Active calls light up debt funds :: Business Line

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Weekly Mutual Fund and Debt Report :: HDFC Sec

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Get banks to lend you more :: Business Line

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Fixed, but attractive :: Business Line

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Playing on debt :: AMANDEEP CHOPRA- Head of Fixed Income, UTI MF in Business Line

Mind the 4Ps: Investment Philosophy, Products, Portfolios and Performance.

Over the last few years, with equities unable to carry on with their dream run, investors turned to other asset classes, such as debt and gold, the latter as a hedge against inflation, in search of returns.

Investors who invested in debt products, especially the ones who entered into duration products in mutual funds or directly into debentures and bonds, have benefited from the dovish policy stance adopted by the RBI from October 2011 to May 2013 (The repo rate fell from over 8 to 7.25 per cent), with returns on many bonds touching double digits.

Rough ride

After June 2013, it has been a rough ride for the investors as they have seen unprecedented volatility which is uncharacteristic of the fixed income markets, due to the turn in global events.

The RBI, in a bid to curtail volatility in the currency markets, initiated unprecedented liquidity tightening measures during this period. This resulted in debt markets turning volatile with yields spiking up across maturities.

The shorter end of the yield curve saw yields going up 300 to 400 basis points, handing down temporary mark-to-market losses and denting the perception of fixed income markets being a source of stable returns.

Tight measures by RBI

Over the last few months, the RBI has taken steps to cautiously unwind some of the exceptional tightening measures undertaken in July 2013. With the macro environment improving, the market expects the central bank to hike rate once more this financial year -- this time by 25 bps in the repo rate.

We believe that the RBI is done with its rate hikes at the moment and will look to pause with an eye on the overall macro picture, including the US Fed stance on tapering and the resolution of US debt ceiling limit by February 2014.

So, before you jump in and invest your hard earned money into debt products, you need to keep a few things in mind. Here’s a short list.

Expenses

A debt security, by nature, generally accrues a coupon on the capital invested as the primary source of return for the investor. Therefore, it is important that one knows the expenses being charged on the product as a higher expense would eat into the potential returns. You also need to watch out for the credit rating of the product or the underlying instruments it invests in.

Higher returns would mean the product probably has higher exposure to lower-rated instruments.

Similarly, a higher rating of the product or underlying instruments mean a lower probability of default or downgrade and consequently lower return from the investment.

Taxes

Most bond offers, except tax-free bonds, pay tax at the slab rate on interest earned.

The advantage of debt mutual funds is that they are tax-efficient investment vehicles.

An investor can look to lower his tax payout by claiming indexation benefit for investments made for more than one year in debt mutual funds.

Be it fixed deposits, bonds, debentures or debt mutual funds (such as fixed maturity plans; lower duration such as ultra short term funds and short term category of funds) the market continues to offer investors the opportunity to gain from elevated returns across maturities despite the volatility shown over the last few months.

So invest in debt funds based on the 4Ps: Investment Philosophy, Products, Portfolios and Performance.

(The author is Head of Fixed Income, UTI MF)

‘Default on loans could be habitual’ :: Business Line

A lot of variables go into building the credit score. In cases of no history, parameters including behavioural aspects of customers influence the score.

With banks becoming more and more vigilant about whom they lend to, services provided by credit bureaus, which rate a customer’s credit-worthiness, have become indispensable. In an interview to Business Line, Sanjay Patel, MD and CEO of Equifax Credit Information Services (India), dwells on these aspects and talks about the prospects of the credit scoring business.

There are already a couple of credit scoring agencies in India. Is there room for another player?

CIBIL began offering its services in 2005 and Experian and Equifax came later in 2010. So yes, we are a late starter. Almost 100 per cent of the market was catered to by CIBIL in the initial years.

But whenever new incumbents come, the overall industry gets better in terms of ability to understand the customers and provide the services they need. There is enough room for all of us. If you consider credit card as a parameter, the penetration is only 3-4 per cent compared to the 90-100 per cent penetration in US. So we have a long way to go.

Reap tax benefits on education loans:: Business Line

Only if you take the loan from an approved financial institution or an approved charitable institution, can you claim this benefit.

An education loan can not only help you fund higher studies but can also help you save tax. The entire interest you pay on the education loan can be claimed as deduction while calculating your taxable income.

This benefit allowed under Section 80E of the Income Tax Act can translate into tidy savings. For instance, if your taxable income during a year is Rs 10 lakh and the interest you pay on the education loan that year is Rs 1 lakh, then you need to pay tax on Rs 9 lakh. This means Rs 20,600 paid less as tax for the year. You can claim the interest deduction on loans taken to fund studies in India and also abroad. But take note of the restrictions.

CLAIMING BENEFIT

Not all education loans qualify for deduction. Only if you take the loan from an approved financial institution or an approved charitable institution, can you claim this benefit.

Financial institutions include banks and some non-banking financial companies. So, if you borrow money from your friends, relatives or employer, you get no deduction on interest paid. Check with the lender whether a loan taken from it qualifies for the tax benefit.

Only the person taking the loan can claim the deduction. For instance, if your relative takes a loan for funding your higher education, the relative and not you will be eligible for the tax benefit. The tax law states that relative who can claim the benefit mean the spouse, parent or legal guardian of the student. So, if your brother or sister takes a loan to fund your education, they will not be eligible to claim tax deduction unless he or she is your legal guardian.

You need to take a loan for funding higher education. This means a Government recognised course of study pursued after passing the Senior Secondary Examination or its equivalent. So, if you take a loan to pay the fee for your child’s primary school, you get no deduction on the interest paid.

The tax benefit can be claimed for a maximum of eight years – beginning from the year in which you start paying the interest on the loan and for seven consecutive years after that. So, if you service the loan over a 10-year period, the interest paid in the last two years cannot be claimed as deduction. Hence, it may make sense to restrict the tenure of the education loan to a period in you can claim tax deduction.

Of course, if you repay the loan within a shorter time-frame, say six years, you can claim deduction on the interest paid only till such period.

Most education loan lenders provide a moratorium period during which you opt not to service the loan. This period is usually until one year after the completion of the course or six months after the student gets a job, whichever is earlier.

If you choose to pay interest during the moratorium period, it will be taken into account while calculating the time limit of eight years.

Bagging a business loan ::Business Line

Public sector banks seem to offer the best deals, though they may not be quick to disburse the loan.

Did you let the entrepreneur in you die, after some unsuccessful attempts to raise money from your family? Go dust off that project report, as this week we give you tips on raising a loan.

Banks should be your first choice when you want to raise seed capital for the business. One, they don’t ask for a share of business profit or a share in ownership and two, they don’t charge usurious interest rates.

Public sector banks today have a number of schemes in their bouquet, specifically for women entrepreneurs. It isn’t essential that you use only these schemes owing to your gender.

Instead, you should evaluate them on the basis of the cost of borrowings (interest as well as charges such as processing fee) and convenience.

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.

Making a fresh life start on debt ::Business Line

Sunila walked out of the debt counsellor’s office in a pensive mood. She had accompanied a close friend for moral support. Her friend had opted for it having run into some financial trouble and some pending loan dues.

The discussion in the debt counsellor’s office was an eye opener. Sunila realised she had to make a fresh start herself to get her finances in order.

Her husband had gone abroad for a short tour on the work front.

She realised now was as good a time as any for him to give this a lot of thought.

She decided to send him a mail right away, lest her resolve melted in the rigours of routine daily life. This was what was happening currently – they were taking it one day at a time, oblivious to what tomorrow will hold, when the larger picture could prove to be a real shocker, when at the verge of their retirement they discover they do not have the funds to spend the rest of their lives not working!

So her letter imbibed the pearls of wisdom she gathered at the counsellor’s.

I now rue the way we’ve wasted options. When we got married, our combined income was Rs 60,000...our loan eligibility (if we had opted for a home loan) was around Rs 30 lakh with about Rs 10,000 left to run the home after rent.

We could have easily set aside that assumed Rs 30,000 EMI every month. At the end of two years, we would have had around Rs 7.20 lakh as savings!

However, it’s never too late to start thinking about some financial goals! So how do we go about this? We should seriously consider a 75 per cent -25 per cent ratio in our debt and equity investment ratio.

This is the only way we can catch up on the option we lost out and also gives us the option of making some miracle money while we are young, salaried and fit to face some ups and downs in terms of financial losses. We can slow this accelerated run as we near our retirement deadline.

Here are my ideas.

I would like to start off on -

a. A contingency fund to offset a job loss. I’m pegging it at 6 months’ worth of salary.

b. Savings - a small portion of 10 per cent as small savings accessible at the bank account.

c. Investment - 75 per cent in equity – that is stocks and MFs and 25 per cent in debt – which is FDs, PPF, NSCs.

d. An infant fund - that takes care of all medical (vaccinations), clothing, toys for the first 2 years. Let’s draw a rough estimate based on research and arrive at a target figure and target time to save.

These four are the top priority in my list. But other funds we could include are a medical fund, parents’ fund, maintenance fund, entertainment fund, luxury fund, vacation fund and so on.Do take sometime to do a similar checklist. We can compare notes and decide how we want to take this forward.

Until I see you on chat,

Love and hugs,

Sunila

So take care not to give in to the temptations of your current lifestyle, where everything is screaming “buy now” at you – a bit of careful indulgence and careful planning could hold you good for the rainy days ahead.

(The author is Content & Research Head at BankBazaar.com.)

How a home saver loan can help you:: Business Line

Banks charge anywhere between 0.5 and 1 per cent over the normal home loan rates, so calculate the probable overall savings before going for home saver loans.

Pre-payment of home loan is a double-edged sword. It reduces the future obligation but incurs opportunity cost and risk in case of an emergency where you urgently need cash. This is where home saver loans help.

Raise debt from family to settle high-cost loans:: Business Line

I am 40 years old and run a clearing and forwarding business. My wife, 36, is a home maker. I have a son aged 11 and a daughter who is 7 years old. My business was flourishing till a few years back. When I expanded operations in the initial period, it was going well, but in the last one year I have accumulated a huge amount of debt. My cost of borrowing in some cases was as high as 48 per cent a year.

I have taken personal loans with a few banks to the tune of Rs 12 lakh and gold loans with a few banks and NBFCs to the tune of Rs 6 lakh. Besides these, I borrowed Rs 5 lakh. Because of the high debt, I am borrowing every month to pay the interest.

I have a flat worth Rs 32 lakh and a plot worth Rs 5 lakh. I have a share of Rs 30 lakh in family property and another Rs 10 lakh from my wife’s side.

I let out the flat to an influential person. Now he is not vacating and is asking me to sell the flat at discount to market price. I have issues in land sale also. How do I repay this debt and save for my children’s education, their marriage and my retirement?

— Adhikesavan (name changed on request)

Take a top-up to settle loan :: Business Line

I am 29 years old and my wife, 25, is a home maker.

We are expecting a child next year. Under my employment, I don't have PF, gratuity and other benefits.

My monthly income is Rs 90,000 and rental income is Rs 3,500.

My expenses are Rs 35,000. I also pay an EMI of Rs 12,500 for a plot loan. My monthly instalment in two chit funds is Rs 30,000. I bid for both of them during my plot purchase. I own a flat and three plots worth Rs 26 lakh. I have a 50 per cent share in a house and its current value is Rs 30 lakh. I took the loan but my father supports the EMI payment. I have sold all my investments while purchasing the flat. My current liability is Rs 7.5 lakh, which is interest-free and needs to be repaid within six months.

I have taken a floater health insurance policy for Rs 5 lakh. I plan to take term insurance for Rs 1 crore.

My goals are:

I want to buy a car for Rs 9 lakh in few years.

How much do I need to save for my child’s higher education and for my retirement at 50. We may live till 80.

— Sridhar

Now, lighter burden from home loans :: Business Line

As there are no prepayment charges, borrowers can switch to banks where the EMI is lower.

In response to rate cuts by the RBI, banks have reduced their base rate by 25 basis points (100 basis points = 1 percentage point). This is good news for borrowers. Since floating rate loans such as home loans are linked to the base rate, the EMIs (Equated Monthly Instalments) will decline.

NEW BORROWERS

While this should bring some cheer to the existing borrowers, it is the new borrowers who walk away with the cake. Take the case of State Bank of India. While existing home loan borrowers (less than Rs 30 lakh loan) have only 25 basis points relief, the new borrowers get an additional cut of 25 basis points. This is because, in August, SBI and few other public sector banks cut the spread between home loan rate and base rate only for new home borrowers. Additionally, a portion of the processing charges are also cut now in order to stimulate home loan borrowing. Let us understand how this impacts the EMIs with a simple example.

Say you took a loan for Rs 1 lakh for 5 years from SBI early this year. You would be paying Rs 2,150 as EMI. Now, you will pay Rs 2,137 a month after the 25 basis point cut. Considering a Rs 30 lakh loan, it lowers the outgo by Rs 390 a month. In contrast, a new home borrower gets a 50 basis point cut and his EMI will be still lower at Rs 2,124 a month.

Take in multiple partners to get out of business debt :: Business Line

I am a 50-year-old self employed individual and my monthly income is Rs 30,000. My business was flourishing till last year. But of late, revenues have started to fall. I am in debt to the extent of Rs 32 lakh. Also, my home loan liability is Rs 38 lakh. My wife, aged 46, is employed and her salary after deduction towards loan repayment is Rs 7,000.

My daughter is in her final year at school.

I need Rs 30 lakh to restart the business, of which I can settle Rs 19 lakh with short term loans. I can continue my term loan of Rs 13 lakh. For future expansion I prefer taking partners.

To settle my revolving credit card monthly payments and to service other loans I am borrowing at very high interest rates. Since my track record of repayment went down in recent times, I am not eligible for loans from banks.

My current assets are a flat worth Rs 35 lakh in Chennai and jewels worth Rs 4 lakh(currently pledged). My wife’s EPF balance is Rs 50,000. A few C&F agents owe me Rs 4 lakh, which I don’t want to take back. If I restart the business, I may find it difficult to appoint fresh C&F agents.

How can I overcome my debt and save for my daughter’s education, marriage and for our retirement.

I believe my product is good and there is limited competition. Hence, I wish to continue the business with partners.

If I bring in partners, how can I protect my business interest?

— Sundar Rajan.

Why credit ratings differ ::Business Line

Rating agencies may give a higher rating to an FD scheme from a company, despite its NCD being rated a notch lower or vice-versa.

If you are investing in a debt instrument, you need to check not just the interest rate but the credit rating too. But did you know that fixed deposits (FDs) and non-convertible debentures (NCDs) issued by the same company may have a different risk rating? Rating agencies may give a higher rating to an FD scheme from a company, despite its NCD being rated a notch lower or vice-versa.

But, why is it so? Well, industry and company specific risks hold good for all investors, irrespective of the instrument. That said, there are few factors that could lead to the differing ratings.

How lenders evaluate your loan application ::Business Line

A good credit record increases the chances of your loan application being approved.

Many people simply apply for credit without giving a second thought to how the lender might actually perceive their loan application.

Only recently have people begun to realise how crucial it is to be aware of, and to maintain, their credit history.

If you have a good credit record then the chances of your loan application being approved are much better.

But those of you who may not have the best borrower profile, understanding how lenders look at the inherent risk of lending money will help improve your chances of qualifying for credit. Thus, knowing how your credit data might be interpreted offers a chance to improve your credit worthiness from a lender’s viewpoint.

Take plot-cum-construction loan to save on taxes ::Business Line

I am 27 years old and my wife is 26. We are planning for a child by 2014. 

My monthly income is Rs 60,000 and my wife earns Rs 30,000. I live in office given quarters. My current monthly expenses are Rs 18,000.

My monthly PF and VPF contributions amount to Rs 10,000. The current accumulation is Rs 6 lakh. My wife’s contribution is Rs 3,000.

Savings:

 I have invested Rs 3 lakh in Gold ETF and I have Rs 5 lakh in a savings bank account. I intend to buy a plot for Rs 20 lakh with a loan of Rs 12 lakh.

Since I plan to construct a house there, is it better to take a personal loan for land and take home loan for construction?

For construction I need Rs 25 lakh, of which Rs 13 lakh I wish to draw from EPF. Once I get transferred to Chennai I will live in this house. I have no other investments.

Can I take a loan against my land in Tirupati for purchasing the plot? I wish to close the home loan within five years.

Is it advisable to pre-close the loan, or is there any better strategy to buy the plot?

I also wish to know whether I will get tax benefits for the land loan availed if I construct the house.

My father retired from defence service with a pension of Rs 12,000. Both parents are covered by health schemes for Rs 3 lakh. Is it better to take separate cover for them? My immediate family is covered by my employer.

— Sonu Dandala

Repay debts before taking long-term loans: Business Line,

August 18, 2012:  

I am 23 years old. My father is a retired employee and my mother is a home-maker. My elder brother is also working. My pay is Rs 3.16 lakh a year. I took an education loan of Rs 2.86 lakh and my EMI is Rs 6,500. But I have been paying only Rs 3,000 due to insufficient funds.

I took a five year personal loan of Rs 2 lakh, with an EMI of Rs 4,758.

Also, I have taken short term loan of Rs 30,000 from my employer. My monthly EMI is Rs 2,500 and it will be repaid by this December. My employer is deducting Rs 15,000 towards a medical policy, which also covers my parents. My EPF contribution is Rs 1,100. My tax for this year will be Rs 10,000. I have an FD for Rs 80,000 with an interest of 10 per cent. I had invested Rs 8,000 in equity. My monthly surplus is Rs 1,500.

My questions are:

How credit rating agencies work: Business Line,