Dilshad comments in Mint on “lessons financial gurus missed when they were young”
Anyone who has just joined the workforce for the first time has a list of things to spend on—from clothes to gadgets, and more. Saving and investment rarely feature in this list. This may sound boring and even unimportant, but if you don’t want to be financially lost, you must plan your finances. Here are a few things you can do with your income in the early stages of your career.
When it comes to growing your money, the earlier you start saving and investing, the easier it will be to build a corpus. “You should understand the power of compounding. Unfortunately, people don’t understand it and how starting early will enable lower investment savings,” said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd.
Say, you are 25 years old and plan to retire at 60. If your current annual expense is Rs.10 lakh, the expenses in your first year of retirement would be Rs.77 lakh, assuming annual inflation of 6%. So, you will need a corpus of Rs.10.7 crore at age 60, for which you need to invest Rs.28,000 per month till retirement age and earn return of 10% on it. If you delay and start investing only when you turn 30, you would need to save Rs.35,365 per month. So, the later you start, the more you need to save.
Identify goals later
You may be wondering, why invest when you don’t have goals. Imagining about retirement or any other kind of long-term goal is difficult when you are in your 20s. “Many financial commitments come in the form of events. The older you get, the more difficult it gets to catch up to the expenses. People don’t think about this in their 20s,” said Leo Puri, managing director, UTI Asset Management Co. Ltd.
How does one overcome this difficulty?
“It is a simple thing. Generally, your financial goals will include retirement, buying a house, marriage, children, their higher education and marriage, your higher education, travel and spending on gadgets or white goods. Even if none of these make into your list right now, they will soon creep in,” said Suresh Sadagopan, a Mumbai-based financial planner. Even if you don’t have a goal, keep a part of your salary aside to be used for future needs.
Once you have decided to save a certain portion of your income, the next step you may assume is to invest. It’s not. the next step should be buying health insurance so that medical liabilities are taken care of. “Life insurance can wait. But you should take medical insurance immediately. You may think that your employer will take care of it. But health issues can occur any time, say, when you are in between jobs. Consider taking health cover of at least Rs.3 lakh, which will cost you under Rs.4,000 per annum,” said Sadagopan. You don’t want to dip into your savings or investments when you have an option to hedge.
After health insurance comes investing. You must remember that over time, money loses value due to inflation and taxes. So, leaving all your money in a savings account is not prudent. Of course, that doesn’t mean that you invest in any product that gives you higher returns than a savings deposit. You should calculate the returns you get after factoring in inflation and tax. “People don’t understand the difference between real return and nominal return. They misunderstand nominal return to be the real return. Always remember to factor in inflation when you are investing,” said Vivek Dehejia, professor of Economics at Carleton University in Ottawa, Canada.
So, which product to choose? Since you have time on your side, you are in a better position to take risk.
“Equity-oriented products are a good option. But you should invest at least 40% of your money in lock-in products such as Public Provident Fund as it will help you build financial discipline,” said Sadagopan.
You can create a corpus by investing in short-term products such as debt funds or even bank fixed deposits. This will help build financial discipline.
Though you should save and invest regular, it doesn’t mean that you can’t indulge. “You can buy a new gadget or go for a vacation, but it doesn’t mean that you go overboard with you credit card and spend more than you can afford,” said Sadagopan.
If you have basic understanding of financial products and how they work, you will be able to make the right decisions about your money life. Doing so will earn healthy returns.
Dilshad Billimoria comments in Mint
This month we saw two fixed rate home loan products launched in the
market. With the rising number of home loan products in the market,
the hunt for the right one is not easy. Financial institutions seem to
think it is a great time to launch fixed rate home loan products, but is it
good for you too?
Here is what you should know before you zero in on the product.
What’s on offer?
On 22 December, Housing Development Finance Corp. Ltd (HDFC)
re-launched its fixed rate home loan product—Trufixed with added
advantage. Trufixed was first launched in 2012. If you avail of this loan,
you can lock-in your home loan at a fixed rate for 2 years, 3 years and
10 years. After the completion of the fixed rate period, the loan will
switch to HDFC’s adjustable rate home loan (ARHL) product without
The adjustable rate product is linked to HDFC’s retail prime lending rate, which is at 16.75% at present.
The floating rates on switching to ARHL would be 10.15% a year for loans up to `75 lakh, and 10.5% for loans above `75 lakh. In this product, if
you pick 2-3 years, the interest rate will be between 10.15% and 10.35%, and for a 10-year period, it will be between 10.25% and 10.50% per
annum for individuals.
This offer will be available only to those customers who apply for a loan between 22 December 2014 and 31 January 2015 and if the first
disbursement takes place on or before 31 March 2015.
Non-resident Indians and persons of Indian origin can also apply for this product. HDFC also allows you to convert the loan into a floating rate
one at any time, though conversion charges will be levied.
Apart from HDFC, Axis Bank Ltd, the country’s third largest private sector bank based on assets, also launched a 20-year fixed rate home loan
product for affordable housing at 10.40%. The product is different from what HDFC has put forth.
The bank offers ‘lifetime fixed’ interest rate home loan scheme for affordable housing. The interest rate is set at 10.40% per annum for the
entire duration of the loan—i.e., 20 years. This product is meant for the affordable housing segment. The maximum loan amount that you can
get under this scheme is `50 lakh for properties situated in metro cities and `40 lakh for properties situated in other locations.
Salaried and self-employed individuals can both take this loan, but the interest rates vary. For salaried customers, it is 10.40%, and for
self-employed rates, it starts from 10.65%. The maximum property value in metros and non-metros is capped at `65 lakh and `50 lakh,
At a later stage, if you want to move from fixed rate to floating rate or make a part-payment or foreclose the loan during the tenor of the loan,
you will have to pay a switching fee or a part-payment or foreclosure fee.
There are other fixed rate loans in the market too. Banks and non-banking financial companies (NBFCs) are offering fixed rate loans at below
10.5%. “At present, the interest rate for such loans is in the of 10.10-10.25% range,” said Rishi Mehra, founder, Deal4loans.com.
LIC Housing Finance Co. Ltd, for instance, offers a fixed rate of 10.10% for two years.
Why the launch?
HDFC said in a media statement that its product is for customers seeking to lock in their home loan interest rates and not take risk on interest
rates for a period of as long as 10 years.
Axis Bank said it is launching the product to fulfil its priority sector lending. “The government and the regulator have been encouraging focus on
affordable housing. Recently, we raised `5,000 crore in the affordable housing segment. This product will help fulfil our priority sector lending
needs too,” said Jairam Sridharan, president–retail lending and payments, Axis Bank, adding that “the interest rate risk should not be borne by
But what is the real reason behind banks launching fixed rate loan products?
“At present, corporate loan growth is slow, and these kinds of fixed rate home loan products will help the banks see credit growth,” said Vishal
Narnolia, a Mumbai-based analyst with SMC Global Securities Ltd. “Another aspect is banks that are looking to fulfil their priority sector lending
needs will be able to come out with bond issues. This will enable them to take care of asset liability management mismatch. Generally, financial
institutions have a tendency to launch fixed rate loan products ahead of a lending rate cut to earn extra margins,” he added.
When lenders offer a loan on high rates, it is beneficial for them because when rates fall, they can still charge a higher interest rate from
consumers who have locked in their fixed loan product.
What should you do?
Like any other financial product, you should understand home loans well before choosing one. “If you are taking a fixed rate loan, read the fine
print carefully. Most of the times, banks and NBFCs have the right to reset home loan rates anytime. Hence, read the agreement carefully and
then sign it,” said Dilshad Billimoria, founder and chief financial planner, Dilzer Consultants Pvt. Ltd.
A fixed rate home loan should mean that the rate of interest applicable is fixed throughout the term of repayment.
However, usually the interest rate on a ‘fixed’ rate loan stays for a certain period and is reset as per the terms and condition of the product.
Hence, it is important that you ask your lender about the reset clause and get an official document of the reset clause.
One of the most important aspects of any loan is the interest charged on it. Therefore, while a fixed rate home loan may sound like a
convenient product that lets you calculate a certain outgo every month, the danger lies in getting stuck with a high interest rate.
“It may not be a good idea to commit to an amount in a falling interest rate environment. Interest rate at 10.4% is definitely high at this point of
time,” said Billimoria.
According to Mehra, a fixed rate that is closer to 10% would be an acceptable level.
Before taking a home loan, be it at a fixed rate or a floating rate, one must understand the interest rate environment because that determines
the path that most lending institutions will take.
There are expectations that home loan rates will come down in the near term. “When fixed deposit rates come down, it is a signal that home
loan rates will also fall. Therefore, it makes sense to defer your plan of locking into a fixed rate product for three-six months,” said Mehra.
Bank of America Merrill Lynch, for example, stated in a recent report: “The RBI (Reserve Bank of India) policy stance is much more dovish. The
policy states that if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging,
a change in the monetary policy stance is likely early next year, including outside the policy review cycle. It reflects high probability of rate cuts
beginning early next year.”
According to a Morgan Stanley research report, the first rate cut is likely to be in February-March 2015.
Also, one must remember that interest rate is not the only cost in a home loan. The lender also levies various charges such as processing fee,
prepayment penalty and some miscellaneous charges.
Before jumping into a fixed rate home loan, you should do the math to compare the total outgo in fixed and floating rate home loans.
Apart from this, there is no prepayment penalty on floating loans unlike on fixed rate loans. Some of the fixed rate products are available only
for a limited period. If you want to take a fixed rate home loan, it may be better to wait for some time as interest rates are expected to fall during
the early months of next year.