allowance
Special Allowance

All the above are a part of your in-hand salary, and therefore, are a part of your CTC pay as well.

Example: Let�s understand this using a simple example. Say your basic is Rs. 15,000 per month, DA is Rs. 10,000 per month, you get conveyance allowance of Rs. 800 per month, and you get HRA of Rs. 4,500 per month. So, your package so far is Rs. 3,63,600 per year.

Now let�s look at some of the other components of your CTC pay � the parts that inflate your CTC package but may not be actually given to you!

Company�s contribution to Provident Fund (PF)

It is mandatory for you to contribute 12% of your basic towards provident fund (PF). Your employer makes an equal contribution (12% of your basic) to your PF account.

(Please read �Provident Fund (PF) and Voluntary Provident Fund (VPF)� to know more about provident fund)

So, although this amount is not given out to you every month, for your company, it is an expense that it incurs on you every month! Therefore, this forms a part of your CTC pay.

Example: 12% of your basic is Rs. 1,800 per month. That is, Rs. 21,600 per annum. Your CTC package becomes Rs. 3,85,200.

Reimbursements

Various reimbursements that you get from your company can also form a part of your CTC package.

This includes reimbursement of:

Medical bills
Phone bills
Magazine subscriptions
Book purchases, etc.

Example: Say you get reimbursement of medical bills of upto Rs. 15,000. So, your CTC package becomes Rs. 4,00,200.

Life Insurance and Health insurance

Most respectable employers provide free health insurance cover to their employees and their dependents. Some companies also provide life insurance for their employees free of cost.

The premium amounts paid for such insurance on your behalf can be included in your CTC salary.

Example: Say you get a health insurance cover of Rs. 1 Lakh for yourself and your family. The premium for this is Rs. 2,000. Thus, your CTC package becomes Rs. 4,02,200.

Medical Facilities

Many companies have in-house health centers, hospitals or other health care facilities where medical care is provided free of cost to employees.

Companies work out a per-employee cost for such facilities, and can include that in your CTC pay package.

Transport Facilities

Many companies provide free transport facility to their employees from their place of work to the job location.

The cost of such transportation can be added to your CTC package.

Subsidized Meals

Many companies run canteens or cafeterias for their employees, which provide subsidised meals to the employees. Such subsidy can be included in your cost to company package.

Example: Let�s say your company provides you lunch for Rs. 10, and the actual cost of that lunch is Rs. 25. Thus, there is a subsidy of Rs. 15 per meal.

For 21 working days in a month, this is Rs. 315. Or, Rs. 3,780 per year. Thus, your CTC package becomes Rs. 4,05,980.

Taking it too far

The components of your CTC salary sound reasonable so far, right? After all, this is the money that you get in one form or the other.

But some companies take the concept of cost-to-company too far! Look at the following:

Office phone bill

The bill for the office phone that you use can be included in your CTC salary too.

Office space rent

Shocked? Its true! There are many companies � especially large investment banks � that include your office space rent in your CTC package!! Yes, it defies logic, but it is true!

Example: Let�s say your office is in Churchgate in Mumbai. Your have a small cubicle, say 6 feet by 8 feet (48 square feet). Let�s say the going rate for rent for office space in that area is Rs. 200 per sq. ft. per month.

What is the cost of your cubicle in that case? Its Rs. 200 * 48 = Rs. 9,600 per month, or Rs. 1,15,200 per year.

When this is included in your CTC, your overall CTC package becomes Rs. 5,21,180!

A side note: Remember this when you read about the whopping, exorbitant salaries paid out to fresh management graduates (Like the IIM Ahmedabad MBAs)! Their large salaries might include the office space rent as well!!

A note on government salaries

We often hear people say that the salary of government employees is quite low.

Although there is truth in this, government salaries wouldn't seem too less if we look at it from a �CTC� point of view.

When we talk about government salaries, we only talk about the �in-hand� component. But we forget that on a cost-to-company basis, it can be quite substantial.

What extras do government servants get? Here's a sample list:

The 12% of basic that the government deposits in their PF accounts, just like private companies
Membership of government clubs or gymkhanas
Free stay at various circuit houses and government guest houses
Free telephone connection at home
Free car with driver
Reimbursement of newspaper bills
Free use of many libraries
In case of defense personnel (Army / Navy / Air Force), a huge subsidy on items bought from their �canteens� (like groceries, appliances, etc.)

When these things are taken into account and salaries of government employees is considered on a cost to company (CTC) basis, it won't seem too less compared to the private sector!

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Restrictions on usage of ATMs of other banks

Tue, 13 Oct 2009 05:57:08 +0530

Although free third party ATM withdrawals were announced with much fanfare in April 2009, some restrictions are coming on such transactions from 15th October 2009. Read on for more details.

In April 2009, the Reserve Bank of India made third party ATM usage free. This was true for both withdrawals and balance enquiries.

(Check out �Free cash withdrawals from all ATMs in India from 1 April 2009� for more)

That is going to change from October 15, 2009.

The background

The April directive by the Reserve Bank of India (RBI) stated that transactions on ATMs owned by banks where you did not have an account (third-party ATMs) were free.

That is, any number of withdrawals � for any amount � were totally free for customers. Account balance checks were free too.

The restrictions

Now, at the insistence of banks, and following the recommendations of the Indian Banks' Association (IBA), there are some restrictions coming in.

Starting October 15th, there would be a cap on the free transactions. You would be:

Allowed only 5 free transactions in a month. Subsequent transactions would be charged (the proposed rate is Rs. 20 per transaction)
Allowed to withdraw a maximum of Rs. 10,000 while using the ATM of a third-party ATM

Also, this facility would be available on to savings account holders, and not to current account holders.

Some exceptions

Of course, the banks would be allowed to be more liberal than this.

Thus, for example, a bank can choose to offer unlimited free third party ATM withdrawals to its �premium� customers.

The reason behind this change

When you withdraw money from a third-party ATM, you bank has to pay some amount (around Rs. 18 to Rs. 20) to the other bank for the use of its ATM. Therefore, the banks have been insisting on limiting these transactions to a reasonable number.

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Interview published at RanjanVarma.com

Wed, 07 Oct 2009 10:01:43 +0530

I have recently been interviewed by Ranjan Varma of RanjanVarma.com. Check out the details.

I have recently been interviewed by Ranjan Varma regarding my opinion about some matters related to personal finance. You can read the interview here: Raag Vamdatt: Helping People making Right Investment Choices

Some of the questions that have been covered are:

Why is it that generally people avoid or have a fear of financial planning? What is the fundamental problem? Is it specific to India or is it a global phenomenon.
What are the various options available for investments? What would be your recommendations?
Can you give a brief overview of how should one�s portfolio be at different ages.. Eg at 25 years, 35 years, 45 years etc.
Is it advisable to have a personal finance consultant who maintains ones portfolio? Are there people who do this? If so how much do they charge? Are they really helpful in the first place?
Do you visualize a growing use of personal finance software to track and manage money in India?
The Regulators are cracking the whip on Asset Management Companies and Insurers. What�s your wish list from the Regulators?
What prompted you to start your Blog? What motivates you to keep on blogging?

About Ranjan Varma

Ranjan Varma has been very active in the Indian blogsphere, and has been writing about matters related to personal finance for a long time now. His goal is to "change the way Indians manage their money".

He writes at Improving my Financial IQ and Personal Finance 201.

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Articles from RaagVamdatt.com published in Dignity Dialogue

Thu, 01 Oct 2009 09:36:56 +0530

Select articles from RaagVamdatt.com are now being published in Dignity Dialogue, a publication from the NGO Dignity Foundation.

I am glad to announce that select articles from this website are now being published in �Dignity Dialogue�, a monthly magazine from the reputed NGO Dignity Foundation.

You can find a sample here:

Missed Your IT Deadline? (Might take some time to download - it is a 4.3MB file)

About Dignity Foundation

Dignity Foundation is an NGO that works for the cause and care of our elders (over 50 years of age). Headquartered at Mumbai, Dignity Foundation was established in April 1995 to cater to the needs of the elderly.

Dignity Foundation is a charitable organisation under Societies Reg. Act 1860 GBBSD/97C.

For more, please visit http://www.dignityfoundation.com/

About Dignity Dialogue

Dignity Dialogue is a monthly magazine published by the Dignity Foundation, and contains articles and information useful for senior citizens.

Amount raised from the subscriptions to Dignity Dialogue is one of the means to fund the activities of Dignity Foundation.

To see the contents of the current issue, please visit http://www.dignityfoundation.com/dd-current.htm

To subscribe and contribute towards the activities of the Dignity Foundation, please click on one of the following:

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Transparency in floating interest rate home loans � Customers to know changes in reference rate instantly

Fri, 25 Sep 2009 10:02:19 +0530

The Banking Codes and Standards Board of India (BCSBI) has asked its member banks to publish the reference rate to which its floating rate loans are tied. The banks have also been asked to publish any changes made to the reference rate.

There has been a very welcome (and desperately needed!) development in the area of home loans.

Till now, if you had taken a home loan on a floating rate, you had no idea what that rate was tied to. It could be any arbitrary rate, like a bank�s �floating prime lending rate (PLR)� or its �internal rate�.

It was vague, and no one outside the bank knew what it was and how it changed. Worse still, you didn�t even know when it changed � you came to know about it only through your home loan statement, which would arrive a couple of weeks after the change!

But this is going to change soon.

More transparency on floating interest rates � finally!

The Banking Codes and Standards Board of India (BCSBI) has suggested measures that would bring in the much needed transparency regarding the floating rates.

[BCSBI is an initiative jointly promoted by the Reserve Bank of India (RBI) and Indian Banks� Association (IBA)]

(Should you go in for floating interest rate, or a fixed interest rate? Check out �To float or not to float, that is the question!�)

Reference rates to be published

BCSBI has asked all its member banks to disclose the reference rate to which its floating rate loans are tied to. This means that banks would need to communicate the reference rate to you if you have availed of a floating interest rate home loan.

BCSBI currently has 79 banks as its members. Most commercial banks are BCSBI member banks, so this directive would effectively apply to almost all banks.

You can download the list of member banks here.

(You need to be logged-in to download the list. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

Changes to the reference rates to be published

Not just this, banks would need to publish any changes in the reference rate on their websites as soon as the change takes place! This would also be displayed in their branches.

Floating rate to fixed rate conversion, or vice versa

Banks would also need to inform you in case there is an option to convert a fixed rate loan to a floating rate loan, or a floating rate loan to a fixed rate loan, and the fee for such a switch.

Disclosure of reset clause and date

If your fixed rate loan has a reset clause (through which the �fixed� rate can be changed based on interest rates prevailing in the market), the bank would need to inform you about it, and the dates on which this clause can be exercised.

Other changes proposed by BCSBI

Apart from the measures announced for floating rates, BCSBI has also announced many other transparency measures:

- Banks would need to explain the income tax implications of interest income earned from a fixed (or term) deposit account whenever a fixed deposit is opened by you

- Banks would need to act on customer complaints within 30 days

- Banks would need to come out with �Most important terms and conditions�, or MITC, for its credit cards and loans. MITC would be a simple (and shorter!) version of the terms and conditions

- Banks would need to state their policies on cheque collection, collection of dues, and a schedule of various charges levied on customers on their websites

- Banks would need to inform joint account holders before they can categorize an account as a dormant account or an inoperative account

- Banks would need to return all documents (title deeds, etc) of a mortgaged property to the borrower within 15 days of full repayment of a home loan

Download

You can download the full text of the code here.

(You need to be logged-in to download the document. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

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7 factors you should consider before buying a second house

Fri, 18 Sep 2009 02:48:38 +0530

You already own a house, and are thinking of purchasing one more. Should you, or should you not? What are the things that you should keep in mind while taking this decision?

Buying a house is a very high priority for most of us. And rightly so � buying a house when you are young has lots of benefits.

(Please read �Settle early in life - buy a home when young� for more).

But what if you already have a house of your own, and are considering buying a second one (flat / apartment / bunglow / anything) for yourself or as an investment?

Here are the seven most important things that you need to consider before taking this decision.

1. Can you afford another house?

Of course, this has to be the very first consideration.

Evaluate your current income, and you current expenses, including the EMI of your current home loan.

Also, consider the changes that you expect in your income and expenses going forward � after all, buying a house is a long term investment, and has long term implications!

Consider the additional EMI if you are going to take a housing loan for the new house. Also factor in the maintenance charges and municipal taxes for the new house.

If you are planning to rent out your second house, then of course you need to factor in the post-tax rental income as well.

Considering all this, carefully evaluate if you can financially afford to purchase a second house.

2. Do you actually need to buy another house?

Now this can be tricky!

If you are planning to buy another house purely for investment, then you need to do financial calculations about your investment and the likely rental yield as well as the possible capital appreciation.

However, you need to be very careful if you are not buying the house as an investment. You really need to think hard if you actually need to buy a house.

For example, many people consider buying a house in a vacation spot, so that they can spend their vacations there (For example, Mumbaiites prefer Lonavala).

If this is the case, consider the time you would be spending there every year, the upfront cost of the house, and the associated fixed expenses like maintenance, electricity and water bills, etc.

Then, you have to take a call � does it really make sense to buy a second house? Or is it better to stay in a hotel every vacation?

(An advantage of not buying a vacation house is that you can spend your vacations at different locations every year!)

3. Home Loan Restrictions

If you are planning to buy your second house through a home loan, please remember that the terms for a housing loan for a second house are usually not the same as a loan for the first home!

While banks finance upto 90% of the value for a first house, they might not finance more than 75% of the value of your second house.

This means that you would have to arrange for more money upfront from your own pocket.

Also, many banks charge a slightly higher rate of interest for home loan taken for a second house!

4. Home Loan Eligibility

How much home loan you ultimately get would depend on your monthly income.

Banks usually don't like to see EMI payments go beyond 50% of your monthly take home salary.

So, the bank would consider all the loans you have taken, including your existing home loan, car loan and personal loans, and would then see how much headroom is available to you.

For example, say your monthly take home salary is Rs. 40,000. The EMI for your existing home loan is Rs. 9,000, and the EMI for a personal loan you have taken is Rs. 3,000.

Thus, the total EMIs that you are paying are Rs. 12,000. A bank would ideally not like to see the total EMI go beyond Rs. 20,000 per month for you.

Thus, you would be eligible for a home loan amount for which the EMI would come to about Rs. 8,000 per month.

You can also take a home loan in joint name along with your spouse. Please read �Advantages and disadvantages of home loan in joint names� for more on this.

5. Income tax benefits of a home loan for second house

There is a misconception that income tax benefit for a home loan (under section 80C for principal and under section 24 for the interest paid) are available only for one house.

This is not true. Income tax benefits of a home loan are also available for home loans taken for second and subsequent houses � there is no restriction regarding the number of houses.

For all the details on this, please read �Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage� and the comments below the article.

6. Income Tax � House �deemed� to be rented out

This is a very important factor, especially if you are not planning to rent out your second house.

If you possess two or more houses, for the purpose of income tax, you have to choose one of the houses as �self occupied�. Other houses are treated as being rented out, and the income from them is added to your income.

This is not a problem if you have actually rented out your second house � you just add the rent received to your income.

However, if you have not rented out your second house, it is �deemed� to be rented out.

The income from it would be the rent that can be reasonably expected from it if it is actually given out on rent. For all practical purposes, this is the market rent that the house can fetch.

Thus, you would have to add to your income an amount that you are not actually earning � and would need to pay income tax on it. This might seem harsh, but, well, this is how the law is.

So, make sure you have factored this in when you make the decision to purchase a second house.

7. Location of the house

Buying a house is not a one-time task � there are many things that you have to keep doing later on for the entire life of the house.

This would include paying the maintenance to the society, paying the municipal taxes, maintenance and repair of the house from time to time, getting the house coloured, etc.

And if you are planning to rent it out, you would need to show the house to brokers, estate agents and potential tenants from time to time.

Due to these reasons, the location of the house becomes very important. Make sure that it is located at a place that is convenient to you, and is easily reachable from your existing house.

Location also becomes very important if you are investing mainly for capital appreciation. Make sure the house is located at a place that is not saturated, and is expecting lots of development in the future.

Concluding remarks

Consider these factors while purchasing your second house, and you would be able to make an educated decision.

However, remember that these factors are only the ones that are unique for a second house � you still need to consider all the things that you would consider for buying any house.

Some of these would be:

Price of the property
Reputation of the builder
Quality of construction
Age of the building
Legality of the building (documents, approvals, etc)
Design and layout of the house / apartment / flat
Amenities to be provided by the builder

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Interest rates are bottoming out � Want to take a loan? The right time is now!

Fri, 11 Sep 2009 03:49:45 +0530

The interest rates are near their bottom today, before they move up again. This is the right time to take a home loan, a car loan or any other long term loan. It also has implications of FDs that you might want to keep.

Interest rates move in cycles. They move up, move down, and then move up again periodically.

Just 2 years ago, we saw rates that were pretty high � about 14% per annum for home loans. And then, we saw them go down due to the credit crisis and the resulting slowdown.

Rates reduced due to the slowdown

There were two reasons for the interest rates reducing during this slowdown.

Lesser demand for money

The demand for borrowed money has decreased in the recent past.

Companies are not borrowing, as they are not certain about the future demand for their products. People are not borrowing, as they are not certain about the future of their jobs and incomes.

This reduction in demand puts pressure on the interest rates, and they tend to go down.

Aggressive rate reduction by central banks

Most central banks, including the Reserve Bank of India (RBI), have been reducing interest rates aggressive to support the economy in this downturn.

Since banks can borrow at a lower rate from the RBI, they can also lend at a lower rate. Thus, the overall interest rates have been sliding down.

Is the recession over?

Going by these reasons, the interest rates should remain low till the time the recession is over. Rates should not go up till we see growth picking up again.

Is this happening? Not yet. So why are the interest rates getting impacted?

There is another factor that has come into play, which is completely changing the demand � supply equation for money in India.

The impact of Budget 2009

In the budget for the year 2009-2010, the government has lined up huge expenditure for various programs and schemes.

However, the overall expenditure of the government is far higher than the revenue it is expecting to collect through various taxes and other means. Thus, there is a very large gap (or shortfall) between the funds the government would be generating and the money it would be spending.

What does this mean?

This means that the government would borrow the difference from the market. (It is just like the situation for you and me � if we fall short of money, we need to borrow. The same is true for the government as well!)

And since this amount of borrowing is going to be huge, this would create a lot of additional demand for the funds available for lending.

Has the bottom been reached for interest rates?

Due to the two factors mentioned earlier (lesser demand for money and aggressive rate reduction by central banks), the rates have been steadily reducing for the past 1.5 � 2 years.

Considering just the normal economic factors, there is scope for the rates to reduce further. However, the large borrowing program of the government would most certainly put a brake on this.

In fact, there is a high possibility that the rates would move up slightly due to this. And when growth in the economy actually picks up again, the interest rates would shoot up due to all the additional demand created by companies and individuals.

Thus, there is a very high possibility that we are seeing the bottom of the current interest rate cycle right now.

What does this mean for you?

Coming to the most important question � what does all this imply for you?

This is the right time to take a loan

If you are planning to take a long term loan like a home loan, the correct time is now.

Make sure that you take a fixed rate loan, so that you don�t get affected by the rising interest rates.

(Check out �An introduction to home loans and factors to consider� for more on home loans, and �Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage� for the income tax benefits that a home loan offers)

The fact that property rates have reduced a lot in most cities (and are also bottoming out) would only help you in acquiring a house at the right time!

Tip: If you haven�t finalized a property, you can always get pre-approved by a bank for a home loan. That way, you would have approval for getting a loan at a certain rate, and this approval (and the rate) usually remains valid for 3-6 months.

Fixed deposits (FDs) � Should be for short term

If you want to save some money in fixed deposits, open only a short term fixed deposit (maybe for 6 months to a year).

(Check out �Fixed Deposit (FD) � A favourite for generations� and �Fixed Deposits (FD) for saving income tax through section 80C� for more on FDs)

The rates are going to go up � and you wouldn�t want to get stuck holding a low-rate FD for a long term!

If you open a short term FD today, you can benefit from the increased interest rates when your FD comes up for renewal.

Conclusion

The rates are bottoming out, and they would not go much lower (if at all) before they start rising again.

If you are planning to take a loan, lock-in to the interest rates today � today�s rates may not be available for another 5-6 years! Also, make sure that you opt for fixed rate loans.

If you are planning to invest your money in bank FDs, invest only in a short term FD so that you can benefit from increased rates during renewal.

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