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posted by sandeeparya @ 6:06 PM
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posted by sandeeparya @ 5:55 PM
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Bank of Americ and Zecco both are offering free online trading
Maybe Zecco was right and stock trades really are a commodity now. Today, Bank of America announced that they will be offering 30 free online trades a month for customers with at least $25,000 in combined deposits. Not surprisingly, shares of discount brokerages like E-Trade (ET) and Ameritrade (AMTD) are not doing so hot, both down ~10% today.
It’s only available in the Northeast at first, nationwide later.
posted by sandeeparya @ 10:37 AM
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For the past week or so, I have been playing with a free Retirement Calculator that I downloaded from Pivot Point Advisors. I urge you to stop by their website, download the calculator, and start looking at your numbers. This link also has step-by-step instructions on how to use the calculator and Martin Gremm from Pivot Point has agreed to check in and answer any questions via the comments to this post.
http://pivotpointadvisors.com/retirementcalculator.asp
I am by no means an expert on Monte Carlo analysis. I do know enough to know that Monte Carlo Analysis helps avoid planning based on market averages, which can be deadly to a portfolio. I did a little research and found this article from Business Week that does a nice job introducing the concept. The article also lists several websites that may be of assistance:
ANALYCORP, www.analycorp.comStanford’s Sam Savage has books and software to learn about Monte Carlo simulations
DECISIONEERING, www.decisioneering.comSoftware firm specializing in risk analysis, with test spreadsheets available for downloads
FINANCIAL ENGINES, www.financialengines.comFinancial planning Web site makes projections based on Monte Carlo simulations
PALISADE, www.palisade.comThe @Risk Monte Carlo program works as an Excel add-on
T. ROWE PRICE, www.troweprice.comRetirement Income Calculator uses Monte Carlo to project withdrawal rates
Finally, if you are heavy into math, you might like Monte Carlo Analysis section at RiskGlossary.com. I saw just enough to realize that I didn’t want to read any more! Also, there is a Wikipedia for Monte Carlo Analysis that might be worth checking out.
Since this is a relatively new topic on this blog, I will probably be talking more about it in the future. Meanwhile, if you have any questions for Martin, please leave a comment and we’ll see if we can get him to stop by and answer them.
posted by sandeeparya @ 8:49 PM
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Cool advertisement by Thai Bank
posted by sandeeparya @ 8:33 PM
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Source:
http://moneycentral.msn.com/content/Banking/creditcardsmarts/P72328.asp
posted by sandeeparya @ 8:09 PM
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http://in.rediff.com/getahead/2005/mar/28fund.htm - How mutual Fund - SIP works
posted by sandeeparya @ 5:03 PM
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Let's say you invest Rs 24,000 in the PPF. Which means you will have to save around Rs 2,000 every month towards this kitty.
Now let's assume that, every year, you save the same amount, Rs 24,000.
Over 15 years (the tenure of the investment), at 8% per annum, your kitty would be worth Rs 7,79,914.85.
posted by sandeeparya @ 4:47 PM
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Source: Courtesy: http://www.rediff.com/getahead/2005/sep/28baby.htm
I remember chatting with a father of two little girls. When he spoke of his daughters, his eyes lit up -- like most dads.
He had just one goal in mind. He wanted his daughters to get the best education possible.
Six years ago, he began to invest every month in a diversified mutual fund for his daughters.
He began with an amount as low as Rs 500 a month and kept increasing it. Today, he invests Rs 7,500 in each of his daughters' names every month.
Though both are still in school, each girl already has Rs 7,00,000 to her name.
How did he do this? Through a Systematic Investment Plan in a mutual fund.
Mutual fund
An SIP allows you to deposit a fixed amount every month in a mutual fund. This money goes towards buying units of a fund.
If the Net Asset Value (price of a unit of a fund) is high, you get fewer units. If it is low, you get more units.
1. You can get great returns
Over time, the returns from SIPs are great.
Value Research, a mutual fund research organisation, did a study on 34 mutual funds in existence from July 1995 to June 2005.
The average point-to-point annual returns of these funds stood at 13.41%.
If you were a regular investor, investing the same amount every month in an SIP, the situation would be completely different.
Let's say you put in a fixed amount every month in a mutual fund. You would have made an average of 20.37% per annum (as against 13.41% in a one-time investment).
Here are the annual returns (given in percentage) over the various years from some consistent performers, had you invested in an SIP.
Fund | 8 years | 9 years | 10 years |
Franklin India Prima | 23.83 | 30.38 | 35.78 |
HDFC Equity | 25.17 | 29.09 | 33.22 |
Franklin India Bluechip | 23.79 | 29.66 | 31.43 |
Franklin India Prima Plus | 21.94 | 27.26 | 30.22 |
Birla Advantage | 17.27 | 21.59 | 26.16 |
Prudential ICICI Power | 13.14 | 18.86 | 23.86 |
Canexpo | 10.17 | 16.28 | 21.90 |
Morgan Stanley Growth | 10.41 | 15.21 | 20.35 |
8 year return as on June 30, 2003
9 year return as on June 30, 2004
10 year return as on June 30, 2005
2. Opt for a diversified equity fund
Since you are looking at the long-term and looking at your investment growing in value -- and not at a monthly income -- it would be wise to invest in a diversified equity fund.
Equity makes money over time. Moreoever, you have ample time to ride the ups and downs of the market.
If you are wary of investing solely in equity, try a balanced fund. These funds invest around 60% in equities (shares) and 40% in debt (fixed-return investments like bonds).
In such funds, the equity part of the portfolio is meant to generate superior returns while the debt component provides stability.
Though the returns tend to be lesser than a diversified equity fund, these funds are suitable for those who are not keen on taking risks or willing invest all their money in equities.
3. Opt for growth, not dividend
A mutual fund generally offers two schemes: dividend and growth.
The dividend option does not re-invest the profits made by the fund through its investments. Instead, it is given to the investor from time to time.
In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the Net Asset Value to rise over time. The NAV is the price of a unit of a mutual fund. The NAV of the growth option will always be higher than that of the dividend option because money is being invested back in the scheme.
Since you are not looking at a regular income from this investment but are saving for a future date, opt for growth.
Public Providend Fund
The limit under Section 80C is Rs 1,00,000.
Even if you put in Rs 10,000 per annum in your child's name for 15 years, at 9% per annum, you will end up with Rs 3,56,458 at the end of it.
Child plans
Child plans basically work like an endowment plan. Which means, on maturity of the policy, a fixed amount is returned to the parent.
This is how it works. The parents pay a premium for a policy. This policy is operational for a number of years. Should the parent die, the child gets the sum assured (amount the policy has been taken out for). Should the parent survive, the sum assured is handed over on maturity of the policy.
Say you want a huge lumpsum when your child turns 15 and is all set to go to college. So you should buy a 15-year policy when your child is born. You will have the option of paying the premium at one go or in phases. When your child turns 15, you get the money and can use it for whatever education expenses you saved it for.
Such polices cover the life risk for a specified period and at the end of this period, the sum assured is paid back to the policy holder.
You can check out the policies offered by Bajaj Allianz, Birla Sun Life, ICICI Prudential Life Insurance, Life Insurance Corporation of India, Max New York Life and SBI Life Insurance.
In addition, you also get child plans from mutual funds. Here, the fund manager invests the money just like a normal mutual fund but returns are not guaranteed. On the flip side, if he makes some smart investments, you could make a cool profit.
Child plans of mutual funds by design are similar to balanced funds. However, the fund manager will select companies that display long term potential as opposed to short-term returns, which any other balanced fund manager may look at.
The fund manager will look at companies that display superior opportunities for growth in the long term simply because most parents aspire to see a Net Asset Value that is slowly but steadily growing as opposed to a sharply volatile NAV.
Mix 'n' match
Don't just pick up one investment avenue. Each have their advantages and risk profiles.
An investment in a diversified equity fund will give you great growth but there is a risk it may not perform well too. The PPF and plans from insurance companies will give you the stability required. The child plans of mutual funds will give a lower risk than a diversified equity fund but a higher risk than PPF and insurance.
Alternatively, you could even buy some shares of companies. Over the years, their price is bound to rise. All the dividends that the company gives can be put into an account for your child. When you child comes of age, you can sell the shares and use the proceeds towards his end.
Financial institutions like IDBI and ICICI come out with long-tenure bonds. You could even look at those.
Ultimately, you will have to mix and match to ensure that you have comfortably invested for your child.
posted by sandeeparya @ 4:45 PM
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Readings for international investments
posted by sandeeparya @ 12:11 PM
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| Plan | Growth |
| SBI: Horizon | 56.64% |
| Sensex | 45.07% |
| Kotak aggressive | 43.72% |
| Reliance Life (Equity) | 43.34% |
| HDFC-Standard: All ULIPs | 43.09% |
| ICICI-Prudential: LifeTime Plus | 39.84% |
| ICICI-Prudential: LifeTime Super | 38.66% |
| Nifty | 38.41% |
| Bajaj Allianz: Unitgain plus | 37.27% |
| Metlife Multiplier | 33.45% |
| Kotak dynamic | 31.41% |
| aviva Saveguard growth | 26.45% |
| Max New York Growth | 25.14% |
| TATA AIG Growth | 24.21% |
| ING Vysya Growth | 20.56% |
| Aviva Lifelong | 16.01% |
| Birla Sun Life - Enhancer | 15.22% |
posted by sandeeparya @ 11:12 AM
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Those of us who tried buying a home in the past 18 months can easily identify with the experience of 32-year-old Rahul Mathur. For this Gurgaon-based senior consultant with recruitment firm Ma Foi, identifying his dream home was more like aiming at a moving target.
Mathur started his search for a three-bedroom flat in Gurgaon in June 2005 with a substantial budget of Rs 25 lakh (Rs 2.5 million). However, during the course of his search in the following months, he would find the property prices going up during every visit to this Delhi suburb. He finally managed to buy a house priced at Rs 32 lakh (Rs 3.2 million) in November 2005 -- Rs 7 lakh (Rs 700,000) more than his budget -- with the help of a 20-year floating rate loan from ICICI Bank.
Of course, there was relief from the success in acquiring what probably would be his life's biggest investment. By stretching himself on home acquisition, Mathur, however, had to make a compromise somewhere else.
"I would have bought a bigger car than the one I eventually bought had the prices not moved up so drastically," says Mathur.
Mathur's predicament is shared by most other home buyers. In the past 18 months, not only have real estate prices soared but home loan interest rates have headed north too, making a substantial impact on affordability of homes. In conditions such as these, should a home buyer go on to make the purchase and stretch his finances or should he postpone his purchase?
Clearly, it is not an easy decision to take, more so if you consider the following risks emanating from rising property prices and home loan rates.
The New Risks
For the sake of convenience one can categorise the new risks according to their sources, that is rising property prices and rising home loan rates.
Risks from rising property prices: On an average, property prices have moved up by 30-50 per cent in the past one year. In some areas, notably Delhi suburbs of Gurgaon, Noida and Faridabad, prices have doubled during the same period. This has exposed the buyers to new risks.
Increased financial vulnerability: This is the one of the major risks that you could face where you, like Mathur, could end up stretching your budget. Home finance companies typically finance 85 per cent of the cost of the property. This means that you will have to arrange for the balance 15 per cent from your resources.
In the backdrop of rising property prices, you run the danger of having to cough up more for the down payment should the prices increase substantially during the period of your home search.
Depending on the state of your finances, you could go through a period of financial difficulty. While Mathur had to compromise only on the car he bought, things could get even more difficult for others. Since you tap liquid funds during your home purchase, stretching your budget might leave you with very little liquidity to address emergencies, especially non-insurable ones.
Cascading effect on associated costs: There are additional costs linked to the cost of the property. Costs such as those for stamp duty payment, registration, builder transfer charges, legal costs and maintenance charges are all linked to the price of the property. For instance, depending on the property's location, stamp duty is 6-10 per cent of the cost.
Last but not the least, when you try to catch up with increasing property prices, you mostly have no option but to take a higher-than-anticipated loan amount. This translates into higher loan-related costs such as administration and processing costs.
Lower Returns: If one of the reasons for buying a home is to have an appreciating asset, you are likely to suffer from less-than-satisfactory appreciation, since you are buying at a high price. What makes the effective cost more is the fact that you are incurring interest costs. In fact, if you compare the current yields from various asset classes such as equity and debt with real estate, you would find the yield from real estate to be the lowest. At times, it may be even less than 1 per cent and post-tax, the figure would go down even further.
Risks from rising home loan rates: The interest rate on housing loan has descended from 13-14 per cent per annum in 2000 to touch a low of 7.5 per cent in 2004. However, there was a reversal in the trend since then and, currently, the home loan rates are quoting at 9-10 per cent.
This week, the RBI has again increased the short-term rates. ICICI Bank was among the first to hike the interest rate on home loans by 50 basis points. Though still below the historical averages, home buyers face a host of risks from this development.
Increasing interest costs: As interest rates are revised upwards by home loan providers, the number of equated monthly instalments (EMIs) and the interest paid out by buyers during the tenure of the home loan increases. Of course, this will be true for home loan products that have rates that are variable, like a floating rate loan, or the ones that have variable element, like hybrid loans that have floating rates for a certain part of the loan tenure. Mumbai-based Ashish Avasthy's experience illustrates the kind of additional burden that can come from home loan rate hikes.
Avasthy, a 30-year-old, who is an assistant manager, legal, at Raymond had been living in a rented apartment at Mumbai's Kandivli-East for one year. After his marriage in 2005, he finally got fed up of shifting his residence every 11 months when his leases expired.
In December 2005, he bought a flat in Wadala that cost him Rs 26 lakh (Rs 2.6 million). He took a 20-year floating loan of Rs 20 lakh (Rs 2 million) at an annual interest rate of 7.25 per cent. The interest rate on this loan has since moved up to 7.75 per cent per annum. While Avasthy's EMI amount has remained the same, the tenure for his loan has already increased to 22 years.
Deadly fine print condition: One of the risks that remain hidden from most home buyers comes from a fine print condition in most home loan agreements. This clause relates to the situation of the property price falling. While many experts rule out this possibility of a real estate price fall in the near future (See below: Bubble Trouble), you will do well to know that many home loan providers have a clause in the loan agreements, whereby they can demand you make good the fall in the value of the property.
"Any remaining balance would have to be borne by the consumer, since he or she is bound by the agreement to repay the debt. Also, if there is a guarantor or a co-applicant, the bank could make them liable," says an SBI official. Thus, more you stretch your finances for acquiring a home, more vulnerable you get to the risk from this clause.
How can buyers cope with the new risks from rising property prices and home loan rates? How does one decide what one can afford? Fortunately, the maze of options and pitfalls of buying a house can be navigated by keeping in mind three factors. We will now explain them in detail.
Strategy # 1: Check the EMI-rent gap
If you are staying in a rented house, figure out how much additional monthly outflow EMIs would entail when compared to your rent. The lesser the difference between your EMI and rent, the more sense it makes to acquire a home. From 2001 onwards, the low EMI-rental differentials were among the major factors that set off the current housing boom.
In the recent past, while property prices have breached the stratosphere, the silver lining is that the rents have not moved up. As a result, the difference between the EMI and rents too has increased. For example, the difference between the EMI outflow and the rents is as high as Rs 65,000-70,000 for some south Delhi properties.
"Such a huge difference between the EMI outflow and the rents is often an indication of a bubble in the market," says Abheek Barua, chief economist, ABN Amro Bank. Till what point is the EMI-rental differential acceptable? Experts say that the ideal difference between the rent and the EMI is not more than 30 per cent.
This is why the decision of Hemant Soreng, 33, a Bangalore-based IT professional, can be termed sensible. While living on rent, he was paying Rs 12,000 per month, while the EMI for the new house he booked in July 2004 and moved into in May 2005, is Rs 16,000. "Since the difference between the rent and the EMI was not much, I decided to buy a house of my own," says Soreng.
However, it is not always possible to conform to such thumb rules, especially when other factors come to the fore.
Avasthy paid Rs 5,250 as rent when he lived at Kandivli-East. For his house in Wadala, he is now paying an EMI of Rs 15,800. "Though the EMI is much higher than the rent, it has helped us improve the quality of our lives and gives us the time and energy to concentrate on our life and careers," justifies Avasthy.
"Staying on rent is an option if you feel that the market is overheated. Otherwise, it may be better to buy at today's prices. The reason being that once in a Bull Run, prices can rise to new highs. Thus, waiting will not solve your housing problem," says Veer Sardesai, a Pune-based financial planner.
Strategy # 2: Keep your EMI within prudential limits
Before you plan to buy a house, you need to know of the loan amount you can afford. Of course, the bank will analyse your repaying capacity. "Generally, the EMIs should be within 50 per cent of the net income of the applicant, subject to an overall limit of 85 per cent of the value of the property," says S.K. Mitter, CEO, LIC Housing Finance.
But financial planning experts suggest that you put a full stop much before that limit. "You should not exceed 30 per cent of your take home salary. In case you have other loan obligations, then your total EMI outflow should definitely not exceed this amount," says Sardesai.
However, there are other financial planners who are of the view that you can stretch the figure up to 40 per cent of your take home salary. Let's illustrate the EMI strategy with the help of an example.
If your take home salary is Rs 35,000, your EMI for the new house should not be more than Rs 10,500-14,000. Financial planners also advise to keep some funds as back up while buying a house. "You should ideally have three months of funds as a backup. This will include your EMI and other expenses," advises Rohit Sarin, partner, Client Associates. This back up helps you to meet contingency expenses.
There is another thumb rule that you need to follow for prudent borrowing. "Your total principal outstanding should not be more than 50 per cent of your assets," says Gaurav Mashruwala, Mumbai-based financial planner.
This means that if you book a property costing Rs 10 lakh (Rs 1 million), take a loan of Rs 7 lakh and you have assets worth Rs 4 lakh (Rs 400,000). You have total assets worth Rs 14 lakh (Rs 1.4 million). Under these circumstances, ideally your total principal outstanding should not be more than Rs 7 lakh.
This is so because in case of any eventuality like loss of job, it would be difficult for you to service the EMIs.You can only ignore the need for prudential borrowing at your own peril. The home buying experience of Kamaljeet Singh, 30, a Delhi-based IT professional will tell you why.
Singh, the only child of his parents, stays with them along with his working wife, who works in Jubilant Organosys. He bought a 324 sq yard plot in Mohali for Rs 37 lakh (Rs 3.7 million) in May 2006, with the help of a 15-year loan for which he pays an EMI of Rs 8,500. His next real estate investment in the same month, a Rs 20 lakh (Rs 2 million) four-bedroom society flat in Mohali, is all set to strain his finances.
If Singh hasn't faced the music so far it is because he has had to pay the deposit money of Rs 5 lakh (Rs 500,000) only. Once the construction starts, he will have to start paying an EMI of around Rs 12,000 on his 15-year loan. This means a total payout of Rs 20,500 on the two EMIs.
At that juncture, one income of either Singh or his wife would go in servicing the two home loans. Of course, Singh has a contingency plan.
"In case any problems arise in repayment of the loan, family's property investments will have to be sold," says Singh. Clearly, this is a case of going overboard. Contrast this with the case of Soreng, who has restricted his EMIs to 25 per cent of take home pay.
Strategy #3: Don't overdraw on your savings for down payment
You will need to organise at least 15 per cent of the cost of the property for down payment. This will give you an idea of how much you can spend on your property. For example, if you are planning to buy a property worth Rs 30 lakh (Rs 3 million), you will need to at least arrange for Rs 4.50 lakh (Rs 450,000). The down payment affordability varies depending on the disposable funds you have. The key lies in knowing which assets to tap for the down payment.
For starters, you can park money specifically saved for buying a house in very low-risk debt instruments like fixed deposits. "Apart from this, liquidate those investments that earn you less return than the rate at which you are borrowing," says Sarin.
This would typically be instruments like your bank FDs, under-performing debt funds, besides equity funds and stocks that have been under-performing for a very long time, with little prospect of future appreciation. Stay away from retirement funds such as your provident fund (PF) and public provident fund (PPF). "This is so, as once people take out money from these sources, they rarely replenish them," says Mashruwala.
Putting the strategies into action: To be effective, all the strategies, especially the EMI and down payment strategies, will have to work together. Let's see how. If your take home salary is Rs 35,000 per month, the EMI strategy tells you that you can have an EMI of up to Rs 14,000 or 40 per cent of your take home pay. If you are to take a 15-year loan at an annual interest rate of 9 per cent, the maximum loan affordable is Rs 14.21 lakh (Rs 1.421 million).
You can similarly arrive at an affordable loan amount from the stipulations laid down by the down payment strategy. Thus, if you can afford to make a down payment of Rs 1.5 lakh (Rs 150,000), the maximum loan possible is Rs 8.5 lakh (Rs 850,000). Clearly, the two approaches throw up two different property prices. Experts suggest that home buyers choose lower of the two figures. In this case, the figure works out to be a property of up to Rs 10 lakh and a loan of Rs 8.5 lakh.
Consider compromise options: What do you do if after adopting these strategies you find home options unaffordable? One option would be to postpone the purchase and wait for the prices to cool down. The other approach would be to buy a home that's affordable even if it means making a compromise on important parameters like the size, that is, settling for a two-bedroom flat instead of a three-bedroom. Many experts suggest that you go for this compromise option.
At a macro level, despite the rise in property prices and loan rates, homes remain affordable. In other words, home buying still makes eminent sense. The only caveat is that buyers need to tread with more caution than they did in the past. But what has not changed is the question that every buyer needs to answer: 'Can I afford this home?' Its relevance has only got heightened. Buyer would do well to remember that the pursuit of a dream home can no longer be a mindless one.
Bubble Trouble
Is there a bubble in the Indian property market? Like all other asset classes, even real estate passes through cycles, and in India, some experts believe, its having an extended run and is expected to rise further in the coming days. In the past one year alone, prices have moved up by 30-50 per cent and, in some places, prices have doubled.
Locations that witnessed unprecedented rise are Gurgaon, Faridabad, Noida and south Mumbai. Even prices of apartments in Bangalore moved up by 70 per cent in the past year.
The increase in prices is not restricted to big cities, but are also evident in Tier-2 cities. "Land prices increased by 150 per cent in some of the Tier-2 cities," says Joygopal Sanyal, business head, urban and infrastructure advisory, Trammell Crow Meghraj. These cities include Indore, Raipur, Siliguri, Bhubaneswar, Guwahati, Kochi, Coimbatore, Vishakhapatnam, Mangalore, Lucknow, Chandigarh, Ludhiana, Ahmedabad, Nagpur and Kolhapur.
There are many reasons for this upsurge. There is a shortage of more than 20 million dwelling units, both in urban as well as rural areas. Apart from this, easy availability of home loans, rising salaries, emergence of India as an outsourcing hub, companies shifting to Tier-2 cities to cut costs and the tax benefits associated with owning a house have been the major drivers.
But how long will the party last? "I think that the property market would continue to go up in the near future with a steady growth rate in almost all the markets," says Sanyal. Though not every one believes that the real estate market is a bubble waiting to burst, there are factors that can reverse the trend.
"Government intervention, rising interest rates and fluctuation in foreign investment in the sector can reverse the upward trend. Also, the last two year's boom has led to an excess of supply, which will ultimately result in stabilisation or even reduction in prices," says Major-General (Retd) Jayant Varma, executive director (North), Knight Frank India.
However, a possible correction may not lead to a crash in prices. Experts believe that it will only lead to a reduction in the rate of capital appreciation. Further, a recent Crisil report suggests that most rallies in home prices across the world end in soft landings rather than abrupt drops.
So how different is the present rally from the one that we saw in the mid-1990s? Experts believe that this rally is very different from the last one. In the '90s, an artificial demand was created and there was no supply to meet that demand -- this led to a crash in prices. In the current rally, however, the supply in new projects is aplenty as are genuine buyers.
posted by sandeeparya @ 11:10 AM
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posted by sandeeparya @ 7:22 PM
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Namaste/Hello Welcome to my Blog World.
