Wednesday, August 19, 2020

Are you financially ready to buy your first house?

 Before buying your first house, assess the affordability and future serviceability of any loan you take.

Sundar, a software engineer from Chennai got married five years back to Raji, a banker. Sundar and Raji are now 34 and 31 years old, respectively. Two years into their marriage, they decided to buy a house that cost them Rs 54 lakh, funded by a joint home loan of Rs 45 lakh. At the time their combined salary was Rs 1.1 lakh (Rs 65,000 and Rs 45,000, respectively).

Fast forward to the present and the couple is expecting their first child in a few months. Raji has decided to be a stay-at-home parent to take care of the child, but it is not going to be an easy road ahead. As they transition from a double-income-no-kids household to a single-income household with a child, they are worried about servicing the EMI which is about Rs 42,500.

"At the time of buying the house, we did not think about such a situation arising. We exhausted all our savings in the down payment while buying the house," said Sundar. This couple is not an aberration to the norm; owning real estate is considered a proud purchase by many households and is normally funded through loans.

While a house is one of the biggest investments you make, it may not always be the best investment. You need to assess this asset class on the metric of affordability and future serviceability of any loan you take. Here are a few factors that should help you decide if you are ready.

Your finances

Unlike financial assets that are liquid (you can redeem your mutual fund units and realize the money in a few days), real estate is not liquid. It can take days to months to find a buyer and the ensuing hassle to sell off the property really makes it a sticky asset. Any financial plan starts with ensuring a solid emergency corpus is in place that will take care of any unforeseen events. Maintaining an easily accessible fund that can cover about six to nine months of your expenses should do the job. This could be kept in your bank account or a sweep-in fixed deposit, for instance.

Next, you have to think about your short-term goals and how these may impact your EMI payments. Reshuffling your priorities can affect the income of the household if, for instance, an earning member puts their career on hold. At the same time home loan EMIs will continue to accrue. It is best to think about this now rather than later. When looking at these near-term goals, ensure that funds set aside for this goal will be liquid by the time the goal arrives, and also make sure to have a back-up plan in case some aspect of your initial plan should fall through.

Start by making a list of your expenses – both monthly and annual. Also, note down any near-term (up to three to five years) goals and the funds needed for these goals.


Whether you can afford a loan is a serious question you need to ponder upon. Without touching your emergency corpus or disrupting your other financial goals (both short- and long-term), you should be in a financial position to make a decent down payment. Work towards accumulating at least 25% of the amount. If you can afford to contribute 40% to 50% of the property value as down payment, you will certainly be more comfortable paying off the loan.

Then comes the EMIs. A good thumb rule is to ensure that your EMI does not make up more than a third of your take home salary. You need to figure out how you will service the loan in case of an emergency like loss of income or unexpected increase in expenses.

To live in or rent out

Then comes the question of whether you will actually live in the house you buy. If you are constantly moving home because of work and are uncertain about where you will live, it may not make much sense buying a house when you will also have to pay rent in another city.

If you are not planning to live in the same city for at least another five to seven years, it is better to stay on rent. Take into account the fact that relocating will involve both paying rent in the new city and servicing the EMI of the house your purchased. Selling the house and buying another house in the new city is not feasible as it involves a lot of effort. The transaction cost—stamp duty, registration fee and brokerage—is also very high.

If on the other hand you decide to let out the house, you may not necessarily get a tenant immediately. However, you will still be obligated to pay maintenance costs which can be quite high, especially in larger housing complexes with many amenities. Other than the cost, it can also be very time-consuming to maintain a house in another city.

Finally, buying a house should not come at the cost of other important goals like your child's education and your own retirement, neither should it impact your lifestyle significantly. If goals like travel or starting a business are important to you, understand that these could get affected by you having to service an EMI. You may also have to wait longer to retire.

Tuesday, August 18, 2020

Basic Financial Literacy Everyone should know

1) 80% of gains come in 20% of the time. So an investor needs enormous patience and conviction to hold stocks for 10 or 20 years.

2) Why not all investors get rich? They like to get rich without going through many years of discipline & patience. Process leads to the outcome.

3)Prices change frequently. Value change over a period of time. There lies the opportunity.

4) Compounding is backloaded. It works well only over a long period of time. There is no substitute for time in compounding.

5) 99% of the time, doing nothing is the best thing to do in the market.

6) You cannot predict or control markets. What you can control is how much you save, investment process and behavior. Focus only on that.

7)Markets usually run ahead or fall behind. Rarely in equilibrium. Over or under valuation can last for a long time. Don’t time the market.

8) Buying and selling are easy. It is holding on through ups and downs is difficult but ultimately most rewarding.

9) Invest regularly. Invest for the long term. You can create huge wealth.

10) Not investing in equity is riskier than investing in it. Remember, you need to beat inflation and retain your purchasing power.

11) We see past bear markets as missed opportunities. However, thinking of future bear markets is gut-wrenching. Strange investor psyche.

12) If someone keeps reviewing the value of his house every day, we may suspect his mental health. But that’s what we keep doing with our equity investments.

13) Equity investments are subject to behavior risks. Always keep a check on your emotions while investing.

Business Owner Investing in Mutual Funds

 These pointers can help anyone who runs a business and looking to invest in mutual funds.

1) Use mutual funds for diversification. Most of your investment is in your business itself, as well as in real estate.

2) Invest a minimum of 70-75% of your savings back in your business, and focus on increasing your stock value.

3) Use a part of the remaining 25-30% for investing in equity mutual funds. Use SIPs and tag it to a goal like your child's education.

4) Invest 30-40% of your emergency fund in pure liquid funds.

5) Use the SIP route for monthly investment and systematic transfer plan or STP for lump sum investments.

6) Do not invest in equity mutual funds if you cannot park it for a minimum of seven years.

7) Invest in stocks only when you have the time and expertise to monitor them, and the money to spare, and when you are sure it will not disturb the focus on your business.

Saturday, October 19, 2019

What to do when your parents cross age of 70?

When you parents(any of them) cross  70 years of age, there are few simple but important things which needs to be done for better personal finance.

1. Talk to your parents. See how their finances are managed

2. some of them could not sign properly .  Be prepared for such things. Selling Real Estate in this country is impossible if the person cannot go to the city of the property, and sign in the presence of the Registrar. Getting a Power of Attorney is just as painful. Get ready for that.

3. some of them could not sign properly hence bank cheques clearing might be an issue.Get all bank accounts, mutual funds, etc. to Either or Survivor mode, and ensure digital access

4.Outsource AS MUCH AS POSSIBLE. Stop guessing. Prepare for a real long innings. Get an extra maid. Cook. Driver (Ola Uber may help). If you need a nurse start looking. Trained nurses are far more expensive. Take a call.

5.Either you will have to move to the location of your parents or they will have to move to your city. Is your neighboring flat available for rent – or if you can buy it, buy it off. You will need the space. Especially if you have kids growing up

6.Share the load with siblings -Although it’s common for one adult child to bear the majority of the care giving burden, there are a variety of tasks that can be spread among siblings.

Monday, July 15, 2019

Advantage of being rich

What do you thing rich people are doing in real world? They are constantly flying to Bahamas, drinking champagne and party hopping . Well, let me share the life style of one real -seriously rich man I know.
He is up at about 5 am and hits the home gym. His instructor comes in at 5.15 and leaves at about 6 am, then this man does his treadmill, and by the time it is 7 am he is ready for break fast. By 7.45 he is in office checking out his emails etc. – he has a rule that he does not do any business at home – not even checking his emails. Almost all his mails get marked to his secy and the secy checks them – and an occasional emergency call is attended to. He tells me he attends to one such call in a week – and he is trying to make it once a fortnight.
He works pretty long hours but tries to be back home by 7 pm for his dinner. Not a party animal at all, he tries to get one/ two days holiday when he goes on his plant visits. Twoof his plants are near very beautiful spots, so he goes on long walks/treks – sometimes with family. He is a sports enthusiast and tries catching some important games – Wimbeldon, a one-day in Australia,..etc. which is invariably along with a business trip.
There are some real advantages of being rich. At least in India the real rich need not stand in a queue to buy groceries or get their car serviced – these can be handled by servants. Now even if you are reasonably rich – say Rs. 10/20 crores you get some of these advantages. For example you could go to Super market at 11 am on a Monday – and be out of the shop in exactly 18 minutes with all the things that you need. You get to choose the time of your meetings – , the fact that you can meet at 12 noon instead of 10 am allows you to beat the  the traffic crowd.
you do not really trade your time for ‘earning’ money. Your money can do that for you. You get to choose with whom to work, what work to do, how long to work, and that is really huge. You get to choose to work with people you like and do the work you love to do. Only as you get older can you appreciate this really.
You avoid a lot of social pressure - When you are on your own and you could be off social pressure – which car you drive, where you eat out, what dress…..imagine how stress free life can be. You can go to the gym at 10am when the trainer is free and has nothing to do except attend to you. No pressure of attending to 3 people at a time because you have gone at 6am! You can really take care of your health – home meals and that too on time
Huge impact on your body – with infinite RoI.
You can read – again an activity with infinite RoI. 
Being wealthy means you can spend on whatever you want. However it does not mean you will spend on things that you do not need. It is like being in a 5 star breakfast menu – you have tons of sugar, maida, deep fried items – your money gives you the choice. You end up eating some fruits and idli!!
Money gives you the choice. Hope you will have the wisdom to make the right choice.

Thursday, April 18, 2019

Are you investing enough to sustaining your life style in future?

AM I investing enough to sustaining my family's life style in future? . This is the question will most of the person's mind considering the cost of living we are going through now.

For this I have prepared the below sheet considering various age and monthly expenses . This will help you to understand what is the monthly income required in future considering inflation.
Also what is corpus amount required after my active employment/business income ends(may be at age 55/60) and till my last day(80 years).

How to read this sheet?

For example if my age is 35 years and monthly expense is Rs 30,000 ,considering 6% inflation I need Rs 96,214 monthly after 20 years(2039) , Rs 172,305 monthly after 30 years(2049) to manage monthly expenses.

What if after my retirement?
Say if you retiring after 20 years (2039) at age of 55 years , you need to create a retirement corpus of Rs 23,274,641(2.32 Crores) .This is to withdraw monthly Rs 96,214 (equal to Rs 30,000 monthly expenses today(2019) ) till age of life expectancy assumed 80 years (with 6% increase year on year considering inflation)

How much I need to invest to achieve ?
Option 1 : Invest Rs  23,294 Monthly via equity mutual funds assuming 12% annualized returns
Option 2 : Invest Rs  39,252 Monthly via FDs,PPF,EPF,Pension Plans, ULIPs , Insurance plans assuming 8% annualized returns(even though some of them gives less than 8% ,i assumed 8% as average for simple calculation purpose)

With this sheet, you can get
1. an idea about your future monthly expenses need including inflation
2. What is your retirement corpus required?
3. How much investment required with different investment products likw Equity Mutual Funds, FD,EPF,PPF,Sukanya Smrithi, ULIP,Pension plans etc
4.If you are already investing check if there is any gap in the investment required amount

Hope this helps . Happy Investing & Secure your future life style :-)

Sunday, March 10, 2019

Why my overall returns from Mutual Funds is less than my current FD rates(6%)?

Why my overall returns from Mutual Funds is less than my current FD rates(6%)?

This is the question i get today from most of my mutual fund clients.To clarify this i take one investor who has invested in L&T Hybrid Equity fund ,which is an balanced fund(in old context to keep it simple) which invests 65-75% in direct equity(stocks) and 35-25% in Fixed income products like Bonds,NCD,Gilts etc from year 2015.

you can see first 18 investments from oct'15 till Dec'16 he has got more than 8% annualized returns in all cases that is  invested above 800 days

Let us see what happend after this

you can see investments made 1 year(365 days) before till 799 days he has got less than +8% to -4% varies.

Let us take the overall investment how it looks like

His overall investment has given +3.5% returns which is less than the current FD interest rates (6%). Sounds right? No. It is not true. 

Observation 1

Out of overall 57 installments made from Oct'15 to till date (mar'19) only first 18 installments given above +8% annualized returns that is invested above 800 days

Observation 2

Out of overall 57 installments made from Oct'15 to till date (mar'19) last 39 installments given less than +8% to -4% varies that is invested less than 800 days

Observation 3

Considering observation 1 &2 the overall investment return +3.5% didn't paint the true story. Isn't it? So you can't make right decision (With drawl/Stop SIP/Switch to other scheme).Hope you are clear now



So if you stay invested in this fund based of last 4 year history ,for more than 800 days for each SIP installment you can expect more than +8% returns which is +2% excess in existing FD rates(6%) that too taking only 65-75% direct equity or stocks exposure.