The Best Financial Resolutions for 2018

 

The New Year is a great time to overhaul your life for the better. And what better way to do it is make those kind of resolutions that will act as a constant guide in that endeavor. For this, Resolutions, like goals, are best when they’re specific.

Financial resolutions made during beginning of the New Year can determine the shape of your short and long term financial objectives whether is it increasing your savings for retirement or putting aside a little extra for this year’s down payment of that property.

If getting your financial life in order is a resolution for you this year, here are some ideas that may help you get there faster:

1. Save Smartly!:It is common knowledge that

• Income -Expenses = Savings

We suggest change that equation from this year, make it

• Income – Savings = Expenses

This new equation will help create an automatic budget, and will ensure you only spend after saving.

Use automatic investment ideas like SIPs and STPs to transfer your monthly savings to dedicated investments for your goals.

 2. Have Contingencies, for everything!:

Dangers and risks are ever present. They can have sudden and significant impact on your finances if they are realized. So it’s better to be safe that sorry.

• Having a highly liquid corpus (available to you in 48 hrs or less) is one way of doing it.
• Another useful and highly critical step is getting adequately insured. While a variety of insurances are up for grab, focus on the basics first. Sufficient health cover for your family and yourself should top the list.
• Followed by insurance for specific risks such as critical illnesses, accidents and even insurance for your home.
• Another smart thing you should do is take a insurance for any big ticket loan you may be servicing, such as a home loan. You do not want to burden your dependents in the event of you passing away, do you? 

3. Have a Strong Debt Strategy:

• Home Loans / Education Loans

Not all debts/loans are equal. It is essential for you to know which loan is drawing the most interest from you. Also some loans are useful, such as home loan as you have access to an appreciating physical asset or a educational loan from which you stand to appreciate the biggest asset of them all, yourself! Plus it does not hurt that they have tax deduction benefits.

• Personal / Credit Card Loans

Personal/Credit Card loans should be ticked off at the first available opportunity, simply because they have high interest rates. If you had to choose between investing into a fixed income product or pay off a high interest loan, you should ideally opt for repayment. Interest saved is interest earned after all! 

4. Know what you want:

It is said “If you don’t know where you are going, well then, any road will take you there”. It is better to have well defined goals. A goal helps you focus because the end objective is clear. For example, it is probably not enough to say, “I will save some money for that amazing Europe vacation that I always dreamed of.” It needs a lot of planning and finances. You not only need to know the destinations you will visit, you also need to the travel routes you will need to take, how much funds you will need, where all do you intend to spend and so on so forth. The more crisp your goal is, the better actionables you will be able to achieve.

 

5. Invest in yourself:

In today’s highly dynamic world, the word of the day is “reskilling”. As a professional, now more than ever, you have to stay on top in your industry by constantly upgrading your skill sets. Therefore always ensure you have enough kitty set aside so that you can opt for those special courses which will give you that edge in your profession.

While not all resolutions can be worked on simultaneously, it is important that you start with some and even more importantly that you stick to them. Give your resolutions time lines so you know what to prioritize. And work towards strong finances and a worry free New Year 2018!

 

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As we shall say, so we shall do…

Sixth bi monthly RBI Monetary Policy FY17

The RBI monetary policy committee ( MPC ) reiterated what it has indicated in its last meeting in December – concerns around core inflation continue to remain with seasonal impacts on currently low inflation on items like vegetables likely to go away over a period of time, a strong global recovery that could create inflationary risks though higher prices of commodities including oil, volatility in global currencies on the back of rate hikes in some developed economies and some pass through of the HRA component of the 7th pay commission implementation.

Whilst none of this was really new, there continues to be a view that what the MPC says and what they will do are different from each other. With two consecutive policies that have reiterated the same thing, we believe that markets will finally believe that the MPC means what they say, and their actions will be consistent with the same.

It is therefore critical to continue to remember that managing inflation in the 4-5% pa range continues to be the number one priority of the RBI , and therefore decisions are likely to be taken keeping this in mind, more than other data points.

Your investments

The RBI also moved its policy stance to ‘ neutral ‘ from ‘accommodative ‘ which possibly means that the interest rate cuts from its side are probably coming to an end. This may mean that investment strategies that were driven around interest rate cuts need to be pared down. However, we need to remember that a neutral policy does not mean that interest rates are going to go up on bonds and fixed income instruments, so there is no need for a complete change in investment strategy on fixed income side. A strong global recovery as indicated in the policy statement ,is actually excellent news for the Indian economy, as a global growth environment has traditionally been positive for Indian companies, and therefore one should expect corporate earnings to get better going forward. The MPC has also indicated that they expect the economy to start showing a recovery going forward, so investments in equities could be enhanced for longer term investors. One also needs to remember that even thought RBI has probably stopped cutting interest rates, banks would possibly continue to cut loan rates as the transmission of the 1.75% rate cuts have only been about 0.85% to 0.9%, meaning that corporate India could continue to see lower loan rates going forward, helping their bottomline.

Your loans

With the banking sector flush with funds, and transmission only partially done, you can expect to see loan rates continue to drop for individual borrowers as well. It is a good time to refinance your loans, especially your home loan, in case you have not done so already. Be choosy about the loan provider that you use, as different variants of loans available could mean that you need to pick what works best for you.

April 6 is the next date to watch for the MPC meeting – expect some volatility in bond and currency markets till then, as they react to this shift to a neutral stance as well as other global events.

 

 

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IPO under the lens – PNB Housing Finance

PNB  Housing Finance is the 5^th largest Housing Finance Company by loan portfolio as of 30 Sep 2016. They offer loans for purchase, construction, extension or improvement of residential properties or plots, Non housing loans in the form of Loan Against Property (LAP), loan for construction of Non Residential premises and general purpose loans to developers for on-going projects.

Data Source: JM Financial

Post issue the share of PNB will reduce to 39% from 51% at present. In case of Destimoney, which took 49% stake in 2009, the stake will reduce to 38%.

Strengths

1. Strong distribution network:

Their business is spread across Southern, Western and Northern regions of India. As on31 st March, 2016, 40% of their loan portfolio originated from the Northern region and ~30% each from western and Southern regions.

2. Stable operating model and centralised operational structure:

Their processing hub is designed to support additional branches which will enable them to deepen penetration. Their branches, processing hubs provide centralised and standardised back end and administrative activities, payments and processing of their business. This enables timely collection of funds, better fund management and proactive alerts to their collection department in the event of an overdue.

3. Diversified and cost effective funding source:

As on 31 Mar, 2016 their lenders include 22 public and private sector banks, 17 mutual funds, 16 insurance companies, 553 Provident funds and 122 pension funds. This has resulted in an overall low cost of borrowing and allowed them to maintain sufficient interest margins.

4. Prudent credit underwriting, monitoring and collection process

This has helped them maintain growth in the loan portfolio without compromising on credit quality. They have a credit appraisal team of experienced professionals who perform credit checks to minimise losses. They also have subject matter experts in several areas of underwriting, legal, technical valuation and collections.

Risk factors

1. If they are unable to manage the growth of their loan portfolio effectively it will impact their business
2. Interest rate volatility may impact their business performance
3. They face risk of default and non-payment by customers, in particular self-employed customers, who constitute 23.76% of their total loan portfolio as on 31 Mar 2016 due to factors like change in interest rates, regulations or other factors impacting macroeconomic or global environment.
4. Due to increased competition and deregulation of interest rates, housing loans are becoming standardised and lower processing fees and monthly reset options are becoming increasingly popular decreasing spreads.

Valuation

Peer Comparison

The Price to Book ratios look reasonable compared to peers.

Data Source: DRHP

There have been stable Net Interest Margins, reducing cost to income ratios and decreasing gross NPAs to total loan portfolio which is positive.

Our opinion: Subscribe for the long term

Its reasonable valuations, strong loan growth and strong distribution network are key factors. However, already existing competition could be a challenge. Investors with long investment horizon can subscribe to this issue as projects like ‘smart cities’ and ‘Housing for all by 2020’ may positively contribute to growth of PNB hosing Finance.

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RBI maintains status quo

RBI in its monetary policy review earlier today, decided to keep rates unchanged as expected by most economists and the financial markets. However, he did provide some interesting insights that could impact your personal finances.

Your investments

Whilst it maintained status quo, it indicated that there could be an upside risk to inflation, as has been evidenced in the last couple of months. A good monsoon, higher oil and commodity prices and consumption demand driven by the 7^th pay commision could drive this upside risk to inflation. Whilst it maintained that the policy would continue to be accommodative ie there could be a possibility of rate cuts going forward, this will be driven by data going forward. Thus, adding exposure to fixed income portfolios dependent on the falling interest rates may need to be tempered, and accrual and short term/mediumd term strategies may be more suitable to lock into current yields. On the equity front, whilst consumption driven growth could be positive and an early signs of a recovery are evident , significantly higher oil prices and inflation could start to impact corporate earnngs that are just starting to show early signs of a recovery. Adding exposure to equities will also need to be tempered with slowing global growth data. Thus, a blended portfolio of equities bought with a long term view, and fixed income focussed on accrual strategies is most suited in this environment. The rupee could be negatively impacted by the potential outflows on account of FCNR maturities in September, and the intense debate on whether or not Rajan will get a second term as RBI governor.

Your loans

Since it has only been two months since the Marginal Cost of Lending Rate has adopted by banks, it will take some more time for RBI to be able to evaluate its actual impact on the ground. As per early observations, the transmission on the ground via cut in lending rates by banks has been slower thus far, but increased pressure on banks for tranmission is likely to result in this happening faster going forward.

What did RBI do?

The RBI in its policy review kept rates unchanged with Cash Reserve Ratio at 4%, Repo rate at 6.50% and Reverse repo at 6%.

On the liquidity front RBI had said it would provide some durable liquidity in the last policy review which was held in April and it did as promised. RBI will continue to provide liquidity as required in the system. RBI had also mentioned last time that there is an intention to move from a liquidity deficit to a liquidity neutrality position. RBI has not attached any time line to it and said it will depend on the market.

The FCNR B deposits that are due to mature in September have been matched with forward positions. RBI will intervene if excess currency fluctuation happens. On the issue of cleaning up of books of banks RBI mentioned that it will not reverse its action and will stick to its original target of March 2017.

What to expect going forward

Further policy action will depend on inflation numbers, oil prices, US Fed actions  and monsoons which are expected to be above average. Also withthe governor’s term with RBI ending in September, there is no clear indication whether he will continue for another term. This is likely to continue to be an area of intense debate till finally settled, which is unlikely immediately.

Watch out for the next policy on 9 August 2016.

 Image credit: www.canstockphoto.com

 

 

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Liability management = cash flow management

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.

Image Source: www.paisabazaar.com

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.

Image Source: www.freepik.com

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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India GDP slowing down – what should you do?

You have been probably watching reports over the last few days indicating a slowdown in the Indian economy. Some of the lead indicators like automobile sales also seem to be pointing towards that.

While this possible slow-down may have created a certain level of anxiety, you need to remember that the slowdown that is being referred to, still estimates a growth rate of seven per cent to eight per cent per annum, projecting India as one of the fastest growing economies in the world. Other parts of the world including Europe and the US which have a slow paced growth, are exhibiting signs of a further slow-down. Lets take a look at the options available to you during the slowdown.

Revisit your financial goals:

In case you have any of your goals that are likely to be reached over the next 24 to 36 months, ensure that the funds required for these goals are in fixed income instruments such as bank deposits, short term mutual funds or liquid funds. For example, if you have been saving up for the down payment of a home or sending your child to his or her college of choice in the immediate future and have the money in equities, you do not want to jeopardize that plan due to a sharp stock market correction. If your financial goals are long-term in nature, you need to ensure that your overall asset mix is appropriate for your targeted portfolio returns, and rebalance if necessary.

Ensure that you have 10 per cent of your portfolio in gold:

With gold prices close to lifetime highs, a large number of investors who do not have gold in their portfolio are very hesitant to include gold into their portfolios at these prices. Gold needs to be viewed as a protection for the rest of your portfolio. If you are hesitant to buy gold at these prices, you could consider a systematic exposure to gold through using systematic investment plans (SIPs) in gold mutual funds.

Prepay your Loans:

With returns from fixed deposits, fixed maturity plans and short term bonds at attractive levels, it is very tempting to lock your money at these rates. If you have outstanding loans, restrict your fixed income exposure to emergency funds and use excess funds to prepay your loans. Remember that most of the loans tend to be of the reducing balance in nature while returns from the fixed income instruments are compounded. You may therefore need to take the help of your financial planner to decide whether to prepay your loan or buy that fixed deposit or mutual fund instead.

Keep some money handy for a sharp correction:

In case there is a correction in excess of 10 per cent in the equity markets, make sure that you have some cash handy to increase your equity exposure through buying blue chip stocks, index funds or diversified equity funds with good track records.

Keep adding if the markets fall beyond that as well, so that you can get the benefit of lower equity prices for your long term equity portfolio.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age  on 11^th June 2011 .

 

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Should I prepay loan or invest in equities?

WITH THE withdrawal of RBI’s accommodative monetary policy and a further rate hike in the next review meeting in mid  September, interest rates on retail loans have started to move upwards over the last few weeks. Both car loans and home loans have already got more expensive.

This has simultaneously been accompanied by rising stock markets in India and overseas, in spite of a fairly mixed news flow.

With interest rates overseas continuing to move at historic lows and no hint of a hike in the sight, liquidity has been gushing in from FIIs, who are taking stock markets to significantly higher levels.

In this environment, the crucial question that an investors having excess liquidity and outstanding debt  faces: Should we prepay or invest?

Unfortunately there is no one size fits all solution. The decision needs to be driven by cost of loan and financial goals:

Cost of loans

Unsecured loans such as personal loans and credit card outstanding tend to be much more expensive than car loans and home loans. It would, therefore, be prudent to repay these loans rather than invest.

Home loans and car loans tend to be relatively cheaper, though most of the loans over the last few years have been of a floating rate nature or with teaser rates wherein the rates are fixed for a limited period of time.

There is an expectation that interest rates could move up substantially from current levels as banks raise their floating rate bench-marks when faced by tighter liquidity and increased demand for funds.

In this scenario, it would be a good idea to prepay loans that have been taken recently, as the interest component on these loans would make up a significant component of equated monthly instalments.

For loans that have finished a significant portion of their tenor, it may be prudent to continue the loans especially if there are significant prepayment penalties involved. Also remember that most of these loans are in the form of reducing balances so the actual interest costs would need to be worked out with the help of your financial planner.

Financial goals

Most investors tend to have multiple financial goals such as retirement, children’s education, medical exigency coverage, etc.

However, our experience has been that investors could be at different stages of achieving their financial goals. For investors, who are on plan as far as achieving financial goals are concerned, it would be prudent to prepay the loans to avoid any surprises through loan interest rates going beyond estimates.

For investors who are running significant gaps on their investment targets against financial goals, they may be forced to get more aggressive and invest in higher yielding securities like equities to try to get closer to their financial goals. While using leverage through continuing loans and investing in equities simultaneously comes with its own risks, this may be necessary unless investors are willing to compromise on their financial goals.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Deccan Chronicle  on  11 ^th September 2011 .

 

 

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