The government has cut the interest rate on Public Provident Fund from 8.7%to 8.1% effective April.
This was part of the interest rate cuts in the small saving schemes and apart from PPF, other very famous instruments like Kisan Vikas Patra, Senior Citizen Scheme & NSC interest rates have also come down by a good margin.
These new rates will be applicable from Apr 1st. Please note that this is one of the biggest rate cuts in the small saving schemes in a long time.
Here is a summary of all the rate cuts
Kisan Vikas Patra interest rates down from 8.7% to 7.8%
NSC interest rates down from 8.5% to 8.1%
Senior Citizen Saving Scheme interest down from 9.3% to 8.6%
5 yr NSC (National Saving Scheme) interest down from 8.5% to 8.1%
1 yr time post office deposits has been cut from 8.4% to 7.1%
2 yr time post office deposits has been cut from 8.4% to 7.2%
3 yr time post office deposits has been cut from 8.4% to 7.4%
5 yr time post office deposits has been cut from 8.5% to 7.9%
Postal saving deposits remain unchanged at 4%
Interest rates aligned with market rates
On Feb 16, 2016 (before the budget) itself the govt had announced that they are working towards bring the small saving interest rates closed to the market rates, but that time no changes were done in these schemes.
The government had on February 16 announced moving small saving interest rates closer to market rates. On that day, rates on short-term post office deposits was cut by 0.25 per cent but long-term instruments such as MIS, PPF, senior citizen and girl child schemes were left untouched.
Now the interest on these schemes is closer to the interest rates given by the banks.
I will leave the decision to conclude if this was a good or bad move by govt on you, however the common man is not very happy with this. Messages against this move are are all over the twitter.
What is your reaction to this?
Majority of investors in India invest in Public Providend Fund (PPF) scheme and it’s very close to their heart. However this move will make many people think if PPF is the best thing they can do with their money or not (learn how PPF interest rate is calculated).
Will they move to equity markets because of this move? Will it make them interested in other kind of financial products?
What do you think? Do you think of this big interest rate cut in PPF and other schemes? Please share your views in comments section.
Are you looking for buying a plot or a piece of land? If not today, maybe you have this dream of owning a plot sometime in the future.
Buying land or plot has in a way to become a premium thing these days especially in big cities because the land is scarce commodity and the pride is associated with having your own plot where you can build the house as per your wish.
In this article I will tell you 10 important things that you should know before purchasing any property in India.
If you happen to visit any real estate exhibition, you will come across many plots projects along with the residential apartment schemes. These plots are generally within 20-100 km of the city radius and often marketed as a second home or vacation home.
On top of it, the pricing is attractive (often within 5-20 lacs) and there is also the facility of installments which makes it too easy to own a plot. The deal is often paying a token amount and pay the rest amount in parts (EMI).
However, a common man is often not aware of the risks associated with buying land and the complexities involved in it. Buying a land is a very different kind of ballgame altogether compared to buying a flat (which is much safer), and today I am attempting to make things easy for you to understand.
My Personal Experience
I have personally visited a few plot schemes myself over the last few years (near Pune). I have interacted with the salespeople and have some experience in this area. Hence, I will try to share what I know with you. If you can also add to my points, I would love to incorporate it into the article.
This article will mainly help a newbie with the simple checklists which they should look at before buying a plot or when they go to visit a scheme or if they are interacting with the salesperson (here is a checklist for buying apartments).
Note that this article is mainly keeping in mind plot schemes or gated communities, but most of the things will also apply for a standalone piece of land.
1. Is the land on the name of the builder?
The first question you should ask the salesperson is that if the builder has legal rights to sell the land or not. Find out who is the current owner of the land? Is it a builder himself or not?
A lot of builders either buy the entire land from the previous owner or enter into a joint agreement with the owners to sell or develop the land and sell the plot scheme. No matter what, make sure that this part is clear. Ask for the documents which clearly show the builder has legal rights on the plot himself.
2. Has the developer taken a loan from Bank for the project?
Builders often take a bank loan for the Plot schemes and even residential schemes. It’s a sign that the builder is more serious about the project and it’s also a positive sign, because if there is the money with builder which will be specifically used for the project development.
The builder is not dependent fully on the advance money the home buyers. It shows that there is a cash flow dedicated to the project and the issue of cash crunch will be minimized.
It’s not always the case the scheme has a bank loan, but still enquire about it. If bank loan is there, it’s proof that the bank has done thorough verification from their side on the legalities and only then granted a big amount (often in crores)
3. Where is the NA order?
By default, all the land in India is ” AGRICULTURE LAND”, unless it’s defined for some other purpose by the govt. So a piece of land is either agricultural or non-agricultural (commonly called as NA in real estate industry)
Agricultural land can be used for Agri purpose, whereas if you want to do any other thing other than agriculture then one has to first convert that Agri land to non-agricultural (NA)
However just because a land has got NA status, does not mean that one can start using it for residential purpose, because there are various types of NA like
NA – Commercial
NA – Warehouses
NA – Resort
NA – IT
NA – Residential (this is the one where one can build a residential house)
So if a plot of land is type NA – Resort, that means that that one can build a resort there, but can’t make a residential scheme. If a plot is NA – warehouse, then one can build a warehouse there for commercial purposes, but can’t make residential schemes and sell to the common man.
So you need to look for “NA – Residential” Plot
So, the point is that you need to ask the builder/salesperson, if the plot of land you are planning to buy is “NA-Residential” or not? Ask them for a copy of that. A lot of other kinds of NA plots are sold as “NA plot, collector approved” which is a misleading thing.
I am attaching a sample NA order below (from Maharashtra) for you too just get a feel of how it looks like
Another thing you have to be very cautious is “Proposed NA” schemes. A lot of builders try to sell a non-NA land telling you that its a proposed NA land, means he has initiated the process of converting a land into NA scheme, and the papers are already in process and “very soon”, the land will become NA-residential and how you will then reap the benefits of the high prices.
While there are chances that the conversion happens, but in most of the cases, its a gimmick to sell a cheap land at high prices and often buyers are stuck in the project, because the land is nothing more than a piece of crap later.
Don’t fall for it, because converting an Agricultural land to NA-residential is a very lengthy process in which a lot of approvals needs to be taken for it. There are cases where it’s been 10-15 yrs and it’s “still in process”
So, ask the salesperson to show you the NA order papers. Have a look at it yourself and do not fall for the promises like its coming in 2 months or next week or anything like that. Don’t get stuck into those kinds of deals.
Understand one thing very clearly, NA plots with clear title are limited and scarce, & often you will have to pay good price for it, If the land price is dirt cheap and it’s promised as NA-residential, there is a good chance that it’s fake or very very far away from the city limits.
4. What is the FSI for the plot?
Suppose you bought a plot of size 2000 sqft for building the house on it.
How much construction can you do?
Here comes the concept of the FSI or Floor space index. FSI simply means how much construction can be done on a piece of land and it depends on the location of the plot.
FSI of 100% means if you have a plot of size 2000 sqft, you can build a house of 2000 sqft on that. If the FSI is 75 %, then you can only build 1500 sqft of house on that 2000 sqft land.
The project I recently came across:
I recently came across a project called Royal Purandar near Pune when I went to visit a plot exhibition. The lady at the counter told me that the plot sizes start from 5000 sqft and go up to 40,000 sqft (which is very big). I was shocked to hear about so big plot sizes because 5,000 and 10,000 sqft plots are quite big.
However, when I asked her what is the FSI of the plot, she told me it was just 15%. So with FSI of 15 %, if you buy a plot of 5000 sqft size, you can just build 750 sqft of house, which is generally a small bungalow.
There is nothing wrong with that, but you should be at least aware of it.
Why FSI is very very important?
So understand that FSI has a very important role to play when you will construct something or even when you will sell the plot to someone else. Imagine 2 plots which are of the same size (2000 sqft), but with different FSI like 50% and 100%
Plot A (50% FSI) – You can make just 1000 sqft home on that, which will be like a 2 BHK)
Plot B (100% FSI) – You can make a 2000 sqft home, which will be like a 4-5 bedroom Bungalow.
But then it might happen that Plot A is selling at 10 lacs and Plot B is selling at 15 lacs, and you might say – “Plot A is cheaper because its less priced and the size is same (2000 sqft)
One important thing you should know is that FSI for agricultural land is very small generally. In Maharashtra, it’s just 4 %, which means even if you buy a 10,000 sqft Agri plot, you can only do the construction of 400 sqft on that land.
You should definitely ask the builder/salesperson to share the document which mentions the FSI on it. Judge the price of land only after learning about FSI, not just the area.
5. What are the other projects done by the builder?
You should ask the salesperson about the other projects done by the builder. Check if they have done other similar projects in the past? What was the response to it? What is the quality of those projects? Were there any legal issues with those schemes? Are the buyers happy with the builder work there?
You can often get some clue about all this on the internet or the online forums. Just go to the website of the builder and find out what are the other schemes he has done. Search with the other project names and see what others are talking about?
If you get a chance, I suggest paying a visit to past projects once. Spending half a day in this will only help you further to take the decision.
6. When will the Sale Deed happen?
You will often hear about the “agreement to sell” which is executed when you book the flat/plot and clear your initial payments (around 35-40%). This is the time when you pay stamp duty and registration charges. Once the agreement to sale is completed, a lot of buyers think that the flat/plot is registered on their name and now they are legally safe.
However, this is a myth and the “agreement to sell” does not make you a valid buyer. The agreement to the sale (often called ATS) is just the AGREEMENT TO SALE, which means it’s an agreement between buyer and seller on the initial points and terms under which the sale will happen in the future.
It mentions the terms and conditions of the deal, how much initial payments are you making along with cheque number and also the future dates, by when you will clear the payments, etc.
What is the “Sale Deed” document?
“Sale Deed” is the document that needs to be registered in the office of sub-registrar in order to make the sale happen. Unless the sale deed is done, you do not become a legal owner.
Hence, ask the builder or salesperson about the sale deed? When is it going to happen? The sale deed is generally done, only when the builder gets all the dues from your end.
7. Will I get an individual 7/12 extract in my name?
Let me first help you understand what is “7/12 extract”? It’s a term which you will often hear in states like Maharashtra and Gujarat. In Karnataka its called 7/12 Uttara. It’s the document maintained by the revenue department which mentions how the land moved from one owner to another owner in the last 30 yrs.
So in a way, its a history of the land and you will find exactly on which date who sold to whom. This way you will find out who is the current owner of the land also.
For example:
If person A sells the land to person B, then it’s important that the name is 7/12 extract is changed from A-> B. Unless B name is not registered in the 7/12 extract, B will not be a valid landowner.
So it’s important to ask the seller about the 7/12 extract. There are many complications around this, like if you buy an agricultural plot from the seller in the name of “NA plot”, then your name will not be there in the 7/12 extract, because there are restrictions on who can buy the Agri land and even the minimum size restriction is there.
Also at times, the builder will tell you that the name of the builder will be there in the 7/12 extract, and not yours. Or the society name will be there in the 7/12 extract and not yours.
Also at times, what happens is that a big piece of plot is broken down into small land areas and sold to many people and a joint 7/12 is made, where all the buyer’s name is there in 7/12 extract (see the conversation below), which makes things very complex in future.
So make sure you enquire on this aspect properly, and if an individual 7/12 extract will be done or not.
8. What will be the per annum maintenance after buying the plot?
Once you buy the plot, there is annual maintenance that needs to be paid which goes towards maintaining the basic amenities like security, upkeep of the project, gardens, water, security etc. It should not be a surprise for you later. This maintenance is generally paid on a yearly basis and it’s proportional to the plot size. For example, if it’s Rs 4 per sqft and your plot size is 2000 sqft, then your maintenance per year would be Rs 8000.
9. Is the plot on flat land or on a slope?
Don’t assume that your plot is always going to be a piece of flat land. If it’s a big project, it might happen that the overall land which builder has acquired is uneven or has slopes. So when it’s divided into several small plots, many plots might be on the slope or it might be uneven.
You will ask what are the main issues when we build a house on land with slope or an uneven plot?
Below are some important points regarding the land on the slope from this website
If the plot is on a significant slope, either the land will need to be cut and filled, or you’ll need to build a house that takes that slope into account. It’s worth remembering that while these things might make your house more spectacular, they’re also likely to cost a fair bit more.
Depending on the angle of the slope and what’s built on neighboring properties, a slope can also reduce your exposure to sunlight – which in turn can affect how much light you get in living areas, and your potential to harness the sun both for passive solar heating and for collecting solar power.
Where we live in the southern hemisphere a north-facing slope is ideal for solar access – a steep south-facing slope not so much.
Below is how the project brochure looks like when its shown to you (often when the project has not yet launched or into the exhibitions)
By seeing this kind of image layout, you never get an idea if a particular plot is on slope or not. So it’s always a good idea to ask this question and verify it by visiting the site yourself.
10. What are the arrangements for water and other basic amenities?
Always ask how they are going to provide water and other basic amenities. Is it going to come from the municipality or the gram panchayat? Or they are doing their own arrangement for it?
And also ask some other questions like :
What about electricity?
Are they going to arrange for a individual electricity meter?
How much are they charging for it?
If the plot/land is too much away from the main road, then what about the access road?
Who will develop it?
What about fencing of plots?
What about security?
Ask everything in detail and in points.
With this, I think we have completed the main high level 10 things you should ask when you are buying a plot. Below is another video on this topic where some industry-level people are talking about the same issue of buying land and the complexities involved.
I strongly suggest watching the 15 min long video below
Now we will see some important points which you should keep in mind before you buy the plot.
Important tips for someone buying a land
Do not hurry. Period! – Buying land is an emotional decision and often salespeople use a lot of tactics for selling the plots (just like flats). Don’t believe the seller when they say that just 12 plots are remaining or the prices are increasing next quarter when they do their “Mega – Launch” . It never happens.
Make many visits to the plot – Don’t book the plot just after one meeting or without visiting the plot yourself. I would say that one should make at least 3-4 visits before the deal. Try to visit the plot once when your salesperson is not on the site. Just make a surprise visit and ask others on the site about important points and you might find some new information about the plot which was not told to you
Check the nearby development yourself – Don’t believe the salesperson about the nearby development information. If the salesperson says that a new flyover is coming up nearby or if there are 3 colleges within a 2 km radius, just find it out yourself.
Talk to people nearby the plot – If you can go a bit further, see if you can talk to people who live nearby the plot. Make a random visit and then ask the shopkeepers nearby, houses nearby on the points which concern you.
Bargaining for the price – Often the list price quoted for the plot is never the final price. In a country like India, it’s a well-known fact that there is always bargaining. So you can easily assume a 5-10% margin. Ask them to reduce up to 10% price and then settle for at least 5%. Take a lot of time to decide and often you will see the prices coming down. It’s very important that you do not show your desperation on buying and also share with them some names of nearby projects and how you also like them and you need a strong reason to buy a plot from them
Search online about the plot scheme or the area of land – Always search for information about the project or builder online. You will often come across others who have visited the site, or interested in the same project, you can connect with them and discuss it
I hope this article has given a good knowledge to you about the important things you should ask and keep in mind before you buy a plot into some scheme.
Beware of small unknown builders for plot projects
By now I think there is no need to tell that land buying is very complicated and one should not attempt it if you do not have the risk appetite for it.
There are many small flies by night people who know how mad people can get to own a plot of land and they come up with schemes where their sole intention is to make money for themselves and cheat customers. Please see this below video where some buyers are sharing their real-life experience of buying a plot and getting cheated.
I would strongly recommend that you involve a good property lawyer for verification of documents and the legality of the project. It would increase your cost a bit, but then it becomes a more secure investment.
Please note that all the points I have mentioned above, are based on my knowledge and understanding. If there is any correction to be done, please share that with us. Also please share your comments and views in the comments section below.
Have you ever bought the wrong financial product? Or it was mis-sold to you out of pressure from family/relative? Or because you trusted the seller too much? If not these reasons, maybe you wanted to do last minute tax saving and you jumped into buying that policy and gave yourself a life sentence of paying premiums which will not help you much in long run?
We are today going to discuss all sort of issues which arise when you get into a wrong financial product and why you should avoid it at any cost.
Background
Let me first give you some background on how I got started with this article. Here is what happened.
A few days back, I was once watching a TV show and there was a story of a woman who married a guy out of the pressure of family who wanted to get married as such as possible. She fell for the short term tricks and didn’t pay much attention to those points which matter in the long term.
Soon after the marriage, she started realizing that she made the mistake. It’s not what she wanted in life and its not a match which can sustain. Life was a mess. She was stuck in this relationship.
Coming out of it was not easy. She was in depression and all the time was going into regretting the decision. Almost 5 yrs had passed and by this time, a lot of her energy and time had got wasted.
Finally, she came out of that bad marriage. Often she wondered why she took such an impulsive decision? What if she had never got into that bad relationship? How would have her life shaped up?
Investors do the same thing with financial products
A lot of investors buy unsuitable or wrong financial products in their financial lives and it drains their money and valuable energy. It gives them unnecessary tension, which could have been avoided if they were a little more prudent in their financial life. Below are the top 4 reasons why most of the people have bad financial products in their life. I surveyed 920 people, the top most reason why because they were careless themselves and bought things without much thought. Where pressure from family/friends was not the major reason.
The careless attitude costs them too much trouble. I have worked with more than a thousand investor now, and I can tell you most of the good financial lives which we see are not because of making good decisions, but by avoiding bad decisions. Most of the people who have high net worth or powerful financial lives are those who have not wasted their valuable time and money in wrong financial products and concentrated on simple things.
One bad move can nullify 2-3 good decisions.
Today I want to talk about 4 core problems that arise out of buying the wrong financial product. Let’s look at them one by one.
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Problem #1
Waste of money
Problem #2
You feel “stuck” and waste your time and energy
Problem #3
The opportunity Cost
Problem #4
You lose trust and everyone looks like a “cheater”
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1. Waste of Money
Nothing hurts investors more than losing their hard earned money. When you buy a wrong financial product, most of the times, you lose money or do not get the returns your hard earned money deserves. A few years back ULIP’s were one of the most mis-sold financial products. Millions of investors have lost their hard-earned money in these products. The charges in the first year were huge at that time which ate away all the returns one got. On top of it, the returns of the ULIP were linked to the stock market and most of the investors never knew this.
Because of this, a lot of investors lost a big chunk of their money in these products.
Below is a snapshot of one of our readers who bought a ULIP in 2008, and he paid a total of Rs 48,000 in the ULIP, however when he checked his statement after a year, his fund worth was just close to Rs 27,000.
The value of the fund had come down due to market movements and commissions structure, but the main point is that the investor never expected it. He didn’t know that it could happen because, at the time of selling, there was no communication of the risk part. This is what happens when one buys a financial product without understanding it.
Then there are other kinds of products like endowment insurance policies which does not pay you back your full money if you surrender them in between or very early. Its the product design. If you pay Rs 50,000 per year premium, then in 4 yrs you must have paid Rs 2 lacs in total. Do you know much would you get back, if you wanted to close the policy and take your money back? On average it would be just 40%-45 %, which means only Rs 1 lac you will get back.
Forget financial products, some time back I bought a sim card which was available on purchase of an internet connection and there were some attractive benefits associated. I fell for it and bought it without giving much thought. I spend a good amount of time and energy behind it, paid bills without using it and finally ran around to close the connection. I could have avoided a lot of pain, had I just ignored it. The same is true for various credit cards, unwanted memberships, etc.
2. You feel “stuck” and waste your time and energy
Forget money, what about the time and energy you waste? Once you are stuck with the wrong financial product, you will keep thinking about it. You will keep regretting your decision. The financial product will be part of your life and you will often wonder why you invested in it?
Most of the people anyways take a lot of time to take financial decisions and just imagine what happens if one of those decisions is wrong or bad for you? You will keep cursing the agent, your financial planner, yourself, the system, SEBI, IRDA and every other person (even yourself).
You feel STUCK …
Nothing is more frustrating than feeling stuck and not being able to do anything fruitful. There are millions of investors who are stuck with their endowment policies, ULIP’s, bad credit cards, wrong advisors, other products. They want to get rid of it, but they DON’T.
Also, the world is cruel, you as investors are taken for granted. See how one of the readers, when tried to surrender his LIC policy, was treated.
Hello – I approached the branch manager on cancellation – it’s not even 7 days – he is asking me to get the agent to the branch! is this correct ? I have a question : If I want to surrender the policy or retrieve the maturity amount , is the agent required , this is weird stuff , If this is not true, please help me how this can be escalated and resolved .
Over-analysis leads to more delay
Investors also over analyze what they need to do once they realize that they bought something bad? How to minimize their losses and how to come out clean. But in that process more and more time passes and the situation gets messier compared to the past. Most of the people keep delaying their policy surrendering for years and the damage keeps compounding.
It’s like you bought a bad stock and you didn’t sell it off when you had a 10% loss. You wanted to get out of it at the right time and then it will send down by another 10% and then another 20% and finally out of frustration you sell it at 50% loss wondering why you didn’t take 10% loss itself at the first place.
In the same way, most of the investors keep thinking about the loss they are going to make if they get out of the bad financial product and keep postponing their decision. Here is one comment from our blog where an investor shares his state of mind. You can see that he feels so stuck. This is a very common problem
Our lives are very busy these days and if one pending item gets added to our list, it takes months and years to complete it, even if it’s just a few hours of work!.
So the big problem which happens when you buy a wrong financial product is that you waste your valuable energy trying to fix the issue. That precious time should have gone into earning more money and managing it well.
3. The opportunity Cost
Opportunity cost here means what is the other thing an investor could have done had he not got into a bad financial product. This is a very important thing to understand for financial success. Imagine a bad decision, where you invest Rs 5 lacs and after 2 yrs, your money worth is just Rs 4 lacs. You are in a loss of Rs 1 lac ?
NO, it’s not just Rs 1 lac.
Why?
Because you could have taken the right decision and could have made a profit which you lost in addition to the real loss. In that same example I gave above, you could have invested Rs 5 lacs in such a way that it would have become 6 lacs in 2 yrs. So your opportunity cost is Rs 1 lacs which you didn’t make here. Instead, you are sitting on a loss of Rs 1 lac.
Another example is of a young investor who wants to create a big corpus in the long term, but he/she is maximizing the PPF by investing Rs 1.5 lacs per year in that.
After 15 yrs, they will get a near inflation return only. I consider even that as a bad decision looking at the goal of wealth creation. The same 1.5 lacs can be invested in an equity product and a better inflation-adjusted return can be earned. The final wealth different in case of equity vs. PPF will be quite a big amount. The difference between 8.5% return compared to a 12% return is huge.
4. You lose trust and everyone looks like a “cheater”
Do you know how does it feel when you take some financial decision by trusting someone and you lose money? The tweet below was done by Kalpen Parekh, CEO Of IDFC Mutual funds.
When investors hear us say, it’s cheap so buy more, this is what Dharmendra will say! pic.twitter.com/UIHLdhpzAC
Money is a very private matter and most of people are very very attached to it. When an investor gets a bad experience once, they carry it with them for a very long term. Every other person starts looking like a cheater to them. Everyone seems to be behind their money and it’s tough to trust others.
It’s a very natural reaction, but the problem is that it also damages the investor’s chances to get into a good association too. There are many investors who contact us for their financial planning and many of those who have faced bad experiences in the past never move ahead because it’s difficult for them to trust someone now.
Imagine a guy who has had a bad experience with ULIP, someone who has lost his money due to market movements, will find it very tough to start his SIP’s in mutual funds for his long term wealth creation. This is a big loss for himself based on his past experience.
I know few investors who have vouched to never buy any other financial product other than a fixed deposit because they felt cheated in the past.
So what is the point I am making? If you take the wrong financial product, then it affects the way you think about financial products and advisors in the future.
How to buy financial products?
I am not going into detail here, but one thing is clear. You have to take out the emotions out of it. No greed, no fear, no pressure, no over trust on others. Make sure you understand what you are buying, why you are buying, for which goal are you buying, what are the risk factors, etc.
If you spend just 1 hour before you get into a financial product, I think 95% of the investor’s woes will be solved.
What do you feel about this article? Do you have more points to add?
Before I even start this article, please watch the first 5-6 min of the following video which comes from Ravish Kumar of NDTV and you will get the hottest points of discussion in this budget, which is taxation on EPF withdrawal.
The video below discusses various viewpoints from govt representatives, economists and some other people on why this is a foolish decision from govt and at the same time, why it makes sense to tax the EPF withdrawal. You will listen to the full video if possible for you, or else at least listen to the first half.
So, I was watching Budget 2016 yesterday and desperately waiting for the personal taxation announcement because that’s the main thing I understand :). By the end of the budget speech, it became clear that there were no changes in income tax slabs nor 80C limits and all hell broke loose on the news that the EPF withdrawal will be taxed on the 60% corpus.
The whole twitter and facebook was full of angry people showing their disappointment on the budget and how it has betrayed the salaried class. The issue went really out of hand and a twitter trend #RollBackEPF started trending and every person from across the country wanted it to be taken back. It was really a crazy day. And today govt has clarified that the tax is only applicable on the interest component only (more on that later in the article)
This budget’s major focus was on the rural economy and farmers which are neglected for decades anyways. Only time will tell if the efforts were taken in this budget work or not and if things improve and get better for farmers and rural economy. Let’s wait for that.
While there were many things in this budget, on the taxation front and other announcements, nothing major was there in this budget for a common man on taxation front and that made the salaried class very very disappointed.
Let’s look at the budget highlights one by one. My focus is to share all the major points which concern or are related to a common man.
1. No Changes in Tax Slab rates or 80C
Let me again share it. There was no change in the income tax slabs or the 80C limit. Everything remains the same on this front. Everyone was expecting that the slab will be raised or 80C limits will be increased, but that didn’t happen. There were conversations like the basic exemption limits should be raised to at least Rs 5 lacs from the current 2.5 lacs, and this was, in fact, Arun Jaitley’s demand in 2014 that the limits should be raised. Not sure what’s coming in his way now when he himself is the decision-maker.
2. Up to 40%, NPS withdrawal maturity becomes tax-free
Now 40% of the NPS corpus will be tax-free at the time of maturity, rest 60% corpus will be taxed if you withdraw it fully. However, if you buy an annuity (pension) from the remaining 60% corpus you won’t have to pay the tax. However, note that the pension amount which you will get will be normally taxes as the income in your hands.
This means that if you have Rs 1 crore in NPS at the time of maturity, if you withdraw the full amount, then 40 lacs will be tax-free, but the rest 60 lacs will be taxed. Now if the applicable tax at that time is 20% (just an example), then 12 lacs will go in tax and you will get the remaining 48 lacs in our hand. So a total of 88 lacs you will get out of 1 crore. However, you can choose to just take 40 lacs in hand and leave the 60 lacs in a pension product to generate the monthly income (which I think many will choose anyways).
One good point is that if the NPS holder dies, then the full death claim will be tax-free in the hand of the receiver.
3. EPF Interest becomes taxable for 60% corpus
As I said earlier, the EPF was the center point of discussion after the budget speech and govt has clarified that only the interest component will be taxed at the time of withdrawal and that too only on the 60% corpus. The 40% part will be tax-free fully. Note that this is applicable only on the interest earned after 1st Apr, 2016. The interest earned before this date will be tax-free.
Also, an important point here is that there is a lot of debate and confusion around this point as of now. We should wait for more clarification on this from govt in the coming days.
4. PPF remains tax-free (its still EEE)
PPF is untouched and still remains full tax-free as of now. Yesterday there was this confusion, that NPS, EPF and PPF, all of them are brought at the same level and many worried people whose PPF was going to mature in the coming months/years panicked and started asking if their PPF corpus will also get taxed.
So at this point of time, PPF remains the only investment product which comes under EEE (Exempt, Exempt, Exempt)
5. Employer contribution in EPF restricted to 1.5 Lacs per year
Now an employer contribution is EPF is restricted to Rs 1.5 lacs per year or 12% of the basic salary whichever is lower. Till now there was no limit like that, but with this budget that is changed. Incase employer does contribute more than 1.5 lacs per year, then it will taxable in employees hand.
Also, note that the govt will now contribute the 8.33% EPS part for the employees from its own pocket for the first 3 yrs for the new EPFO members.
6. Health Insurance of Rs 1 lacs for Senior Citizens
There will be a health insurance scheme launched soon which will provide Rs 1 lac of health cover to poor families. Also, the senior citizens who belong to these families will also get an additional Rs 30,000 top-up cover on top of Rs 1 lac. The govt budget documents give the reasoning for this scheme.
Catastrophic health events are the single most important cause of unforeseen out-of-pocket expenditure which pushes lakhs of households below the poverty line every year. Serious illness of family members cause severe stress on the financial circumstances of poor and economically weak families, shaking the foundation of their economic security
7. HRA exemption under Sec 80GG raised from 24k to 60k per year
As per sec 80GG, those who do not get HRA in their CTC from their employer can now claim up to Rs 60,000 per year as a deduction under rent paid. Earlier this was only Rs 2,000 per month. This will help a lot to those people whose employers are not giving them HRA Component. Rs 5,000 though is a less amount, but still a respectable deduction at least.
In other word eligibility will be least amount of the following :-
1) Rent paid minus 10 percent the adjusted total income.
2) Rs 5,000 per month. (this was Rs 2,000 earlier)
3) 25 percent of the total income.
8. First time home buyers to get extra Rs 50k deduction in Interest
The first time home buyers will get an additional Rs 50,000 tax exemption in interest part apart from the current exemption, provided following points are true
The loan amount should not be more than 35 lacs, and the value of the house should not be more than 50 lacs
The loan should be sanctioned between 1st April 2016 – 31st Mar 2017
The home buyer should not have any other residential house on his name
9. Dividends above Rs 10 lakh to attract an additional 10% tax
Now if a person is earning more than Rs 10 lacs of dividend from stocks will have to pay the tax of 10% on it. Right now companies anyways pay DDT (Dividend distribution tax) on the dividends declared. I think this is anyways going to impact only those who have very high investments in stocks and they earn big dividends. A normal investor will mostly be out of this.
10. Service tax increased from 14.5% to 15% due to Krishi Kalyan cess
A new cess called Krishi Kalyan cess of 0.5% is added to service tax, which is applicable to all taxable services, which simply means that the service tax has now gone up from 14.5% to 15%. While this 0.5% does not look much, its actually going to be a decent amount for a common man in addition to what we pay.
That means an extra Rs 2 in the bill if you have food worth Rs 1,000 in a restaurant.
That means an extra Rs 5 in your phone bill of Rs 1,000
I think it will add a few hundred extras in your expenses if you count entire years of expenses. This will be applicable from 1st June, 2016 so you still have some time 🙂
11. TDS of 1% on buying cars above Rs 10 lacs
1% TDS is proposed on the purchase of luxury segment cars costing Rs 10 lacs or more. The same TDS is also there if one buys any goods or services exceeding Rs 2 lakh. On top of this, an infrastructure cess of 1% is on small petrol cars, CNG cars and 2.5% cess on diesel cars are there, which means that cars, in general, become a bit expensive.
Even the branded clothes and tobacco items will become costlier due to the excise duty increase
12. Possession period for property raised to 5 years for claiming tax benefit
Earlier, if one used to buy/construct a property, one had to get the possession in 3 yrs itself to claim the tax benefits on the interest paid under sec 24. Now it has been raised to 5 yrs. This will help those real estate investors who have not got the possession due to delays from builders.
13. Tax Rebate of Rs 5,000 for those with income less than 5 lacs
For small tax payers with an income of fewer than 5 lacs, the tax rebate is increased from Rs 2,000 to Rs 5,000. This means that if the income tax payable is upto Rs 5,000 for small tax payers, they don’t have to pay it. Rs 5,000 will get deducted from the tax payable. So if a person is earning Rs 4 lacs (taxable income), then as per slab his income tax is Rs 15,000 (10% of the income above 2.5 lacs), out of this Rs 15,000 tax payable, he will get the rebate of Rs 5,000 and he will pay only Rs 10,000. This was earlier set at Rs 2,000 only, but now changed to Rs 5,000
14. ATM’s in Post offices
Over the next 3 yrs, govt plans to roll out the ATM’s in post offices so that more people in rural areas can access the banking services. The department of Posts plans to bring around 25,000 post offices under this in the next few years.
There are many more things in the budget, but I am not going into each of those. The points above are the main highlights which I am discussing here. You can read all the points of budget in this PDF file
Please share how do you rate this budget and what do you think about the move on the EPF taxation?
Indian Govt has brought a new amendment in the EPF rules, according to which the members will not be able to fully withdraw from their EPF before they reach the retirement age.
The maximum one will be able to take out is their own contribution and its interest (which was raised to 8.8% recently), and that can be done only after 2 months of ceasing employment.
The only exception shall be made for female members resigning for the purpose of marriage or pregnancy or child birth. I came across this news from Nitin Jain when we got an mail from his employer about this notification. Thanks for Nitin to send the notification PDF to me.
Below is the snapshot of the exact wordings taken from the notification which was released by the govt recently. please find out the PDF of the notification here
So whatever your employer is contributing to EPF and the interest on that part will be retained in EPF till the retirement age and you will be able to use it only at the end.
Many investors when they change jobs withdraw from their EPF’s and till now they used to get the full amount. But this is not going to happen from now onwards. What this means is that if you have an EPF account, your relationship with EPFO is lifelong now, because your account will be active till you retire (or die)
This is not a sudden decision taken. It was properly planned many months back itself and there was news about this restriction coming up in future, however that time, it was said to be the limit of around 75% of the total amount, but now it’s close to 50% only (employees share only).
Also note that as per the stats from EPFO; out of the 13 million annual claims pending with the EPFO, over 6.5 million claims are for 100% withdrawal, that’s 50%. This means that out of every 2 claims which EPFO gets for withdrawal, 1 of them is for full withdrawal.
This means that a big portion of claim withdrawal applications was coming from people wanting to withdraw the full amount. Now with this new rule, the number of applications to EPFO will also reduce drastically.
Is this new change in EPF withdrawal rules Good or bad?
From an employee’s point of view, the flexibility to withdraw the full amount (the painful process) has gone and now you can’t just take out full money like you used to do earlier. EPF is a social security measure, and was designed keeping that in mind, but people used to apply for withdrawal the moment they changed the jobs most of the times, now with this new change, it will not be possible and in reality one will be forced to keep a part of their wealth in EPF till their retirement
No matter how much I try to think like an employee, my experience of working with thousands of investors tells me that it’s a good move. PDF is the only saving at the moment, which happens by default for a salaried person, and even though one does not touch it for years, eventually a big percentage of the population always thinks of withdrawing the money on job change and the money gets utilized somewhere.
Retirement Age increased from 55 to 58
Another change in the notification is that the retirement age is increased from 55 yrs to 58 yrs, which means that one can now only consider themselves to be retirement from the EPF point of view once they turn 58 yrs. One can also apply for a pension only at that point in time.
This is a good move if you think long term. Consider a person who is 28 yrs old, and his salary is Rs 30,000 per month. Assume that his basic salary is 40% of the gross amount, which here comes to 12,000 per month. Now on this, he will get 12% of salary deducted as for the EPF and another 12% will be added from the employer which would total Rs 2,880 per month.
Now if the salary increment happens @7% per year and the return on EPF continues to be 8% per year, the person will retire with 80-90 lacs of EPF corpus at the time of retirement, provided he does not withdraw anything in between. However now even if the person chooses to withdraw the money in between, with this new rule the employer contribution is going to the restricted and one will bound to have 40-50 lacs at a time to retirement (with the assumptions above). Below is the chart which shows how the numbers move.
Note that the above chart is only for illustration purpose, The only point I want to make it a decent amount of money will be there at the time of retirement because of this new forced rule.
Please share what you think of this new rule. Do you think it’s good or not? How do you react to this?
Today, I want to help you understand how a mutual fund operates in layman language and how its structure looks like. How various entities come together to create a mutual fund.
There are a lot of investors who are new to mutual funds concept and they have just heard about the mutual funds. All they know about it is that some investors pool in their money in mutual funds, which invests in markets by a fund manager and they get very good returns. While that’s a simple explanation, I today want to inform you about the details and how things actually are structured, which makes mutual funds one of the safest instruments and highly professional, and leaves almost no chance of fraud in mutual funds
So let’s get into the entities which comprise of a mutual fund.
1. Sponsor
The first entity is the “sponsor” of a mutual fund. It’s a person or the corporate body which initiates the launch of a mutual fund. You can see this person as the promotor of the company, who is the first one to think about the company. As per SEBI, the sponsor should have a good reputation, great professional competence and they should be financially sound to become a sponsor.
They also need to have at least 5 yrs of experience in the financial services industry and should contribute 40% of the AMC net worth (we will soon see what is AMC). The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of the mutual fund
2. Trustees
The next thing you should know is that a mutual fund is created as a public trust and registered with SEBI. The sponsor appoints the trustees which look after the trust and they are the owners of the mutual fund property and assets.
However, the role of the trustees is not to manage the day to day affairs of the mutual fund, but only to regulate the mutual fund. They make sure that everything is happening as per regulations and the money invested is managed as per the objectives set by the mutual fund. The trustees act as a protector of unitholders’ interests.
As per the SEBI rules, At least 2/3rd of the directors of the trustees have to be independent directors who are not associated with the sponsor in any manner.
3. AMC (Asset Management Company)
Now comes the main thing.
AMC means the Asset Management company which actually manages the investor’s money and takes the decision of investing the money. The AMC is appointed by Trustees. AMC does the fund management and charges a fee for their services which is borne out of the investor’s money (that’s why expense ratio is there)
The AMC has to be approved by the SEBI and the Board of Directors in AMC must have at least 50% of Directors who are independent directors. So an AMC functions under the supervision of SEBI, Trustees and the board of directors.
Some rules set by SEBI
As per rules set by SEBI, An AMC (also referred to as fund house) can’t use the same broker to buy more than 5% of the securities. Just like we use a trading account to buy and sell securities, in the same way, an AMC uses a broker to buy and sell securities in large quantities, but they can’t buy a bulk quantity with the same broker, which makes sure they can’t have any “arrangements” with one of them.
So when you say HDFC Mutual Fund, you are referring to the Trust. The AMC for HDFC Mutual Fund is “HDFC Asset Management Company Limited”. So all the investment decisions of buying and selling the securities are taken by the AMC and not HDFC Mutual Fund (the trust)
Below you can see the details of trustees, sponsor, and AMC which I took from the HDFC Mutual Fund website
AMC is responsible for floating a new mutual fund scheme, and inorder to do that, they have to follow rules prescribed by SEBI and require the signature of the trustee.
So the HDFC Top 200 fund was floated by HDFC Asset Management Company Limited (AMC), but owned by HDFC mutual fund (the trust). It is the AMC that hires all the fund managers, IFA (agents) who helps in sales, and all the employees who work at the AMC offices.
4. Custodian and Depository
Here comes the interesting part.
The securities which are bought and sold by the fund manager, it’s actually not in the custody of AMC, but another entity called custodian or the depository participant. It is registered with SEBI and has the access to the securities.
A custodian keeps the physical securities (like GOLD and any physical certificates) and any Demat stocks/units are stored at Depository level.
A custodian is also responsible for keeping an eye on all the corporate actions like when is a stock declaring dividend, bonus issue etc in the stocks where fund has invested. So an AMC just focuses on the decisions like buying and selling and all the task of managing, storing of actual securities happens at the custodian level
Note that an AMC can have more than one custodian for various kinds of securities, like in case of HDFC AMC, the securities are with HDFC Bank LTD (one of the custodians), but for their HDFC Gold ETF, the custodian is Deutsche Bank A.G which stores physical gold.
As per regulations, Sponsor and the Custodian must be separate entities which make the mutual funds a very safe instrument and fraud is almost impossible.
5. Registrar and transfer agents (RTA)
Finally, comes to a very important entity called as Registrar and Transfer agents(RTA), which are appointed by AMC
These RTA are the entities that carry out all the clerical work like processing of applications, processing KYC of investors, issuing unit certificates, sending refunds, processing redemption orders etc. So you must have heard about CAMS and Karvy, which are the RTA agencies for mutual funds. So some AMC’s give contract to CAMS and other AMC’s have given it to Karvy. The RTA charges a service fee for the work they do.
So for example, HDFC, Birla, ICICI, SBI are serviced by CAMS, whereas Reliance, UTI, Axis mutual funds have chosen Karvy as their RTA. Note that all the AMC offices also carry out the clerical tasks like if you want to change the address in your mutual funds or add a nominee, you can go to AMC office directly or their RTA
Below is a snapshot of what all mutual fund companies servicing is done at CAMS at the time of writing this article
This completes the high-level structure of mutual funds. There are various other small entities that are sub-parts of these bigger entities but let’s not get into that as of now.
By looking at the above structure you can understand that a lot of care has been taken to design the mutual funds and at various points, the conflict of interest does not arise.
Are you investing in mutual funds?
Mutual Funds are wonderful products and especially for long term goals. You can now start your mutual fund’s journey with Jagoinvestor if are planning to invest in mutual funds.
Our biggest dream gets fulfilled today. We are once again ready to serve investor’s community with our brand new offering jagoinvestor school.
There has been enough of text articles on our blog (which will continue as it is). We now want to go to the next level and for those who are committed to going to the next level, for then we will do more of webinars, video programs and online classrooms where learning and sharing insights will make personal finance FUN.
We both (Manish and Nandish) will give our best to the school members, but we will also get the best of the best people to share their knowledge, wealth creation ideas and strategies with school members.
What is Jagoinvestor School?
Jagoinvestor School is all about becoming a dedicated student of wealth. The school will help you to fall in love with the overall process of wealth creation. For the next few years we are going to dive deep into the school. We will dedicate our time, energy, knowledge and skills to empower members of the school.
We will teach and share everything that we have learnt so far from the time we started this blog. We will stay committed and will also generate high level of commitment amongst all school members. We will demand action and will ask members to do the required work.
The school is not for the faint of heart, it is for those who are committed to creating wealth. The foundation of the school will be FUN, ACTION and COMMITMENT.
Why you should join the school?
If you have benefited from the blog and want to learn more about personal finance, then come and be a part of our school. If you want to create an extra-ordinary financial life you should immediately join the school. The school is for those who want to get accountable in the area of money, who wants to work on their financial life and someone who wants to take their financial life to the next level.
It is our promise you will see a dramatic shift in your discipline level and will start to enjoy the overall process of wealth creation.
Here are the 10 things you will get in Jagoinvestor School
Because there are so many people waiting to get help in their financial world and when we help someone to reinvent their financial journey it fills our heart with a lot of fulfillment. In the last 2 months, we have received 100+ thank you emails, out of which we are sharing some of them below.
We are not sharing their names and these are personal sharing written straight from the heart. The sharing done is not about us it is about investors who have rigorously worked on their financial life and created an amazing financial life for themselves.
Hope you are doing great. After having consulted with you ~3 yrs back through “Financial Coaching” I had seen a phenomenal change in the way I treat things in lieu of financial discipline. I truly have to appreciate your efforts in transforming me like this.
I now am relatively confident that I will be able to tackle things much more carefully when it comes to policies / ULIPs etc.
I now want to go with you again, to review my new financial goals and the path I am taking to achieve those. Please let me know what is correct means to go over this with you. Please do revert at your convenience. Looking forward to a positive reply from you.
Wishing you and your families a New Year 2016 Filled with good health, peace, and happiness.
Please find below a small write up on my personal finance journey in 2015.
2014
One of my colleagues told me about the Jagoinvestor website.
Began reading the articles written by Manish/Nandish.
I had huge credit card bills during that period. The articles helped me take the right steps and gave me a perspective.
Planned and worked towards getting debt free on the credit card bills in 2014.
I had improved on that front but wanted to get better and make my financial life stronger and be more in control.
Dropped an email on 20th Dec 2014 wanting to connect with Jago and avail of their services/support.
2015 :
Since I was travelling on a business trip, Set up my 1st call with Nandish on Sat 24th Jan 2015 around 11:00 AM.
Nandish shared a couple of docs that entailed the complete flow of our association e.g. Data Sheets, Health Checkup Data Sheet > Final Report, etc..
Nandish invested some time in going through my data sheet and reverted with a Basic Financial Plan. Along with the plan were simple action check-list for taking actions for me.
Now commence the journey to bettering and being more in control in my financial life.
Learned on what basis were the most important and had to be in place.
Corrected and improved on the wrong choices and products I had made in the last 10 yrs.
Which never took into consideration inflation and may other critical areas that need to be looked at.
Based on Nandish/ Manish guidance we worked on strengthening the foundation in the below areas
Term Plan
Medical Insurance for Family
Investments (SIP)
Attended the Jago workshop held in Mumbai and personally met Manish and Nandish and various individuals like me, It boosted the confidence all the more, to stay focused and consistent on this journey leading to financial freedom.
It has been a slow and steady journey to correct the errors of the past and dig and build a New and strong financial foundation for the future for me.
I’m very happy about the progress we have made in 2015, this would not have been possible without the guidance and support from Manish and Nandish. Based on my personal experience I’ve recommended the same to my various friends and even my sister who is working with the Jago team.
Looking forward to keeping on bettering and strengthen the foundation each year and being more financially free and continue this associate with Manish and Nandish.
Not sure if I manage to cover all the points, as I just keep writing impromptu
Starting the year 2015, I made a promise to myself that I will not ruin my sleepover money management issues. To fulfill this, I had taken the necessary steps towards being a better money manager of our(me & my husband’s) hard-earned money, i.e. meeting Nandish & Manish.
I was following the blog from 2014 but I was always having doubts in mind: Does these process really work and will it work for me as well? I attended a one day workshop that is held in Pune by Jagoinvestor and that was the turning point of my life.
After the workshop, I decided to take help from Manish & Nandish and hand over all my worries to them. I did it and I can really sleep better now.
For 2016, my goal is to be a better organizer on maintaining Financial documents and do the remaining planning part of it.
Hi Nandish, happy new year to you and your family too.
2015 has been a great year for us. We continued on our monthly targets and never missed any. We saw great growth coming this year and we are completely debt-free this year. Though we need to improve on two fronts. Our expenses have increased a lot now after the kid.
So we need to be careful to plan nicely and stick to it. On the heath front, some health issues are cropping in. So we need to exercise much more and much harder.
The year 2015 gave me a better awareness of why Financial Management is important. In terms of finances throughout the year, the inflow was barely able to meet the outflow. Midway through the year, the realization dawned that my finances are more tilted towards Real Estate and questions on liquidity, gain in the context of a weak Real Estate market.
I was sincerely praying that I get proper guidance on how I should be saving for my next 5-10 Years. I do not know if I should call it as luck or prayers answered, I somehow got a chance to read Manish’s book “16 Financial Principals every investor should know” which was an eye-opener pointing me to the mistakes I have made in my investments.
It did not take time for me to connect with Jago Investors and have been interacting with Nandish. I feel I am in safe hands and hopeful that the year 2016 will be a year of consolidation and growth in my financial journey.
[/su_note]
The School is about creating SUCCESS STORIES:
I shared a few stories with you because jagoinvestor school is all about creating success stories. Every month we will encourage school members to learn and to take action in their financial life. It is our promise if you will surrender to the structure of the school your financial world will go to the next level. You can visit a dedicated page of school to learn more about the elements of school.
Invitation to join the school
We invite readers, Asset Management Companies, Insurance companies, and various other financial institutions to get associated with this school. From the bottom of our heart, we invite each one of you to be a part of the school, this is one of the best choices you will be making as an investor.
We would like to join hands with some Asset Management companies or organizations to make sure the school reaches maximum investors.
The money generated from the school will be used for the expansion of the school, we will one-day eradiate financial illiteracy and every Indian investor will be a proud jagoinvestor. We need your love, blessings and encouragement, share about school with your loved ones and see that you join the school at the earliest.
If you have any questions about school feel free to ask in the comments section.
Do you want to create a lot of wealth? Do you want to see crores of rupees in your bank account? I am sure you know that’s not an easy task. You also know that it will take a lot of time and dedication to create wealth over the long term. Do do you know that it’s more tough than you think? I will show you why?
Have you ever seen those retirement calculators online, where you punch in your numbers and find out how much corpus you will be able to generate over the years if you consistently invest a fixed amount year after year at a certain rate of interest?
The calculator throws a big number at you and you feel – “Wow … That’s looks straight forward and simple”
Below you can see an example.
I calculated how much wealth a 30 yr old guy can generate by the time he retires at age 60 (30 yrs tenure) if he invests Rs 20,000 per month at a return of 12% per annum. Below is the result.
It looks so simple on paper. One can generate a wealth of Rs 7 crores in 30 yrs period if one consistently invests Rs 20,000 per month.
Doesn’t it look over simplified? It definitely is!
While the calculator above makes it look like a child’s play to create long term wealth, in reality – it’s definitely not that easy and there are various things to be considered here, which I want to discuss in this article.
What are the assumptions in the calculator above?
If you look at the calculator above and the numbers, you will realize that 5 assumptions which are
The investor keep earning over the years and bring back the income
The investor will have enough surplus each month
Investor will be able to generate a 12% return over long term
The investor will not use the money out of the accumulated money till the end of tenure
Now if you look at the 5 points above, long term wealth can be created only if all the 5 points above are true or maximum of them are true. Each of the point above is a challenge in itself. If you overcome all these 5 points, you are then set to build long term wealth.
So now, if you try to capture these points as the ACTION and RESULT, then here is how it looks like
So let’s touch on each of these 5 assumptions one by one and see in detail and see what are the challenges in handling them
Assumption #1 – The investor will keep earning over the years and bring back the income
Let’s start from the most basic foundation point.
A lot of people who have been earning from many years (let’s say 5 yrs) and never faced any issues in their career seem to feel that its a cakewalk to continue doing it without any issues for the next 20-25 yrs of their life. They think that it would be a smooth ride. However, you need to know that
There is a section of the population who are struggling in their career and will not be getting the same salaries if they switch jobs
There are people whose income is not rising as per their expectation and a lot of people take salary cuts
A lot of investors are out of their jobs/business due to competition, policy changes in the industry
A lot of investors at times spend many months without bringing back any income because of health issues, layoffs, and other reasons.
At least 3 of our clients have stopped their SIP’s in the last 6 months because their income has stopped/reduced due to some issues at their workplace. While it might be a short term problem, you never know if it can extend for a very long time for some one. One client is working in the Middle East, and his job is not that stable and he is damn scared of this fact.
Another client told me that as per his understanding, he is getting the maximum salary he can command in his industry and if he loses his job for any reason, he will have to join another company at a lower salary.
One client is hell scared because he is just surviving his job from many years and if he is fired due to non-performance, he does not believe that other companies will hire him at the same salary
Focus on your “employability” and potential to earn
My partner Nandish Desai, says a very important point about employability – “To get a job, you need to be useful for someone”
You need to make sure that whatever you do, whichever sector you enter, which ever skill you acquire – do it like a pro. Become a highly useful person in your domain of work. Be among the best. Your skills should be outstanding and you should be the master of what you do. If that happens, you will be highly sought after and everyone will want to hire you.
This way you are ensuring that all your future income is secured. If things get tough in your industry, you will be one of the last people who will face issues. If you face any issue, you will soon find a new job. And if you want to switch, you can command a better salary.
Focusing on your career and investing in your own development is one of the most rewarding decisions you can make in your financial life. Only when you ensure that you have taken care of this point, other points will come into the picture.
You need to understand that only if your future cashflow is protected, only then you can save from it and only then you can think of the returns and everything else. No income, no wealth in the future!
Assumption #2 – The investor will have enough surplus each month
Taking the example above, the 2nd assumption was that the investor will continue investing Rs 20,000 per month over the next 30 yrs without fail. For you personally, this number can be Rs 10,000 or Rs 50,000, the same is true for yourself.
Will you be able to consistently invest that much each month? Will you be left with that much each month? year after year?
You might be able to continue that for some months or years but think of the real-life issues which we all face. And you never know your life will take turns, you never know how unpredictable things are. You might have to switch jobs because of health?
When you will have kids, your expenses might shoot up, you may face an emergency which might last for many months to come, there can be health issues and you can get into the never-ending cycle of –
High income -> high expenses -> less saving.
In fact, I have seen this in reality. Forget about investing each month, one of our clients is redeeming back from his mutual fund’s corpus because there is a prolonged medical emergency at home and he is not able to handle all expenses the way he had planned before.
My whole point is that it’s very very tough to maintain the consistency and discipline in investing in real life and there will be disturbances.
High Lifestyle is making saving tougher
Now a day’s it’s more common to see people living on a paycheck to paycheck basis. The high lifestyle and the increased consumerism have ensured that even if you are earning high, it will get tough for you to save. Salaries like Rs 1 lac or 2 lacs per month are very common these days in many cities, but the savings are not in line with the salary.
Hence, you need to ensure that you after your expenses are done, you generate a consistent and a minimum 20% of investible surplus from your salary. Take it as a game and try to win it each month.
Assumption #3 – The investor will be able to generate a 12% return over the long term
The next assumption is that the investor will generate 12% return over long term from his investments? Now where do you invest your money to get more than 12% returns over such a long term?
Any guesses?
The answer is equities !. It has to be in shares, equity mutual funds, ETF’s, Index funds, etc. This is not an easy thing for the majority population in India, because most of the people in India do not understand how equities work and banking products are their lifelong favorite. They are earning 8-9% (6-7% post-tax) from years.
So for them to earn 12% would be very tough because first, they need to get clarity about how equities work and get comfortable with it.
Data and chart:
Now let me show you some data and charts which will convince you why you should be in equity to earn a 12% return on your investments.
Below is the chart which shows the CAGR return for 10 yrs periods if the money was invested in NIFTY. The data is from 1st Jan 2001 to 1st Jan 2016, so there are many 10 yrs period like
1st Jan 2001 – 1st Jan 2011 (first point)
2nd Jan 2001 – 2nd Jan 2011
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1st Jan 2006 – 1st Jan 2016 (Last point)
We then plotted the CAGR Return for all these periods and below is the answer. The CAGR return almost always was above 12%, however for few months towards the end it was a bit below 12% .
Another graph which I want you to see is the 10 yrs CAGR return chart from Sensex, which is for its 36 yrs of existence.
So there are 26 different “10 yrs” tenures and we calculated the CAGR return for all the 26 data points and below is the result. Around 21 times out of 26, the return was more than 12% and at times it was very high like 20%-30 %. Few periods had fewer returns like 6% or 11 %, but then if you look at the overall 36 yrs period, the CAGR return converts to 17% return.
Now while it’s very easy to conclude that if you invest in equity over a long term, you will get required 12% return, its very tough to practice in real life, which we will see in next point very soon.
Lets me share with you that a very small percentage of our India population invests in Equity.
The major money lies in FD, Gold and insurance products and even real estate. And it’s going to be very tough to generate a 12% return from these asset classes. In fact, Morgan Stanley’s Research has clearly shown that equity has beaten all the asset classes in the long run and below is a snapshot of that research.
So if you want to build wealth over the long term and you are investing the majority of your money in FD, understand that your post tax return is lower than the inflation.
Your money might be growing in numbers (Rs 10 lacs became 20 lacs in 9 yrs), but the worth of your money has come down (20 lacs today can buy less of what 10 lacs could have bought 9 yrs back). You are in fact getting poorer in a slow-motion and you are not realizing that.
Assumption #4 – The investor will not disturb his wealth creation process
Read the following question and answer.
Q – Do you know what is the biggest challenge for an investor if he has invested in equities (mutual funds or Stocks)?
ANS – To remain inactive and sit tight without doing anything and let his wealth grow.
Making money in stock markets is challenging, not because markets have any issue, but because we investors have a behavioral issue. We can’t handle the uncertainty and volatility which comes with the stock market. It’s not for weak-hearted.
For some one who has been with FD’s and has the habit of seeing his investments grow in a linear fashion, he can literally go crazy with mutual funds because it brings so much of ups and downs and volatile movements.
Should I stop SIP when the market is falling?
In the last 2 weeks itself, we have got many emails from our clients whose SIP’s are going on in equity mutual funds, asking if they should stop their SIP’s as markets are falling? I have told them to act like a ninja investor and see it as an opportunity and pump in more money because in the coming years we might see a very good bull run? (any body remember what happens for the next 2-3 yrs after 2007 crash ?)
Note that all these clients SIP’s are running for very long term goals like retirement or children’s education which are going to arrive only after 15-20 yrs. There is no problem as such with that behavior.
It’s very natural, but I am just trying to tell you that it’s not that easy to handle the pressure which comes from the volatile nature of markets and very few investors have that dedication and understanding of how things work in the stock market.
Very few people can control their greed and fear and that’s the reason very few people are able to make the most of the returns from the equity markets over the long term. Below you can see a snapshot of kind of queries which start coming up if markets show any kind of fall for a long time like 6 months or a year.
The cycle of Greed and Fear
If you see the stock markets right now, you will realize that we currently are in that same phase where investors panic and take out the money from their portfolios. Markets are falling from last 1 yr and especially this month it has gone down by a big margin.
So even if an investor is investing a good amount each month and he has read about how equity markets work and they understand the game of equity, still it’s very tough for an average investor to stay calm and stay with markets consistently for a very long time.
Some stop their SIP’s, Some redeem their money and shift it to FD’s thinking – “I will again be back, when the markets will calm down and start going up”.
However, you never know when that up move started and by the time you realize, you lose the next bull run. The below chart clearly shows how 99% of investors think and behave in stock markets.
So what is the solution? What should you do?
Remember that if you are in equities with a long term view like 10-15-20 yrs, then you are going to see many cycles of ups and down. You can’t escape it. You need to think of the down market as the “sale” where you can accumulate more stocks or mutual funds units at a cheaper price so as to gain from the up move later.
And when markets are going up, don’t redeem your money or try to “book the gains” because you will most probably miss the bigger up move trying to redeem the smaller up move. You need to understand that you are not there for “trading” or short term profit booking (incase, you are there for trading, then this does not apply to you)
Just sit tight, keep your SIP going and make sure you are in right mutual funds (not the best, because it does not exist). Review them in a few years and let the process of wealth creation take place. It requires patience and only a small percentage of investors are going to reach the final destination. Be one of them.
Assumption #5 – The investor will not use the money out of the accumulated money till the end of tenure
Having 5 lacs in your bank account is very different from having Rs 5 crores. You might think – “What’s the difference? it’s just 100X, rest everything is same”
No, your feelings about your money, your risk appetite, your thoughts around money, your desperation to do something will be at a very different level when you have 100X money in your bank account.
It’s a very tough thing to “not do anything” when you have so much money getting accumulated in your account. Once your corpus reaches a respectable limit like 80 lacs or 1 crore, you will start thinking in these lines
Let’s shift some money in FD now.
Let’s upgrade our house now, I can surely take out 50 lacs from my portfolio
Now I deserve that dream car I always wanted, I have good money now
Let me have a grand wedding for my children, after all – I have a good corpus now
Let me be clear, that I am not saying there is anything wrong with spending your money or using it for yourself.
please do that. After all, if you have managed to earn so much money and accumulated the good corpus, you surely deserve a better lifestyle.
All I am saying is that it’s a challenge to let your portfolio grow and not disturb it. So in our example at the start of the article, you might not reach 7 crores as per calculation, but may be 4.3 crores or just 3 crores, because you keep taking out the money out of your corpus many times in between for various reasons.
If you are just taking out a portion of your corpus and reinvesting in something else which you can redeem back later, it’s still fine. But if you are “spending” the money and consuming it, then it’s GONE. That part will not reflect in corpus now and you will have a lesser corpus to that extent.
If you can make sure you have that ability to stay calm and see your wealth grow without disturbing it, then you are bound to see a good amount of wealth in your life.
So here is the final checklist before you start your wealth creation journey
Spend a good amount to time to understand how equities work in the long run. I have explained about equity in the 3rd chapter of my 1st book – “16 personal finance principles every investor should know”. Get a copy and read it
Work on your career strongly and become very very good at what you are doing. Make sure you are highly employable even if the bad time comes. This will make sure your cash flows are more or less ensured.
Spend 10% time on cutting down your expenses if there is any scope, and spend 90% of your energy in increasing your income. Remember, reducing expenses is tough and has a lower limit. Increasing income does not have a ceiling.
Make sure you start the SIP in equity mutual funds with a long term perspective. When markets fall, rejoice ! and keep adding more money. Be a tough hearted and you will be rewarded over long term
Make sure you plan for other goals separately so that you do not use your main corpus in between for small things
Let me know if your way of looking at long term wealth creation has changed or not by reading this article. I would love to hear your views.
This is a guest post by a reader Prithvi, who wanted to share his views on the redemption charges by ICICI bank on the payback points. Here goes the article which was sent by Prithvi to me over email. We would like to have a discussion on this topic and see what everyone else has to say about this.
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Hi Fellow Investor
This is Prithvi. I wanted to share few thoughts I have about the ICICI bank and its redemption charges on usage of Payback points.
ICICI Bank is probably the best private sector bank in this country, it is because of them that the banking scene in this country has progressed so much.
PAYBACK is probably the best loyalty program in India, before PAYBACK, people never even thought that reward points meant anything and PAYBACK was the reason that this changed in India.
Now, there is one thing that this bank is doing that is not ethical. ICICI Bank is looting its account holders with the name of PAYBACK.
PAYBACK is a loyalty reward program with ties to several major brands in the country. You can earn PAYBACK points when you shop online or offline with many outlets, Future group outlets are one of them, Brand Factory, Pantaloons, Home Town, Central. Online you can earn and spend PAYBACK points at eBay.in, MakeMyTrip.com etc, to name a few. You can also earn PAYBACK points with your ICICI Bank Debit/Credit Cards and also ICICI Internet Banking. Note that PAYBACK and ICICI Bank are different entities
American Express also offers a card with which you can earn PAYBACK points.
Now, what’s unethical here? Let’s look at how you can earn and spend points.
Ways to earn PAYBACK points
Swipe your PAYBACK card at partner outlets
Enter your PAYBACK number at partner websites
Use ICICI Bank Credit/Debit Cards/Internet Banking for Purchases
Use American Express Cards for Purchases
Ways to spend PAYBACK points
Swipe your PAYBACK card at partner outlets
Enter your PAYBACK number at partner websites and confirm spending with a PIN.
Now, there are 2 categories here
Non-ICICI Bank Account Holders
ICICI Bank Account Holders
Steps For Non-ICICI Bank Account Holders
Enter your PAYBACK number/Mobile Number on the website(e.g eBay).
Enter your PAYBACK PIN to confirm. (4 PAYBACK points = INR 1)
If you are purchasing an item that costs INR 1000, you have 2000 PAYBACK points, you will get INR 500 discount and you have to pay only the remaining 500.
The transaction completes for free
Steps For ICICI Bank Account Holders
Enter your PAYBACK number/Mobile Number on the website(e.g eBay).
Enter your PAYBACK PIN to confirm. (4 PAYBACK points = INR 1)
If you are purchasing an item that costs INR 1000, you have 2000 PAYBACK points, you will get INR 500 discount and you have to pay only the remaining 500.
The transaction completes, but you are charged a redemption fee in your ICICI account.
Here is the problem.
PAYBACK confirms that its redemptions are free of charge and also confirms that PAYBACK does not charge for redemptions.
ICICI says that they have a right to charge for redemptions because they have a tie-up with PAYBACK.
Now let’s look at a scenario where it gets a little complicated, if you have a PAYBACK card from Brand Factory and you also have an ICICI Bank account and both of them are linked, this is when ICICI begins to loot you.
If you earn points at Brand Factory, the points get credited to your PAYBACK account and now when you spend those PAYBACK points, ICICI charges you a redemption fee.
This is blatant robbery. ICICI has no right to charge PAYBACK users for redemptions. Please listen to this audio which was created by me to explain my views on this topic.
ICICI Bank says that it has the right to charge users for PAYBACK redemptions when contacted by email.
PAYBACK confirms that it DOES NOT charge its users for redemption.
So, you have been reading a lot about CIBIL these days and you have got the impression that having a high credit score like 800 or 850 is a key to get your kind of loan?
If that’s the case, let me break your myth that having a high credit score is not a guarantee that you will get a loan from a company. Look at the following comment and you will understand what I am talking about
Dear Sir,
I have taken the PL of Rs.1.5 L from HDFC and get settled of amount Rs.15 k in 2013. In March 2015, I checked my CBIL score, it is 813 however loan status is settled.
Recently I applied for PL of Rs.5 L in ICICI but it gets rejected based on previous settled loan. I don’t get this, when my CBIL score is 813 then how its get rejected. Kindly guide me how could I get PL as its v.urgent for me.
Regards
What is CIBIL remark and score?
In case you are new to this CIBIL concept. I suggest you read this article or watch this video below from the Cibil team.
It will help you understand the concept of the credit bureau and credit report. Once you view the video, then you can move ahead.
Let me share with you a personal experience. My brother had taken a bike on loan a few years back and I was with him in the Bajaj showroom where I asked the executive if they really looked at CIBIL score (CIBIL was new around that time). The executive shared with me that they don’t look at a credit score, instead, they look at the remarks on the report and that is what matters most along with your other factors.
It was really a new thing for me to know that a credit report does not have that much Importance compared to the credit score in your loan approval process.
Credit remarks vs. Credit Score
Let’s understand both the concepts and the meaning of these two things
What are Credit Remarks on your report?
If you have 3 different kinds of loan accounts (1 home loan, 1 car loan, 1 credit card). In that case, you will have the remarks for each of these loan accounts and the current status. Imagining you have closed the loan accounts, the remarks may say “Settled” , “Written Off” or “Closed”, out of which the first two are bad remarks. At times, if you are not able to pay off the loan, the loan guys will try to persuade you to settle the loan with a lesser amount and close the chapter.
However note that it’s a short term solution to just get away with the problem. Eventually, the remark will be marked as “Settled” or “Written Off” and in future when another lender looks at your report, he will come to know that you didn’t pay the full/partial amount of loan outstanding.
At this point in time, even if you have great salary or a good credit score (we will look at it below), they are going to reject your loan application.
What is a Credit Score?
Credit score is a number between 300 and 900, which signifies your credit worthiness and how likely are you to default on paying your loan installments. A low credit score means that there are higher chances of you defaulting on the loan payments. This credit score calculation is a trade secret and no one knows the algorithm of how it’s calculated, but there are various factors that are considered by the credit bureau which its calculation.
So one can still have a high credit score (the chances of paying their future EMI’s regularly), but still their past remarks will have a greater impact on their loan evaluation process. While a score of 750+ is desirable (as per CIBIL around 79% loans were given to those with CIBIL score of more than 750), don’t think that just because your score is higher than 750 means that you will surely get a loan.
In the same way, if yours is less than 750 (like 600 or 720), but if your credit remarks are clean, you will most probably still get the loan, considering you qualify on other parameters like (salary, other EMI etc)
So while credit score gives a future insight, the credit remarks gives insight into the history.
4 other factors because of which loan application rejection can happen?
If you are a guarantor for a loan which is already defaulted. Though you have not taken the loan directly, your application might get rejected if you have become the guarantor of a loan by your friend/relative and they have defaulted.
If you are too dependent on credit already (means if you are over-leveraged). Imagine if you are already paying 50% of your income on EMI’s and have many different kinds of loans running. Even then your application might be rejected.
You don’t have enough tax payment history. If you have not been paying your taxes regularly, then it’s tough for the company to ascertain your paying capacity, hence, make sure you file your returns regularly and properly
Too many unsecured loans, if your loan portfolio has too many unsecured loans (credit card, personal loans) then it’s not a good sign and makes you look a credit hungry customer. This might lead to rejection.
So what’s the learning?
So what’s the learning out of this?
The main thing you should focus on is to make sure that your credit report does not contain any bad remarks and if there are any, then you should take actions to rectify it. It will by default help you in improving your credit score. Don’t get obsessed with increasing the credit score. If your credit score is above 700 and your report is clean, you are 95% good to go. Beyond that, if your score is higher, it’s a great thing. But don’t over-focus on it.
Before applying for any kind of loan, make sure you apply for your credit report and score before few months and analyze it to find out if you need to fix it or not. Over the long run, just keep paying your dues on time and do not abuse your credit utilization and you should be good in the long run.
