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Tips while Buying House, Real life experiences

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Are you thinking of buying your dream house? If yes , then you must be having a lot of questions and you must be looking some guidance from everyone you know, Why not utilize the knowledge of readers here.

Buying House in India

Over the last couple of days I was tying to catch up with readers who have bought flats or other real estate property and asked them 3-4 questions which could give you good understanding/points of what all you should take care while buying real estate.

You will also get to know some basic tips and tricks given by our readers here which they learnt or heard from others while making their purchase in Real estate. Overall see this article as a real life experience’s of readers on real estate and their learning out of it for others.

I hope you had a look at the debate on Buying vs Renting

Tips while buying house in India

Ankur Lakia Experience

Most important thing to take note of while buying the home :

Costs other than quoted per square feet rate. Few of costs like floor rise, parking, stamp duty and registration are fairly well-known. However, I was surprised when asked to pay for value added tax liability and service tax.

Since I bought under construction property and with all payments by cheque, I did not have much option but to pay for these costs. These are substantial costs and buyer needs to be aware of these additional costs while budgeting for the property purchase.

Biggest advice of caution will you give to new buyers :

While buying under construction property, buyer needs to do a thorough due diligence on builder’s track record on completion of property on time as well as quality of work. It is better to buy from a big name builder like Raheja, Hiranandani, Lokhandwala like (as far as Mumbai is concerned).

Even though one might need to pay a bit higher rate, it is worth it as it gives peace of mind when someone accepts all payments by cheques and abide by contractual terms. A good read from Subra on Mumbai vs Navi Mumbai Real estate .

One trick/idea which can help new buyers :

One thing which helps, is to buy little old / used property, may be 3-5 years old property. 3 to 5 years do not make much difference in usable life of property. However, usually one can get such property at much better rate than normal market price for new property.

More important though, buying little old property has several advantages:

1. One gets good idea of available infrastructure like nearby groceries, shops, availability of household help, situation regarding water supply etc which matters more to the lady of the house.

2. One can see whether building is being maintained or not. When I visited a building just two-year old, I was quite surprised to see its shabby look. It turned out that many members of society were quarreling and not paying their dues. One can easily skip such headache if buying slightly old property.

3. You can very well see the neighbours. It might be good idea to just meet them and greet them even if for only little time. It gives good idea on what standard of living is maintained by residents and whether one can easily fit-in.

For example:

my brother skipped a building which was really well maintained, with quite good location and flat available within budget. Surprised, I asked him the reasons. It turned out that almost every one of the residents was having more than one car in family and holiday trip abroad was fairly common.

My brother did not want to be part of such residency as he thought it would not be possible for him to fit in with people having such life styles since he could not afford such life style and, then, he would be odd man out.

4. There are some buildings where there is only one flat occupied on a floor, others being bought by “investors”. One can avoid possibility of living on a ghost floor by buying little old property..

Any other learning :

I am quite amazed by people stretching themselves on floating rate loans while buying property. I think people need to be aware that rates could be headed much higher, and higher enough to make material difference in their EMI obligations.

I think there are a lot of people who do not understand risks of floating rate loans or loans with first couple of years of very low-interest rates.

Meena Sivaram Experience

I will definitely give my inputs based on my experience. My advice will be more geared towards those who want to buy a house for the first time for self-occupancy and NOT those looking for immediate gains and make a killing in the real-estate market.

I am not the right person to advise those people as there are experts in that area. Here are my 2 cents:

Affordability – Do not go for over-priced properties which are beyond your means. Do not be impressed by those fringe attractions that builders dole out to impress the potential buyers like club, swimming pool, golf course, gyms, landscaping and what not…All these so-called benefits inflate the price of the property.

More important than these are the quality of construction and the basic facilities provided by the builder like earthquake-resistance (the richter scale it can withstand), the ratio of super area:built-in area, quality of material used within the apartment, 24 hr backup of electricity etc.

If you can manage your cash flow by reducing some other expenses, go for a size which is bigger than required i.e you need 2 BHK for now, go for 3 BHK and so on.

Location – This is important. I know most people cannot afford to buy a property on a prime locality like South Mumbai or South Delhi but when you are house-hunting in the suburbs, look for the development activities in the surrounding areas.

If there are metros, malls, highways, office or commercial and residential building being constructed in the vicinity, such properties have the potential. Choosing a right property in a right location is like picking up a good stock.

Buy when prices are low but has a potential to go up in the medium to long-term.

Words of Caution to New buyers

  1. The land on which the property is being constructed is not under any legal dispute and the papers are clean
  2. Make sure the builder has taken all the necessary approvals from the municipal and other bodies required for the construction of property. Any slack here will delay the possession.
  3. Previous track record of the builder on the completion of projects on time. Most builders do not adhere to the schedules. Of course such a risk is not there when you are buying an already constructed property but they are more expensive.

One last piece of wisdom: 

Go for your first property when you are around 30 years of age and do not DELAY it. Go for a 15 year loan tenure and aim to repay it within 10 to 11 years. So by the time you are 40-42 years, you are out of the loan liability. CAGR % for Meena house is around 12% and Tenure is 14 Years , She lives in Delhi-Ghaziabad Border

Wasim Sayyadd Experience

1. After identifying the property, look if the builder has constructed any apartment nearby/surrounding that is already occupied. Go..talk to people find out how genuine this builder is.This gives you a feedback how genuine and chalu the builder is.

That way be prepared based on your questionnaire.

2. Read Agreement carefully before signing it. Eventually, in the process of purchasing Flat we built mutual trust and the builder promised me to give parking, but this was not included in my agreement. He called me to sign at registration office without handing over a copy of agreement in advance.(I also didn’t question being a good relation)

I got the copy after a registration..same day I read carefully all the lines..and noticed parking is not included..called builder he assured to give parking. Am still waiting..as parking is not yet alloted to the Flat owners yet.

Ratio of parking available to the owners is less. And I am following it up..to get my part.

Manish Jagtap Experience

I am assuming the target audience to be the end-user who will stay in the house, and not a Real Estate speculator.
  • Put max possible down payment. Otherwise Bank interest over long tenure will eat up all price appreciation of the property.Also do not keep EMI more than 40% of husband’s salary. Ladies are most likely to take breaks for kids. Do not consider their income while planning for EMI. If wife continues her job, you can user her money to do partial pre-payments. (Compare different home loans)
  • Check Builder reputation. Also, if possible go for ready possession. These days builders show some garden, play area in brochure (you consider such things at the time of buying) and later on build something else on that land.  You don’t want to see a balcony of some other building that the builder pops up on such land, to stare right into your leaving room/bed room.
  • If possible go for group booking since it gives you a negotiating power. Lots of IT guys do these now a days. Mistake I did was to go for 95% loan even though I had money to pay for the flat. Price appreciation was eaten up by interest on the loan amount. Also, keep in mind the rising cost of children education, your retirement funds.

Robin’s Experience

I will start from the first step instead of the zeroth. A buyer has an option to choose from a ready-to-occupy apartment or an under-construction project. Ready to Occupy projects are priced much higher as the risk associated is far less.

The unit is all ready. An Under Construction on the other hand is cheaper but other than the risk you also have to wait for the unit to be complete. If one has enough fund for the Ready to Occupy option, people prefer it. In our case the Under Construction works better.

We did not have enough funds to actually buy a Ready to Occupy unit. A 2 BHK from a reputed builder was priced upward of 50 lakhs, It would have required a loan of more than 40 lakhs. An EMI of 45k per month was in the uncomfortable zone, plus it meant very little monthly savings.

Remember we had a car loan too.

Under Construction plan has a silent benefit which most people tend to neglect in their calculation. While the project is under construction, we are also drawing our salaries. Since the payments are construction linked, initial EMIs are quite low. This has an advantage.

By the time  we get the possession of the flat we would have easily saved more than 10 lacs (we are considering 3 yrs time frame), something which would have been difficult in the Ready to Occupy plan.Other than the financial aspect we also have the legal aspect to take care off.

The project should be clean and should have all the necessary permissions from various govt. bodies. SBI seems to have the most stringent legal policies. So if a project is rejected by SBI, one should show extra caution. If one is looking for a flat which is Ready to Occupy type, one should consider the second sale option also.

This should be used just before the registration in the original owner’s name. Most of the original buyers are investors, they would like to sell the property before the registration to avoid paying registration fee.

Check Your EMI

Check more Amazing Calculators

Vikram Experience

Most important thing to take note of while buying the house :

The location of the house is quite important. Are their schools nearby if there what are the standards of the school.What are the standards of my neighbors and so on are also. How far are the groceries or provisional stores and other amenities.

Biggest advice of caution for new buyers :

Look before you leap. Think a million times before you buy a house. Check the EMI and see if you have enough on your hand to survive.
If you are on rent and going to pay EMI for an unfinished house, check if whatever you are left with is sufficient for you to lead a decent life. People with kids especially should tirple check before they commit to a 30 or 40 lakh EMI options. The market never remains the same. Have a backup plan just incase you are not able to pay an EMI.

Any other learning you want to share :

If you are planning to buy a new house by selling an old house, ensure that you have the new house papers in place before you sell your old house. I personally was affected by this issue or risk or whatever you wanna call it. Dad had a house and it was planned that that house will be sold and we will buy two new flats for me and my sister.
The sale of the house happened but we never were able to buy a house because of market boom. It was the worst decision of my life agreeing with the sale but I am repenting for it and the things I have to do get some extra money to buy a house is making me die everyday.
With an 8 month old baby now I am really not sure how to make things happen. A single bad decision ruined a lot more than just my finances.

Ashutosh Tewari’s Experience

Most important thing to take note of while buying the home :

Connectivity and basic infrastructure (grocery stores, road/ rail connectivity, safety),  Consider re-sale property (less than 5 yrs old construction is the ideal bet) as there are several advantages of it :

  • More carpet area: In most of the new construction the super-buildup to carpet area ratio is barely 60-65%
  • Better Infra : Most of the older construction already have shops and amenities established around them
  • Lesser Maintenance : This is fixed monthly outflow that most people don’t take into consideration while decision-making. Newer constructions (especially the ones with exotic “themes”) can have a pretty high Maintenance outflow. There are some in Mumbai, where it’s as high as 10,000-12,000 per month.
  • Ready to move :  You can move into it right away, as against waiting for 2-3 yrs in case of newer construction. If you stay on rent then this can be an important consideration.

Biggest advice of caution for new buyers:

  • Before making the buying decision decide on the budget and strictly stick to it.Do not get tempted by up selling.
  • The net EMI outflow should not exceed 35% of your net monthly take home, this will help reduce the stress level substantially. Also set aside a contingency fund which can cover 6-8 months of EMI.
  • Do not get over excited and limit your spend on furnishing and interior designing. This is an emotional decision in which usually tend to go overboard very easily. Also for people living in metros there is a high possibility of their moving to a bigger apartment or a different city, in that case there are things which may not fetch returns while selling.

Sunil Jaiswani Experience

What is the most important thing to take note of while buying the home :

Keeping apart the finance / affordability aspect because it has already been discussed, one important aspect while buying a house is the maintenance expenses,basic amenities and cost of living in the area.Not all places have good water / electricity availability + distance from workplace.

Biggest advice of caution will you give to new buyers  :

To be very careful of the person you are dealing with in case of non branded flats/homes because a new buyer can easily be caught in the nexus of land mafia which are obviously gundas and if something or the other goes wrong you cannot do a thing about it.

In small towns we even have instances of some properties being sold multiple times and also illegal land grabs/kabjas. I was lucky enough to escape such a condition but only after facing a lot.

One trick/idea which if implemented properly can save some good money :

New to this process but if you plan to sell the investment flats or homes in some short time you can save the registration money by holding a POA ( power of attorney ) in your name and save the investment on registration.

Later when you sell you can directly transfer the registry to buyer saving you a good amount. + in case of small town purchases more u bargain ( and more the upfront money ) more the price reduces.

Other learning :

Other than flats /duplex which yield a return of 12-15% CAGR the land prices in tier 2 and tier 3 cities offer much higher and brisk return sometimes.Thus if you are looking to invest irrespective the location , small cities are a good option to consider.

Moreover having been to all major cities and small towns , trust me that living conditions and resources are still much better in small towns with respect to electricity , basic cost of living , proper water and food availability.

Raja Panda’s Experience

  1. Check out the individual flat plan and match it with the actual size of the flat. Take extra care to match(measure) the size of balconies. This is where most of the builder do plan violation by increasing the size of balconies to get extra money. That’s because the expenditure on the balcony for construction is the least but the customer pays the price as part of the Super Built Up Area.
  2. Again measure the exact size(carpet area) of the flat. Most of the customer take the word of builder as sacrosanct when it comes to stated size of flat, but on calculation one can many times find a 2-5% shortfall. Remember that can mean a difference of 80 k to 2 lac rupee difference in a 40 lac flat. Now you get it! right ?
  3. Check out your undivided share of land. Very simply put an unit of undivided share of land equals (total super built area of all flats in the complex)/(total size of land for the complex). So, to reach at the undivided share of land allotted for your flat it should be (your super built up area) * (the unit calculated above). Lot of times this is overstated by builder to attract customers. But remember, if there is a natural calamity like earthquake,fire etc and the building gets destroyed it’s only the undivided share of land which you really own. Don’t leave it for later. Builder which do not allot undivided share of land to buyers are a strict no-no (yes there are such builders).
  4. For under construction flats it’s very common for the builder to give possession of the flat once it’s occupation ready. But the amenities (if any) are given after long gap and hassles. My suggestion would be simply hold the money for the amenities part until it’s really completed.
  5. For ready to occupy building’s insist on occupancy letter which is issued by the authorities. This ensures the plan violations has been checked and regularized by authrities when the consturction got over and it’s really ready to occupy.

My Comments

First thing I would say is dont rush, learn about things, buying a house is one of the biggest decision (atleast financial) you will make in your life and you will commit your lifetime of cash flows in it. Planning things well in advance and doing your investigation will lead to smoother and successful execution.

Your chances of making wrong purchase or a bad purchase will be minimized if you take time and do your investigation well enough.

Just for an example :

You buy a house , you do your basic investigation and the house was available at very very attractive price, and gives you a hope of making 100% profit in 2-3 yrs and suppose later you come to know that everything was fine, however the construction quality is not that great and have been compromised.

You really don’t want to get into that situation because first point is that if its your first home , you probably be planning to get settled there and wont move out once you are in your comfort zone and once things settle down like your office is very near, your children schools are there and you feel good there.

Every decision you take is your decision. Just like Wasim Sayyadd (One of the above), we Indian’s are emotional, we shy away from talking direct and think too much about feelings, relations and how others will think?

We make oral promises and also rely on them many times. There is nothing wrong in asking straight questions and questioning each and every step when you buy anything, because Damn! , its my money and its me who will suffer if things go wrong . So make sure you go through a detailed checklist because you buy a house or any other real estate property .

Here are some from my side.

  1. Patta Verification
  2. Guideline Value
  3. Demand at least EC for minimum 15 years
  4. Check the Property Tax recipt till date & name
  5. if the Seller is a power Agent check weather he has all the rights to sell the property
  6. Check that the plot is approved by Panchayats/CMDA/DTCP/MMDA
  7. Check that the property belongs to which zone (Resi/Agri/Comm/Aquifier/Non-Resi/industrial/Special)
  8. Check that the property had undergone any heir purchase, mortgage, loan, if so NOC from the concern department
  9. Check that the plot can be approved for residential purpose in case of unapproved
  10. Verify the documents with a legal Advocate
  11. Check the documents with a Banker for Loan Possibility (without patta & Approval loan is not possible)
  12. Dont agree for any Oral Agreement , Never !
  13. Check that the Layout has been allotted OSR Area ( temple, school, park, shop ) or else the owner has to pay 10% of the land value to the Government for approval. Only if the layout exceeds 3000 sqm, 32258 sqft, 74 Cents .
  14. Insure that the Plot is minimum 500 meter away from National Highway, Sewage Canal, Sea Shore, River, Pond, Lakes, Dam, Airport, Bus stand, Railway station, Nuclear Power Station, industries.
  15. The Registration Stamp Duty charge will be 8% of land value and 1% as Registration fees and Misc Charge extra
  16. The Road Width defines the no of floor you can build, in case there is Airport near by you can get only G+1 permit
  17. The Zone type and the Road Width defines how much area you can build, in case Aquafier Recharge Zone you can get only 0.8 FSI wherels in residential Zone you get 1.5 FSI
  18. Check the frontage length of the plot.
  19. Check the type of ground soil.
  20. Check the type of ground water.
  21. In case of corner plot check the shortage area
  22. Check the road level height and rain water stagnating
  23. Check for Vastu (it will be better if it is east facing and rectangle in shape), if you believe in it.
  24. Check weather Drainage faculty is there.
  25. Have a detail conversation with the landowners near by and always have touch with them
  26. It is Mandatory to have the complete details of the property seller including his photograph.
  27. If the plot is near by Burial Ground the value will get low.
  28. Other Essential Facility Nearby & Need to Know are Schools , Collages , Bus stand , Railway Station , Ration shop etc. Understand that you need all these for next many decades , so are they 2-3 Km away or 10 Km away can become one of the biggest deciding factors 🙂
  29. Make sure you have address and phone numbers of all the relevant and concerned offices like Panchayats Office , V.O Office, R.I Office, Tahsildar office , Register Office, EB Office , Court , Police Station, Post Office
Source : Indianrealestateforum.com

Question: What was the biggest or most valuable learning you take out from this Article, If you also bought a home, please share your learning and we can add them in the post.

Tax Deductions from Infrastructure Bonds under 80C

Posted on by Jagoinvestor

Finally govt gave clarity about the Infrastructure bonds under sec 80C where you can invest upto Rs 20,000 for additional tax deduction apart from the current Rs 1 lac. Look more on Income tax slab .

Infrastructure bonds in India for tax deducations

Who can issue those Infrastructure Bonds ?

  • Life Insurance Corporation of India
  • Industrial Finance Corporation of India
  • Infrastructure Development Finance Company
  • Any non-banking finance company classified as an infrastructure finance company by the RBI also qualifies, for example : L&T Infrastructure Finance

Other Features

  • Lock in period of 5 yrs
  • Mandatory to furnish PAN (Permanent account number)
  • Minimum Maturity period of 10 yrs (you can get out of those after 5 yrs if you wish, but not before that)

Read about changes in Direct Tax Code which will not have these Infrastructure bonds

Where will this money be invested ?

The money invested in these Infrastructure Bonds will be invested in building of Airports, power plants, roads and ports, which is mainly to meet the infrastructure need of the country. This is a good move, where people can invest money for tax saving and even govt can raise funds to improve the infrastructure of our country.

How to exit from the Funds after 5 yrs ?

It depends. If the bonds are traded on stock exchange, then you can sell them after 5 yrs on exchange or go for manual redemption from the issuer (filling form for exit etc.)

Yield/Returns of the Bond

This detail will actually differ from issuer to issuer and has to come from them , but government has notified that the yields from these bonds will not exceed the yield of govt securities of similar residual maturity bonds, as reported by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) .

Who should Invest ?

As the returns from these Infrastructure bonds are not exciting, you should only invest if your risk appetite is very low and security is your top most concern apart from tax saving being one of the reason . If you are looking at growth of your investments , better invest in equity oriented products even if they are not tax saving products.

Note : Even after the govt have clarified about the bonds , they are yet to be issued by the respective companies , I think they would launch them at the end of year when most of the people are hunting for tax saving products .Look at this video where IDBI executive is talking about about Infrastructure bond.

Question : Are you going to invest in these Infrastructure bonds ? Yes/No ? Why ?

What is Real Return and How Inflation eats your money

Posted on by Jagoinvestor

Recently all news dailies carried the headlines : ‘inflation rate has crossed double digits’. This indeed is worrying. So what is inflation and how does it affect the common man. In simple terms inflation is nothing but rise in the general level of prices of goods and services in an economy. What leads to this rise in the price of goods? It is ‘too much money chasing too few goods’ which leads to the rise in the prices of goods. It is a simple demand-supply mismatch. Because of inflation, our paper money or currency starts losing its value.

Some 15 years back when I saw my first movie in a movie hall it cost me Rs 15 to watch that movie. Now 15 years down the line, to watch the same movie in a multiplex, it costs me about Rs 225. So in 15 years the cost of watching a movie has multiplied 15 times. Now it might cost you Rs 15 just to park your car in the multiplex basement, forget about watching the movie in Rs 15. That’s inflation for you.

Explanation

Let’s take a simple example to understand this. Suppose you have a currency note of Rs 100. Assume that as on today with this currency note of Rs 100 you can buy 1 dozen apples (mind you this is just an example. In real life good quality apples are much more costly and I doubt if Rs 100 will even buy you half a dozen of good quality apples). But you don’t need these apples as on today and need them 1 year down the line. So you don’t buy the apples today as you can’t store them for one year as they will get spoilt. So you invest this Rs 100 for 1 year in a bank fixed deposit which will fetch you 8% at the end of 1 year. Now at the end of 1 year you have Rs 108. But let’s assume that inflation as compared to last year has risen by 10%. This effectively means cost of living or general prices of products have risen by 10%. So now the same 1 dozen apples which were costing you Rs 100 about one year back will now cost you Rs 110. Your money has grown by 8% (Rs 100 has become Rs 108) but the prices of apples have gone up by 10% (price increased from Rs 100 to Rs 110). So to buy the same 1 dozen of apples now (1 year down the line) you will have to put an additional Rs 2 from your pocket. This effectively means your currency or paper money has lost value. This is because of the effect of inflation. If the cost of living goes on increasing at this rapid rate every year, then 10 years down the line I doubt whether the same Rs 100 rupees will be able to buy even a single apple, forget about buying 1 dozen apples with Rs 100.

Had you bought the apples last year you would have managed to buy 1 dozen apples for Rs 100. But since you are buying them one year down the line and the return on investment (8%) that you have earned is less than increase in inflation (10%), you have to put more money from your pocket. So inflation erodes the value of your money over a period of time if the money is not invested wisely.

Nominal Returns and Real Returns

At the time of making investments you should make sure that, you earn a return which is higher than the inflation rate. Many people while measuring the returns on their investment forget to consider the effect of inflation. In the above example if we don’t consider the effect of inflation then our investment in the bank fixed deposit has earned 8% return. But this is not the correct way of measuring returns. This is just the nominal return. The return calculated after considering the effect of inflation is known as the real return. Real return can be calculated using the following formula

Inflation in India

Here r is the rate of return (8%) and i is the inflation rate (10%)

1.08 / 1.10 is 0.9818

0.9818 – 1 is -0.01818

-0.01818 * 100 is -1.8181

So the effective or real return earned on this investment is -1.8181%

So even on the face of it, it seems that your investment has made a return of 8% (nominal return). After considering the inflation rate (10%), the real return is a negative 1.81. Which means actually on maturity you did not make any money, infact your money has lost value due to inflation. Surprised and hence the name of the article – ‘Inflation – The Silent Monster’ – inflation silently erodes the value of your money if you don’t invest wisely. So consider the effect of inflation while measuring your returns on maturity. Use following calculator to find your real investments real return .

Children Education Cost Inflation

Whenever the Weekly or Monthly Inflation Number is declared by the Government, the number represents average inflation which takes into account the rise in the average cost of living. This is a much broader number. If we break down this broad number into different components then we realise that different components have varied impact on individuals. All people are impacted by common things like food inflation and fuel inflation. People who have small children have to prepare themselves for Children Education Cost Inflation and Children Marriage Cost Inflation. So how do Children Education Cost Inflation and Children Marriage Cost affect and why do parents have to plan for this? Let us try to understand this with the help of a case study.

5 Easy Steps to do your Child’s Education Planning

Sample Case Study

  • Let us take the example of Ajay. He wants to make his 1 year daughter, Priyanka a MBA when she grows up. Priyanka will take admission for the MBA course when she turns 21 years old. So Ajay has 20 years in hand to plan for Priyanka’s education.
  • The MBA course as on today costs Rs 4,00,000. If we assume that education costs (inflation) will rise by 8% every year, then the same MBA course will cost a whopping Rs 18,64,382 after 20 years.
  • To accumulate this Rs 18,64,382 in 20 years, Ajay will have to make a monthly investment of Rs 2046 per month if his investments earn a return of 12%. So even though the amount of Rs 18.64 Lakhs seems huge on its face, with regular investments, and the magic of compounding over a period of 20 years, this mammoth target can be achieved with investments of as low as Rs 2046 per month. But the secret to success is to start early and make regular and disciplined investments.
  • If the returns earned by our investments are 15% then the investment amount further falls to Rs 1421 per month. Historically equities have given annual returns in the range of 15% over a long period of time.
  • If the target of Rs 18.64 Lakhs has to be achieved without taking much risk through a Public Provident Fund (PPF) account which guarantees a return of 8%, then this target can be achieved with a monthly investment of Rs 3276 per month.

9 effective financial education tips for your Children

Importance of Starting Early

It is very important for the parent to start investing for the child’s future as early as possible. Starting early allows his money the much required time to grow and reap the benefits of compounding. Let us consider the above example of Ajay planning to accumulate money for Priyanka’s MBA course.

  1. His goal is to accumulate Rs 18,64,382 in 20 years. To accumulate this Rs 18,64,382 in 20 years, Ajay will have to make a monthly investment of Rs 2046 per month if his investments earn a return of 12%.
  2. If Ajay delays the investment plan and starts investment when the daughter is 6 years old, then in this case he will have 15 years to achieve his goal. In this case the monthly investments that he will have to make will rise to Rs 3956 per month to achieve his same target of Rs 18.64 Lakhs if his investments earn a return of 12%.
  3. If Ajay delays the investment plan and starts investment when the daughter is 11 years old, then in this case he will have 10 years to achieve his goal. In this case the monthly investments that he will have to make will rise to Rs 8400 per month to achieve his same target of Rs 18.64 Lakhs if his investments earn a return of 12%.
  4. If Ajay delays the investment plan and starts investment when the daughter is 16 years old, then in this case he will have 5 years to achieve his goal. In this case the monthly investments that he will have to make will rise to a whopping Rs 23205 per month to achieve his same target of Rs 18.64 Lakhs if his investments earn a return of 12%.

Use this Goal Planner Calculator to Plan your future goals .

The below table shows the monthly investment that will be required by Ajay to achieve his goal of Rs 18.64 Lakhs based on his investment time horizon. It is assumed that the investments will earn 12% in all the scenarios.

 

Investment Time Horizon (Years) Return (%) Monthly Investment Required
20 12 Rs 2,046
15 12 Rs 3,956
10 12 Rs 8,400
5 12 Rs 23,205

inflation in india

The sooner the parent starts planning for the child’s education and marriage the better. These are long term goals and need proper planning. This is the best gift that parents can give to their children. As a parent the sooner you sow the seeds of early investments, the bigger will be the fruit the tree will bear which will take care of your child’s all future needs, primarily education and marriage expenses.

Children’s Marriage Planning

Like education it is the same story for children’s marriage expenses (inflation). If you as a parent feel that today your daughter’s marriage will cost you Rs 7,00,000 then the same marriage will cost Rs 11.27 Lacs 5 years down the line if expenses increase (inflation) at the rate of 10%.

Sample Case Study

Let us consider the following case study to understand this thing better in simpler terms.

  • Sharon has an 8 year old daughter Mini. Sharon needs to accumulate funds for her daughter’s marriage. The marriage is planned 16 years from now.
  • According to Sharon, as on today, Mini’s marriage will cost Rs 4,00,000. If inflation (rise in costs) of 5% is assumed the same marriage will cost Rs 8,73,150 after 16 years.
  • If Sharon wants to make a one time investment which will give her Rs 8,73,150 on maturity after 16 years, she will have to make a lumpsum investment of Rs 1,42,429 (assuming the investment earns a return of 12% p.a.).

But many of us don’t have lumpsum amount to invest and we prefer to make monthly investments. To accumulate this Rs 8,73,150 over a period of 16 years Sharon will have to invest Rs 1,615 per month if her investments will earn a return of 12% p.a.

Watch this video which shows you the effects of Inflation in Zimbabwe and how the paper money has lost all its value.


Conclusion

Last but not the least to end the article here is something for you all to ponder over your money in the bank savings account is earning an annual return of 3.5% and the annual average inflation rate (increase in cost of living) is 5-6%. So if you calculate the real return how much is negative return that you are making or how much is the value that your money is losing???? Think about it

This is a Guest post by Gopal Gidwani , He writes on his blog www.bachatkhata.com

JagoInvestor Mumbai Meets and Presentations

Posted on by Jagoinvestor

We recently had JagoInvestor meets in Mumbai , not just one time , but two times , the first meet was on 26th June at Powai and 2nd was on 24th July at Andheri (minutes of meeting , thanks to JP) . It was amazing to see so many people coming in and participate in these meets. In the first meet we mainly introduced each other, discussed the purpose of these meets and Nandish Desai gave a talk on how our psychology governs our decision making in Personal Finance and why we do mistakes in our personal life when it comes to money. That talk was exceptional and everyone liked it a lot.

The group in Mumbai was enthusiastic and so motivated that it started preparing for the next group meet on its own and with the leadership of Jayaprakash (reader) and some other folks “JagoInvestor Mumbai Chapter” was formed. They arranged for the second meet in Andheri and we had great session again, Gajendra gave a very nice presentation on Mutual funds which was in detail and covered all the aspects of Mutual funds Investing. Then there was group interaction where people listened to each other queries and gave their experiences if any. There was a nice video named “Armed with Hope” shown. It was raining that day very heavily so some readers could not make it, however the turnaround was great and an achievement in itself. I would like to congratulate Mumbai team and every participant who is related to this for this effort, This is going to bring some great change in our society as far as financial literacy is concerned.

We are scheduling the 3rd meet now on 28th Aug in Andheri itself. So who ever is in Mumbai are invited to Join JagoInvestor Mumbai Chapter Facebook Group and Register for the Meetings, I will mail you all for the next meet details. For other cities, we have collected the contacts, But it can take some time to conduct the meets. Bangalore has amazing 85 registrations.

First Mumbai Meet Pictures

First JagoInvestor Mumbai Meet

First JagoInvestor Mumbai Meet

First JagoInvestor Mumbai Meet

Second Mumbai Meet Pictures and Clips

second JagoInvestor Mumbai Meet

second JagoInvestor Mumbai Meet

Presentation on Mutual Funds (2nd Meet)

Changes in New Direct Tax Code (DTC)

Posted on by Jagoinvestor

The Government has come out with new revised Direct Tax Code (pdf) and there are many changes which might look good to investors finally. Most of the people were not happy with the old tax code as it made some products taxable like PPF , Endowment Plans etc, which investors were totally worried about. Now Govt has made some changes earlier which looked extreme to investors and they were not happy about it, however still there are some things which will pinch investors. Old Direct Code tax was challenged and the govt reconsidered the Old Direct Tax Code and has finally come up with this new revised set of rules which I will list down here.

Pure Life Insurance Products/Pension Products/PPF/EPF/NPS

Finally, under New Tax Code:  PPF, EPF, NPS, Pure Insurance products and Pension Products have come under EEE regime, which means that the amount you contribute, & any return or interest generated and the final maturity is exempt from tax. The major change in the revised Direct Tax code is that at the time of maturity of these products, you don’t have to pay tax on the amount you get. In the old Code the maturity was taxable.

Endowment/Moneyback and ULIP’s

These products are under EET regime, so the money you get at the end will be TAXABLE.  (More)

Real Estate

Existing and prospective real estate buyers have some thing to cheer about. In the Revised Tax code, Interest will still be exempted upto 1.5 lacs, but principal would not be getting any place in sec 80C , which is again not a big problem as generally 80C gets filled up with EPF, Insurance, children’s tuition and other products for most people.  (Returns from Real Estate)

Another big change which is there is that now on a rented flat, the gross rent for taxation would be actual rent received. Earlier, if you had not let out your flat and it was vacant, you still had to pay tax on the notional rent (the old draft it was said that it can be upto 6% of the value of the property.) But now, with revised tax code you don’t have to pay any tax if you don’t get any rent from your rented (and second house) house  Would be nice to see your views on controversy of Buying vs Renting

Existing Investments

Incase you have any existing Investments, which enjoyed EEE method of taxation, they would be treated the same way for their full tenure.

Capital Gains on Equity

There are some big changes here. For sure your equity investments in shares and Equity mutual funds are going to be taxed now 🙂 But in a different way. The old tax code suggested that short-term capital gains on Equity should be added to the income and taxed at applicable tax rates and long-term gains (above 1 yrs) should get Indexation benefits and then they should be added to your income for taxation purpose.

However the new revised tax code has changed this and a new concept of “Deductions” is in . As per this rule , for any long-term capital gains, you will get certain specified deductions which will be some percentage of your profits, and then after deducting these, the rest will be added to your income and then taxed at applicable rates. The indexation concept is now gone . The short-term capital gains still gets added to income and then taxed . The short-term capital gains will actually be now beneficial to people who earn 10 lacs of less , as earlier they had to pay 15% tax , but now as they have to pay 10% tax as per the new slab , the tax on short-term capital gain part will be 10% only .There is no enough clarity on the deductions percentage as of now. (Using looses to reduce your tax)

One another major change is the definition of the holding period. As of now, it will be 1 yr from the end of the financial year when you bought your shares which means that if you bought your shares or mutual funds on 5th of Apr 2010 , then the end of that financial year would be 31st Mar 2011 and then 1 yr from that 31st Mar 2011 would be 31st Mar 2012 , so effectively your Holding period can range from 1 yrs to 2 yrs depending on when you buy the shares, so the short-term capital gain would be if you sell it before your holding period and long-term capital gains would be if you sell it after your holding period .

Capital Gains on Gold , Debt Funds , Real Estate

The long-term gains on these assets would now be after 1 yrs 🙂 . Earlier it was 3 yrs. The long-term capital gains would qualify for Indexation as it was applicable earlier and short-term capital gains will directly be added to income and taxed . Earlier the base date for indexation values was taken from 1 Apr 1981, however now the base date shifts to Apr 1, 2000. This will now reflect the inflationary changes in these asset classes in a better way.

What happens to the properties very old like 30-40 yrs ? Some thing new has come up !! , your original indexed cost price wont be considered , but the price on Apr 1 , 2000 would be Applicable, as per my understanding .

Interesting : So what about those who have invested in Equity after Mar 31 , 2010 ? If they sell it before 31st Mar 2011 , they will pay short term capital gains of as high as 30% or 20% (depending on which slab you come in this year) , OR the other option is to hold it and sell it later so that New Direct Code applies to you and you pay just 10% on the profits considering you taxable income is less than 10 lacs . Watch the video below on this issue .



Still , there are some areas where there is no clarity on what will happen , Please share your views on how this new tax code impacts you ? what are your views on this ?

Is Gold worth Buying ? A shocking Study

Posted on by Jagoinvestor

To understand this Study, we have to go back to years when human civilization started. Surprised! But yes, lets go back to those times where human civilization just started. Those days, economic activity was bare minimum and there were few trades between humans. For example, if a farmer wanted to build a home, he used to give some quantity of grain to carpenter, plumber etc and that system was called BARTER SYSTEM. So goods itself were basically used as currency.

Economic activity grew and then emerged an alternative currency which was in the forms of coins and we had what is called ASHRAFIYA. We had gold, silver and copper coins which were used as currency and it was Emperor who used to control the currency system. Then economic activity picked up further and since there was a limitation to the amount of gold, silver and copper we had, Paper currency emerged and till date such currency is the main form by which we all trade. Though now-a-days, we are witnessing another form of currency which is called Plastic Card Currency/ Credit Currency which if not used judiciously, can be a disaster. In fact,the entire US came to a halt in 2008 as credit currency was mis-used to unimaginable extent.

Today also, each emperor (so called Government) produces and controls their own currency as DOLLOR, Rupee, Dinar etc. But internationally, gold still remains the purest form of currency as it cannot be manipulated. Now in paper currency world over, Dollar became the most acceptable currency as US economy is still the biggest and almost all countries trade with US. After US dollar, the most acceptable form of currency is GOLD. If you have gold and you are not carrying dollar, you can still buy items in any country of the world but you cannot do so with Indian Rupee. Hence, in economic terms, gold is a currency.

 

 

Gold in relation to Dollar

Gold is a recognized international currency and currently Dollar is the most recognized Paper Currency. Hence gold is valued in terms of Dollar and not in Rupee. Now if we go back in the history, in the year 1976-81, gold had a dream bull run. From $100 per ounce in 1976, it had gone as high as $850 per ounce. That rise took place as people feared that US economy would collapse and $ would have no value. That time, US was in war with Vietnam & then came Iranian Revolution – inflation in US was at very high levels and in a way, there was hyper-inflation.

Once the war was over and inflation eased out, Gold came crashing down. In the year 1990, it was $400 per ounce and in the year 2000, it was close to $250 per ounce. That means the effect of bubble was so big that even in 20 years, the gold could not recover its original price and was languishing at less than 1/3 of its peak price. So please don’t be surprised if you will be able to buy gold again at levels of Rs 10000-12000.

 

Gold Price Chart from 1975 to 2010

Now, Dow Jones was at 10000 in the year 2000 and today also it is at same levels. The US economy is in bad shape and in last 10-12 years, it has not really made any significant progress, rather its debt is so much so high, that there is a fear that US would only have to print further paper currency i.e., dollar either to repay the loan or to keep in the economy going. The moment any government print notes without significant growth in the economic activity, the currency loses its value because of high inflation as same quantity of goods and services are being chased by more money. Anyway, US government is printing billions of dollar just to keep the economy afloat.

 

So, the rise in Gold is happening on the background that the most recognizable international currency is loosing its value. If US economy further goes down and government there keeps printing notes, again gold may rise in dollar terms. Such fear exist, even in 1979-80. We don’t know what lies ahead as we are not astrologers.

Dollar in relation to Rupee

In the year 1980, $1 was equal to Rs.8 and today as we are writing this article, $1 = Rs.46. Dollar has appreciated more than 5½ times in last 30 years. In the year 1991, there was a time, when Indian government was literally bankrupt and they had to devalue INR more than 25% in just a single day, just to repay the debt we had. That was the time, India was liberalized and government opened their economy and allowed foreign companies to do businesses. Since then, India has grown dramatically. The fact of the matter is that in the year 1991, sensex was close to 1000 and today it is at 18000.

As Indian economy keeps rising and US economy keeps doing down or at the max stands where it is, the likelihood is that dollar should depreciate. In the year 2007, dollar had depreciated to as low as Rs.37.

Gold with relation to Rupee

Gold was Rs.1450/- in the year 1980 and today it is Rs.18800/-. The rise of 13 times in last 30 years @ 9% p.a. But 5½ times of such rise is on account for Rupee depreciation in terms of dollar. So if we were to analyse the rise in gold price in relation to rupee alone without taking dollar factor, it is only 2.35 times. You see, even in terms of dollar, gold has risen only 1.5 times in last 30 years.

What can happen in future?

As we have said, we are not astrologers, so we can’t predict future. Though we can give some options that may happen:

  1. If dollar in comparison to INR were to stay at the same level of 45-46, then there is a likelihood that gold may rise further.
  2. If due to the sheer strength of Indian Economy, dollar flows to India by way of FDI, FII etc continues, rupee would strengthen and that would mean that even if gold were to rise in dollar terms, it will still decline in rupee terms. In fact, as it happened from 1980 to 2000 that gold kept going down in dollar terms but since the rupee was depreciating in dollar terms, the gold kept rising in Rupee terms. The reverse can happen now and gold may decline in rupee terms.

Basically, the price of gold depends on currency movements; for example,  in Yen terms (Japan) gold have moved 240% & in Pound terms (Britain) 390% in the same period (Check below Chart).

And you already know about Gold price in Rupee term. So what do you feel – whether India will grow & its currency will appreciate or economy will slow down & our currency will depreciate further? We don’t know what lies ahead, but looking at the history, we are not bullish on gold as much as we are bullish on Indian Equities. As long as world keep rising, gold will not give much return. Here we would like to add a recent quote of  legendary investor Warren Buffet – “We live in a world where 80 years out of 100 will be good. But we don’t know which 20 will be bad.”

We always used to suggest investors that gold is not an investment, it is an insurance which would save you in case the entire financial markets were to tumble down. The live example is that of Zimbabwe where, paper currency has lost its value and if you are holding paper currency, it is depreciating at a rate which is unimaginable. You have to carry crores of Zimbabwe currency just to buy a loaf of bread. Now if you are holding gold, you can actually buy or barter goods there. At least, you can go to neighboring country South Africa and buy what you want as gold is recognized everywhere.

Now, if an average Indian household were to look at their asset allocation, they already hold more gold in the form of jewelry or otherwise than they hold Indian equities. In fact, Indians are the biggest consumer of gold. One must consider gold as part of asset allocation tool and over-boarding on it may not be that a great idea. It may happen that in short run, gold may give better returns but mind you, it is Indian equities that will create a long lasting wealth for investors.

One more important point to note

It is often said that Gold is a Hedge against Inflation. But if you were to look at the graph below, you would find that gold has not kept pace with rising inflation. The blue line shows the actual price of gold and the red line shows the price which gold should have carried in order to match with inflation

In October 2009 when Gold was $ 1072, Bloomberg made this statement “While bulls say gold is cheap, the inflation-adjusted price is 15 percent above its 30-year average, Bloomberg data show.” First time in 100 years gold has touched it’s inflation price – what will happen next?

What they meant is that it is for the first time that gold price is above its inflation-adjusted price which clearly states that gold is over-priced as it is a sheer currency and nothing else.

Research on investor psychology

The following are Google trend charts. It analyzes a portion of Google web searches to compute how many searches have been done for the terms you enter, relative to the total number of searches done on Google over time. This clearly shows that people start searching for investment which have gone higher in recent past. Check 2nd Graph of Mutual funds which peaked in December 2007 when equity markets were also at their peak. No one was searching for Mutual funds in the end of 2008 or start of 2009 when actually it was the best time to invest. Upto 2007 end when it was best time to invest in gold but no one was searching for it but when price went up, the number of searched went up.

Few points that we would like to leave open for discussion:

  • What will happen if Indians were to start selling gold as it is at its highest price
  • Why IMF sold gold when it was at $ 1045 per ounce
  • Today experts are saying – Buy Gold. why did not they said when gold was at Rs.5000
  • Gold has appreciated 13 times in last 30 years and sensex has appreciated 140 times. Still why Indians love gold more than sensex

But the problem is “The markets can stay irrational longer than you can stay solvent…“. So never try to time the markets/assets & keep a proper asset allocation.

 

This is a guest article by Hemant Beniwal & Ashish Modani. They both are CERTIFIED FINANCIAL PLANNERCM & writes at The Financial Literates.

Review of HeartBeat Health Insurance Policy from Max Bupa

Posted on by Jagoinvestor

Max Bupa Health Insurance Company Limited is the latest health insurance company to join the ever-growing list of health insurance companies in India. It is a joint venture between Max India (promoters of Max New York Life Insurance) and Bupa (the UK based Health Insurance Company). Max Bupa has come out with a Family Floater Health Insurance Product by the name of Heartbeat.

So is Heartbeat Health Insurance Plan also one of the family floater products offered by other health insurance companies? What is it that makes Heartbeat different from other health insurance plans already available in the market? Let us take a closer look at this product. (Download Brochure)

Three Variants – Heartbeat comes in 3 different variants –

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  • Heartbeat Silver Plan
  • Heartbeat Gold Plan
  • Heartbeat Platinum Plan

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Features of Heartbeat –

  • Life-Long Renewal:

Yes, you read it right. The company assures you life long renewal year after year during your lifetime. This feature of the product makes it stand out among the numerous other family floater products available in the market. A lot of health insurance companies don’t offer renewal of health insurance policies after the age of 65 years or 70 years.

  • No Maximum Enrolment Age:

There is no minimum or maximum age for enrolment. A lot of insurance companies have a maximum entry age of 55 years or 60 years for health insurance. After this age, they don’t take new enrolments. Also, lot of companies have restrictions on the minimum entry age for enrolment. But in this policy, there is no minimum entry age for enrolment. A newborn baby can be covered right from day.

  • Maternity Benefits:

The policy provides maternity benefits for up to 2 deliveries. To avail this benefit the individual and spouse should have been covered for 3 years continuously. All newborn babies where the company has paid the maternity claim are automatically covered from birth until the next renewal. The plan also covers 1st-year vaccinations for newborn babies where the company has paid the maternity claim.

  • No TPA’s Involved:

The company has not tied up with any Third Party Administrators (TPA) for claim processing and settlement. All the claims are handled by the company personnel inhouse. Read more about TPA’s in How to choose Medical Insurance Policy?

  • Dedicated Relationship Manager:

The company assigns a Personal Relationship Manager for Gold and Platinum variants of the product. The relationship manager helps at the time of hospitalization and also at the time of claim settlement.

  • Online Tracking:

The company offers all the details of the policyholders on the website. The policyholder can access his personal details, profile, claim history, etc on the company website.

Other Features –

Other features of the product include general features that are offered by most of the health insurance companies in their policies. Some of these features are as below:

  • Cashless Treatment: The company has tied up with a number of network hospitals and offers its customers the facility of cashless treatment by providing them health identity cards.
  • Free Look Period: The product comes with a 15 day free look period. Within this period if the policyholder is not satisfied with the terms and conditions of the policy, then he can return the policy. The company will return the premium after deducting few charges.
  • Wide Range of Covers: The product comes in 3 variants offering a wide range of cover from a minimum of Rs 2 Lakhs to 50 Lakhs.
  • Health Check-up on Renewal: The company offers a health check-up on renewal under some of its variants.
  • 24/7 Support: The company offers customer service round the clock even in case of late-night emergencies.
  • Pre and Post Hospitalisation Expenses: The policy covers medical expenses incurred up to 30 days prior immediately before admission to the hospital and 60 days after discharge from the hospital.
  • Tax Benefits: The premium paid under the policy is eligible for tax deduction under Section 80D of the Income Tax Act.

Read More on company website

What is not covered ?

  • Benefits will not be available for Pre-existing Conditions until 48 months of continuous coverage have elapsed since the inception of the first Policy with us.
  • No treatment taken during the first 90 days since the commencement of the Policy, unless the treatment needed is a result of an Accident or Emergency.
  • It will not cover some things permanently like –
  1. Addictive conditions and disorders;
  2. Ageing and puberty;
  3. Artificial life maintenance;
  4. Circumcision;
  5. Conflict and disaster;
  6. Congenital conditions;
  7. Convalescence and rehabilitation;
  8. Cosmetic surgery;
  9. Dental/oral treatment;
  10. Drugs and dressings for outpatient or take-home use;
  11. Eyesight;
  12. Experimental treatment;
  13.  Self-inflicted injuries;
  14. Sexual problems and gender issues;
  15. Sexually transmitted diseases

Read in detail  Here

Conclusion

As we saw above, the policy offers some very good benefits compared to other health insurance products available in the market. But it may just be a matter of time before other companies also follow suit. If that happens the customer will truly be spoilt for choice of good plans available in the market. This will ultimately benefit the customer.

Note: Please check the company website or the product brochure for the latest features of the product carefully before deciding to buy the product.

This is a Guest post by Gopal Gidwani, He writes on his blog www.bachatkhata.com

Controversial Debate on Buying vs Renting a House

Posted on by Jagoinvestor

There is a very good debate going on in the previous article I wrote about EMI and how it can change your decisions regarding Home loan and other Loans. A lot of readers have put their thoughts about the Home loan and whether they prefer Buying or Renting, we got a lot of readers who supported Buying and some said renting is better, the conversation went so in the flow that It was worth mentioning here and getting everyone’s point of view.

So please go through these views on Buying Vs Renting and put your comments and views on why you support Buying or Renting. The main points discussed where the opportunity cost, Emotional satisfaction and what are the prospects in return over the long term in real estate.

Should we buy our own house or live on rent?

#Conversation 1

Meena Says’s

I liked this article immensely and echoes my sentiments exactly. I agree with you regarding the way people go overboard on car loans and personal loans to satisfy their craze to keep up with their friends and neighbors. But I would differ on the home loans. For most people, buying a first home is an emotional decision especially if they want to occupy it for personal use. Even if the value of a self-occupied house appreciates substantially, it is only notional as you don’t want to sell it.

I want to relate my personal experience on the home purchase. We are a joint family and about 14 years back, we (my husband and I, both working and earning) purchased a 2 BHK flat in a Delhi suburb for 11 lakhs. We wanted 3 BHK flat badly but could not afford the EMIs although it cost only 2-3 lakhs more. But a few years down the line, both our incomes increased and in hindsight, we repented the decision of not going for the 3 BHK flat.

Now the cost of the same 3 BHK flat is close to 80 lacs which is quite unaffordable. So my point is, while deciding on the home purchase, look for present affordability as well as future earning potential. Also buying a house is any day better than renting it out if you have no plans of relocating to any other place.

My Reply

I agree that the decision would depend on the current affordability and future earning potential. However in your case as you said that you were not able to afford the 3 BHK that time, does it mean that you were not able to pay any EMI if you took 3 BHK or for the next several years. I think the mistake happened in not able to factor out your earning potential of the future? Correct?

I would like to hear your views on why you said that “Buying a Home is anytime better than renting out if you are going to stay at the same place? “. Under what assumptions do you say that? Will it be true for any case, do you also consider the other alternative of investing your money somewhere else? Are you biased towards emotional attachment related to this overall buying home issue?

Meena’s Reply

Hi Manish,

We anticipated that after paying EMIs for 3 BHK flat would have resulted in a liquidity crunch for some time. So we did not take the risk at that time. But what we did not factor in, was that the liquidity crunch would have lasted only for a very little time as the incomes also increased.

When I said that buying is better than renting, is not an emotional decision but a pragmatic one. 1. For one, investing in a house is good for your asset allocation – you are spreading out your investments in Equity, debt, real estate, etc. 2. I do not buy the argument that the money spent on EMIs are better deployed in other investments like MFs or stocks.

At least in metros like NCR, the real estate gives decent returns over the years (a CAGR of 12-15% in 10 years as in my case). 3. Also renting a house has many hassles: Rents increase @ 10% p.a. and you are at the landlord’s mercy as he may ask you to vacate anytime. 4. You get very good tax breaks when you own a property. All these are good arguments for many people to invest in at least one property.

My Reply

Meena

I will agree with some of your points.

1. Asset Allocation: Yes, you achieve asset allocation by investing in Real Estate, but in the early phase if your debt and equity is not high, then even asset allocation is stretched on real estate side much, for example, if one has just 2-3 lacs in Debt and 4-5 lacs in Equity and buy a real estate of 50 lacs, that 85% Real estate, 5% Debt and 10% Equity, though there is some asset allocation, but still most of the portfolio is in Real estate, However, what you say about allocation makes sense when there is good balance between all the 3.

2. This can depend on what kind of investor you are and your concept about “owning home”. For an investor profile like yours, it will actually not makes sense because your priorities are much different, you feel more satisfaction in “owning home” and that your priority, however, there are many readers I have interacted with and know them who are more comfortable with the option of renting out and that makes them more comfortable, It might make sense for them to deploy the EMI – rent money in other investments, at the end if you know what you are doing makes sense.

Also regarding the returns from real estate, there are 25% returns, 15% returns and even 5-6% returns also in the last 10 yrs depending on the location and timings. In the last 10 yrs, the situation has been very different and the next 10 yrs will be different than those, What you get in returns as % terms at the time of selling the property will actually matter and not for the time when you actually Hold. So it’s my rough guess that if you live in the same flat for the next 20-30 yrs and then sell the flat, you will find out that the returns over the period of times will be in single digits, maybe 10% max.

Historically real estate has never given more than 9-10% over the very long term (very long term again) in the last many decades (even centuries), so I dont see why it should be different now. Real estate runs in cycles and they are long, a 10 yr return in real estate can be very different than very long term returns figures, while I say this, I will also say that real estate in India is promising and next 1-2 decades can be exceptional and give returns on the higher side of average till date.

3. Renting has hassles, but has advantages too, just like owning our own house has hassles and advantages of its own, so what you call as hassles might not look like hassles to someone else. It’s different for different people, and everyone is right for themselves.

4. That’s very temporary and introduces some years back only, in the DTC earlier there was a proposal to take the tax breaks out, but with the updated draft, I think it’s still there. no one knows if that will remain or go away in another few years. So tax breaks is not a criteria to decide if one wants to go for real estate or not. You should read subramoney.com real estate articles, you will get a clear picture of what I am saying

Conversation 2#

Pramod Says

Manish,  This is absolutely right. There is a big industry flourishing on “how to get you into debt trap” mantra. The best remedy against this trap is self-discipline. The temptations are high which tends to divert your attention. My wife is asking me to buy own house but I have only one answer that is expensive.

She asks, Property has been expensive for the last 100 years, it will never become cheap. Right, but for me inexpensive means within my reach. The house I want to buy should not come bundled with Headache, High BP and insomnia. What I tell her is that we will buy a house when –

  1. The total cost of the house is not more than my 4 years’ income.
  2. have enough savings to pay a down payment of at least 30-40% of the price.
  3. EMI must not be more than 10 years long.

So now for me to buy a house either prices have to come down or my income has to go up. BTW I am betting on the prices to be stagnant and my income to be growing for at least the next 3 years looking at the supply that is coming up in NCR. In Greater Noida alone where I live, more than 70000 units will be available within 15 km in the next 3 years.

For a car, I prefer a second-hand car from Maruti, It is always good. Most of the depreciation takes place in first two years so let someone else pay for that and you enjoy the ride.

My Reply

Haha, Wife is a very scary word when it comes to the decision of buying Home, I have already talked to several people here who’s wives are bugging them like anything for owning house. You are correct on the “industry working on getting everyone in Debt trap” . over the pricing of real estate, the bubble is strong and I can’t say when it will burst, but whenever it does, it will be very bad day to see.

However, even if it does not burst, Still living on rent is so affordable in today’s times that we can do it for next several years .. after all, if everyone will buy and buy only, who will live on rent?

Pramod Says

Yes, Today I am residing in a flat with a rent of 7000. If I were to buy that it costs 30Lacs. At 80% loan which is 24lacs the interest @ 5% (flat equivalent to 10.5% reducing) comes out to be 10000 a month. Remember I am only talking about interest here so that comparison should be only in the costs. Add society maintenance, maintenance (paint, pest control, seepage repair), property tax, etc to the cost & surprisingly you will find that rent is cheap.

Also if I add the opportunity costs i.e. investing the EMI and front cost minus rent in an MF with only 10% return it will become 1.32 Cr in 15 years so if the flat in which I live today is available for 1.32 crore after 15 years, it’s OK, nothing to worry.

Secondly, detach emotions from house & treat it like a commodity. I often ask people when you dont have a car do you whine about using public transport or do you feel embarrassed about hiring a taxi. If no then why the hell you shy living on rent. Just pay that cheque & save all the bothers of becoming a landlord. One more benefit of the rented house ” You can always change it easily when your astrologer tells you that it is not VASTU Compliant, Will you ever get such wonderful chance to enhance your luck so easily in your own house

My Reply

Pramod, you are one of the rare found die-hard fans of renting. While your views are more biased about renting, which I fully agree. You have taken out some of the things which drive people to own home and that can be pure emotional reasons and its fine.

Some people will feel suffocated enough to live in a rented house and the idea of not having their own home will kill them each day, this idea of renting if better than owning and blah blah will not work on them no matter what one does

While I am with you on renting, the point I want to make is renting vs buying has its own positives and negatives and nothing wrong about it, just that a person should understand which boat he wants to sail in. What do you say Pramod? Read Meena’s comments above, you will get what I am saying

Pramod Says

Manish, I am a fan of renting as long as the rent remains within the 3-4% range of the property value. As I shared with the group I am also planning to buy a house but only when it is affordable. I do not want to spend the next 20 years of my life in stress & sacrifices.

As far as Meena’s points are concerned, I am 120% in agreement with her on-point no. 3 and that is the single most reason that provokes many to buy a house.

But in these days of apartments you can negotiate well as owners know that an empty flat is going to cost him the maintenance and it always depend on your relations as well as the demand-supply situation.

Coming to the other 3 Point –

1- House as an investment, An investment by def. is something which you are going to encash upon value appreciation. So your first house is never going to fit into this axiom. Are you going to sell it after 20 years? 99.9% of people won’t, so what kind of investment?

2. The investment in MF vs Real estate depends upon your kitty. Till the time I have 5-6 lacs accumulated can’t even dream of buying a property even on loan so it always depends on your net worth and no arguments on this point as it is very personal.

3. On this point I agree but again it is emotional and depends on the market. In Gr Noida where I live 50% city is empty so no dearth of flats on rent and I can negotiate.

4. This is one thing that comes as the ultimate logic for buying a house. Let’s see. The principle amount is incl in 80C so after PF, Children fees & insurance what the hell is left. For interest, you can claim tax 1.5 Lacs. Anyone who can buy a house worth 30Lacs must be earning 50K & in this salary, the HRA usually is 10000 approx. so if you take benefits of 1.5l interest payment you have to forego 1.2 lacs benefits of HRA which brings it down to 30k.

Is it worth to buy a house to save a maximum of Rs.9000? Better not watch some crapy movies and save 200 rs on popcorn which is available for 10 Rs outside the cinema hall.

Finally indeed renting and owning has its own pros and cons but here we are discussing these things from personal finance angle not emotional otherwise nothing can replace the joy that I can see on the faces of my family if I take them to Switzerland but can I afford it And also we have seen many old people who spent their life savings owning a house and are still struggling to meet life’s basics in the last stage of the life. Is the house really an investment?

So remember 1st house is always a commodity that you are going to use and 2nd, 3rd …nth property is investment only so do not buy the argument of returns however use these “returns” to check the affordability factor for you say X years down the line if you will still be able to buy that flat.

My Reply

You have made some excellent points . However on one point, I would like to comment. You said

“Are you going to sell it after 20 years? 99.9% of people won’t, so what kind of investment?”

Yes, you are correct that most of the people would not like to sell and will not sell. However if the price of the house is a lot and one has got some good returns like 15-16% CAGR in the last 20 yrs, one will be sitting on a very expensive house and it can act as an emergency fund to them.

If a person house is costing say 2 crores and they can buy the same kind of flat on the other place at 1 crore, maybe in another city, in the times of job crises and loss of income, one has an option of selling the first home and moving to the same quality/size house at other place and cash on the rest in some instrument which will act as a monthly income to them.

So overall I would say, even if a person does not sell a house, he/she has some good unused advantages.

Meena Says

I totally agree with Manish’s views that even if you have no plans of selling your house, you are sitting on a wealth which would give great peace of mind when you have repaid all the EMIs and the house is all yours. My father bought a house in a prime locality in Delhi 40 years back for Rs 30,000.

I calculated the CAGR of the property keeping the current market value in mind. It is a cool 18% return that we see here. If my father had thought like Pramod and other fans of renting, he would have a tougher life as a retired person living in a rented accommodation in some outskirts where rents are cheaper.

I also agree with Pramod that the first house is more a commodity than an investment. But if you are not going to buy the first house, where is the question of buying a second property as an investment. The tax benefits of the second home (if you can afford) is even better. You can get the deduction of the entire interest amt from the taxable income.

So by totally ignoring this avenue of wealth creation, you are missing out a vital component of your asset building. Mind you, I am not discounting the importance of PPFs, MFs, etc here. I am still a great fan of owning the house in spite of very persuasive arguments put forth by Pramod, Manish, and others in favor of renting

Raja Says

Wow!! that’s really an interesting conversation going on here. I just would like to add my 2 cents here.

1. Rental price as we discussed, is a function of demand and supply. Essentially meaning that the renter is not so much in control of how much he might have to pay for the same accommodation on a future date. Just calculating it as 3-4% of the current property price and ruling out the future rental price appreciation doesn’t sound too prudent to me.

When a person buys a house on loan he basically locks in his outgo in form of EMI to a certain extent. Of course, drastic interest rate changes on the upside can alter his calculations.

But I think in the mid to distant future India has a better chance of seeing interest rates softening like so many developed nations than it moving drastically up from the current 10% range. Whereas when someone is depending on the rental mode of accommodation he is exposing himself to drastic future variations in rent.

Take for example the case of a tier-2 city like Bhubaneswar. Not so long ago (around 5 years back) the rent for a decent 2 Bhk used to be in the range of 2-3.5 k. In just 5 years’ time it has skyrocketed to the range of 6-8k for the same accommodation.

The rise is mainly attributed to a rerating of the city as a small IT hub and the factor’s like a growing number of IT professionals employed with Infy, Wipro, Satyam, etc…Now someone who had the affordability to buy a house 5 yrs back but didn’t do it is surely ruing the decision. Of course, property prices too have risen in similar fashion so buying now is even more difficult.

2. I am not aware of the statistics but I guess most of the new houses are bought by people when they are of marriage age. So, probably the age profile will be in the range 26-34. This means the main cash outgo in form of EMI will be over by the time they in the age range of 41-49 (Assuming an average 15 yr loan).

There are a good 16-24 yrs of life left after that (Assuming a life expectancy of 65 years). What are trying to say is with buying a house one will be done with most of the hard work in his prime working years. Whereas rent is a never-ending story, one has to keep on paying the rents for his lifetime.

3. Reverse mortgage – Even if one were to see some bad time during old age reverse mortgage can come to rescue.

4. If the roof over the head is assured it’s easier to live off one’s savings for a few months/years if one were to see bad times in the form of loss of income. isn’t it ?? I mean it’s not impossible to live with just food-transport-communication expenses in the bad times. Add the rental expenses to this list of expenses and suddenly it would seem a little difficult to manage. Of course, the assumption here is the bad times are after one has paid off the EMI’s

Conversation 3#

Rahul Says

Dont quite agree, Manish this time.

Let’s take the example of the couple with the 3-BHK flat. Recently married, they will need a 2-BHK (AT LEAST) in the next 3-4 years, as they will start a family. If they have frequent guests, like parents, (of both husband and the wife), relatives, friends etc., they will need at least 1 bedroom extra, making it a 3-BHK, which is the minimum requirement nowadays.

There can be several other cases requiring such a flat. If either parents’ stay with them, or they plan to have 2 children or they have relatives/guests/friends staying over, a 3-BHK becomes a minimum requirement. Also. once they buy a bigger flat, they will pay it off in say 15 or maximum of 20 years, if not earlier. It takes off a big headache, once you have your roof over your head. No tension till you retire! With property prices rising, it is a good investment too.

On the other hand, if they buy a small flat, in addition to daily problems of staying in a small place, they will have the constant headache of looking for a better, bigger property. And with increasing process, it may not be in their reach too. So, better buy it now and finish it off.

What do you think? Do you have better ideas?

My Reply

Rahul

You have not taken the article in the right sense. I am talking about people who buy beyond their capacity just because EMI is available. I have clearly stated in the article that people who have a requirement and can’t do without buying something have to buy it.

What about the family (only 2 people, married) who can not afford a 3 BHK and can only afford 1 BHK. Dont they get guest or dont start a Family? They do. They make adjustments and how many times do guests come, it also depends on that. I am little crude on this, but I personally would not like to buy a 3 BHK because my guests come for 4-5 days in a year. I rather sleep on the floor and offer them the room. That’s a better choice, at least for the initial years till I am capable of affording a bigger house.

Another point you made was that if the couple is starting a Family soon? Wh y is it necessary to assign a separate room to kids till they are 7-8. You can manage things somehow. We are talking about cases where a person can not afford a bigger house. Dont you think so?

Rahul’s Reply

Manish,

I think if you buy a smaller house and then go for a bigger one after 6-7 years, it may get out of your budget by then, especially the way India is progressing and infrastructure is developing. Practically all Indian cities are bound to expand as more and more people move to the cities and our country becomes an urban country from a rural one.

In such a scenario, it makes sense to accumulate as much land(flats etc.) as possible. It is almost certain that land, flats’ prices will keep rising for the next 20-25 years. Besides, practically speaking, paying off steep EMIs just beyond your reach inculcates a habit of savings too. One has to pay the high EMIs to come what may, so expenditure is automatically checked.

I have seen this in numerous real-life examples I have also seen that having 4-5 residences gives one a feeling of financial security and achievement too! Keeping all this in mind, I’m all in the favor of paying steep EMIs, just within your reach (leaving just enough for daily expenditure and a 5% room for emergency exp.) to accumulate as much land/flat as possible.

and Manish you said about sleeping on the floor when a guest arrives. Really, that is taking it too far! I mean, the house you have should have some spare capacity. Homes in which we live is the best indicator of our financial status. What point is served to be a crorepati, if one has to sleep on the floor if a guest comes in !! And what if by chance there are 2 guests staying overnight?? really embarrassing!

What do you think?

My Reply

Rahul

You took it too literally. Sleeping on the floor means sleeping on the mattress, not “on the floor”. Dont we do it? There will be instances when you have it no matter how big your house is, even if you have 3 BHK, It can happen that you have many guests which can be accommodated on beds and in different rooms, That is the time you always shift on the mattress on the floors, That’s what I meant.

And it depends from person to person what is embarrassing for them or not, I personally would rather be embarrassed squeezing my financial life and being in debt up to neck rather than sleeping literally “on the floor”. Its a personal choice, nothing wrong . What do you say about this?

Let’s Decode Warren Buffet Rules of Investing

Posted on by Jagoinvestor

In this article, we discuss two rules of Warren Buffet and understand their essence. A lot of people in the stock market quote these two rules of his, but the majority of them don’t even understand what they mean exactly, and what Warren Buffet actually tried, to communicate with his rules.

He mainly stressed on “Controlling losses” which is the most crucial point, when one deals with Equity. This can be directly investing in the stock market or through Equity mutual funds. Let’s look at them.

Warren buffets rule of investing

Warren Buffet Rule of Never Lose

Warren Buffet says, there are two rules in the stock market

  • Never Lose Money
  • Never forget Rule #1

Most investors have heard this and have read it a number of times. But for the most part, they’ve taken these words casually and feel that they are just funny lines. How can one never lose and how can that be the single most important rule in the stock market?

The real meaning of these two rules lies behind those words and if we dig a little deeper, we will understand the real value of those rules.

Let me decode it for you here. Read it with all your concentration & focus. Those two rules, really are, worth everything in the stock market.

Stock Market and Warren Buffet

What Warren Buffet really means when he says “Never Lose”?

No one in this world, wins all the time. One loses frequently, and this is true in stock markets also. No one can ever trade or invest in such a way that he/she never loses.

What Warren Buffer actually means by “Never Lose” is that every time we lose, it has to be an insignificant loss. The quantum of loss, has to be so limited or small, that It’s not going to affect us psychologically. If we make a profit of 100 every time and lose 20 or 30 every time we lose, we are actually not losing, if that’s your series of trades.

If you win 100 and lose 20, you are actually only winning 40 for every trade in series of 2 trades… But if you are letting your losses mount and never controlling them, then you are really losing and then those losses can impact you in a big way…

What he means when he says “Never forget Rule number 1”?

By this, he wants to emphasize on how important controlling losses are. Another one-liner of his, that in the stock market and in life you don’t need to do a lot of right things as far as you are not doing a lot of wrong things.

So, as far as you remember that controlling your losses is the topmost rule, you just need to be an average investor or trader and the power of compounding will take care of rest for you. I’ll summarize those rules again for you and what you should actually read in them.

Rule 1: Never Lose (Control your losses, cut them soon enough, so that you don’t feel them)

Rule 2: Never forget Rule 1 (Controlling your losses is the topmost priority you should have. As long as you are able to take care of it, other things will take care of themselves).

Let’s take an example – There are two investors, Ajay and Robert, who both make 1000 trades in their entire life, 500 losing trades and 500 winning trades. Ajay makes a profit of 6% on winning trades and a 3% loss on losing trade.

He has $11.9 Billion dollars in the end. On the other hand, Robert concentrates more on controlling his losses (and hence is able to control his losses up to 1% on average per losing trade) and also makes 5% on winning trades. At the end of his career, he would have $25 billion.

Conclusion

Its only controlling losses which made Robert more money than Ajay. Remember this, you need to concentrate more on “not messing it up” rather than making it “rock”.

The EMI Disease

Posted on by Jagoinvestor

“A dog held a juicy bone in his jaws, as he crossed a bridge over a brook. When he looked down into the water he saw another dog below with what appeared to be a bigger juicier bone. He jumped into the brook to snatch the bigger bone, letting go, of his own bone. He quickly learned, of course, that the bigger bone was just a reflection, and so he ended up with nothing!”

What do we learn from this short story?

Some thing, really similar to this story is happening in our lives – where the bridge which we are cross is our lives, the bone is our home,(or car or any thing we own) and the “other dog” is none other, than the people around us, our friends at work, neighbors, relatives, etc., who might have a bigger home than us, a better car or a more expensive LCD.

Does that mean that we also need to run towards that bigger bone? Yes? No? There is no harm in fulfilling our needs. As our families grow, and our need for comfort increases, we are bound to buy bigger homes, better cars (read more expensive) et al… And while we are at it, why not buy that much bigger LCD or enjoy that international holiday with the family? The EMI system changes our “wants” into “needs”.

Is Installment system of payment bad?

Definitely NOT! It’s a very convenient way of buying things, but the problem is that the EMI way of buying, gives a lot of people the feeling that they can afford anything which comes their way. And there lies the problem! A sizable chunk of people believe, that they need a bigger bone (when they actually don’t) and the easy availability of everything, in EMIs plays a large role in said belief. The EMI is such a beautiful concept, that even a person with a salary of 30k can buy a helicopter!

Why not? Just 9999 per month, for the next 200 years! Does he need it? Who cares? He can afford it! The problem is not the EMI concept in itself. The problem is us – losing our control on our spending and extending our affordability horizon to such great lengths, that we have everything in our life; but most of it is under debt.

Our home and our car are the two classic examples of this. Let’s talk about home. I don’t have much data, but my instinct says that most of the people who have taken a home loan are living in a much bigger home than they need. As per an in-house study, (through a poll,) I found out that as much as 67% of the readers on this blog or urban net-savvy people are paying at least 1 EMI, which would mostly be a house or car loan EMI. It was astonishing to see that 11% of readers here pay more than 3 EMIs! That’s too much!. Make sure that your EMIs are not more than 50% of your total, in hand (net), salary.

Number of EMI's paid

Affordability of  EMI vs affordability of Loan

If you tell a person, the EMI of a product, chances are that they will believe that he/she can afford it, as compared to when you tell them the actual price of the product. The problem lies in the numbers. The lower the number, the more affordable it becomes! However, this is not true! Actually, the more you reduce the EMI figure, the longer the tenure, and hence the total cost for you over a long period of time increases drastically!

Let’s take some products –

Home Loan

A classic example is the Home Loan. When a person plans for a loan, he makes sure that the EMI figure is affordable to him and does not concentrate much on the final value. For example, consider a person earning 50k per month. The EMI for a home worth 30 lacs @10% will be Rs 39,645. This may look unaffordable to him, so he increases the tenure to 20 yrs instead of 10, and brings down the EMI to 28,951/- Magically, this same home starts looking affordable to him!

What they concentrate upon, is the initial years, and not the big picture. They might not be considering some important points… like what if interest rates increase to 14%? In which case, the EMI will go up to 37000/-! These are young, recently married individuals, who have no idea of where they will be working in next 5 yrs. Will they be in the same job or same Industry? What will be their liabilities then? A close look at Real Estate Returns in India

I am not sure if a 3 BHK is the right choice for a recently married couple who has no one else with them, to live with. The justification can be that in future they may require it, however, if that’s going to happen in the next 15-20 years, a 1 BHK or 2 BHK is a better choice. It’s better to live in a 1 BHK and breathe easy, rather than a 3 BHK and suffocate every day from the burden of the heavy EMI. Here’s a good article on Home Loan EMI calculation.

Calculate your EMI

Car Loan

A lot of people buy a car before a home, as the EMI is affordable and the car adds to their comfort. I know a lot of people who can easily manage their life with a bike or without a vehicle, but have bought a car for reasons only known to them. There are just 2 people in the family, both have company transport, aren’t really outgoing, but they have a car. Not sure why!

A car is a depreciating asset. This means, that when you buy a car on loan, you are paying more money for something, whose value is coming down day by day, unlike your home. So buy a car, only when it’s really important or your comfort gets bigger than your simplicity when commuting is a problem.

The main problem again, is people buy cars that are much bigger and costlier than what they can afford and need. If you are in the starting phase of your career and have no more than 4 people in the family, why take anything beyond a Santro or Zen? You can always buy that dream car when you are more stable in your career and the other important things in life are taken care of.  My views may be biased because I am not a car or vehicle lover, so all car experts might disagree with me here 🙂

Holiday/LCD/Camera/Air Tickets

IRCTC has started giving air tickets on 6 equal EMIs! There is no catch! You can buy a ticket worth 3k today and pay 500 a month over 6 months. The only catch, is that this makes many people feel that they can afford it now. A student who was earlier traveling second class in train or at most, 3rd AC will not just be tempted but will believe that he can afford air travel now, which he couldn’t if he had to shell out 3k in one go.

Just because it’s a smaller chunk, we tend to buy things that we don’t need and can’t afford. The holidays are a perfect example! We Indians, are earning very well in this new decade, thanks to the opening up of our economy and IT sector especially. Our future earnings are more predictable now, compared to the past and this is the reason why most of the products are available on EMI; which makes us buy today and then pay for it for the next couple of years.

Conclusion

There is nothing wrong with buying things on EMI, as long as you know what you are doing, and then only if you really need it. Don’t run after everything you can get on EMI, and don’t drown yourself in so much debt, that it gets tough to come out. Save a good amount for the down payment and take debt only when buying something becomes inevitable. An early Start in Saving today will make your wealth overtime.