What you should know about your housing loan

When there is an increase in the Prime Lending Rate (PLR), the interest rate on your loan will also go up, and your repayment would be higher. However, in most cases, financial institutions would allow you to pay the fixed amount of monthly repayment (EMI) throughout the loan tenure and would make any adjustment caused by the variation in interest rate by increasing or shortening the loan tenure, as the case maybe. Also, do note that the PLR will soon be replaced by the Base Rate (BR) from July 2010 onwards.

Owning a piece of land, a house or a property is a lifetime dream for every individual. Maslow’s law of hierarchy indicates such a dream as well. Taking a home loan nowadays has become much simpler. Each year the budget regulations seem to lean towards the housing sector and construction sector in terms of generosity!

There are many home loan providers in the market to make your dream come true. However, before you opt to take a home loan, you need to consider certain factors related to the property that you are interested in buying and also understand the features offered by a home loan provider.

Choosing Your Financial Institution

When you shop for a home loan its good to research your financial institution well before opting to go with them. Remember that when you take up a housing loan, you will be dealing with the lending institution you choose on a regular basis for a long period of time.

Therefore, you should also consider factors other than just interest rates. Some of these are:

How professional is the financial institution in dealing with customers?

Does it offer quality service in terms of efficiency and reliability?

What are the available loan packages and which package suits you best?

What are the various charges involved?

Assessing your loan repayment capacity

You should ensure that your monthly loan installment repayment (EMI) should not be more than around 40-50% of your gross monthly household income. If you have savings or fixed deposits, they can be used to support your loan application as financial institutions may take them into account in evaluating your eligibility. Different financial institutions have different criteria in calculating the repayment capacity. In the case of a floating rate loan, you should also note that your loan tenure or (if you so choose) your monthly repayment may increase substantially when interest rates go up.

When there is an increase in the Prime Lending Rate (PLR), the interest rate on your loan will also go up, and your repayment would be higher. However, in most cases, financial institutions would allow you to pay the fixed amount of monthly repayment (EMI) throughout the loan tenure and would make any adjustment caused by the variation in interest rate by increasing or shortening the loan tenure, as the case maybe. Also, do note that the PLR will soon be replaced by the Base Rate (BR) from July 2010 onwards.

Margin of finance

It is assessed on factors such as:

• Type of property
• Location of property
• Age of the borrower
• Income of the borrower

Generally the margin for the borrower (down payment) will be about 15% of the property as assessed by the bank/ lending institution. For mortgage loans the lending institutions will assess the value for the property based on the ‘Distress Sale Vale’ - this is the value of the property in case it is sold on an urgent need basis. This value can be much lower than the market value of the property.

Rights and duties of the borrower and the financial Institution

Both the borrower and the financial institution have certain rights and duties during the course of the loan repayment period. Some of these include:

RIGHTS

Borrower

• Right to have access to all information that would affect your borrowing decision
• Right to be treated professionally, courteously and without prejudice
• Right to be consulted on changes to the terms and conditions of your loan
• Right to have accurate information on a regular basis on your loan account
• Right to enforce legal action in the event of a breach of contract

Financial Institution

• Right to have full relevant disclosure of information on borrower’s credit standing
• Right to correct and truthful information on the borrower
• Right to timely repayment of interest/ installments of the loan
• Right to enforce legal action in the event of default/breach of contract

DUTIES

Borrower

• Duty to read and understand all terms and conditions of the loan
• Duty to observe the terms and conditions of the loan at all times
• Duty to enquire and get clarification on all aspects of the loan to their satisfaction
• Duty to make prompt payment on the fees, charges, interest and installment of the loan

Financial Institution

• Duty to discharge borrowers’ obligations as described in the loan agreement
• Duty to consult borrowers on any changes made to the terms and condition, fees charged and other relevant information
• Duty to attend to all queries made by borrower

Before getting a housing loan take stock of your finances and assess your loan repayment capacity. Then shop for the best offers available. You can also approach a financial counselor for optimum allocation and utilization of your money.

article source: bankbazaar

FDI in Insurance : increase in the limit

A day after the government announced its intent on allowing foreign direct investment (FDI) in insurance, the industry is upbeat. All companies with a foreign partner, whose shareholding is currently curbed at 26 per cent, have showed interest in increasing it to 49 per cent. "We are contributing capital even today in the insurance companies," a senior AIG (American International Group) official said.

In its home country, AIG is facing financial problems but said it will look at increasing stake in Tata-AIG Life and Tata-AIG General Insurance companies once the FDI norms are relaxed. "AIG will consider increasing its stake subject to the agreement between both the partners. We will review the situation at that stage (when the insurance bill is passed)," he said. "Standard Life will be increasing stake to 49 per cent," said Paresh Parasnis, principal officer and executive director of HDFC Standard Life.

"The first MoU that was signed between the promoters provided for that. Another agreement signed over a year-ago said that the valuation arrived would be at a fair value basis." But he's not jumping the gun. "We will have to wait and see as to what the new provisions provide for. Will the foreign promoter be allowed to increase stake through FDI or through a combination of FDI and foreign institutional investment (FII)," he said.

"It does not depend on whether the foreign promoters are willing to increase their stake but whether they are capable of increasing their stake," said US Roy, CEO and MD, SBI. "The situation will differ from promoter to promoter. BNP Paribas has so far not indicated anything. It will be decided by the shareholders.""There is also a need to augment resources in the banking and insurance sectors in order to permit them to serve the needs of society better," President Prathibha Patil said on Thursday.

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Private equity players set to infuse $8 bn

Venture capitalists and private equity players are now working overtime when it comes to new investments. Due diligence is taking moretime than before.Anywhere between $5 to $ 8 billion is waiting to be pumped into the Indian market in the form of private equity. Slowdown-free sectors like healthcare and education are hot picks, besides those catering to domestic consumption.

"Right now, we are evaluating proposals in diagnostics, logistics and energy saving," says Srini Raju, co-founder of Peepul Capital. His fund has a war chest of $220 million of which $150 million has been invested in telecom and manufacturing companies.The global slowdown and rupee appreciation has led to a shift of focus from exportoriented firms to ones meeting local demands. "Even foreign VC funds are keen to invest in local industries," says Srini Vudayagiri, long time private equity and angel investor.

So much so that even micro finance related ventures is finding favour with foreign funds. And with the new government coming into power, there is renewed interest in infrastructure projects as well. Retail and other consumption driven industries having a strong focus on tier II and tier III markets are also being favoured by private equity players.In technology, VCs/PE players are looking at those companies which derive revenues from alternate markets instead of just America.

"They are looking at a balanced play portfolio with multiple engines of growth," says Sameer Mehta of Atlas Advisory. Venture capitalists are now stringent on exit strategy. "Exit scenarios are more definitely spelt out in the term sheets than ever before. The documentation covers scenarios like what if the IPO doesn't happen within the stipulated time period. Earlier, such issues were relegated to the periphery," says Vudayagiri.

Fluctuating rupee has also forced many investors especially foreign funds to protect their dollar value and that is now clearly spelt out in term sheets. While private equity funds are normally known to take the company to the IPO stage, managers are exploring other exit options like selling stake to growth stage funds.

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Maximise returns from long term investment

“Every investor is a long-term investor until the stock market tanks,’’ says Amar Pandit, certified financial planner (CFP) with My Financial Advisor, a wealth management firm. “You get to know his mental make up only by how he reacts to the market fall. If he stops or discontinues his regular investments, it becomes clear that he doesn’t have the stomach for risk. Also, he can’t think of his investments in the long term,’’ adds Pandit.

Financial experts have many such stories identify the so-called long-term investor from others. This is because most of them aver that planning investments with a long-term perspective is vital to one’s financial well being. Though one often comes across well meaning advice about long-term planning, people often fail to stick to it—especially when it comes to equity investments.

“It is not that equity is the only long-term investment. When one invests in real estate, public provident fund or employee’s provident fund, one knows they are long-term commitments. For example, PPF is a 15-year account and EPF can be of 30 years, depending on one’s working life. In all these, people have long-term view,’’ says Pandit.“They wouldn’t quit these investments based on short-term trends, either due to emotional reasons or because they can’t be easily liquidated. However, when it comes to equity—an instrument only meant for long-term investors—people take decisions based on short-term trends in the market,’’ he adds.

However, advisors add that one shouldn’t conclude that people haven’t realised the importance of a long-term investment perspective. “People who have been investing for some time in the market realise the importance of long-term commitment.For example, when the market was down, the impression was created that most people would discontinue their SIPs, but it was not the case,’’ says D Sundararajan, investment consultant, Trendy Investments, an investment advisory firm.

“Most seasoned investors continued with their investment programme, as they perhaps realised that it was beneficial to buy stocks when the market was down,’’ he adds.In short, if you haven’t taken a long-term view of your financial needs and planned your investments accordingly, you are very unlikely to achieve your goals. “When we talk about a life goal like retirement or child’s education, we are talking about at least 10-15 years ahead. If you don’t include the possible return over that period or the impact of inflation on your corpus, you wouldn’t get a realistic picture,’’ says a wealth manager in private sector bank.

“In such a scenario, a person will have to face unpleasant surprises in the last moment, when he wouldn’t be in a position to take remedial actions,’’ he adds.Having a long-term perspective will also come handy when you reallocate assets in your portfolio to mitigate the volatility in a certain segment. Sundararajan offers an example of how having a long-term perspective could help prune the portfolio in times of uncertainties.

“When the stock market was down, we decided to include gold in the portfolio of many clients. We took this decision on the basis of our view that the stock market may take a long term to recover because of the uncertainties in the global economy and gold would add the much needed stability to the portfolio,’’ he says.

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Essar Oil's Q4 net at Rs 660 crore

The Ruias-promoted Essar Oil posted a net profit of Rs 660 crore for the fourth quarter ended March 31, 2009, against a net loss of Rs 8 crore during the same quarter in 2008. The company’s profit surged after its refinery at Vadinar in Jamnagar began operating at full capacity from May 2008.

“We commissioned our refinery last May. This helped our sales. Also, oil prices were high, which helped in boosting the profit,” said Naresh Nayyar, CEO, Essar Oil.Total income during the quarter increased by Rs 6,832 crore from Rs 49 crore in the corresponding period last year. For the fiscal year comprising 11 months, the company reported a standalone net loss of Rs 514 crore, as compared with a net loss of Rs 41 crore in the year 2008.

The gross refining margin for the quarter stood at $10.92 per barrel. The crude processed during the quarter was 3.31 million tonnes, the company said. The company has decided to seek its shareholders’ approval for issue of further equity shares and/or convertible debentures by way of private placement in domestic or international market up to $2 billion.

Meanwhile, Essar Exploration & Production-India Director and CEO S R Agrawal said that Essar Oil’s investment may go up to $70 million in exploration and production (E&P) this year if a long-pending Production Sharing Contract (PSC) with the government for the Ratna and R-Series fields is concluded early.

“Our E&P capex for FY10 is $50 million if (signing of contract for) Ratna happens. For our CBM block in Raniganj, it is $20 million,” Agrawal told reporters here.The company said that its Raniganj coal bed methane (CBM) block has been estimated to have high prospects of recoverable gas reserves.

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10 Investment Basics

• Start early:

Investing is easy once you know how. That’s why starting early gives you an extra edge, to learn from mistakes and experiment with various investment techniques and asset classes. As you grow older, you can take limited risks with equities and would prefer to invest in debt too.Also, every year that you postpone investing towards retirement, the annual savings you need to make to reach your financial goal will keep on rising.

For instance, to get Rs 10 lakh at the end of 20 years, if you start now you will need to invest Rs 13,879 annually but if you start 10 years later, the annual investment will shoot up to Rs 56,984.

• Know yourself:

Invest in shares or mutual funds based on your needs and after doing proper homework. Don't buy something because your neighbour believes he has a winner on hand, or your broker is issuing a big buy report on a stock. Carefully choose securities that fit your profile.

It is important to relate the risk perceived in a given security not only to returns, but also to your attitude towards risk. It is important to understand your emotions towards money and comfort levels with risk. For instance, what would be your reaction if your stock investments plummet by 35 per cent in a month? How would that affect your medium term or long term plans?

• The risk/return trade-off:

There is no harm in assuming a big risk in the quest for higher long term returns, and your profile does not preclude taking of such risks. Equities promise higher long term returns but the period taken to realize these returns too can be uncertain. As far as debt mutual funds are concerned, they are more stable tenure but returns are much lower.

As an investor, you should be able to judge whether the perceived risk is worth taking in order to get the expected return and whether a higher return is possible for the same level of risk (or a lower risk is possible for the same level of return). Smart investing will involve choices, compromises and trade-offs. And you have to decide the combination of factors that suit you best.

• Don't overpay for growth:

Seek out shares that are capable of delivering sustainable earnings growth but don’t fall into the trap of overpaying for growth. Even the best growth stock may not deliver dream returns if your purchase price was too high to begin with. Warren Buffet, one of the most successful investors in the world, said back in 1983:"

For the investor, a too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments." So growth riding on the back of a reasonable purchase price may be a good motto to stick with.

• The reinvestment risk:

If it suits your plan, choose a fund that reinvests your dividends or interest. That won't leave you exposed to the risk of reinvesting the amount at equivalent or higher returns for the same level of risk. Such alternatives are more than often not easily available. The reinvestment risk is implicitly defined for a debt instrument. Yield-to-maturity, which is the actual yield on a bond if held to maturity, may be a familiar term to those who invest in fixed income.

But few know that this YTM assumes that each interest cheque received by the investor is reinvested at the coupon rate. In reality, however, most investors are probably spending this interest on fullfiling current needs. So even if investors are getting a coupon of 18 per cent on a semi-annual debt instrument, their YTM is much lower.

• Beware of the law of averages:

The average, or mean, acts like a powerful magnet that pulls stock prices down sharply, often causing returns to deterioriate after they exceed historical norms by substantial margins. Stocks display runaway tendencies by appreciating sharply. Subsequently, prices may plateau causing disappointment. In such a situation, investors may profit from selling out earlier than originally planned. And if the fundamental story is still intact, you could even buy back your shares at a lower price. So stay tuned to any short-term movements in the stock market that affect your stocks.

However, if your goals are long term, don't get into the trading mode, where you compromise on the big picture for short-term gains. It is important that you still think long term. As Benjamin Graham, author of the investment classic The Intelligent Investor wrote: "In the short term, the stock market is a voting machine-reflecting a voter registration test that requires only money, not intelligence or emotional stability-but in the long run the market is a weighing machine.

• A trend may not be your best friend:

The psychology of the stock market is not only based on how investors judge future events, but also on how they react to the immediate past. There is a tendency among common investors to buy shares of those companies or sectors that have performed well very recently. It is critical that you assess where you are in the cycle during any bull run. That's because what may seem to be an everlasting phenomenon eventually turns out to be illusory.

It will be replaced by another, equally compelling one. And as an investor, you are left with shares bought at the peak of a cycle.Like Burton Malkiel, the author of A Random Walk Down Wall Street has to say: "It is not hard, really, to make money in the market… What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges."

• Time marches on:

Time can dramatically enhance the value of your starting capital through the magic of compounding. At 10 per cent annually, the annual incremental capital accumulation on a Rs 10,000 investment is Rs 1,000 in the first year, is over Rs 2,300 by the 10th year, and just under Rs 10,000 by the 25th year. After 25 years, the total value of the initial Rs 10,000 is Rs 108,000, a ten-fold increase in value.

Give your investment all the benefit of time that you can afford. Choosing an investment plan that automatically reinvests your dividends and interest is also a way to benefit from the power of compounding.

• Evaluate your future:

A lot of investing is about how you see your future, financially speaking. We all make certain assumptions while estimating our future needs, and how we intend to meet those needs. But circumstances can change. Hence it is important that you review your portfolio at least once a year.

Also try to evaluate the performance of your investments against the level of risk you are assuming for achieving the returns you want. And when necessary re-balance your portfolio to stay on track with your long term financial goals.

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Your Age And Your Investment Plan -- A lifecycle guide to investing

Age plays a key role in determining your investment profile. Hence, constructing a portfolio that suits your age is essential. By mapping your age and your background, you can establish a portfolio that comprises of different asset classes, in differing proportion. For example, if you are five years away from retirement, with no major savings for a post-retirement life, then you would build a portfolio comprising fixed income instruments. Similarly, a 24-year old would focus on parking investments in riskier investments like equities, since time is on his side.

We have constructed profiles based on your age and some assumptions. Then we have constructed a break-up of investments that can be used as a guide. You may wish to fine-tune this to meet your own requirements. While reading through these profiles, please note that these are typical attributes and are not absolute. Again, your risk profile changes depending on how you perceive yourself too.

A senior citizen with no dependents, but with lots of savings, may find it perfectly okay to take on more risk. Similarly, a young person but with many dependents and lots of financial liabilities may be more conservative than other people his age. We have assumed that tax liabilities have been provided for, and the suggested investment break-up is for the net funds available.

Broadly, you can classify investments in to cash and bullion, fixed income instruments, equities and mutual funds. Cash and bullion are taken as one, as both are equally liquid and widely used as a means of savings. Savings would also include funds in your bank savings accounts Apart from pure equities and fixed income instruments, mutual funds are popular investment vehicles.

We have classified mutual funds separately since the risk of investing in funds is relatively lower. Moreover, balanced funds juggle between debt and equity making an all-inclusive classification difficult.

Age : 22-30 years

Profile:

You are single or are married but with no kids. Dependents are not an issue at this stage and your focus is on creating a sizeable corpus of investments for the future. Incomes typically grow at a fast rate annually. The ability to take risk is high and losses in the short term are acceptable. You can invest in equities with a time frame of about 5-6 years which protects you from short-term fluctuations.

Category in %

1. Cash and bullion : 10%
2. Fixed income instruments : 30%
3. Equity shares : 40%
4. Mutual funds-equity growth : 20

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Age : 31-45 years
Profile :
You are now married and your family size has expanded, with two kids. Your parents are now dependent on you for emotional and some financial support. The focus is on consolidating your investments, making them more secure. The ability to take risk is there but to a limited extent. Limiting losses is a priority. Building on a corpus of funds for children’s education becomes a priority now.

Category in %

1. Cash and bullion : 10%
2. Fixed income instruments : 40%
3. Equity shares : 30%
4. Mutual funds-equity growth : 20

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Age : 45-60 years

Profile :

This is the age when retirement blues set in. Children's college and higher education make demands on your funds. You must also ensure that your retirement plans are in place, if you have not done it already. Hence, risk taking ability as a whole diminishes considerably.

Category in %

1. Cash and bullion : 10%
2. Fixed income instruments : 50%
3. Equity shares : 20%
4. Mutual funds-equity growth : 20

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Age : Beyond 60

Profile :

You are taking life easy, some introspection, spending time with the family and maybe doing some part time work. Or like some workhorses, you are still engaged as a full time consultant with your ex-employer. The ability to take shocks is extremely limited and you should lower your exposure to equities. Your prime criterion should be to have a higher proportion of fixed income investments and stay liquid to meet any medical emergencies.

Category in %

1. Cash and bullion : 10%
2. Fixed income instruments : 70%
3. Equity shares : 10 %
4. Mutual funds-equity growth : 10%

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