To hold on to it or to let it go?

“The only real battle in life is between hanging on and letting go.”

― Shannon L.

                

             

This is exactly what you need to ask yourself while reviewing your existing set of investments.

Once you have decided your goals, you need to review your existing investments. This will give you a sense on which is the ones that are not doing well so that they can be replaced. It will also help you understand based on your asset allocation and goals that going forward where you need to invest so that your investments are in line with your goals.

You may be having some investments in stocks, Mutual funds, Real estate, fixed deposits, gold, etc. Or there are even chances that your investments may be concentrated in some of the assets.

Here’s what you can do

Stocks and Mutual Funds

If you have stocks in your portfolio and you understand bit of markets then you can decide based on what is happening in the economy, what are the sectors that are outperforming or under performing at that point in time, the demand environment, the credit environment, etc.  and accordingly decide whether you want to keep it or sell it.

A better way to do this would be by investing through Mutual Funds. There you will benefit from the expertise of the fund manager. It will also save you from micromanaging at security level. With the introduction of direct plans, you can now invest by paying a lesser expense ratio compared to a regular plan. Mutual funds can be used to take exposure in equity, both domestic and international, debt, mix of debt and equity through balanced or Monthly income plans, commodities and index.

Fixed Deposits

If you have Bank or company Fixed Deposits or Post office investments then you need to see the rate that you are getting on your FD and what is the interest rate expectation going forward. If your FD is due to mature shortly and there is expectation that interest rates are going to fall, similar to the current scenario, then either you lock in now at the existing higher rates or when your FD matures you can reinvest it in some other investment instrument depending on your goals. In FDs also there are Bank FDs and Company FDs. Company FDs offer comparatively higher returns but remember to focus on quality

Real estate

It’s not a great idea to lock in 70 to 80% of your wealth in real estate. Real estate has its own cycles of boom and depression. It’s difficult to sell these at the price of your choice. They are certainly not assets which can be sold immediately due to their illiquid nature. Doing so will need you to settle at lower prices. In real estate also there are some pieces which appreciate faster based on demand environment, location, etc. while some of them do not see much appreciation again due to unfavorable location, lack of demand, etc. Therefore, try to sell that piece of your property which is not yielding good returns and channelize your investments in some liquid and appreciating investments.

Gold

Indians have emotional value attached to gold. These days there are options like sovereign gold bonds and Gold ETFs which can fetch you returns both in the form of value appreciation and interest. Going forward you can start this paperless form of investing into gold.

Remember,

Keep the investments which are doing fine and have a good future outlook, and allocate them to your goals. Give up the ones which are loss making and you do not see a scope of recovery any time soon. It’s important to cut losses when required.

Last but not the least, remember why you are investing – don’t miss the forest for the trees.

Image credit: www.fotolia.com, financialtribune.com, www.colourbox.com, pondicherryurbanbank.in, www.etastar.com

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Budget2016 and your money

 

Reams of paper have probably been dedicated to the Union Budget already, but here is a detailed analysis after going through the fine print in terms of Budget 2016 and its impact on your personal finances.

Your Income

1. House Rent Allowance change: This has been hitherto a lesser used deduction as it comes with multiple conditions. Section 80GG allows individuals to claim a deduction in respect of house rent paid. The limit has gone up from Rs 24,000 previously to Rs 60,000 subject to following conditions:

a.If the person is either self-employed or salaried but does not receive deduction for       HRA from the employer

b.Does not own a residential property in the city in which he is staying on rent.

c.If the tax payer owns property at any place other than the one mentioned above, he        should not be claiming benefit of the property as self occupied. That property should be deemed to be let out.

To claim this deduction the tax payer has to furnish a declaration in Form 10 BA

The deduction allowed under section 80GG for payment of rent shall be least of the following:

1. 5,000 per month
2. Rent paid less 10% of the total income
3. 25% of the total income of the tax payer for the year.

Your Expenses

1. Tax collection at Source introduced – TCS of 1% on purchase of luxury cars of value greater than Rs. 10 lakhs and purchase of goods and services in cash exceeding Rs. 2 lakhs is now being levied. This does not change the price of the product but will create a trail of transactions in cash of high values, targeting cash usage.
2. Increase in service tax – Service tax has been increased by 0.5% on all taxable services, with effect from 1 June 2016. As a result, expect the costs of all services to go up.
3. Infrastructure cess- 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars and 4% on high engine capacity vehicles and SUVs, will mean that cars will become more expensive.
4. Excise duty on branded ready made garments – garments with a retail price of Rs. 1000 and above has changed from Nil to 2% without input tax credit. Thus, expect garments to become a wee bit more expensive.
5. Excise duty on tobacco hiked – expect cigarettes to be more expensive as a result.

Your Investments

1. Long Term Capital Gains tax on equities and debt investments did not see any change – This is positive for investors, as there were fears around tax being introduced on equities or the holding period for equities being changed. Status quo is good news.
2. New Pension Scheme (NPS) – There are 3 types of withdrawals currently allowed under the NPS.
3. Normal Superannuation – Lump sum withdrawal on retirement, which was 60% earlier has been changed to 40% now. Earlier this withdrawal was taxable. Now the government has proposed withdrawal upto 40% to be tax free. The balance 60% can be used  for purchasing annuities, to make the annuity portion tax free as well. Thus, the NPS is far more attractive as an instrument to be used for your retirement goals now, especially as its ability to permit equity exposure enables you to get the wealth creation benefit of equities over the long term.
4. Upon death- The entire 100% would be paid to the nominee/ legal heir and there won’t be any purchase of annuity. These entire 100% proceeds are tax free.
5. Exit before normal superannuation( 60 years) – At least 80% of the acculturated pension wealth of the subscriber should be utilized for purchase of an annuity and remaining 20% can be withdrawn as lump sum. Considering that this is a long term retirement product, be sure to use the NPS to fund your retirement goals, as early withdrawals make it less flexible.
6. Other pension products like EPF and superannuation – There has been an attempt to bring all pension products on the same page in terms of taxation. Therefore, EPF and superannuation will also permit 40% of the corpus withdrawn to be tax free. The interest earned on the balance 60% of the contributions made post April 1, 2016 will be subject to tax unless it is used to purchase an annuity.

There is also proposed a monetary limit for contribution of employers to a recognized Provident and superannuation fund of Rs. 1.50 Lakh per annum or 12% of employer contribution, whichever is less, beyond which the same will be taxable in the hand of the employee. You could see smaller contributions towards the EPF from employers going forward as a result, and voluntary Provident Fund contributions could also reduce as a result.

4. REITS (Real Estate Investment Trusts) and InvITs ( Infrastructure Investment Trust) – Real Estate Investment trusts are listed entities that primarily invest in leased office and real assets allowing developers to raise funds by selling completed buildings to investors and listing them as a trust. Previously REITs did not take off due to taxation challenges. This budget has done away with Dividend Distribution Tax, thus enabling exposure to commercial real estate at lower values.

Expect Infrastructure Investment Trusts to also take off as a result of this change in dividend distribution tax provisions.

5. Gold Bonds- Long term capital gains from the sale of gold bonds will continue to be taxable but now eligible for indexation benefits. This facilitates taking exposure to gold in a paper form.

The budget has also proposed to make interest and capital gains from the gold monetization scheme tax free. Thus yields from gold are possibly now more attractive than rental yields from residential real estate, considering that the returns are tax free.

6. Measures for deepening of corporate Bond Market-

a. LICof india will setup a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising credit rating of bonds floated by infrastructure companies.

b.Development of an online auction platform for development of private placement market in corporate bonds.

c.A complete information repository for corporate bonds covering both primary and     secondary market segments will be developed jointly by SEBI and RBI.

d.A framework for an electronic platform for Repo market in corporate bonds will be    developed by RBI.

This will enable investors to invest in corporate bonds and give them another option to add fixed income exposure to their portfolio.

7. Fiscal target to be maintained at 3.5% – With the government sticking to its target of 3.5% of GDP for FY 17, fiscal discipline has been adhered to for now. This could lead to drop in bond yields and could be particularly positive for duration funds or portfolios having longer duration bonds. Transmission of falling interest rates could finally be a reality.

Your Taxes

1. There has been no major change in income tax slabs , for individuals earning upto Rs 1 crore.
2. Surcharge- There has been an increase in Surcharge on income above Rs. 1 Crore from 12% to 15%.

For an individual below 60 years with an income above 1 Crore ( eg. 1.1 Crore), he will end up paying approximately Rs 91,000 more due to the 3% increase in Surcharge.

3. Rebate- Under Section 87A, for individuals with income not exceeding Rs. 5 lakhs, the rebate has increased from Rs. 2,000 earlier to Rs. 5,000.

3. Dividend Distribution Tax- The amendment in dividend distribution tax law is applicable to dividend declared under Section 115O. The section is applicable to domestic companies and it is proposed to amend the Income-tax Act so as to provide that any income by way of dividend in excess of Rs. 10 lakh declared by such domestic company shall be chargeable to tax at the rate of 10%.The above amendment will have no impact on the dividends received by the Mutual Fund unit holders as dividend paid by a mutual fund scheme to a unit holder is covered under Section 115R of the The Income tax Act, 1961. This will hit investors drawing higher dividends but since it is not applicable to dividends from mutual funds it’s a relief.
4. Presumptive Tax – This scheme is available for small and medium enterprises with turnover not exceeding 1 crore rupees. These were free from getting audited and maintaining detailed books of account and could pay tax at 8% .This turnover limit has increased to Rs. 2 Crore.

Also under the presumptive taxation for professionals with gross receipts up to Rs. 50          Lakh, the presumption of profits has been introduced to 50% of gross receipts.

This should result in significant time saving and costs for professionals and small business owners. However, remember to read the fine print on this clause.

6. Reduction in tax slabs for companies with business income upto Rs 5 crores – The path to reduction of corporate tax rates has begun with a 1% reduction in tax rates for smaller businesses. Expect more to follow going forward.
7. Undisclosed income – A window from 01 June 2016 to 30 Sep 2016 has been introduced for people to pay 45% on their undisclosed domestic income. This undisclosed income will not be subject to any scrutiny if done within this window. This is an attempt to garner additional revenues and solve the challenges of black money.

Your Loans

1. Additional deduction of Rs. 50,000- For first time home buyers an additional deduction of Rs.50,000 on top of already existing Rs. 2 lakh has been proposed for loans upto Rs. 35 lakh sanctioned during the next financial year subject to the value of property not exceeding Rs. 50 lakh.

All in all, it’s a budget that will probably not change your money life significantly – but it has a little here and a little there. “Fortunately, there is a sane equilibrium in the character of nations. As there is in that of men.”

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Should NRIs invest in a commercial property?

NRIs looking for higher rental yield should consider investing in a commercial property in India. Here is a look at the pros and cons of such an investment and advice on what to do and what to avoid while making this investment.

Image Source:www.bangalorebest.com

NRIs keen to invest in a property in India should evaluate the prospects of the commercial (office) segment. This segment offers several advantages vis-a-vis the residential segment. The rental yield is currently higher at 7-9% p.a. compared to the 2-3% p.a. yield that the residential segment offers. Rental yields drop when one comes to smaller commercial spaces though, but are still likely to be higher than those offered in the residential segment. Whereas residential real estate in India is caught in a downturn which may last for quite some time owing to the high inventory levels in most leading cities, there is greater equilibrium between demand and supply in the commercial segment, and rentals are inching up in most leading metros. As the economic recovery gathers momentum, as is widely expected to happen in 2016 and 2017, the demand for commercial space should increase further.

This segment offers several advantages vis-a-vis the residential segment. The rental yield is currently higher at 7-9% p.a. compared to the 2-3% p.a. yield that the residential segment offers.

Another advantage of investing in a commercial property is that NRIs can use it to run their own venture if and when they return to India. However, be warned that the capital appreciation in office property tends to be lower than in residential property over the long term. And if you are looking for a loan to buy the property, that too may be harder to get than a loan for purchasing a residential property. While the Indian economy is on the cusp of a cyclical recovery, be warned that a downturn in the economy has a negative impact on the demand for office space. The office space you have bought could remain vacant or you may find it difficult to revise rentals upward.

Capital appreciation in office property tends to be lower than in residential property over the long term. And if you are looking for a loan to buy the property, that too may be harder to get than a loan for purchasing a residential property.

Outlook for office segment

According to CBRE South Asia’s third-quarter 2015 report on the office segment, sentiment within this segment is positive, with the ongoing economic recovery supporting the demand for office space. Leasing demand is expected to be steady in the coming months. Demand will be driven chiefly by IT-ITeS and banking and financial services. To a lesser extent, it will also come from manufacturing and engineering, e-commerce, research and consulting and pharma companies.

According to CBRE South Asia’s third-quarter 2015 report on the office segment, sentiment within this segment is positive, with the ongoing economic recovery supporting the demand for office space.

While demand in the central business districts of all the major cities will remain strong, there will also be demand in the peripheral markets from occupiers looking for cost-effective spaces.

The report from CBRE adds that demand for quality office buildings will be high and such spaces are likely to get leased out even before they are completed.

What to do? And what to avoid?

When buying commercial property, choose a location where the pace of economic growth and job creation is likely to be high in the future. While capital values tend to be lower in the peripheral areas of a city, the availability of empty land in the vicinity means that there is no limit on the supply that can come in. This has the potential to cap the growth in rentals in these areas.

When buying commercial property, choose a location where the pace of economic growth and job creation is likely to be high in the future.

Check the infrastructure in the locality that you choose to invest in. The area should be well connected by highways and possibly a Metro or rail link. The inner roads in the locality should be in good shape. The building that you choose to invest in should be situated on a wide road so that it is easily accessible.

Next, the NRI should check the credentials of the builder in whose project he intends to invest. One way to do so is to have a trusted source visit a couple of his older projects and speak to owners in those buildings. They will be able to tell whether the builder had delivered the project on time and had adhered to the quality standards that he had promised. Check out the quality of maintenance in his older projects. Either the developer himself or a maintenance agency could be handling this task. The quality of maintenance is crucial since it determines the ability of a building to attract new tenants.

Next, the NRI should check the credentials of the builder in whose project he intends to invest.

NRIs should get a lawyer to do the legal due diligence. This includes determining that the developer has acquired and is the rightful owner of the land on which he is developing the property, and has obtained all the statutory clearances for developing the property.

NRIs should get a lawyer to do the legal due diligence.

The stage of development at which the NRI invests in a commercial property also determines its level of risk. If he invests in a property that is under construction, he is likely to get more capital appreciation in it. But he will also have to face what is known as development risk—the risk that the project may be delayed or may not be completed at all. On the other hand, if he invests in a property that is completed but not rented, or completed and rented out, he is likely to get lower capital appreciation in such a project. But his risks will also be much less.

If he invests in a property that is under construction, he is likely to get more capital appreciation in it. But he will also have to face what is known as development risk—the risk that the project may be delayed or may not be completed at all. On the other hand, if he invests in a property that is completed but not rented, or completed and rented out, he is likely to get lower capital appreciation in such a project. But his risks will also be much less.

Owing to the slowdown in the real estate market and their inability to raise cash either from buyers or banks, developers nowadays offer assured return schemes on their commercial projects. It would be best for NRIs to avoid such schemes . In fact, the very offer of such a scheme indicates that the developer is probably in a tight corner financially. To avoid the risks that such schemes carry, NRIs should instead invest in a developer who has a strong track record and has the financial wherewithal to complete his project.

NRIs should also avoid investing in the soft launch of a commercial project. Developers offer a discount of 7-10% to investors who invest in their project at this early stage. This is the stage when the developer may not have completed the acquisition of land or acquired the permissions for developing the project. Due to the high risk involved, NRIs should avoid investing at this stage as well.

NRIs should also avoid investing in the soft launch of a commercial project. Developers offer a discount of 7-10% to investors who invest in their project at this early stage. This is the stage when the developer may not have completed the acquisition of land or acquired the permissions for developing the project. Due to the high risk involved, NRIs should avoid investing at this stage as well.

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Is this a good time for NRIs buy a residential property in India?

NRIs may want to buy a residential property in India for self-use—for the time when they decide to return to the country eventually. Whilst buying residential property in India, especially in the metros, has become an expensive proposition, it makes sense for NRIs to make this purchase in advance only if they are absolutely sure about the fact that they will return, and are clear about the geography and amenities that they will require on their return.

 

 

Image Source:   dir.indiamart.com

Image Source:   dir.indiamart.com

With the residential real estate segment witnessing a slowdown, there are multiple bargains and discounts to buy homes.

Long-term investors, having an investment horizon of 10 years plus, may go ahead and invest in residential real estate despite the current slowdown. Since the Indian economy is growing more rapidly than the developed countries of the West, NRIs are likely to earn a higher return on their real estate investment in India than abroad.

Long-term investors, having an investment horizon of 10 years plus, may go ahead and invest in residential real estate despite the current slowdown.

Outlook of the residential sector

The real estate sector in India continues to witness a slowdown, whose intensity, however, varies from one geography to another. Markets in the North, such as the NCR, have been affected more. When the bull market was on, these markets had witnessed higher price appreciation. These are also markets that were more investor-driven. On the other hand, markets in the South, such as Bangalore, where the price appreciation was more moderate, and which are more end-user driven, have been affected less.

Owing to the slowdown, developers are now focusing more on project completion and delivery rather than on launching new projects. A recent report from Cushman and Wakefield , an international real estate consultancy, states that between January and September 2015, 77,900 residential units were launched in the top eight metros of the country, a decline of 36% over the corresponding period last year.

A recent report from Cushman and Wakefield , an international real estate consultancy, states that between January and September 2015, 77,900 residential units were launched in the top eight metros of the country, a decline of 36% over the corresponding period last year.

Delhi NCR and Bengaluru together accounted for 35% of the total launches across the top eight cities. Delhi NCR witnessed a drop of 18% in new launches compared to the previous year, but still contributed 19% of total launches during the year. In 2015, Pune overtook Mumbai, Kolkata and Chennai in total units launched, although it barely witnessed an increase over the last year, suggesting a steep fall in new launches in other cities. Ahmedabad and Hyderabad were the only cities that recorded significant increases in the number of units launched.

Capital values showed a mixed trend across cities based on local market forces. In September 2015, capital values in Bengaluru saw y-o-y appreciation in four sub-markets in the range of 3-7%. Prices remained stable in the mid-segment in most sub- markets since September last year. Delhi-NCR, on the other hand, witnessed softening of capital values in two of its sub- markets by 5%, namely in South-East and South-Central Delhi. Gurgaon and Noida witnessed stable capital values in the mid segment. In Mumbai, quoted capital values have largely remained range bound in the last one year. However, the closing value of transactions, after negotiation and taking into account the schemes offered by developers, is definitely at a discount, thereby indicating that prices are under pressure.

The report however also highlights that in the long run demand for housing will far outstrip supply in most major metros. Due to this supply shortage, capital appreciation is likely to be good over the long haul.

The report however also highlights that in the long run demand for housing will far outstrip supply in most major metros. Due to this supply shortage, capital appreciation is likely to be good over the long haul.

Do’s and don’ts

 

Image Source: www.silcotek.com

Many developers hold exhibitions in foreign destinations aimed at wooing NRI buyers. The latter should not get taken in by the jazzy presentations and brochures of developers. Instead, they should get a friend or relative in India to visit the project site and offer feedback.

NRIs should not get taken in by the jazzy presentations and brochures of developers. Instead, they should get a friend or relative in India to visit the project site and offer feedback.

If the NRI buyer plans to return to India eventually, he should buy the property in the city where he intends to settle down. It is also preferable to buy in the city where the NRI has a relative or friend who can look after the property and manage it.

It is also preferable to buy in the city where the NRI has a relative or friend who can look after the property and manage it.

Like local buyers, NRIs should do the legal due diligence. They should hire a lawyer to find out whether the developer is the rightful owner of the land on which he is developing the project. Land acquisition for the project should be complete before he invests in it. The developer should also have obtained all the clearances for developing the project.

NRIs should do the legal due diligence.

The NRI buyer should get his representative to visit the builder’s past projects and check whether he had delivered them on time, and whether he had delivered the promised facilities and specifications.

If the NRI buyer is buying the property primarily as an investment (for rental yield and capital appreciation), he should choose a city where a lot of economic development and job growth is expected in the future. The project should be located at a convenient distance from an office or manufacturing hub and should be well connected to it. This will make it easier for the NRI owner to find tenants.

If the NRI buyer is buying the property primarily as an investment (for rental yield and capital appreciation), he should choose a city where a lot of economic development and job growth is expected in the future.

Owing to the slowdown, most developers, especially in the North, are facing a cash crunch. Consequently, project delays have become common. To circumvent what is known as “development risk”, NRIs should consider investing in completed projects.

To circumvent what is known as “development risk”, NRIs should consider investing in completed projects.

Developers are offering discounts to push sales amid the slowdown. NRIs should not agree to pay the initial price quoted by the builder but should get their representative to negotiate and get the best possible price.

NRIs should also avoid paying a high percentage of the total cost of the apartment upfront, even if the developer offers a discount on such payment schemes.

NRIs should also avoid paying a high percentage of the total cost of the apartment upfront, even if the developer offers a discount on such payment schemes.

Finally, an NRI investing in residential real estate in India should not expect quick and easy returns. He should have an investment horizon of at least 10 years if he wants to enjoy a reasonable return on his investment.

 

 

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Is this a good time for NRIs buy a residential property in India?

NRIs may want to buy a residential property in India for self-use—for the time when they decide to return to the country eventually. Whilst buying residential property in India, especially in the metros, has become an expensive proposition, it makes sense for NRIs to make this purchase in advance only if they are absolutely sure about the fact that they will return, and are clear about the geography and amenities that they will require on their return.

Image Source:   dir.indiamart.com

Image Source:   dir.indiamart.com

With the residential real estate segment witnessing a slowdown, there are multiple bargains and discounts to buy homes.

Long-term investors, having an investment horizon of 10 years plus, may go ahead and invest in residential real estate despite the current slowdown. Since the Indian economy is growing more rapidly than the developed countries of the West, NRIs are likely to earn a higher return on their real estate investment in India than abroad.

Long-term investors, having an investment horizon of 10 years plus, may go ahead and invest in residential real estate despite the current slowdown.

Outlook of the residential sector

The real estate sector in India continues to witness a slowdown, whose intensity, however, varies from one geography to another. Markets in the North, such as the NCR, have been affected more. When the bull market was on, these markets had witnessed higher price appreciation. These are also markets that were more investor-driven. On the other hand, markets in the South, such as Bangalore, where the price appreciation was more moderate, and which are more end-user driven, have been affected less.

Owing to the slowdown, developers are now focusing more on project completion and delivery rather than on launching new projects. A recent report from Cushman and Wakefield , an international real estate consultancy, states that between January and September 2015, 77,900 residential units were launched in the top eight metros of the country, a decline of 36% over the corresponding period last year.

A recent report from Cushman and Wakefield , an international real estate consultancy, states that between January and September 2015, 77,900 residential units were launched in the top eight metros of the country, a decline of 36% over the corresponding period last year.

Delhi NCR and Bengaluru together accounted for 35% of the total launches across the top eight cities. Delhi NCR witnessed a drop of 18% in new launches compared to the previous year, but still contributed 19% of total launches during the year. In 2015, Pune overtook Mumbai, Kolkata and Chennai in total units launched, although it barely witnessed an increase over the last year, suggesting a steep fall in new launches in other cities. Ahmedabad and Hyderabad were the only cities that recorded significant increases in the number of units launched.

Capital values showed a mixed trend across cities based on local market forces. In September 2015, capital values in Bengaluru saw y-o-y appreciation in four sub-markets in the range of 3-7%. Prices remained stable in the mid-segment in most sub- markets since September last year. Delhi-NCR, on the other hand, witnessed softening of capital values in two of its sub- markets by 5%, namely in South-East and South-Central Delhi. Gurgaon and Noida witnessed stable capital values in the mid segment. In Mumbai, quoted capital values have largely remained range bound in the last one year. However, the closing value of transactions, after negotiation and taking into account the schemes offered by developers, is definitely at a discount, thereby indicating that prices are under pressure.

The report however also highlights that in the long run demand for housing will far outstrip supply in most major metros. Due to this supply shortage, capital appreciation is likely to be good over the long haul.

he report however also highlights that in the long run demand for housing will far outstrip supply in most major metros. Due to this supply shortage, capital appreciation is likely to be good over the long haul.

Do’s and don’ts

Image Source: www.silcotek.com

Many developers hold exhibitions in foreign destinations aimed at wooing NRI buyers. The latter should not get taken in by the jazzy presentations and brochures of developers. Instead, they should get a friend or relative in India to visit the project site and offer feedback.

NRI’s should not get taken in by the jazzy presentations and brochures of developers. Instead, they should get a friend or relative in India to visit the project site and offer feedback.

If the NRI buyer plans to return to India eventually, he should buy the property in the city where he intends to settle down. It is also preferable to buy in the city where the NRI has a relative or friend who can look after the property and manage it.

Like local buyers, NRIs should do the legal due diligence. They should hire a lawyer to find out whether the developer is the rightful owner of the land on which he is developing the project. Land acquisition for the project should be complete before he invests in it. The developer should also have obtained all the clearances for developing the project.

NRIs should do the legal due diligence.

The NRI buyer should get his representative to visit the builder’s past projects and check whether he had delivered them on time, and whether he had delivered the promised facilities and specifications.

If the NRI buyer is buying the property primarily as an investment (for rental yield and capital appreciation), he should choose a city where a lot of economic development and job growth is expected in the future. The project should be located at a convenient distance from an office or manufacturing hub and should be well connected to it. This will make it easier for the NRI owner to find tenants.

If the NRI buyer is buying the property primarily as an investment (for rental yield and capital appreciation), he should choose a city where a lot of economic development and job growth is expected in the future.

Owing to the slowdown, most developers, especially in the North, are facing a cash crunch. Consequently, project delays have become common. To circumvent what is known as “development risk”, NRIs should consider investing in completed projects.

To circumvent what is known as “development risk”, NRIs should consider investing in completed projects.

Developers are offering discounts to push sales amid the slowdown. NRIs should not agree to pay the initial price quoted by the builder but should get their representative to negotiate and get the best possible price.

NRIs should also avoid paying a high percentage of the total cost of the apartment upfront, even if the developer offers a discount on such payment schemes.

NRIs should avoid paying a high percentage of the total cost of the apartment upfront, even if the developer offers a discount on such payment schemes.

Finally, an NRI investing in residential real estate in India should not expect quick and easy returns. He should have an investment horizon of at least 10 years if he wants to enjoy a reasonable return on his investment.

 

 

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Spend Smart, Save Smart!!!!

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Make a FINANCIAL CONSTITUTION – Article by Vishal Dhawan in Khaleej Times, Dubai

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Financial Vows Every Newlywed should take..

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Do NRIs need a Financial Plan

From our experience of interactions with nonresident investors, we have found that a significant number of investments by NRIs tend to be made during their short visits to India.

During that period, when they visit their bank or speak to relatives/ friends, they get a broad view on what is happening to various asset classes – be it real estate, stock markets, or bank deposit interest rates. Between the various social obligations, time with family, and other things to do in their action packed agenda, quick investment decisions tend to be made, a large number of which tend to be long term commitments through investments in long term insurance policies/ real estate investments. Unfortunately, a large number of these investment decisions are not necessarily aligned to long term financial goals of the NRI and his family. Once NRIs return back to their home overseas, they then tend to wonder if it was the right investment decision or whether haste made waste, especially as they now get time to think about it. They wonder whether these investments fit in case they wish to return to India at a latter point in their lives or in case they wish to use these investments for children’s education or their own retirement, or to support their family members back in India.

In addition to the alignment to financial goals for self and family, it is critical to ensure that the investment products chosen allow non residents to invest in them, the repatriation restrictions (if any) on the principal amount and the gains, as well as the taxation of the gains in both India as well as the overseas location of the NRI. A lot of these answers can only be obtained when there is clarity in terms of what role the investment is expected to play for the NRI in his portfolio.

It is therefore critical to ensure that the focus on working to a financial plan is given the same degree of importance, irrespective of whether the individual is a resident or a non resident. In fact, working to a plan tends to be even more critical for a non resident than a resident, due to a legacy holdings and finances that they may have from their days in India.

A very large number of NRIs tend to leave India during a phase of their life when they have already begun their financial life – they have probably opened regular savings bank accounts in their names, bought investment products like stocks/mutual funds/insurance products/PPF accounts, or even made a real estate investment. Since there is a tendency to leave India on an overseas assignment/project, a higher education and then decide to settle down overseas, the starting point for a financial plan is to get your existing portfolio of investments in order.

 

The following steps need to be taken to ensure that the existing finances are aligned to the needs of a non resident

1. Close all resident bank accounts or convert them to nonresident ordinary (NRO) accounts. These NRO accounts can be used to credit amounts from investments that may have been made earlier, for example, dividends from stocks, rental income, amongst others.

2. Ensure that the tax returns in India have been filed. Whilst filing a tax return is not mandatory if the income is less than the taxable limit, it is important to be sure that the total income is less than the taxable limit.

3. Review your demat accounts so that they can be converted to nonresident demat accounts.

4. Change your mutual fund portfolios (if any) to a non resident status and link your NRO bank accounts to these investments.

Once the legacy portfolio of investments have been put into order, it is crucial to begin the process of setting up your financial goals through a financial plan. Whilst a financial plan may sound rather complex, it is simply a roadmap that allows you to think about what you want to achieve with your life goals and how your finances will allow you to get there.

Let me illustrate this with an example. Let’s say one of your life goals is to have your child study at a particular post graduate program. How would you design your financial plan towards this life goal?

1. Establish the current cost of the education that you want to plan for – The costs for higher education vary significantly depending on the type of college, country of education, type of program and number of years of education. The total costs of education should be established including the costs of living and travel and not just education costs.

2. Understand the impact of inflation on current costs – Inflation rates on education may vary significantly depending on whether you wish to plan an education in India or overseas. You need to establish the corpus required for the education after adjusting for inflation.

3. Choose the appropriate asset mix to achieve your target – It is critical to establish the right balance of stocks and fixed income exposure so that you understand the returns and associated risks that you will take on the portfolio in order to reach your target.

4. Choose the appropriate product/products to achieve this targeted amount – Once the above steps have been undertaken, you can move to the product selection stage where you can look at the merits/demerits of using deposits, mutual funds, insurance plans , stocks or other options to achieve your target.

5. Evaluate the progress towards your goal at regular intervals – It is important to review the progress of your financial plan to ensure that you are on track to achieve your financial goals. However, it is important that you give your products adequate time to deliver as per their designed objectives. A review once a year should be adequate.

A financial plan can be developed for all your life goals accordingly. You may need to take the help of a financial planner to integrate all your goals into a plan so that your overall finances can be aligned to all your goals. For example, your retirement plan could vary depending on whether you wish to finally settle down in India or continue to live overseas once you retire.

In addition to each of planning for your financial goals, you need your financial plan to cover:

1. Taxation of these investments in your home country – Tax treatment of investment products in the home country may be different from those in India. For example whilst there is no long term capital gains tax on equities or equity mutual funds in India, capital gains tax may be chargeable on these investments in the country that you live in. It is therefore critical to understand the tax implications at both levels as a part of your financial plan. You may need to seek the help of a tax advisor in both India and your home country, so that there is complete clarity on the same. In addition, there may be double tax avoidance treaties in place that allow you to set off the taxes you pay at in one country against taxes due in India, so that you are not taxed twice on the same amount. Your tax advisor should be able to help you on this.

2. Succession planning – Inheritance laws tend to vary from country to country. In addition, whilst India does not currently have any estate duties and taxes, a large number of countries have an inheritance tax. Since you could end up inheriting assets from your parents/ other family members and also having your assets transferred to your family members on death, it is critical to ensure that succession planning documents like wills are created keeping the inheritance laws of both countries in mind.

Once you are clear about your financial goals, taxation and succession laws, you will be in a position to pick your investment products far more easily and can focus on tracking how your investment products are taking you closer to your financial goals.

 

This article was written by Vishal Dhawan, CFP^CM 

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Avenues for real estate investments

WITH SIGNIFICANT interest in theIndia growth story amongst both foreigners and Indians alike, both stock markets and real estate prices have been moving with an upward trajectory over the last 12 months.

Equity exposure has been possible through investing in small chunks due to availability of small lot sizes and mutual funds.

However real estate, especially in the metros, has tended to require large com-mitments. We felt it may be prudent to look at avenues for investors to participate in the real estate growth story with smaller initial outlays.

Real Estate Funds:

Whilst real estate funds have existed in the past, they were available only with very large commit-ments. Over time, these products have got more broad based and allow investments in smaller chunks. Essentially, these funds raise money from investors and enter into arrangements with developers to fund their projects.

Since the funds typically have management teams with a superior understand-ing of demand/supply trends, pricing and developer quality, they are in a position to identify multiple opportunities and make a more objective investment decision. They offer the benefit of diversification with smaller sums of monies, as they could invest in different geographies as well as different types of real estate including commercial, residential and retail.

Most of these products also offer a gradual payment program. However, they do not have too much liquidity and requircommit-ments for 6-8 years in line with the ideal investment horizon for real estate investments.

Primary market purchases/Buying under construction real estate:

Since many developers offer construction linked payment schedules, it is possible to use a combination of future cash flows and existing investments to build on this investment strategy.

This is akin to doing a systematic investment plan in real estate albeit at a fixed locked in rate, except for the fact that a default could result in heavy penalties/forfeiture so it is critical to bite only what one can chew.

A couple of precautions are critical here  firstly, quality and reputation of the builder are critical as there are a large number of cases where financing constraints for the developer end up delaying the project for abnormally long periods.

Secondly, a clear understanding on the cash flows as the initial stages require much larger commitments and you could end up hav-ing to put away as much as 85-90 per cent of the project cost one year before possession.

Primary/Secondary market purchases using leverage:

Availability of leverage at attractive rates and the associated tax benefits make real estate an interesting option to consider.

However, please remember that the leverage has a cost attached to it and this needs to be built into the overall cost of investment.

A large number of real estate investors do not account for the interest costs as a part of the overall cost of the investment, thereby believing that the return on investment is higher than what it actually is.

Besides, leverage is a double edged sword when real estate goes through its periods of downturn.

With interest rates likely to start moving upwards over the next few quarters, this tool will need to be used cautiously especially as a large number of loans today are what we call honeymoon loans  low fixed rates in the beginning and set to climb sharply over the next few years. Please keep in mind that these are recommendations for real estate investors andnot end users.

Also remember that real estate investments are not risk free and are exposed to volatility contrary to what many investors have come to believe over the last few years.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age  on 11^th July 2010 .

 

 

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