RBI has come with 25 bps cut in mid quarter monetary policy yesterday.
Please follow the link below to read full Monetary Policy Note..
20 March 2013
Mutual fund SIP or home loan? ::Business Line
Which is the wiser of the two investments — starting an SIP of Rs 20,000 for 20 years in a mutual fund or taking a home loan for a second flat with an EMI of Rs 20,000 for 20 years?
— Thomas
If you look purely at quantitative parameters, the second flat is likely to give better returns than the equity fund.
We arrive at this conclusion based on a few assumptions. To start with, let us suppose that both the equity mutual fund (in which SIP of Rs 20,000 per month is made for 20 years) and the second flat (which is repaid through EMIs of Rs 20,000 for 20 years) appreciate at 12 per cent annually. The interest on the home loan is charged at 10 per cent annually and the entire value of the flat which works out to around Rs 20.7 lakh is financed through the loan. Rental yield on the flat after tax and expenses is 1.5 per cent. Both the flat and the mutual fund are sold after 20 years.
In this example, after 20 years, we arrive at after-tax gains of around Rs 1.7 crore on the flat, while the mutual fund nets you around Rs 1.5 crore. This is because the real estate investment enjoys a few unique benefits – high leverage (the whole flat value starts appreciating from the beginning even as your loan repayment is staggered), tax benefits on repayment of interest and principal, and rental income. A higher rate of return on the property than the cost of the loan also helped.
But before taking the plunge, do take note of qualitative factors on which mutual funds seem to have the upper hand.
The top equity mutual funds have delivered returns of over 20 per cent annualised in the last 10 years. Returns on an equity mutual fund held for more than one year are also tax-free. This improves its post-tax returns.
Plus, with equity funds you can diversify your risk across 3-4 good funds each holding a minimum of 20-30 stocks. This reduces the chances of your losing money. Selling a mutual fund is easy - this earns it brownie points on liquidity. But returns and risk go lock-step. Any investment in equity carries the risk of capital erosion, but this risk is more worrisome in the short term.
And contrary to popular perception that real estate prices only head north, property rates also go through cycles when they can stagnate or even decline. Case in point are markets such as Hyderabad, Jaipur and Kochi where real estate prices today are lower than in 2007 (Source: NHB Residex). So, ‘assured high returns’ in real estate is a fallacy. Risk is very much there, especially with the steep rise in property prices over the past few years which has impacted affordability.
A big risk with investing in property that it is difficult to diversify or liquidate. Usually, you will end up investing the entire sum in one property in a single location. Selling a property can be quite time-consuming. Besides, you need to do your homework thoroughly (check title deeds, sale agreements, approvals) when buying property so as to not get caught in a tight spot.
Therefore, on parameters such as concentration risk and liquidity, an investment in equity mutual funds scores over property.
Is the worst over for investors? ::Business Line
With outlook improving for inflation and interest rates, macro metrics may soon turn the corner, thereby paving the way for sharper recovery in stock prices.
After three successive years of anaemic growth, the coming year (fiscal 13-14) may hold some promise for the upturn. With base effect kicking in alongwith the hope for reversal of interest rate cycle and recovery in investment cycle, chances of real dawn showing up have never been brighter. But nothing can be taken for granted given the precarious nature of twin deficits (Fiscal and Current account) and the stubborn nature of the inflationary trend so far.
Sustained and aggressive rate cuts are key to reviving growth (especially in investment demand).The RBI is keeping a tight lip on this while pundits have been busy making predictions. It will be keenly watching the quality and progress of the Finance Minister’s fiscal adjustments besides looking for softening of core inflation (prices of manufactured goods) to decide on cutting policy rates. On both counts, there are reasons to believe that the outlook is turning more positive. Confidence on this stems from (1) credible fiscal plan that has been laid out in the Budget by the Finance Minister and (2) expected boost from base effect on an already softening core inflation. Moody’s endorsement of the fiscal roadmap as well as the GDP growth projections for fiscal ‘13 is a big thumbs up and should clear any doubt that may still linger in the minds of officials in the Mint street.
There were worries (justifiable though) that the Government might fund its most ambitious (and most populist) food security bill by cutting down plan expenditure (capital investment outlays), while projecting a market friendly headline fiscal number of sub 5 per cent .
These fears became more pronounced in the days leading to the Budget given the political compulsions (with elections not far away) of the current administration.
The reasons for the RBI’s discomfort on such an approach are not difficult to fathom. Diverting funds from plan allocation to social programmes will fuel food inflation while hurting industrial growth and thus worsening the already fragile inflationary trend.
But the fears proved unfounded. The Finance Minister deserves more credit than what the market has given for not succumbing to such pressures and for presenting a more fiscally prudent budget in a politically sensitive time.
For critics who lament cynically that the Budget lacked any big-bang moves, it needs to be understood that it was a deliberate attempt by the Finance Minister to keep it a non-event, given his penchant for clever policy actions (reforms) outside budget (so as to keep the opposition at bay) . So, it was no surprise that there were no fireworks in this Budget. All that it means is that one will see lot more actions on the policy front in the coming days and months, going by Finance Minister’s track record over the past six months.
Taking these together (fiscal prudence and stronger policy actions), there is now a growing case for the RBI to return the favour by cutting rates aggressively. Well coordinated monetary and fiscal actions can script a very convincing turnaround story for India. With the Government setting the right tone and pace for such a script, the story should play out smoothly though minor twists and turns cannot be avoided. Of course, the current account deficit (CAD) and pressure on the rupee are key imponderables which the RBI will keep a close watch when it starts loosening its hold on the reins, as those macro risks have not gone away especially with the election riskslooming large.
It may not be far-fetched to say that India is going through a classical bottoming process at the moment with all economic indicators at its worst point with CAD at 5 per cent of the GDP and earnings cycle at its low, besides the weakening rupee. With outlook improving for inflation and interest rates, macro metrics may soon turn the corner, thereby paving the way for sharper recovery.
(The author is CEO & MD TrustLine Holdings Pvt Ltd. The views are personal)
Reap returns from farmlands ::Business Line
Real estate investment conjures up images of flats, villas or small plots of land, but there is yet another way to invest – farmland. “But I am not a farmer”, you protest? Relax. One could reap returns from owning a farm - an investment described as ‘gold with a coupon’, without getting one’s hands soiled.
The cost of land in rural areas is typically low, offering an affordable entry point for investment. An acre of farm land in rural areas of Tamil Nadu can be acquired for as low as Rs 1.5 lakh per acre, compared to Rs 1.5 crore for an acre for residential land (at Rs 350 per sq ft) in a town close to the farm.
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