Posts Tagged ‘EMIs’

uncertain inflowsI have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

  1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 
  1. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 
  • Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!
  • Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 
  • Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.
  • Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

  1. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.
  1. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

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It is important to keep track of your assets and investments and how they are performing and how far they are helping you in achieving your goals but it’s equally important to keep a check of your liabilities. Your cash flows at any point in time will be greatly impacted by the way you manage your liabilities.

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Let’s broadly classify liabilities into two parts to make it easy for us to understand.  Your ongoing home loan, car loan, education loan or your personal loan could be one type of liability. Your pending credit card bills or any other kind of unpaid bills could be the second type of liability.

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Let’s talk about the second type of liability first. There is a very high interest rate that they charge on the unpaid credit card bills. It is important to get rid of these as fast as possible. The amount will multiply much faster than you realize and you will get into the loop where you will pay of a part of it and by the time you decide to pay the rest of it already a huge interest might just get added to it. In short it leads to drain of wealth of an amount much higher than your original liability. Another important implication of this is on your credit scores. Every individual who has ever taken a loan has a credit score. This depends on your financial behavior and the way you service your existing debt. Going forward the debt score will determine your loan taking ability and the rate you will be charged for the same.

The other type is your home, personal, car, education loan, etc. Most commonly people have either a home loan or a car loan. The way you can manage them will depend upon the rate of interest that you have been paying on your existing loan and what are the current loan rates in the market. If there is a scenario similar to the current one where there is an expectation of further rate fall then you should take a new loan at a lower rate to repay your existing loan where you may be paying a higher rate.

If you have some goals, so you can choose to pay either higher EMIs or lower EMIs depending on the need for cash flows at a particular point in time. In any loan the EMI that you pay services your interest portion in the beginning and then slowly it starts servicing your principal component. Therefore you might notice after few years of regular EMI payment your principal may have reduced by a very small amount.  If you have a surplus cash inflow at any point in time then you might want to prepay some part of your loan. Its appraisal time now in some of the organizations. If you receive a salary raise then you might choose to pay a higher EMI to speed up your loan repayment.

If the rate of return on the investment is higher than the rate of your loan then you should consider investing instead of prepaying. But if it is the other way round then you should consider prepayment.

Also recently Marginal cost based lending rate (MCLR) has been introduced and is applicable from 1 April 2016. The MCLR linked loans are at least 0.10% cheaper than base rate linked lending rates. Only floating rate loans can get linked to MCLR. It has a reset clause which means your rate will get reset on every reset date. Reseat date depend from bank to bank. MCLR rate is calculated based on deposit rate of the respective bank plus a spread instead of base rate as it was done earlier. At every reset date when your rate changes it will alter your loan tenure and not your EMI. But if you want a change in EMI you can inform the bank. The new loan applicants will get loans linked to MCLR Rate. The existing investors can also shift to this rate by paying a fee. Most banks are charging close to 0.5% fee. So if there is a difference of at least 0.25% in the rate that you are paying currently and the new MCLR rate then only you should consider switching.

Last but not the least,

Don’t just keep paying EMIs. Take a look at available cash flows, need for cash flows and your goals and then decide how you want to manage your liabilities.


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It’s that time of the year, when the mornings have a nip in the air in certain parts of India and come with fog in other parts. It’s that time of the year when I don’t go on my morning walk as it feels nice to lie in my cosy bed. Of course, I also don’t go for my morning walk in the rains as I may get wet and in summer as it’s too hot. It’s that time of the year to look forward to some good times with friends and family, as a large number of relatives and friends abroad make their annual or biannual visit to India. So it’s a great time to look forward to some exciting new gifts from overseas as well for all the little children at our homes.

As you spend time with your friends and family from overseas and savour the good old times and their favorite mithais with them, don’t forget to remind them how investing in India at this point could be an excellent opportunity. This could well be the best return gift that you can give them on their India visit this time. And whilst you are giving them their return gift by telling them about the India investment opportunity, don’t forget your own investment portfolio. Whats good for them is also good for you.

Whilst the falling India rupee has been a terrible advertisement for India in the last few months, with the fall in the Indian rupee against the US dollar being the sharpest amongst all Asian currencies, we believe that this makes India even more attractive for long term investors. Whilst there are concerns in India due to the higher current account deficit that India has as compared to other emerging economies, we believe that the current depreciation in the Indian rupee is only partly an indication of the weak current account and trade deficit of India. The other part of this depreciation is actually driven by the strength of the US Dollar, which has emerged as a relative safe haven as compared to other global currencies. This seems strange as the fundamentals of the US itself are currently under severe stress on the back of persistently high unemployment and debt and spending that continues to be significantly above comfort levels. However, financial markets are known to take extreme views of events and the liquidity that the US dollar provides could be the most important determinant of its value currently rather than the fundamentals of the US economy.

So why should you or your NRI friends and relatives invest in India?

1. Attractive Demographics – Whilst most parts of the developed world are struggling with aging populations and China is also facing the challenges of a one child policy that they have followed, India with a median population of 26 years has the benefit of an ever increasing workforce that is likely to consume everything including two wheelers, cars and processed foods.
2. High savings rates – Whilst rising inflation and EMIs have impacted savings rates to a certain extent , India still has a savings rate in excess of 30% and expected go grow to close to 40% over the next few years. Compare this to savings rates in other parts of the developed world of low single digits. This means that Indian businesses will continue to have access to a huge pool of money domestically to grow their businesses.
3. Interest rates in India close to peaking out – Whilst this could result in a temporary slowdown, we believe that these rates are unsustainable for long periods and may thus start to come down over the next year. It may therefore be a good time to look at locking into fixed income instruments that give you the benefits of high interest rates that are currently close to double digit and will also gain when interest rates start to come down.
4. Equity markets at a discount to historical prices – Whilst it is always tempting to try to time the entry into equity markets at its lowest point, we know of very few people who succeed at it consistently. Since stock markets are at a discount to long term averages currently, we believe this is an excellent opportunity to buy into good quality Indian businesses that are quoting at a discount either through stocks directly or through equity mutual funds.

Whilst it is tempting to put all the money into just one place due to the ease of managing it and the high interest rates, we believe that India provides an opportunity for building a good quality diversified portfolio at this point across both fixed income and equities. You may need the help of a financial planner to build an optimal portfolio.

It’s that time of the year again, when companies are on a discount sale in stock markets so don’t let the opportunity go.

It’s that time of the year, when interest rates are very attractive, so try to lock in for a long duration.

It’s that time of the year, when you want your visiting relatives and friends from overseas to go back with sweet memories of their India visit and your return gift of a great wealth creation opportunity.

And whilst you are playing the perfect host, don’t miss the wealth creation opportunity yourself.

This article was written by Vishal Dhawan, CFPCM 

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THE promise of a demographic dividend with its young working population, the second highest GDP growth rates in the world, an excellent monsoon in most parts of the country, automobile sales at all-time highs, a domestic consumption driven economy with relatively smaller dependence on the rest of the world vis-à-vis other Asian economies, I could go on and on. With most economic indicators on the upswing, andIndiagaining acceptance amongst foreigners as both a great business and tourist destination, it is difficult not to get carried away by the immense possibilities that the future offers.

Whilst we are extremely bullish about what the future holds for India, we also believe that it is unlikely to be a straight-line opportunity over the next decade. Our belief is that the significant linkages that exist globally will mean that economies and financial markets, and as a result businesses will see cycles that will swing between extremes on both sides. Therefore, the seeds that are sown in good times will probably dictate how we are able to ride through the down cycles that we will encounter along the way. Thus, your spending habits during the good times become critical. Our five commandments for spending are as under:

Earn, Save, Invest & Spend: This order of managing one’s finances is critical. Unfortunately, we find that a lot of people don’t follow this pattern the most common process is save what is left over after spending. In fact, there is an increasing trend towards spending what you have not even earned yet. Sit down with your financial planner to understand what you need to save to achieve your financial goals, set and implement your investment targets, and then spend what’s left over.

All Wants Are Not Needs: Whilst it is always possible to justify a want as a need, especially if a neighbour or friend also possesses the object of desire that we want to spend on, ask yourself if your need is truly aneed or only a nice to have want.

Indulge Yourself Occasionally, But On Small Items: Managing your spending is a bit like a weight control programme. Most success-ful long term weight control programmes recommend that you do not go off your favourite foods completely just eat them occasionally and in controlled amounts. In the same way, do not go off spending completely as you risk coming back with a vengeance, that could do significant damage to your financial health. The next time you feel like spending, walk into your favourite bookstore rather than an electronic store or car showroom.

Don’t Stretch Your EMIs: The house that you live in is not an asset and what you spend on it is an expense, not an investment. Most people are unable to downgrade or trade down their residences homes during difficult times, making it unfair to compute it in your net worth. Whilst a roof over your head is critical, what it costs is also very important. Therefore, be careful about how much you stretch on the EMI for your primary residence, especially in an inflationary environment where interest rates could rise significantly. Besides, only a few home improvements actually increase the financial value of your home, so spending on homes needs to be controlled just like your other discretionary spending.

Focus On Good Spending: Just like good debt and bad debt, there are good spends and bad spends. Attending a workshop on managing your finances, spending on a hobby that will keep you occupied long after the kids have settled into their own lives, taking a weekend break with your loved ones, all with controlled budgets, are good spends as they make your life more wholesome and give you a sense of fulfilment.

Take advantage of the good times so that you are the king of all times, not just the good times.

This article was written by Vishal Dhawan, CFPCM and appeared in the The Economics Times on 9th  December 2010 .

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