All You wanted to know about Personal Loans

 

There was a time when borrowing used to be considered as almost a sin. Whereas today, you name an incident a loan is available for you from not one but many resources. Whether you want to get married, go for a vacation, celebrate a festival – ‘Personal loan’: your loyal and honest companion will be with you 24*7! 

Personal loans are attractive:

It is very simple and easy to get this loan. This loan is unsecured loan, it means you do not have to give any guarantee to acquire this loan. As it requires very few documents to process the loan, documentation is simple. After you put in the request and fulfill the eligibility criteria, you are in receipt of the money within a week or two. 

You generally get 1-5 year’s time to repay the loan. You need not give anything (movable, immovable assets) as a security to process this loan.

If this is the case then why any financial institution will give away a loan like this? Why they will try to benefit their customers at the cost of their own risk? Alternatively, there is something in between the lines, which we need to pay attention to..., let us see.

Basics of Personal Loan:

First, let us know about the documents mandatory to apply for the personal loan. And these include

●      Pan card, passport or driving license as identity proof.

●      You can submit passport, ration card , electricity / telephone bill, Gas Bill, Bank statement as a residence proof.

●      If you are working then you need to give your salary slip, form 16 and 6-months’ bank statement. And for a person who is self-employed needs to submit his 2-3 years’ accounts statement/IT returns as proof of income.

Remember when you give such proofs to the organization while applying for the personal loan .You are actually giving them a blueprint of your wealth condition. So don’t be under the impression that bank is asking for no documents from you.

Coming to the Interest Rates:

As banks claims it to be, loan with no end-use restrictions and no-security. Interest rates charged upon Personal are extremely high. They can range between 16 to 30 % annually. More to that, interest rates differ from bank to bank and person to person.

For salaried person if interest rate is ‘X’ then for the same personal loan it can be ‘X+1 or 2%’ for self-employed person.  For government employee interest rates may go down further. So depending upon your repaying capacity and bank’s willingness to lend you can negotiate for the better rates. You can even offer your Equities, M.F. and insurance policies as security to bank which will increase your credibility and may decrease interest rates.

Other charges:

Interest, of course, is the most significant of the costs. But that doesn’t mean you should ignore the other charges. These would typically include:

●    A fee which is charged for complete procedure. This processing fee is non-refundable if your loan is approved and partially refundable if your loan is rejected. It can be between 0.5% to 3% of the loan amount.

●    If you prepay your loan then bank might lose out on interest money acquired on your personal loan .Hence penalty is charged on the prepayment of the loan .And this can be up to the 5% of your loan amount.

●    Not only that bank might charge you for the things like documentation, late fee, duplicate statement, service tax etc. 

A personal loan can be proved beneficial in certain conditions. How? Let us explore that too.

Examples of Right usage of Personal Loan:

●    Setting a debt which has higher interest rates: Say, you borrow Rs 1 lakh from a moneylender for your sister's wedding of which interest rate is 2.5% per month. So practically, you will pay Rs. 30,000 as interest to your lender while loan amount will be the same. In such a case, you can take a personal loan to repay the loan to moneylender. A loan of Rs 1 lakh for two years at 18% a year means an equated monthly installment of Rs 4,992. After two years, you would have not only paid off the entire loan, you would have paid only Rs 19,818 as interest, much less than the Rs 30,000 you would have paid the money lender as interest for one year.

●    Paying off a large credit card balance: A personal loan can also be used to pay off a substantial credit card balance that is being rolled over for months. Paying just the minimum amount on the card bill will not help you as the interest is charged over the total bill amount and is very high, usually 2.5-3% a month. It's better to divert the money to paying the EMI of a personal loan. You could save 16-30% depending on the rate of interest you are able to get on the loan.

So you can always opt for personal loan when you are in dire necessities mentioned above but with a caution that” Personal loan is injurious to your financial health”!!!!!!  

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.

What every Investor needs to know about Stock Market, Currency market and Commodity Market to make Profits?

 

 

Few best kept secrets, you may not know about Stock Market, Currency market and Commodity Market

 

What is the most profitable place to invest? Stock Market or currency market or commodity market…? Confused about which market to invest…?

Understanding the fine distinctions between these markets, often spells the difference between failure and success in investing.

Being a regular reader of  personal finance columns,  you must be knowing about what stock market is, what currency market is and what commodity market is. I would like to highlight a key difference between stock market and the two other markets.

 

A Key Difference:

 

Stock exchange has got both the spot market as well as the derivatives market. Whereas the commodity exchange or currency exchange have only the derivatives market. Let us quickly recall what is spot market and derivative market.

 

In a spot market, as an investor you can buy shares and hold it perpetually. You can sell it whenever you decide to. You can hold the shares for long term – say 5 years or 10 years. For Example, you can buy Infosys shares and keep it for 5 years or 10 years.

In the derivatives market, you will do advance booking to buy or sell a particular quantity of shares or commodities or currencies on a pre-determined settlement date for a pre-fixed price. As you are doing only advance booking you need not pay the complete price; you need to pay only the margin money. You can’t hold these contracts perpetually. You need to either buy or sell the shares or commodities or currencies on the pre-determined settlement date.

 

Let me illustrate. In the commodities market you would like to trade in crude oil. Minimum size of a crude oil contract is 100 barrels. The price of the contract as of 18^th june 2014 is Rs. 632100. This contact will expire on 19^th Nov 2014. You need to pay 5% of the contract value as the margin money.

 

If you expect the crude prices to go up, then you can buy this contract. If you expect the share prices to go down, you can sell this contract. Say you expect the prices to go up. So you buy this contract by paying the margin money of Rs.31605. On 19^th Nov, if the crude moves up to Rs. 6,39,900, then you will gain Rs. 7800.

 

On 19^th Nov, if the crude moves down to Rs. 6,24,300, then you will loose Rs.7300.

Let me reiterate the key difference. Currency and commodity exchange have only the derivatives market. Stock exchange has got both the spot market and the derivatives market.

 

Derivatives as a tool for hedging:

 

The original purpose behind derivatives is hedging. You can hedge yourself against the future fall or rise in the price of a particular asset. Why do you need to hedge? Let me explain you with an example.

 

Say you are an importer. You have placed an order with the exporter. You need to pay the exporter at the end of 3 months in dollars. You are not sure how the exchange rates will move. If the rupee value falls at the end of 3 months, then you may end up paying more in rupee terms to settle the exporter. This will cut your bottom line badly.

 

So you do advance booking for dollars which you will take delivery at the end of 3 months by paying a small margin. By doing this you have removed the downside. You have hedged yourself against the rupee fall.

 

Similarly an agriculturalist that is producing wheat can book the sale price for his produce now-itself, however he can do the delivery after 3 months. He has hedged himself against the fall in the prices of wheat. Somehow, the fall or rise in the price of a particular asset is going to affect you. So you protect your position by hedging with derivatives.

 

Derivatives as a tool for Speculation:

 

Though the original purpose of derivatives is hedging, it is often used as a tool for speculation.  Though, the fall or rise in the price of a particular asset is not going to affect you, you trade in derivatives to profit from the price movements of an underlying asset.

Say you are not an importer. However you expect that the rupee value will fall and want to gain out of that. Therefore you do advance booking for dollars. This is pure speculation.

 

Stop Speculating and Start Investing:

 

Stop speculating in the derivatives market and Start investing in the spot market. Speculating in derivatives market is a zero sum game. Either buyer or seller of the contract can make money. Both can’t make money. Whatever the loss of one person will be the gain of another person.  Money is not generating more money. Money is not put into productive use. Money is rotated. Money moves from one pocket to another pocket.

As you need to pay only the margin money, you may take over exposure which will increase the overall risk.  Either you will make huge profit or huge loss. This leads to greed and emotional imbalance. Therefore you will loose control at some point in time.

A person who gains in ALL the speculative transactions is only the broker. That’s why Benjamin Graham says, “The investors make money for themselves and the traders make money for their broker”.

When you are investing in shares through the spot market, both the buyer and seller can make money. For Example, Mr.A can buy a share for 100 Rs and keep it for 5 years. At the end of 5 years, he may sell it to Mr.B for 200 Rs. Mr.B can hold the shares for another 5 years and sell it to Mr.C for 400 Rs.

Both the buyer and seller can make money. Here money is not rotated; money is generated.

As you are investing in shares of a company, the company does its business with your money as capital. The company generates more money by way of profit in its business. Because of the profit the share prices go up.

As our money is put into productive use, it breeds more money. As a result, both the buyer and seller can make money by investing in the shares for long term. If you patiently accept the short term volatility you will have long term gain. As you are patient enough and investing only long term money in the stock market, you will be emotionally balanced.

In the spot market, as you are investing for long term, you need to buy the shares by paying its full value and not paying just the margin money. So you will take risk only to the extent you can afford to. Hence, you will not loose control over your investments.

Tell me why:

I have asked this question frequently with the investors. Tell me why you would like to invest in the stock market or commodity market or currency market. Most of the times, their reply will be very vague. They will say, ‘I would like to make more money’.

When you just say you want t make more money, it is not very clear that, you would like to make more money in the short term or long term…? What is your return expectation…? Is it 15% or 50%...?

As you are not very clear about your purpose of investing, it is easy for the broker to confuse you and give you a sugar-coated sales talk about making quick money by trading in the derivatives market.

Why brokers recommend trading in derivatives market over investing for long term in the spot market?  In the derivatives market, though you are asked to pay only the margin money, the broker charges his commission as a percentage of the total contract price.

In addition to that, in derivatives market, you can’t invest for long term, so you need to frequently trade. For every trade broker makes money. Also he can feed your greed easily.

In the spot market, if you invest for long term say 5 years or 10 years, broker makes less commission, that too once in a while.

If you are very clear about why you want to invest in the stock market or commodities market or currency market, then the sugar coated sales talks of the broker will not affect you. The very clear answer for the question ‘why you want to invest in the stock market…?’ is ‘I want to meet my long term financial goals with inflation adjusted returns by taking calculated risk’.

Clarity is power. Clarity brings focus.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

 

Do you fall prey for this Emotional Sales Pitch?

 

 

It has been a long tradition amongst us that you allow your heart to rule when you fall in love. You heart takes the decision there and not your mind. Similar thing should not happen when you take your investment and financial decisions. Most of the financial and investment products are marketed to create an emotional appealing and not a rational appealing.

 

Why the marketing campaigns are emotionally appealing?

 

Well, I think all those investors who are above 30 years will vouch safe for me is that heart takes decision non-rationally (not irrationally), which is quicker, means it takes the decision and may or may not think about the consequences. Hence, marketers find it easy to sell their products, even complex financial investment decisions with long term implications, by appealing to heart.

 

Let us see some examples?

 

Selling pension schemes!!! Very few people actually think of retirement planning until and unless they approach 50 years of age. Now how to lure young people between 30 and 40 years of age to buy retirement plans like pension schemes. They would show an elderly couple frolicking in Goa beaches to show that they are enjoying their life even in their retirement life and money is no constraint as they have invested in the right pension plan when they were young.

 

Selling Children Education Plans!!! While advertising an educational plan for children, the marketer would tug at the heart strings of the parents by showing a picture where the child is dreaming about a good overseas degree. Now which parent will think twice about not fulfilling the dreams of their child (and in today’s nuclear family, there is only one child to educate). And, a further stronger pulls at the heart, by putting a girl child’s photograph, with career aspiration. Making the parent feeling double guilty for not doing much for the girl child, and if she is the only child, more so.

 

Is it wrong to follow the heart?

 

Many of my friends will now argue that it makes sense to go for retirement planning when one is younger or it is not always the aspiration of the parents to give the best to their children. I have no issues with these arguments. I would like to join in this chorus by advocating both. But with a word of caution.

 

Look for Right investment products

 

Please look for right investment products which will fulfil your need of retirement planning or savings for children education who are not spending too much money on advertisement saving it to give higher returns on their investment products.

 

PPF is a very good safe investment option for anyone to accumulate money for their long term needs like retirement or children’s education / marriage.

 

Similarly investing in mutual fund SIPs is also a good way of accumulating money for retirement and children’s future. The charges in mutual funds are very low when compared to the charges in children plan or pension plan from insurance companies.

 

Avoid buying a long term insurance product like a consumer product like soap!!!

 

Long term saving product are not consumer product, which we finish using within a month. It is OK if you see your favourite actress selling a soap and you opt for it. But will it be wise for you to go for an insurance policy (Payable for 10 years or more) product sold by her.

 

Please remember! The marketers who are pulling at your heart strings through advertisements have also the onus to recover the advertisement expenses including their own salaries, bonuses and perks. Why become a Mamu just like that!!! Use only your mind, when you make your investment decisions, and you will hardly regret any such decisions.

 

Next Steps:

 

Now take a list of all your existing investments and check you have bought them because it appealed to you rationally or emotionally. If you have just bought them, only because it emotionally appealed to you, then now verify the same investment appeals to you also rationally or not.

 

If it is not rationally appealing, then you have fallen prey for the emotionally appealing strategy used by the marketers. Good that you are able to find this now. As you have realised this now, take a prudent decision to come out of this wrong investment and buy a right investment rationally.

 

A man must be big enough to admit his mistakes, smart enough to profit from them and strong enough to correct them.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

An Overview of Taxation on India ESOPs for US based NRIs

 

 

Employee Stock Option Plans (ESOPs) give employees a right to buy company shares at a pre-decided price and it forms part of taxable income. Most senior employees working with bluechip companies get ESOPs regularly and they have to pay tax on their ESOPs. When an Indian employee moves to the US to work there, he has to pay tax on his India ESOPs in US too, In this article we will explain how ESOPs are taxed in the US vis-s-vis India.

 

ESOPs can be taxed on two occasions: on exercising the option and on selling of exercised shares.

 

Taxation in India on exercising the option

 

It would be easier to understand the taxation on ESOPs with an example. Amit Verma is a 34 year old software engineer with one of India’s biggest software companies. Being a senior employee, he receives his ESOPs regularly in the form of company’s shares listed on the Indian stock exchange.

 At the beginning of the next financial year, his ESOP of 50 shares got vested and he exercised the same at price of Rs 200 per share. The fair market value at that time was Rs 400 per share. Hence his perquisite value for taxation in India stood at Rs 200, that is, Rs 10,000 in toto. As he was in the highest income bracket, he had to pay tax at the rate of 30.9%, that is, Rs 3, 090.

Taxation in India on selling the exercised shares

                                                                                          

 

In India the difference between the sale value and the market value at the time of exercising the option determines the capital gain on ESOPs. For example, if Amit sold his shares at Rs 500 per share, his capital gain per share would be Rs 100. The rationale behind this is that he has already paid the difference between the exercise value and market value, so now he must pay tax on excess only.   

In India, long term capital gains tax is NIL if a share is sold after one year of purchase, on the contrary short term capital gain tax is levied at 15% if the share is sold within a year.

Taxation in US on exercising the option

 

It is mandated by the US tax law that a person who is a citizen or resident of the US must pay taxes on his global income. As is the case with India, in US too, the value of the ESOPs awarded is taxed right away when the employee exercises the option.

Suppose in 2011, Amit moved to the company’s US office in 2011. Now being a US resident, he is bound to pay taxes on his global income in the US, which includes the perquisite value of his India ESOPs.  As per the prescribed exchange rate by the IRS, the ESOP perquisite value of Rs 10,000 would be USD 204. Amit is entitled to claim a tax credit in his US tax return since he has paid tax in India on this income. Using form 1116 he can claim a tax credit of USD 63 (Rs 3,090 converted at the rate of Rs49).

But there are certain limitations on the amount of credit you can claim. For example, the India tax credit you claim should not exceed the tax payable in the US on your Indian income.

Taxation in US on selling the exercised shares

 

In the US, the same method is applied to calculate capital gains as in India. The only difference is that there is no tax exempt on long term capital gains in the US. In the case of Amit, he is not entitled to pay taxes in India on his long term capital gains if he sells his shares after a year, but he has to pay taxes on those gains in the US. With reference to short term capital gains tax, he can claim a tax credit in his US tax return which is paid in India.

So as an US based NRI, when you exercise Indian ESOPs or sell Indian ESOPs, your taxation will not complete if you adhere to the Indian Taxation Rules. In addition to the Indian Taxation rules, you also need to comply with the US taxation rules.  The only good news is you will get tax credit in US tax return for the taxes you paid in India with reference to these ESOPs.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

 

 

How to Choose the Best Investments for You Always?

“I am always at a loss while planning my finances. With so many options and choices available, everything looks green in one second and completely in red the next second. I get confused a lot on choosing the best investment option for me, what can I do about it?” Not only the beginners but also the experts get such thoughts many times.

What is known as the best investment option?

To be frank with you there is no “best investment option”. There is only the right investment option. The right investment option is the one that helps you meet your financial goals. Are there any criteria available to buy the right investment products? Of course yes. Read on to get clarification on all your doubts.

Understand what you need

At times, i have seen people who are not clear about what they need. When i ask them ‘what kind of investment you are looking for?’ the typical answer i get is ‘low risk with quick and high return’.

Detail what you are looking from an investment:

·        What for you are investing? ( financial goals)

·        How long you will stay invested?

·        What kind of risk you are willing to take?

·        How much you are planning to invest?

·        How are you going to invest? Lumpsum or periodical...?

This gives you clarity about what you want. This clarity helps you avoid 50% of your confusion and makes your short listing process easier.

Understand the product before investing:

Understanding the different investment vehicles will help you avoid the balance 50% confusion gives you more clarity.

·        What are all the charges involved in this investment?

·        What are all the different types of risks involved in this investment?

·        Is there any lock-in period?

·        How long i need to stay invested to get an optimum return?

·        How much return i can expect from this investment?

·        What is the tax liability for the returns from this investment?

Understanding is the one simple thing that can make or break your relationship with your investment as well as your spouse. Take time to understand what you need and in which you are planning to invest.

Warren Buffet quotes “Don't invest in something you don't understand”

Let me give you 3 examples, about how investors invest without understanding and how to correct them. 

People trade in shares and derivatives without understanding the risk:

Trading in derivatives is a zero-sum game. Money is not getting generated in trading. Money is getting rotated from one pocket to another pocket. Whatever the gain you make out of trading is somebody else is loss. Whatever loss you make is someone else’s  gain. In investing, both the parties, buyer and seller can make money. In trading any one of the parties can make money.

Also for trading in shares or derivatives, you need not pay the full value. By paying just 15% to 20% of your trading position,  you are allowed to trade. So you end up taking more risk then you are afford to take risk. If the trade makes you loss, the loss can be more that what you have paid. So you may need to pay more from your pocket to cover your loss.

Understand how the guarantee works in your investments:

People invest in insurance products like the highest NAV guaranteed ULIPs thinking that they have invested in risk free instruments.  It is extremely essential to know how guarantee works here. ULIPs begin with the highest exposure to equity funds, then slowly move to debt funds. Upon maturity, they increase the fraction to debt funds. NAV is maintained within the pre-set level as the equity profits are transferred safely.

Ok, NAV is maintained as guaranteed, what is there to worry about? Is this what you think? Please understand that the high NAV is not the same as high market value. Also, keep in mind that the investments involving equities do not guarantee assured returns.

Understand the interest rate risks associated with your investments:

Most of the times, you invest in income funds and gilt (g-sec) funds without understanding the interest risk in it.Gilt funds are mutual funds connected with government sector securities. The income funds are the mutual funds invested in government, municipal, corporate debt funds and dividend paying instruments.

You must understand the difference between credit risk and interest risk here. As gilt funds are supported by government, you almost have nil credit risk. But, the interest rate and bond prices in gilt or government security funds and income funds are inversely related. When the interest rates go high, the government security gilt funds and income funds value drops down. So you may incur losses in gilt funds and income funds.

The most important steps you must take while choosing the investment option:

1.     Do not recklessly follow what the agent or the relationship manager talks about the products.

2.     There is no guarantee or risk-free plan come along with equity investments. When you hear about ‘guarantee’ connected to any product, understand it well how it works in the market.

3.     Ask questions about the interest risks, credit risks and other threats associated with the products.

4.     Learn well about the key fundamentals used in calculating the stock value.

5.     Educate yourself about various products like equity, debt and other investment options.

6.     Always read the instructions in the brochures and get all your queries clarified before investing.

Be very careful and do not hesitate to ask questions to the agents talking to you about various products. Do not blindly sign the application form because of laziness or falling victim to marketing pressures. Always remember that no supernatural number will give you an idea whether to sell or buy your stocks. Educate yourself very well before taking decisions!

Education brings awareness. Awareness brings understanding. Understanding brings clarity. Clarity removes confusion and brings confidence. By understanding your requirement and the investment product you will transform from a confused investor to a confident investor.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

4 Different Stages of Investing: Which stage are you in?

Let us think of the moment when we first began learning a car. What things come to mind thinking about first learning to drive a car, or any say any vehicle for that matter? Cautiously braking, keeping a close watch at the speedometer, very awkwardly raising your speed, and feeling anxious to merge into the freeway.

These were a few things that made you gain mastery over the task. Now, as you have achieved the desired skill-set, you can do all these tasks unconsciously while listening to music, talking on the cell phone, or even putting up your make-up. Thus, driving changed from a conscious process to something that you can do competently and with the skill-set gained, without requiring much effort.

Reading all this, you must be wondering why am I sharing all this when I should be talking about learning the steps for building a strong investment portfolio. Profitable investing, I believe, is not an unresolved mystery anymore. It is a process similar to learning any common activity like an infant learning to walk, a child to ride a bicycle, or an adult to drive a car. Let us now understand each of the four stages in making a consistent and profitable investment, and things to do and learn to reach the next profitability stage.

               Unconscious incompetence:

At this initial stage,one is not aware of his incompetence. To understand better, you may not know about what you do not know. Therefore, at this level everything may seem new to a beginner as so much of it is unexplored and unknown. This may cause a lot of anxiousness as well as failure risks. Usually, anxiety may cause easy reliance on others’ investment advice.

As unconsciously incompetent, you may have no particular investment plan, irregular profits, or even suffer losses at times. Thus, this stage can be marked with little concept of being on the path of wealth. Statistical evidences show that a good number of investing population, i.e. around 60-80% are stuck here at stage 1. In short, this stage can be precisely described as financially oblivious.

Conscious incompetence:

In this stage, one learns enough to know about his/her incompetence. This is the first step towards passive investing, and realization of the fact that there is so much more to becoming consistently profitable. You may aspire to create wealth, as well as play the game of getting financial freedom. However, a strong knowledge base, investment skills and risk management are still missing from your game plan.

At this stage, you may not understand what causes profits and losses in your portfolio with the changing times. This might let you put the blame on things such as the tough market conditions prevailing, your broker’s investment advice, or any other causes outside your domain. This stage makes your entry to the road to wealth, still having lots to learn.

Conscious competence:

At this stage too, you are still a learner not a master. You know enough of the investing game to be comfortable in the same. However, there is still a lot to work on. This stage may be accompanied by a solid investment plan, and its execution as well. It is based on proven principles leading to success. Still, your approach is not grounded in risk management, and the plan complexities are still left to gain expertise in. This may cause faults and losses occasionally. These occasional and unexpected hiccups may be disturbing, and point to a higher knowledge level that can turn out to be consistently profitable.

Unconscious competence:

This is the final stage of gaining knowledge. Here, you have a competence subject knowledge that it may become your new comfort zone. Investing here is primarily an administrative task. Here, you need other’s advice only for getting factual investment information rather than establishing your base on the same. You may become really financially independent by this stage, regardless of your current net worth.We can characterize this stage with someone knowing the complexities of investment strategies. By this stage, you have mastered the risk management skills and can go ahead creating a consistent and profitable portfolio. Wealth, here may be just a matter of time.

The above-mentioned step-by-step process can lead one to become a more consistent and profitable financial investor. One should base his/her wealth-plan on verified and grounded investment techniques, in order to confirm their goals and values. Take time to check, which stage of investing are you in and what is the next stage. Continuously and consciously take your next step to the next stage.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.