InvestmentYogi

Buying Real Estate? Keep Your Eyes Open for These Hidden Costs

Yogi — Tue, 15 Nov 2011 14:43:22 GMT

When I was seeking to purchase my first property, I was excited. It was directly from a developer and the building was under construction. We discussed the rate per square foot: it seemed reasonable. My wife decided to pull out her measuring tape to see if the area matched, and the marketing executive watched us patiently as we went from room to room. When we finished the exercise, there was a shortage. “Ah,” said the executive, nonchalantly. “What you were measuring is the carpet area, but what you are paying for is the built up area.” That included the walls inside the flat. I realized later that I was fortunate as compared to my friends in Mumbai who paid a rate for the super built up area: that included the common areas such as stairways and lift.

There’s more to pay at every step

I did a quick mental calculation (area multiplied by rate), and arrived at the total cost of the flat. It was a stretch, but there was a price to be paid for the family’s joy. The costing sheet, that the developer’s executive thrust under my nose increased the price. It was then that I was introduced to the concept of legal fees, deposits for electricity and water. Much later, after the construction was completed, there was an additional amount to be shelled out for registration. It will not be askance to state that the basic cost of purchase had to be increased by 25% by the time the flat was delivered to us, interiors not included.

Notional Loss

These hidden costs are easy to calculate. What I realized is that developers did not have any penalties built in if they delayed delivery of the project. Those of you who were in the queue waiting for your construction to be completed during 2008-09 know what I am referring to. Developers ran out of cash, but had the gall to inform investors by way of a simple letter that the delivery of the project was pushed back by 90 days to 12 months. Not only had investors to pay interest on their loans taken so far, but also monthly rentals till they moved to their “home”. And in the rush to complete their project and collect the final payment(s), some developers have cut corners and compromised on quality of finish.

The New Fad of Maintenance Deposits

Recent projects have included 10 year maintenance deposits which are collected upfront. That gives investors peace of mind, until they realize that the developer did not bargain for inflation in costs and these deposits will run out much faster. There is always a tussle among now owners of such a project to choose between higher costs and reduced services to make the maintenance funds last longer.

Are All Approvals in Place?

We are all aware that the value of land appreciates and is a greater treasure than the apartment we live in. In many parts of the country, undivided share of the land is a valuable component of what the investor owns. If the developer has built more flats than the original sanction, this single seemingly insignificant line in the agreement may be altered downwards and is possibly the single largest hidden cost that the buyer must beware of.

(The author, Lovaii Navlakhi, is the Managing Director and Chief Financial Planner of International Money Matters Pvt. Ltd. You can visit www.immpl.com for more information)

Has RBI Policy to Contain Inflation Failed?

Yogi — Sun, 13 Nov 2011 10:22:53 GMT

RBI came out with 2nd quarter review of monetary policy on 25-Oct-2011. This was much awaited policy review for investors in stock markets, bankers and economy in general. This came in the wake of latest inflation data which showed food inflation at 10.60 per cent ( Has gone up to 11.43 per cent on 27-Oct-2011). However the policy review was very disappointing. Barring de-regulation of interest rates on savings deposit, there was nothing new in the policy. The inflation riddle which continues to baffle all of us was once again given the same medication by the regulator. The central bank increased repo and reverse repo rates by 25 basis points. This was 13th increase in repo and reverse repo rate since March 2010. We all know that all rate hikes have been done with an objective to contain inflation and stability to Indian economy. However, the fact remains that inflation concerns are far from over. Does this raise some questions on the RBI policy to contain inflation through monetary measures? Let us look at the hard facts.

In spite of multiple increase in repo and reverse repo rates, in the current financial year the WPI indicated rate of inflation has been 9.6%, which is abnormally high. Why it is that inflation has not been contained despite so many rate hikes. Though RBI has shown some optimism in the latest review and has indicated that the inflation may come down post December,2011, the view expressed by RBI shows that central banker is not sure about it . This gets manifested in the fact that RBI has shown serious causes of concern on inflation front.

The RBI in its second quarter review has stated that ,' Going forward, the inflation path will be shaped by both demand and supply factors. First, it will depend on the extent of moderation in aggregate demand. Some signs of demand moderation are evident, although the impact is being felt more on the investment side. Second, the behaviour of crude prices will be a crucial factor in shaping the outlook of domestic inflation in the near future. The benefit of a decline in global crude prices in the recent period has been more than offset by the depreciation of the rupee in nominal terms. Thus, the exchange rate will also have some impact on the behaviour of domestic petroleum prices. Third, the inflation outlook will also depend on the supply response in respect of those commodities characterized by structural imbalances, particularly protein items. Finally, there is still an element of suppressed inflation in the economy. Domestic prices of administered petroleum do not reflect the full pass-through of global commodity prices. Prices of coal and a few other commodities do not reflect the current market conditions. As and when price adjustments take place, they will add to inflationary pressures'.

These four points mentioned in the review document are clear cut indication that the inflation may or may not fall in the days to come. Let us look at these four critical points one by one. RBI has been successful in moderating demand in the economy but the fact remains that only investment demand has fallen. Increasing interest rates have resulted in high cost of capital and companies have reduced investments in new projects. This has also been reflected in the slowdown of growth. However, on supply side nothing substantially has changed.

Crude price is indeed a cause of concern. There has been consistent increase in the crude price and India has an economy felt the impact of increasing crude price on inflation. Recently when crude oil price started falling due to crisis in Europe, an expectation was built that crude price will fall in domestic market. However it did not happen as depreciation in rupee was so fast that entire benefit of fall in crude price was nullified by a depreciating rupee. Going ahead if global economy recovers, we may see further increase in crude price and this will derail inflation calculation once again.

RBI policy measures can do very little to remove structural imbalances which has been caused by supply side constraints and hence policy measures will not work on this front. It is indeed surprising that in spite of record food grains production of 241 million tonnes in 2010-11, we continue to have all time high food inflation. This shows the flaw in distribution chain and also inappropriate the government policy to contain food prices. Can monetary policy measures do anything on this front? The answer is emphatic no. RBI is also worried about suppressed inflation as the effect of crude oil price has not been passed yet to the investors. As and when this is done, the inflation will increase further.

Then why is it that RBI has been increasing repo and reverse repo rates continuously. RBI has believed that by reducing money supply, demand for money can be reduced, which will pull down inflation. This is where effectiveness of monetary policy has always been questioned. RBI policy over a period of 18 months (since 2010) has been successful in slowing down growth but has failed to reduce inflation. Some analysts feel that increase in interest rates can only tone down growth in sectors which are interest rate sensitive such as auto and home loans.

Had the situation been worse off without RBI policy measures? Not really. Since inflation cannot be controlled by monetary policy alone, RBI has failed to control inflation by increase interest rates. RBI has put the entire economy into a vicious circle. Every time when there is an increase in inflation, RBI ups repo and reverse repo rates, but this does not work. If this vicious circle continues, then we will see interest rates been increased again and again but inflation will not be controlled.

While RBI was an extremely successful regulator in handling 2008 global crisis in terms of its impact on Indian economy, in the current scenario the regulator has failed. As a part of policy measures rate of growth has come down while inflation continues to be high. Isn’t it right time when the regulator should stop intervening through repo and reverse repo rate hikes? It will be better if the government comes out with policy measures to control food inflation like working against hoarding, ensuring that foodgrains are not rotting in godowns and profiteering in not done by black marketers. Why should common man be made to suffer by paying higher rate of interest on loans, when the problem lies somewhere else.

About Auhor

Vivek Sharma is a faculty at Institute of Financial Markets, Vashi. He is CFP, M.A. in Economics, MBA Finance and Fellow in Life Insurance. He can be contacted at viveksharma95@rediffmail.com

Educating Children about Money

Yogi — Sun, 13 Nov 2011 08:13:12 GMT

Introduction

Every parent has a dream to provide the best education to their children. They want them to progress in every field, whether it is related to studies, sports, music or any other activity. Many parents lack the promising vision for their child’s career. They want a kid to learn everything, at the same time they forget to ask, why? Study is required for mental education; sports for physical education, but what about it’s financial relevance? It’s true that the intrinsic value of study and sports cannot be calculated in monitory terms but what about having a vision to act for some income along with other activities.

History Of The Indian Education System

Our ancient education had many things to teach children about money from the elementary education itself. The children were supposed to complete their education in the ashram. For a complete education term, they had to work hard and in return, they were provided with education. During the final pass-out, students had to pay guru-dakshina (Fees) to their masters (guru) from their own earnings. This process was very encouraging for children to make themselves financially independent.

Ways to Inculcate Finance Education in Children

Let’s see how we can support our children to learn finance and money from their own efforts:

Teach children about money from the day they learn numbers and counting. Educate them about it’s importance through stories and games.
As children grow, they tend to demand more. Gradually teach them about the value of money. Tell them stories of your struggle and what difficulty you faced while started earning. Teach them about importance of saving and spending wisely.
A lot of demands by the children are not genuine. Teach them to understand the importance of their demand. Let them decide about the importance of a demand being need or want.
For their every requirement, provide a fix amount of money and try to give them a choice, so that they can select the one that suits them best, while saving some money. For example, if they want to buy shoes. Give them Rs. 500 for purchasing the shoes and tell them that whatever they will be able to save, it would be given back to them for their saving.
As children grow, start giving them allowances for their monthly expenses. Keep strict watch on how they spends their money. Tell them to make details of expenses every month. If the children control his expenses well, then give him reward points and for the aggregate years point gives them some handsome gift. Whatever a child saves in a year, try to praise him and motivate to save more.
Sometimes borrow money from children for their motivation and repay with some interest on the amount. This way, they will learn about interest and investment. They will be encouraged to save more.
If children ask some question, then don’t ignore them. Answer them for all their queries until they are satisfied. Groom them to be more analytical as they grow.
It is very important to allow children to experience the loss and profit on themselves. The loss will increase their risk assessment ability, and profit will motivate for better performance. Incase child feels demoralized then boost them with your valuable guidance for boosting the moral.
While selecting the career, advise your child to keep a view on earning capacity along with interest in the opted field.

Conclusion

Some people think that money can make children money minded, selfish, and even they can slip into wrong hands, but I say, this is what a good parent can take care of. If you take proper care, then there’s no doubt that as your child will grow you will find your children performing better in career. They will learn to set his goals accurately and focus better towards their vision of the life.

About the author:

Amit Sethi is an MBA (Fin) graduate. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

How to Make Good Use of Your Annual Bonus

Yogi — Sun, 13 Nov 2011 08:07:09 GMT

We work hard and wait eagerly for our annual performance appraisal – all for a few Rupees more! But most often this money gets spent in an impulsive way and we regret later and wish that you had used the money for a better cause. So we present to you a list of financially prudent things (in the order of priority) that you can do with your Annual Bonus:

Pay back your Creditors – Many Financial Planners agree that it is wise to close out expensive loans like credit card debt, personal loans and overdrafts as soon as possible as we end up paying higher interest rate on the same. You may consider partial repayment of home loan or any other existing loans you may be currently running for which you are paying higher interest than what you would normally earn if you had invested the same at a competitive rate.

However, full repayment of home loan should not be considered if they have been taken recently. With the high interest during initial years coupled with pre-payment penalty, one will end up repaying more than what you would actually pay had you continued with the loan; besides, you will also have to forego the tax benefits available on home loan repayments.

You’re Future Goals – A Rupee well spent!

The most popular reason why people end up spending money on those that they actually do not want is because they don’t have a clue on what to spend the surplus on!

Some of us buy ULIP policy on our well-wisher’s (read: agent’s) insistence, or decide to put the money into some mutual fund until we decide what to do with it.

Putting your money in the right savings instrument(s) is half the battle won. The best way is to avail the services of a qualified Financial Planner who would help you figure out your future goals and desires in financial terms and allocate your monthly savings, bonus and windfall money accordingly as per the investment period and your risk appetite.

The nominal fee you pay for good Financial Planning service helps you save significantly in taxes, transaction costs and comforts you with peace of mind knowing that your future goals and commitments have been planned for, and you can now focus on life’s better things.

Still have surplus money? Splurge!

What is such life where you cannot splurge on things you crave for? When you put your financial house in order and then splurge on stuff you’ve been longing to get your hands on, the feeling is GUILT-FREE!

So this time around when you receive that hard-earned bonus, take a moment to think where you want your money to really go.

written by Priya Rao

The Impact of Savings Account Deregulation

Yogi — Sun, 13 Nov 2011 08:03:33 GMT

Till recently the interest on savings account deposits was governed and regulated by the Reserve Bank of India (RBI). Banks had no control whatsoever and a meagre 3.5% on the lowest amount available in the account from the 10th to the end of month was paid out. With the RBI’s recent move to deregulate this interest rate, banks now have a free hand in deciding what they wish to pay to their depositors. Here is a quick snapshot on what this deregulation is and how the move could impact you.

The Deregulation Guidelines

Though the Reserve Bank of India has given banks a free hand to decide the interest rate, certain guidelines have to be adhered to by all banks.

A uniform interest rate is to be maintained on all savings account deposits up to Rs. 1 lakh, irrespective of the amount in the account. This means that all deposits from Re 1 to Rs 1 lakh must be paid the same interest rate.
For all deposits over Rs. 1 Lakh, a differential rate may be offered, provided there is no discrimination in the interest paid between one deposit and another of similar amount, accepted on the same date, at any of its branches.
Deregulation is applicable only to the interest rates on savings accounts of Resident Indians. Interest rate on Non-Resident Accounts will continue to be regulated.

What Does Deregulation mean to Depositors?

As a common man, the deregulation move is definitely going to have an impact on each and every one of us in some way or the other. On the brighter side deregulation would mean:

Ø Higher earnings from saving accounts

With banks having no restriction on the interest rate, the savings account could fetch you better returns. Higher interest makes them more attractive now, with more value for your money.

Ø Short term investment option

Investors looking out for short term investment avenues would now find the savings account a safe haven. High liquidity, better interest and of course the lack of volatility, makes them a good short term investment pick.

With banks already making announcements on revised interest rates, deregulation could also mean:

Ø Increased cost of loans for borrowers

Current account and savings accounts funds are used by banks, to lend to borrowers at higher interest rates. A major portion of the banks income comes from this interest rate difference. Increasing the savings account interest rate would mean banks would need to increase the loan rates too, in order to maintain a decent interest spread. Such hike in loan rates would have to be borne by borrowers.

Ø Increased charges

The additional interest expenses on the savings account borne by the bank may be passed on to customers in the form of charges on transaction or ATM usage.

Deregulation Impact on Banks

Increased costs and decreased profitability

Savings account deposits form a large part of a banks liability. Any increased interest expense on it would bring in additional cost pressures on the bank thereby affecting their profitability. And as mentioned above, such cost pressures could be passed on to borrowers and customers.

Less takers for short term fixed deposits

With a higher interest rate on savings accounts, short term fixed deposits may no longer attract depositors. The savings account would not only offer a high rate of interest, but it would also provide high liquidity.

Increased competition

In the competitive world of retail banking, every bank uses aggressive mechanisms to retain and attract customers. The deregulation move could make savings account interest rate as a decisive factor for customers to opt for a particular bank. Banks would have to offer customers more value for their money, as part of their marketing effort.

Asset and liability of banks

A banks “core” deposits come from its savings accounts (liability). These funds are used by banks to cater to various kind of long term loans (asset). With banks increasing their interest rates, other smaller banks dependent on savings accounts, may lose out their vital core deposits to the one offering a much higher interest rate thereby creating a mismatch between their assets (loans to borrowers) and their liabilities.

Points to Keep in Mind

The deregulation move could bring in a possibility of both an increase as well as a decrease in savings account interest rate. Where competition could force the banks to hike their interest rates, a decrease in rates is also possible in times of a surplus.
Do regular checks of what banks have to offer. It financially makes sense to shift banks only if the interest rate difference is substantial enough.
Before making any shift, check to see what are the charges you would have to pay. Service charges, ATM costs, transaction charges etc… have to be looked into.
Banks offer benefits to their priority customers and to those who have maintained a long standing relationship with the bank. Check to see if you could avail of any benefits from the current banker, before you make a move to a new one.

Written by Ramya Ramachandran

Safety Tips While Dealing With Your Broker

Yogi — Tue, 25 Oct 2011 13:54:44 GMT

What’s the most common story you have heard from relatively unaware innocent stock market investor. I hope it’s none other than him being tricked by his broker advise and investment decisions, and sitting at loss which is nearly impossible to cover. Is it so difficult to avoid falling prey to this trap? The basic reason for this sad ending in most of the cases is lack of knowledge, a little bit of carelessness from investor’s side and over trust shown on the broker. As an investor you will have to come out of your comfort zone and put some effort from your side so that nobody gets to play with your money mindlessly.

In this article we will discuss some basic tips which one must follow while dealing with brokers so that the financial crisis is avoided in future.

Search – Utilize the power of internet

Before choosing and getting into relationship with your broker try to search about its historical performance, its popularity with existing customers, legal disputes if there are any, its membership details and quality of management. These details are very easy to find out once you Google them on internet. A great understanding comes from reading the review comments of existing customers.

Be careful - Filling the Documents

Once you have chosen a renowned and reliable name it’s time to fill up the contractual documents. Just don’t behave like you are buying a mobile sim card where you give your photo and id proof and leave the rest to the vendor. He is free to fill all your details in the form without your knowledge. This is one of the biggest mistakes which create the financial mess for the investor. Read the contractual document carefully and fill the details as per you want it. Don’t leave any blanks (strike them off if you don’t wish to fill anything) as in case of dispute one might fill data in it without your knowledge and produce it as proof in future. This rule applies for each and every document be it KYC, Brokerage plan, trading options (stocks, currency, MF, derivatives etc). Never ever submit an incomplete form.

Read the Numbers – Audit your account at regular intervals

Your broker is not GOD and you are not a devotee who has donated all his money to serve him. It’s a business relationship and it should be treated as one to avoid losses. You should be watchful about the flow of funds from your account. Keep an eye on unusual transactions or transaction fees. Get full knowledge of the types of fee he charges for various kinds of services. The best frequency to do so is daily as it will alert you instantly and major losses can be avoided. Don’t keep more money than is required for a particular transaction in your account. Unused sum is one of the major sources of unwanted transactions.

Be possessive – Don’t share your Login/Password Details

This is the situation where being unrealistically possessive is not a taboo. There is nothing new in this suggestion. You have heard it n number of times and any discussion regarding investor’s safety cannot be complete without this statement. It’s just a strict reminder “Please don’t share it with even the most trusted ones if you don’t think you are going to die the next day”. Uncalled for trades might take place and you will be left poker faced and sobbing if you don’t stick to this rule. Changing passwords every week is also recommended as it provides additional shield.

Don’t lose your Power – Be careful with the POA (Power of Attorney) you sign

Power of attorney is the legal document which authorizes your broker to operate your dmat account as per the documented rules. POA is the document which gives immense power to the holder if not drafted properly. Please read the draft carefully and take care of the following points before signing it:

1. It should not be for infinite period. Termination date should be documented clearly.

2. It should not give unlimited power to the holder. Try to restrict the rights till transactions only and not give the rights for closure and opening of accounts. Broker should only be allowed to take positions with available amount in the account and not use leveraging without taking your consent.

3. It should contain the cancellation clause at any time with prior notice.

Conclusion

The list above does not contain all the safety measures but the most basic and effective ones. These are good tips to start with and with time and experience one can definitely master this art. Remember “The foundation needs to be tough to build a strong house”. Happy investing.

About Author

The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at bimleshs@gmail.com.

The ABC of Pre-approved Loans

Yogi — Sun, 09 Oct 2011 13:07:38 GMT

“Congratulations sir, you have been sanctioned a pre-approved personal loan of Rs. 5, 00,000. All that you need to do is to contact our nearest branch to complete a few simple formalities.”

Baffled by such a call from a pesky tele-marketing executive? Well you sure aren’t alone. Almost every day banks use tele-marketing executives to sell pre-approved loans to prospective borrowers. So do such loans actually make sense and how minimal are the formalities? Here are the several finer points of a pre-approved loan you must look out for to decide if it is actually worth the buck.

Pre approved Loans and Credit Record

From the secured home and car loans to the unsecured credit card and personal loans, pre-approved loans exist for all. So how do banks pre-approve a loan, even without having a look at your documents?

The answer lies in your past credit track record. Banks judge your eligibility on the basis of the various accounts you may be holding with them. For example, if you have a salary account with the bank, it makes it possible for them to know the salary drawn, the liquidity in your account, if any loans are being serviced with late payment fees, and your cash outflow. Credit cards too, give an insight into your finances. Put simply, a savings account plus a credit card with a bank, gives a clear picture of the amount of loan you could be eligible for and your behaviour towards debt.

Pre-Approval Does Not Imply Guaranteed Sanction

Though you may have been made an offer for a loan, the bank is under no obligation, and sanctions are purely subject to successful verification of all relevant documents. So in reality, the requirements of a pre-approved loan are quite similar to a regular loan. You would still be required to provide your bank account statement, your pan details, salary slips and tax returns details. If you are already an existing customer with the bank, this procedure could be a bit easier as they already would have the information. For all secured loans, banks would do a check as required on the property, asset quality etc… It will sanction and disburse the loan only if it fits the banks pre-determined criteria.

Costs Involved

Though often sold as low interest rate loans, pre approved loans do come with a fee attached. Banks charge a pre-approval loan processing fee. Where sometimes this amount is refunded if the loan is taken, many banks, do not offer a refund.

So Should You Consider Such Offers?

Pre-approved loans are in reality no different from the regular ones. In a way we could also consider it as a means by which banks cross sell products to their customers. Hence they could get a bit pushy in this regard. Nevertheless it pays to do your bit of assessment before taking any decision.

The Pros

· Availability of discounts – Look out for the discounts most banks offer a discount on the interest rate of a pre-approved loan.

· Quicker loan processing- With the bank already having most details about your finances, the time taken to process the loan is generally lesser.

· Negotiating with your seller: Having a pre-approved home loan in your hand, sure does give you an edge when it comes to negotiating with your seller. The builder is aware that your finances are ready and you are a genuine buyer as pre-approved loans are available for a specific period only.

The Cons

· Fixed time frame- Pre-approved loans are valid only for a certain period of time. So if you have been offered, say for example, a pre-approved home loan, you need to shortlist your home at the earliest. The money is not released till you have selected the property and have all the formalities in place.

· Additional processing fees- You end up paying processing fee twice in cases where you don’t use the pre-approved loan within the valid time and you later opt to get it approved.

Questions to ask yourself when such loan offers are made to you.

1) Do I really need the loan? - Do not go in for it simply because you have been offered one. Remember, every loan comes at a cost. So if you really don’t see the need, stay away from it.

2) Does the pre-approved loan offer any extra benefits?- Of course such loans do have its share of advantages as mentioned above, nevertheless do a comparison with a regular one and see if you save on the cost.

3) Is the loan amount right for me? - Banks pre- approve loans on the basis of your credit history and any previous loan repayments. So the amount approved may actually not be as per your requirement. The first step in this regard is to decide on the loan amount on the basis of your requirement and not because a certain amount is being offered to you.

Written by Ramya Ramachandran

EMIs on Credit Cards

Yogi — Sat, 24 Sep 2011 05:53:05 GMT

It’s festival time again and almost all shops and malls have lined up discount sales. From home appliances to the latest gizmos, this season sure is the perfect time to spend that extra bit. But how do you handle your financial liquidity at such times? How do you settle credit card dues post all the shopping? To handle such concerns, credit card issuers provide the option of the “Equated Monthly Instalment” on your credit card, giving you an extended period to settle dues. Sounds good? Read on to know what such schemes have to offer and the extra strings that need to be borne along with it.

Credit Card EMIs Are A Hassle Free Loan Option

Credit card EMI is a convenient option to settle the outstanding amount in a fixed number of equal instalments every month, very similar to the EMIs on your home loan or personal loan. It is a convenient option for those who are facing a temporary liquidity crunch to repay their credit card dues. The facility of credit card EMIs may not be made available at all times by card issuers. Many a time’s only specific purchases from select merchants would be eligible for the EMI benefit. You would need to contact your card issuer for the details. In general banks such as ICICI bank, HDFC Bank, Standard Chartered Bank, and Citibank etc...offer zero interest rate EMIs to low interest rate EMIS schemes ranging anywhere from 1.49% to 1.99% to their existing customers on request. In comparison to personal loans, EMIs on credit cards come with minimal or no documentation.

When Should You Opt For it?

EMIs on credit cards work out to be an ideal option for those facing a temporary cash inadequacy. It is a more cost effective option in comparison to non repayment or late payment of dues. Delay or non repayment of outstanding amount before the due date attracts a late payment fee, a high interest rate of around 30 % (annualized) and also a bad credit report for the borrower. At such times opting for the EMI sure serves to be ideal.

What to Watch Out For

Ø The Existing Credit Limit

During the period of your EMI, the preapproved credit limit on your card is reduced to the extent of the outstanding amount. This amount is released as and when the EMI is billed and paid for. So remember you wouldn’t be able to make purchases as per the approved limit on your card during the EMI time.

Ø The Extra Costs

Banks levy additional charges for processing, documentation and prepayment. Even 0% interest schemes have such costs inbuilt in them. Pre-closure charges range around 3% of the outstanding principal amount. Such charges sure do end up being quite an amount when annualized. So work out these costs along with the interest rate and compare it with other finance options.

Ø Discounts at Merchant Outlets

Very often banks have tie ups with leading merchants and offer an EMI finance option only on certain products. If you are going in for something of this kind, the first thing to do is to talk to the cashier or representative of the outlet about the EMI program. Other discount offers on the product generally cannot be clubbed with EMI schemes.

Ø EMI Defaults

Defaulting on EMI of credit cards should be strictly avoided as very high penalty charges are levied and the remaining balance may be converted into normal credit card dues.

Reading the Fine Print

The credit card is convenient tool and using it wisely is essential to avoid getting entangled in a world of debt. Thus, it is wise to read the fine print thoroughly to know the actual benefits entitled. Do keep in mind the following points.

1) At their discretion, card issuers may do away with the interest free periods, or even hike interest rates. Also, they reserve the right to revise the prepayment charges, with prior notice of course, and such revised charges are binding on the borrower.

2) There will be a service tax applicable on processing fee, foreclosure fee and on the interest rate and is billed in the same statement.

A good EMI scheme may seem to be a convenience, yet, it is always better to avoid using it as the first option. Going overboard on a spend-splurge drive and then totally relying on EMI repayments should be avoided. It is vital to distinguish between needs and wants and spending should be well within your income and reach. Remember there are no free lunches, and any expense and purchases has to be finally borne by you.

Written by Ramya Ramachandran

First Steps In Managing Money While Studying Abroad

Yogi — Fri, 09 Sep 2011 00:34:36 GMT

I vividly remember the experiences shared by a school teacher who addressed us at a MDRT (Million Dollar Round Table) conference nearly five years ago. His fifth grade class was a “live” version of Monopoly. Children were given “currency” at the start of the month which they used to rent out their seats in class. The closer it was to the teacher, the more expensive the seat (like prime land in a city). There wasn’t enough money to pay for the full month’s rent, after which you sat on the floor. You could earn more money by doing well in your tests, performing good deeds, behaving well, etc. His brightest kid had earned enough to buy a seat for himself in the first row, and a few months later, to buy another one which he rented out! The kids from this teacher’s class did not have to worry about managing money at a later age, as these money management lessons would last them a lifetime.

Plan well before your overseas course starts

Today, more and more children are travelling abroad for their studies. You need a fix on the tuition fees, accommodation and living expenses -- else the budget can skyrocket. Your child will be busy preparing for his final Board or University examinations, but his decision is already made, as application deadlines are already past. So, this is some homework for you, parent!

Get a realistic fix on all the fees payable

The tuition fees shared by the institution will be at previous year levels. Our assumption that inflation rates are lower in developed countries will go horribly wrong, as education expenses rise by 7-9% for most international institutions. A similar rise must be assumed for accommodation charges as well. While budgeting for accommodation (most universities will have on-campus options), take into account that your child may wish to reside in a self-contained unit and not a dormitory in the first year at least.

Living Expenses

It may be useful to talk to experienced parents, preferably from the same University, to understand how to estimate living expenses. A recent traveller and someone whose lifestyle you relate to may obviously present a more realistic picture. Remember to take into account cost of the food plan, purchase of books, cell phone costs, gifts for friends, cost of movies, local and national transport costs; including those for going to the movies, and travelling to the airport and back when taking flights home – don’t forget the cost of the flights itself. It will be beneficial to encourage your child to work within a budget. I for one agreed for my son to come home this Easter only after he offered to share the air ticket cost: feel glad that he understands the value of money.

Currency

The most critical aspect of managing overall costs of overseas education will depend on foreign currency movement.

You will need to evaluate the benefit of transferring funds now at a rate which seems beneficial with the lower rate of interest that you will earn on money sitting in your son’s bank account abroad. For a start, read up on the past movements of the currency and the factors that affect its movement. Individuals too can take forward cover on the currency to avoid facing surprises; but I, for one, would rather use this opportunity to learn how the Indian Rupee moves against foreign currencies. What about you?

(The author, Lovaii Navlakhi, is the Managing Director and Chief Financial Planner of International Money Matters Pvt. Ltd. www.immpl.com)

Money Management Starts From Home

Yogi — Tue, 23 Aug 2011 09:43:55 GMT

Recently, I got a chance to talk with a lady from a small town of Rajasthan. She was in her mid fifties from an average Indian family. During discussions, we introduced each-other; she was a house-wife and her children were studying in school and colleges, and husband had a ready-made cloth shop in same town.

I asked her how’s life in small towns and how they are fighting inflation. She answered, after thinking for awhile. We have learnt how to live in adverse situations. She said that an ideal house-wife is the best example of a good fund manager. I asked her, how?

She smiled and said, many times in life, she has faced situations when she was left with lesser money than her monthly home budget. In such situation, she has to take care of the needs of her children, their education, her husband and other daily needs along with food, gas and medical expenses. Her children being her first priority,she has to manage their other expenses as well. She has come out of many difficult situations.

She told me that she gets Rs 12,000 every month from her husband for home expenses. Out of this she spends Rs 7,000 for grocery items, Rs 2,000 for children fees, Rs 1,000 for gas laundry, etc. and Rs 2,000, she keeps for daily expenses like vegetables and medicines, etc.

How Inflation is Troubling Her?

She told me that 2-3 years back, Rs 10,000 was sufficient for a month, and many times she even saved some amount out these. However, with Rs 12,000 it is getting very difficult day by day. Grocery items are very expensive, vegetable's prices are skyrocketing, gas, medical, travelling and all day to day expenses are costlier. Apart from other expenses now she has to pay for Mobile bills and Dish Tv also.

How is She tackling the Inflation

“It’s a grand mother’s trick” she told me winking at her eyes. She said, earlier she used to buy vegetables at once for four days now she goes to market everyday and buy fresh vegetables, doing so also ensures variety in items and helps to reduce wastages due to prolonged storage. She purchases grocery items for 20-22 days. She said that by cutting ration for 10 days she’s able to keep some money in hand. She doesn't spend this money, but it gives her some flexibility in planning her budget. When the ration is about to finish, she uses that money to buy things from nearby small grocery shops, and hence it enables her to stretch the ration for one full month. I asked her, that she is managing 20 day rations for one-month requirement, isn't she is undercutting food in dining table? She laughed and said no son whatever I am saying, is the story of every home, ask your mother about it, and you’ll get the same answer. Earlier, I used to buy expensive non seasonal vegetables and fruits, now I have curtailed it, and this doesn’t mean I have compromised with quality or quantity. It is pure management! If I can serve more tasty and nutrition food, than pizzas at half its price, why not I should save money? If potato or tomato can be cooked for more variety of delicious and nutritious food, why should I buy more of beans?

Finally

We were now about to reach our destination, but i was amazed to see the managerial quality of a house wife. At last, she said bye to me, and we were on our way. I reached home and told the whole story to my wife. She laughed and said that’s a part of our daily life, we have to manage a lot more than that but all are not to disclose. She smiled and left the room to the kitchen. I thanked God that we don’t have to manage home budgets, and we have got a better manager at our home!

About the author:

Amit Sethi is an MBA (Fin) graduate. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

Should You Pay Pre-payment Penalty on loans in India?

Yogi — Tue, 16 Aug 2011 09:12:46 GMT

Prepayment penalty - a sum amounting to as much as 2% of the unpaid loan - is charged by banks in India if a borrower intends to pre-pay the remaining EMIs in one go and close the loan. Akosha team dug into the issue and here is what they found.

Introduction

In 2006 when Ashish Raizada (also an Akosha customer) sought to buy a home for this family he undertook a home loan from HDFC Home Finance. At that time he could not have predicted the circumstances that were to engulf him four years later. In those four years due to a financial stringency, that wasn’t totally isolated from the global recession, Ashish encountered a setback. These factors contributed to Ashish’s realization that there was no way he would be able to continue his EMIs considering the steep interest rate; hence Ashish decided that he would pre-close his loan in 2011 by paying off the entire balance amount from his own sources in one go (by selling the home), thus, releasing himself from the interest stranglehold. However, he was in for a rude shock when his prompt and complete repayment cost him Rs. 50,000. When he asked HDFC about this they conveniently explained that this was a prepayment penalty.

What is prepayment penalty?

The term prepayment penalty refers to a cost borrowers have to incur if they choose to settle their loan before the pre-decided duration. The idea of this penalty may seem ironic to some; “Shouldn’t the bank encourage prompt repayment?”, “Isn’t it better for a bank if the borrower pays the whole loan amount at one go (that too early) instead of a measly EMI payment?”. Common logic dictates that these doubts are justified but a little economics is all that is needed to erase them.

In order to understand this we must understand the reason why banks choose to give a loan. Economically speaking, what is the bank’s incentive? The simple answer to this question is: interest. The interest they will earn over a period of time combined with the repayment capability of the borrower are the factors based on which banks decide whether to grant a loan or not. Out of these two factors interest can be termed as the primary factor, since this is what the banks stand to earn from their “investment” in their borrowers. So consequently the banks do encourage prompt repayment but the later you pay, the more the banks stand to earn. Moreover, if you choose to pay a large amount which you were actually supposed to pay back in little instalments combined with interest over 15 years at once then the banks lose out on the major chunk of their revenue. This fear inspires the banks to employ policies such as prepayment penalties.

Two kinds of prepayment penalties

In the present scenario these prepayment penalties are employed by the banks in two situations; first where you choose to pre-close your loan by repaying the entire balance amount at once before the set duration of the loan, secondly where you discover that a loan from another institution will cost you less (due to lower interest) and choose to transfer your loan there. In both of these cases the penalty charged is almost 2% of the balance loan amount remaining. However, the implementation of this penalty is not free from controversy in any of its forms. There has been immense debate on the legal validity of the use of these policies by banks.

As regards the first situation, where a borrower chooses to pre-close the loan by repaying the entire balance amount at once, a distinction has been drawn depending on whether you choose to pay the amount from your own funds or whether you procure the funds from somewhere else (which leads us to the other situation). The National Housing Bank, which regulates the functioning of all registered housing finance companies, issued a strict directive on October 18^th, 2010 precluding all the registered housing finance companies from charging a prepayment penalty where a borrower repays the entire balance amount before the pre-decided duration out of his own sources. (see the list of registered housing finance companies below and a copy of the directive). This directive, which came into immediate effect, also mentioned that any non-compliance would be dealt with seriously under the National Housing Bank Act, 1987.

PLEASE NOTE: This directive may NOT apply to loans other than housing loans.

Therefore, if your bank or housing finance company is registered under the list given below, and they are still asking you to pay prepayment penalty, you can bring the October 18^th, 2010 directive to their notice and complain to the National Housing Bank if necessary. See also the Akosha Guide to Approaching the Banking Ombudsman.

The policy of imposing a prepayment where a borrower transfers his loan to another bank offering a lower interest rate is a bit more complex. Ideally, if a borrower has undertaken a loan with say 10% interest, he should be entitled to transfer this loan to another bank if it offers him the same amount at 8%. Though this transfer-prepayment penalty has received considerable flak for offering very little flexibility to the borrowers, no concrete measures have been taken to check this practice. The Competition Commission of India in its very first final decision recognized this on-going practice as a legally valid trade practice (here is the link for the Competition Commission of India ruling - http://www.cci.gov.in/menu/RPrasadDissenting.pdf )

Conclusion

However, despite some bold measures taken by the regulating bodies in aiming to help the common consumer, there is a lot that is left to be desired. Most importantly, there is need for a strict implementation of any and all of such regulations, moreover, any non-compliance must be dealt with seriously in order to aid and further the cause of consumer protection.

List of housing finance companies registered under the National Housing Bank Act

(*As checked on 14 July 2011)

Can Fin Homes Limited

No. 29/1, 1st Floor, Sir M.N. Krishna Rao Road, Basavangudi, Bangalore-560 004. KARNATAKA.

Cent Bank Home Finance Limited

9-Arera Hills,Mother Teresa Road, Bhopal-462 011.
MADHYA PRADESH

Deutsche Postbank Home Finance Limited.

CHANGE OF NAME OF BHW HOME FINANCE LIMITED TO DEUTSCHE POSTBANK HOME FINANCE LIMITED

202, II & III Floor, Okhla Industrial Estate, Phase - III,
New Delhi 110 020

Dewan Housing Finance Corporation Ltd.

Warden House (2nd Floor), Sir P.M. Road, Fort, Mumbai - 400023. MAHARASHTRA.

DHFL Vysya Housing Finance Ltd.

S-401, 4th Floor, Brigade Plaza, Anand Circle, Banglore - 560 011,
KARNATAKA.

GIC Housing Finance Ltd.

Universal Insurance Building (3rd Floor), Sir PM Road, Fort, Mumbai-400 001. MAHARASHTRA. GUJRAT.

GRUH Finance Ltd.

"GRUH", Netaji Marg, Nr. Mithakhali Six Road, Ellisbridge, Ahmedabad-380 006. GUJARAT.

Housing and Urban Development Corporation Ltd.

HUDCO Bhawan, India Habitat Centre, Lodhi Road, New Delhi-110 003.
DELHI.

Housing Development Finance Corporation Ltd.

Ramon House, H.T. Parekh Marg, 169-Backbay Reclamation, Church Gate, Mumbai-400 020. MAHARASHTRA.

10.

ICICI Home Finance Company Ltd.

ICICI Bank Towers, Bandra Kurla Complex, Mumbai-400 051.
MAHARASHTRA.

11.

Ind Bank Housing Ltd

66-Rajaji Salai, Chennai-600 001.
TAMILNADU.

12.

LIC Housing Finance Ltd.

Bombay Life Building, 45/47-Veer Nariman Road, Mumbai-400 001. MAHARASHTRA.

13.

Manipal Housing Finance Syndicate Ltd.

"Manipal House", Manipal-576 119. Udupi District.
KARNATAKA.

14.

National Trust Housing Finance Ltd.

MOH Building-1st Floor, 576 Anna Salai, Teynampet, Chennai-600 006. TAMILNADU.

15.

PNB Housing Finance Ltd.

Antriksh Bhawan-9th Floor, 22-Kasturba Gandhi Marg, New Delhi-110 001.
DELHI.

16.

REPCO Home Finance Ltd.

"Repco Tower", 33-North Usman Road, T. Nagar, Chennai-600 017.
TAMILNADU.

17.

Sundaram BNP Paribas Home Finance Ltd.

21-Patullos Road, Chennai-600 002.
TAMILNADU.

18.

Vishwakriya Housing Finance Ltd.

Office No.117, 209, Masjid Moth, South Ex Plaza II, South Extn Part II,
New Delhi - 49.

19.

Indo Pacific Housing Finance Limited

(Formerly AIG Home Finance India Limited and originally incorporated as Weizmann Homes Limited)

Unit 3 &4 A, 4th Floor, Southern Park,
Saket District Centre, Saket, New Delhi- 110 017

National Housing Bank Notice

Text of the notice:

The issue of levying prepayment penalty or prepayment charges by housing finance companies on pre closure of housing loans by the borrowers out of their own sources has been considered by the National Housing Bank and it has been decided that housing finance companies should NOT charge prepayment levy or penalty in such cases.

It is, therefore, advised that prepayment levy or penalty should not be collected from the borrowers when the housing loan is preclosed by the borrowers out of their own sources. All HFCs are advised to ensure compliance of the above with immediate effect.

Please note that non-compliance with the above advisory may attract penal consequences under the National Housing Bank Act, 1987.

Please acknowledge receipt.

Yours faithfully,

R S Garg
General Manager
Department of Regulation and Supervision

"Akosha helps consumers in getting their problems against banks resolved. See www.akosha.com. Reproduced from Akosha blog."

How We Indians are different from the Western World and Thank God for That!

Yogi — Thu, 11 Aug 2011 09:46:15 GMT

Property prices will always go up: that was the mythical belief that brought about the 2008 crisis, equally for individuals as well as for the financing institutions. The last few weeks in the US brought me face to face with these “victims”, and got me thinking of the lessons that we can learn from this. It also made me strengthen my faith in the Indian financial systems and the ethos that we follow.

Our Attraction to Property

I suppose we have largely had positive experiences with property purchases. We have been prepared to hold on to this asset for ten years, or even for ever and always found a profit at the time of sale. Selling an asset purchased for Rs. 12 lakh at a profit of Rs. 1 crore 20 years later will give anyone a high --- the fact is that the returns are 11% p.a. and are below equity market returns for the same period. But this article is not about property vs. equity, but about our beliefs and investment philosophies.

What we Indians do right

Even if we do take housing loans, we ensure that we make the 15% down payment and then ensure that the equated monthly instalments comprise of principal plus interest, and not interest alone. The tenure of the loan we take may be set at 15 or 20 years, but our focused objective seems to be pay down this loan at the earliest. In the US, home owners are keen to increase their 30 year mortgages and get incremental interest-only funding for the enhanced value of their homes. The institutions too find themselves at a disadvantage when property prices fall as foreclosures increase and individuals return the key of their home to the bank in the mail and walk out to a cheaper accommodation. The additional money obtained by this individual to invest in other assets results in a situation of over-leverage.

Savings vs. Spending Culture

One of the key cultural differences between India and the West is that we live within our means. We may be heading in that direction, but as of today, we do not spend more than we earn. A far cry from living it up on plastic, and spending today what we hope to earn tomorrow and the day after! The sub-prime crisis may be over; but the prime mortgage defaults are increasing as former double income families are finding it difficult to make ends meet after one of them has been unemployed for a few months, and jobs are not coming back in a hurry.

Lessons for the Future

Investments must be diversified. We must accept the truth that other countries could do better than ours. In fact in the last 10 years (2000-2009), India has never been the best performer, though in consistency it has remained among the better performers worldwide. The assets one possesses must remain in India at least to the extent they are required for the local financial goals; the rest must be invested elsewhere. Those in the US learnt it the hard way in the past decade. Since end 2001, the BSE Sensex has gained 450% vs. the Dow Jones Industrial Average’s nil, yes zero, return. From a currency point of view too, the US $ has weakened against the Indian Rupee by 3% during the same period, enhancing equity returns in dollar terms even more. Heed the five words your financial planner offers as advice today: asset allocation is the key. We don’t want to be caught napping with our eyes open, I suppose.

(The author, Lovaii Navlakhi, is the Managing Director and Chief Financial Planner of International Money Matters Pvt. Ltd.)

Credit Card Balance Transfer- A Smart Way to Reduce Interest on Dues

Yogi — Mon, 08 Aug 2011 12:57:53 GMT

Have you overspent on your credit card and need time to settle dues? Or, do you often find it difficult to keep track of due dates of your various credit cards? Credit Card Balance Transfer is an ideal option in such situations, to consolidate all dues into one card, without having to pay high interest rates and penalties. Sounds good? Investment Yogi evaluates this facility to see if it is actually worth the buck.

What Does it Offer

Credit card balance transfer is a facility to transfer outstanding dues from one credit card, to another credit card of yours, or to a totally new card. Balance transfer could be quite a boon especially when you have a high outstanding bill, which needs more time for payment. It lets you postpone your payment by a few weeks and the transferred dues remain constant, without interest additions. You could either transfer the entire outstanding balance or just a part of the balance. Balance transfer is also useful to consolidate dues from multiple credit cards into one single card.

When should you consider a balance transfer?

Ø Unable to settle the dues within the due date

If you have overspent on your card and are unable to settle the balance because of a short term liquidity crisis, a balance transfer comes as a temporary relief. By transferring your outstanding to a new card, it gives you more time to payback.

Ø High interest rate on current card

You could consider a transfer if the interest rate quoted by your current card issuer is high. Of course such interest rate is applicable only when your payments are outstanding beyond their dates. So if you are carrying forward balance every billing cycle at a higher interest rate then go for a new one at a lower rate.

Ø Poor customer service

If you really aren’t content with your current card issuer’s service, then by opting for a balance transfer, you could pay up the outstanding with a new card and get rid of the earlier one.

Going about a Balance Transfer

To enable a transfer you would need to approach the card issuing company, to whose card you want the balance transferred. Submit an application detailing your credit card number, credit limit, expiry date, the outstanding amount and the amount of money you wish to transfer. In proof, you would have to submit photocopies of the credit card, last bill statement and an address proof. Once approved, the new card issuer would send a demand draft for the outstanding amount to your current card issuer to settle the dues. Your outstanding balance now moves over to your new card.

The amount that you transfer to the new card must not exceed 80% of its credit limit. Also, once the outstanding amount is transferred, the credit limit of the new card is reduced proportionately in tune with the amount transferred.

For example, let us say you have a new card with a credit limit of Rs. 60,000 and you transfer Rs. 30,000 to it. The Rs. 60,000 limit on the new card reduces by Rs. 30,000. The amount that could be transferred is up to a maximum of 80% of 60,000 i.e. Rs. 48,000.

Interest and Charges

The interest rate on balance transfer generally ranges from 0.5% to 2%. Many, card issuers use balance transfers as a way to lure customers, and offer low or zero interest rates. In such offers, the outstanding amount or balance transferred could be repaid at zero or low interest, within a specific time frame, depending on the card issuer. A service tax and a processing fee in the range of 2% and 5% of the total transferred amount, is levied on all balance transfers.

What to Watch Out For

The biggest advantage of a credit card transfer is that it acts as a temporary relief, getting you time to repay your dues without being charged a high interest. Here are points to keep in mind to get the maximum benefit from your balance transfer.

Ø Zero Interest

The zero interest on balance transfer offered by many issuers is only for a specific period. Be aware that once this period is over, interest rate may be considerably, high, if payments are not made. Thus, ensure you pay off all dues within the zero interest periods.

Ø Processing time

The process of balance transfer takes around 7 to 10 days. In this period, don’t miss out on the due date of the existing card. Pay up at least the minimum due amount till you receive the draft for the balance transfer.

Ø Issuer’s terms and conditions on new purchases.

New purchases on your new card will generally not fall under zero interest rate. Card issuers charge a high interest rate on all such purchases. Ensure such outstanding amounts are paid on time.

Written by Ramya Ramachandran

Pre-EMI for Under Construction Properties

Yogi — Mon, 08 Aug 2011 12:47:10 GMT

When buying an under construction home, developers often seek payment on the basis of the stages of construction completed. Catering to such requirements, Home Finance Companies (HFC), facilitate partial disbursements of the sanctioned loan periodically, in tune with the developers demands. For these partial loan disbursements, a borrower would be required to pay what is called as a “Pre-EMI”.

Applicable only for under construction properties, Pre-EMI’s are very different from regular EMIs in composition and tax treatment. A basic understanding of their working is thus essential for effective loan.

How Does Pre-EMI Differ From EMI?

For under construction properties, the sanctioned loan amount is disbursed to the builder as and when the stipulated work is completed as per the agreement. For this periodic partial disbursement, the interest that is paid, till the completion of the property is known as Pre-EMI.

A regular EMI begins after the sanctioned loan amount has been fully disbursed. Irrespective of whether it is an Advance Disbursal Facility (where the full loan amount is disbursed at one go) or the case of Pre-EMI, a regular EMI would begin from day one of the complete loan disbursement. Unlike the regular EMI which comprises of a principal and interest component, Pre- EMI comprises of only the interest portion.

Calculating Pre-EMI

Vikas has just signed an agreement with a developer for an under construction property to be completed in 12 months. He has been sanctioned a loan amount of Rs. 12 lakhs at 10% interest rate p.a., for 20 years. The builder requires Rs. 1 lakh every month till final completion.

The simple interest payable per month is: Rate of interest per annum x (Total loan outstanding at the end of current month) / 12.

Here is an example illustrating how Vikas’s monthly Pre EMI is arrived at.

* Fixed rate of interest has been assumed for illustration purpose and simplicity.

Total interest payable over 12 months by Vikas would be Rs. 65,000. Thus, the average Pre-EMI per month works out to be Rs. 65,000/12 = Rs. 5,416. Vikas would thus be paying only the interest for the first 12 months. His actual EMI and loan tenure would begin only thereafter, for 240 months.

So Is Pre-EMI a Good Option?

Well, technically speaking, pre- EMI does get a bit more costly considering that you pay an extra bit of interest in the pre construction phase, plus a regular EMI thereafter. Nevertheless, many experts still believe that it could serve as a good option.

The Pros

Ø Pre-EMI comprises only of the interest portion and is thus a lesser amount than your EMI. If you are having a tight financial situation and are anticipating future gains, you could pay a pre-EMI and still get to purchase a home that you want.

Ø Loan disbursements and hence payments to the builder in a phased manner over a period of time, could add quite a pressure on the builder to finish the project on time.

Ø With a pre-EMI, your actual EMIs don’t start right away. So the difference between the two could be used to invest in high yielding investments and generate some returns.

The Cons

Ø There is an extra interest payment over and above the regular EMI payments, which you would be paying. Of course there is a tax deduction available, but that is possible only after you take possession and that too in 5 subsequent years.

Tax Implications

The brighter side to all the extra interest that you pay through a Pre-EMI is the tax deduction under Section 24.

All interest paid as pre-EMI prior to completion of construction, is a deductible in 5 equal installments, in the five subsequent years, beginning from the year in which the construction is completed. Say for example, you have paid a total of 2.5 lakhs, in the pre construction period as Pre EMI. Then Rs. 50,000 (i.e.2, 50,000/5) would be the tax deductible in each year for the next 5 years.

There would be no tax benefit available on any principal repayment, if at all done, in the pre-completion phase. Principal repayments on a loan made in the years after the construction of the property eligible for deduction up to a limit of Rs. 1 lakh per annum.

Also while claiming pre-EMI tax benefits the total interest component (i.e. the current year post-possession interest component + the previous year's 20% pre-EMI interest component) cannot exceed the Rs. 1.5 lakhs.

Written by Ramya Ramachandran

Home Loan EMI Calculator

Exclusive Financial Products for Women

Yogi — Wed, 06 Jul 2011 12:05:06 GMT

The modern Indian woman is a financially savvy individual who prefers to make her own independent decisions when it comes to finances. No wonder the market is flooded with women centric financial products to cater to her specific needs. Whether she is a working women or a home maker, there is definitely a product available for her.

Welcome to the World of Financial Products for Women!

In this world of consumerism, financial players are luring women in a big way by offering women’s only products. Most of these products are genuine with attractive features and are not just marketing gimmicks. These specialized financial products provide women, financial independence, and an opportunity to save and build a strong financial portfolio.

What to Look Out For

So how good are these products and do they actually bring about some value to wealth? Here is a peak into some of them.

Ø Savings Accounts for Women

Various banks offer exclusive savings accounts for women that require a much lower average minimum balance to be maintained. Add-ons such as free personal accident insurance, discount schemes, and free debit cards may also be included as part of the account. A few of the women’s accounts being offered are as follows.

BANK NAME	ACCOUNT NAME	KEY FEATURE
ICICI Bank	Advantage Woman Savings Account	Minimum balance of Rs 10,000. Daily card spending limit of Rs. 25,000.
IDBI Bank	Super Shakti Account	One zero balance savings account free for child below the age of eighteen years, Locker services at a concessional rate and investment advisory services.
Axis Bank	Smart Privilege Account	Minimum balance of Rs 10,000, zero-balance minor account, jewellery insurance cover with debit card.
UTI Bank	Smart Privilege Account	Automatic insurance coverage for critical illness related to women. The debit card linked o the account gets discounts on certain products from Lakme Beauty Salon, Dominos, etc

Ø World of Plastic Money

From special bill payment services to discount schemes at big retails, women specific cards, have it all. Added benefits such as cash back facility, accidental insurance cover, and lower maintenance charges, are also commonly offered. Some of the cards for women are:

BANK NAME	CARD NAME	KEY FEATURE
HDFC	Easy Shop Woman's Advantage Debit card	Rs 1 as cash back on a purchase of Rs 200 for a year, 50% discount on locker fee for one year, special rates on purchase of gold bars and a personal accident insurance cover of Rs 2 lakh.
Citibank	Woman’s Visa Silver Card	Free card for life, free additional card, one reward point for every Rs200 spent and discounts at various merchant establishments.
Standard Chartered	Diva Card	Free health check-up at leading hospitals once a year, bill paying facility, discounts at beauty salons.

Ø Insurance

With changes in the society, women today have a position and their lives are considered as important as their male counterparts. Insurance products for women have been designed to cater specifically to ailments and concerns women commonly face such as complications of pregnancy, on-the-spot assistance for lady drivers and critical illness benefit covering *** and cervical cancer.

INSURANCE PROVIDER	POLICY NAME	KEY FEATURE
LIC	Jeevan Bharati-1	Money back policy offering critical illness cover for pregnancy- and women-related diseases and medical cover for child born with congenital problems
Birla Sun Life	Birla Sun Life Woman First	Cover for pregnancy and women –related diseases plus a guaranteed return of 3%.
Kotak	Kotak Preferred term life	Rs 50 lakh cover for 25 years to a 30-year-old female for an annual premium of Rs 5,984,
HDFC Life	Sampoorna Samridhi	Dual benefit of endowment plus a whole life plan. Option of either receiving an enhanced maturity amount at the end of policy term or a maturity amount with an additional sum assured on death up to the age of 99.

Ø Loans

For women borrowers various lenders offer low interest rate loans for marriage, education or buying a plot. Exclusive gold loan schemes for women are also commonly offered.

Lender	Loan Name	KEY FEATURE
Bank of India	Star Mahila Loan	Loan for buying gold at 13% p.a.
Dena Bank	Dena Shakti	Attractive loan scheme for women entrepreneurs
Corporation Bank	Corp Mahila Power	Provides personal loans at a rate of at least 1.5-2.5% point lower than personal loans available with the same bank

Though most of these offers and schemes may seem to be cheaper and attractive, one must have a good understanding of their financial position and basic requirement before opting for one. Choosing a product exclusively tailor made for women is definitely a good option, nevertheless weighing all pros and cons is a must before taking the plunge.

Written by Ramya Ramachandran

Fixed Deposit Calculator

Rising Loan Interest Rates - What Should You Do

Yogi — Fri, 24 Jun 2011 11:34:55 GMT

The last year saw constant hikes in the Cash Reserve Ratio and the Repo rates by the Reserve Bank of India resulting in an upward movement of loan interest rates. For the common man, such rise in rates is definitely a setback. Borrowers face tight financial constraints and coupled with a rise in inflation, it sure are tough times. Here are some practical options available to help you ease the loan burden at such times of high interest rates.

The most common option when the interest rate goes up is to either increase the EMI or increase the tenure of the loan. So which one of these is actually better?

Ø Increasing the loan tenure and keeping the EMI constant

When interest rates rise, a sudden rise in EMI could be quite a pinch especially for individuals in tight financial conditions, those with more than one debt and those nearing retirement. At such times, keeping the EMI constant and increasing the loan tenure works out as an ideal option. Lenders accommodate the interest rate increase in the increased loan tenure and retain the monthly outflow at the same level. However keep in mind that by doing so in the long run, you end up paying more interest for your loan. Also, some lenders may not permit an increase in loan tenure beyond a specific term, especially for those nearing retirement. So check with your lender on the possible way out.

Ø Increasing the EMI, with the same loan tenure

For those who can afford it, many financial experts, often recommend going in for a higher EMI and maintaining the same loan tenure. This is because, by increasing the EMI and retaining the same loan tenure, though the monthly outflow is higher, the total cost of the loan works out to be much lesser. The increase in EMI must be within your financial capacity to make payments every month.

Other Options Available

Ø Loan Prepayment

For many borrowers, loan prepayment could be the last option in times of high interest rates, as it primarily depends upon the liquidity position. When going in for a prepayment, remember to check on the prepayment charges the lender would quote. Banks generally levy 1.5% to 2% for prepaying the whole loan amount. So consider prepayment, only if the cost of prepaying the loan works out to be much lesser than the rise in interest rate.

Loans could also be part prepaid. By doing so, the loan principal value comes down, thus reducing the total interest amount you’ll pay. The EMI would reduce, or at least, the same EMI would remain even after an interest rate increase. Some banks may not even charge a penalty for up to a certain percentage of prepayment. A combination of a part prepayment with a marginal EMI hike could sometimes work out as an ideal option, if funds are available to do so.

Ø Loan Refinance

Loan Refinancing is replacing your existing loan, with a new one, under fresh terms and conditions. When interest rates rise, switching over to a lender who is offering a reduced interest rate, could serve to be a good deal. For a fee, you could switch over from a fixed to a floating rate, or vice versa. Many lenders are more than happy to attract borrowers by lowering their interest rates. However this process does not come easy. Be ready for a lot of paperwork along with foreclosure charges, and processing fees. Also take into consideration 2 to 3% penalty which the previous lender would impose. Despite the penalty, if the new lender’s interest rate works out cheaper, it is worth a consideration.

Points to Remember

Under current economic conditions and inflationary situations, borrowers could probably expect to see more interest rate hikes. Whatever the option you choose, the following key points must be kept in mind.

Avoid utilizing the money that has been set aside or has been invested, for goals such as marriage, retirement, children’s education etc., to prepay your loan.
The basic thumb rule is to keep the EMI within manageable limits. If you have requested your lender to increase the EMI ensure you would be able to service it.
Interest rates may increase or decrease depending on the market direction. So cater to such rate changes in your financial plan, so that you are not caught off guard at any time in the future.
Always choose an option that you are most comfortable with, and not because, your lender, colleagues or friends have suggested you to do something. Remember it is your loan, and the responsibility and the cost of the loan finally fall on you.

Author: Ramya Ramachandran

Home Loan EMI Calculator

How the Rich in India Spend, Save and Invest Their Money

Yogi — Thu, 09 Jun 2011 06:07:16 GMT

The Major Segments

Kotak has just published a report on High Net Worth Individuals in India, dividing up the growing group into 3 segments: The Inheritor, the Self-made and the Professional. The report acknowledges there are 2 distinct groups which are “Old Money” and “New Money” but that the 3 segments divide it up even more specifically. The Inheritor has been “Born with a Silver Spoon in his Mouth” and quite simply inherited the money, though he/she may work very hard to maintain or increase it. The Self-made may have been middle class or even very disadvantaged in youth, but somehow made great wealth. The Professional could be a doctor, tech engineer, or financier who was able to parlay his work into significant income and savings.

What does an HNI look like?

One major recent change in High Net Worth individuals (HNI) is that the class is much more heterogeneous in India now. An HNI could well be someone who inherited wealth but could also be a professional who’s made money in Technology or a farmer’s son turned industrialist. Whatever it be, HNIs in India tend to spend heavily on quality homes, food, clothing, and the luxuries of life in terms of entertainment, education, travel and family vacations. They invest conservatively and are increasingly interested in giving to charity and making a mark on the world through other means than the private consumption of their wealth. Passing the bounty on to successors is an important shared trait in this group.

Spending: Brand names and More

There are interesting differences in how the various groups like to spend and save their money. For example, the Inheritors seek out name brands less and are as comfortable wearing a Titan Watch as a low-end one their daughter might have given them using her pocket money.

The Self-made prefer to focus on name brands and hold them in high esteem. They are highly receptive to product innovation and are a goldmine for marketers of luxury products and services. The Self-made typically tend to use brands as a means to fulfil their aspirations. They are, therefore, plum targets for products based on cutting-edge technology or products tailored to their needs. They tend to purchase products from retail outlets in India, being short on time, whereas Inheritors often like to shop abroad, even for the same products.

Professionals make choices wisely and spend on brand names when they feel it makes sense, not purely for the brand. They often are passionate about hobbies and interests and tend to spend lavishly in these areas rather than for prestige or glamour.

Seeking Help and Support in Wealth Management, Accounting, Estate Planning

The Professionals use the most wealth management services, and are willing to pay for them, preferring to spend their time on family, hobbies and vacations. Self-made HNIs feel more comfortable with people than organizations so they favour developing personal relationships with specific chartered accountants, wealth managers, and private financial advisors. Friends and family often seek their advice on critical matters. Inheritors generally have an established network of advisors and professionals who guide their finances for them.

Investment Styles

Investment styles differ in that Inheritors like to invest in more conservative asset classes whereas the Self made are comfortable taking on more risk in their investments. Professionals have a greater proportion of their total income available for spending and investing than other ultra HNIs. As most of them do not run a business, a lesser portion of their total income is marked for business investments. Professionals, therefore, spend and invest a greater proportion of their income, placing about three-fourths of their investments into financial assets, primarily equity and debt. They like to give to charity more than other ultra HNIs and prefer to give through charitable institutions rather than at an individual level.

The Self-made take calculated risks with their investments. For instance, they are likely to have the highest proportion of investments, among the ultra wealthy, on alternate assets such as private equity. They also favour FDs and insurance policies, however, and tend to invest only in assets they understand. They are likely to own a mix of real estate assets such as holiday homes, commercial buildings and agricultural land and plantations, apart from apartments and villas.

Inheritors are the most risk averse in the group, preferring ample real estate investments (approximately 40%) along with a highly diversified portfolio of equity, in about the 30% range. They have established systems for the succession of wealth, but these are changing with time, especially when a child does not want to take on the family business and a professional is brought in.

Whatever the sub category, the Ultra HNIs are a class apart, and a growing class in India. For more information, check out the study at this link.

Here is a calculator which can help you determine the time it will take to become a crorepati.

Reliance Jewels Promotes Safe Investment in GOLD

Yogi — Tue, 03 May 2011 06:01:20 GMT

Akshaya Tritiya is one of the most auspicious days in the Hindu calendar. The word “Akshaya” means imperishable and eternal prosperity that which never diminishes, so new ventures made and valuables purchased on this day would be fruitful and believed to bring luck and success. Traditionally, in India, on this day most people invest into gold which is the symbol of wealth, prosperity and fortune. This year it will be celebrated on 6^th May, 2011.

Reliance Jewels, a fine jewelry specialty format of Mukesh Ambani owned Reliance Retail Limited-a subsidiary of Reliance Industries Limited (RIL) had announced on 26^th Apr, 2011 the launch of ‘Akshaya Tritiya pre-booking offer.’ In this scheme Reliance Jewels had offered ‘Double Gold Rate Protection’ to its customers, who pre-book jewellery for Akshay Tritiya before 1^st May, 2011 and fix their gold rate to protect against price increase. If the prices of gold rate on Akshay Tritiya i.e 6^th May 2011 is lower than the booking rate the customer would be able to recover the difference in rates. In addition, the company is also giving its customers a discount of Rs. 100 a gram on gold jewelry.

This scheme by Reliance Jewels management team is in order to give its customers (investors) reliefs from rising gold prices also improve their own sales. Now, let’s analyze the trend of gold price from 2006 to 2010 in one month period before Akshaya Tritiya day. This day was celebrated on given dates between years 2006 to 2010; 30^th Apr 2006, 20^th Apr 2007, 7^th May 2008, 27^th Apr 2009 and 16^th May 2010.

Analyzing, the above table it can be concluded that gold prices have seen upside movement 2 times out of 5 years which we considered. There was global slowdown between 2007 and 2009 due to which there was not much movement in gold prices during the month prior to Akshaya Tritiya day.

Now, let’s analyze the performance of gold price in month of Apr, 2011 and post announcement of offer i.e 26^th Apr, 2011 till 30^th Apr, 2011. Then, find out whether the investors taking the advantage of Reliance Jewels scheme to buy gold ornaments, bars, etc. are at advantage?

Gold Price during month of April, 2011

Gold Price post announcement of Reliance Jewels scheme

The above table portraits that investor seems to be at advantage by pre-booking the gold investments with Reliance Jewels for auspicious day of Akshaya Tritiya under the scheme ‘Double Gold Rate Protection’. The investment into this scheme has closed on 1^st May, 2011. Now, let’s see the gold prices on 6^th May, 2011 which seems moving upside.

In future, it’s expected this company and competitors will churn out similar kind of schemes on other festivals like Dussera, Dhanteras, Deepavali, etc. to attract customers and improve their own sales margin. The customers shall be updated and knowledgeable with such attractive schemes to avoid any disappointments later.

This analysis would have given some dope of upside movement for gold price (per kg) during festival periods. The customers are recommended to take an advantage of such schemes after understanding pros and cons whenever it’s rolled out in future before investing in gold jewelry, bars, etc .

By: Hiral Thanawala, CFP^CM

Errata: The prices mentioned in the tables above are on Rs per 10 gm basis

What Does the Budget 2011 Mean to You: Analysis and Highlights

Yogi — Tue, 01 Mar 2011 04:27:19 GMT

“All is well”; for the Aam Aadmi in the Budget 2011. With no significant changes it elicits a neutral reaction.

To quote statistics, GDP is estimated to have grown at 8.6% in 2010-11, and expected to grow at 9% in 2011-12. Direct Taxes Code proposed to be effective from April 01, 2012 and Inflation is seen at 5%. The government has set the fiscal deficit target for FY12 at 4.6% of GDP.

Personal Taxation: No Significant change

While the intent has been to move towards the DTC structure which is effective 2012, from a structural sense not much has changed in the income tax slabs. The basic tax exemption limit for men is up to Rs. 1.8 lakhs (up by Rs. 20000 but less than the expected limit of Rs. 2 lakhs. This will mean an additional savings of Rs. 2640 for men The limit for women remains unchanged at Rs. 1.9 lakhs.

The exemption limit for senior citizens is now Rs. 2.5 Lakh and will be applicable from the age of 60 years (earlier 65 years). What seems a tad unusual is introduction of a new category for citizens above the age of 80 years. They will now get a basic tax exemption of Rs. 5 lakhs. In jest, the minister while announcing this structure also went ahead to clarify that he still dint come under this bracket and had more years to go. The will get benefit by Rs. 4133 in a year.

What seems like a change of reasonable significance is the change in the filing norms. Those with just salary income as their source of income and having taxes deducted at source will not need to file income tax returns. However this means that there should be no other income (interest income or income from property or gain) that needs to be accounted for. The central board of direct taxes will be issuing a notification soon on the exempt classes for salaried citizens who donot need to file returns. Currently, every person whose earnings exceed the taxable limit has to file a income tax return. The person in the lowest tax brackets benefits from this move. However, till more details are known, it is wait and watch for us. The Rs. 20,000 tax-free investments in infra bonds continues this year with no change.

Service Tax : More Outflow

The effort to introduce GST with the agenda to pass an amendment in the constitution this year to put into effect the Goods and services tax is a good step towards aligning the taxation structure pan – country. This has also brought in additional services under the tax net. The rate of service tax is retained at 10%+ cess. However there are a host of new services for which you will need to shell out more.

Your hospital visits just got expensive. Health check-ups done by hospitals with more than 25 beds or those with air conditioning will now be in the service tax net. If you step into a hotel where the tariffs is more than Rs. 1000 a day or eat at an air-conditioned restaurant that has a license to serve liquor your bill amount has just moved upwards. Most of these establishments already bear luxury tax imposed by the state governments, and hence, are likely to pass this additional burden on to the consumer.

Apart from these, the service tax on economy class airfare has been increased by Rs 50 to Rs 150 on domestic sectors and by Rs 250 to Rs 750 for international travel. Domestic travel by business class or any other class higher than economy will attract a service tax of 10% + cess on the value of the service provided by the airline, a steep increase from the earlier Rs 100 per ticket.

In the insurance space, the mandate by the FM is clear to ensure that these companies focus on the business of risk cover and directionally moving the consumers too in the same direction. Investment portions of all policies now will attract the service tax net. This means apart from the pure term cover all other investment polices including endowment, money back etc will be more expensive. However there is no move to make health insurance more affordable for the masses.

A nominal 1% central excise duty has also being imposed on 130 items, many of them consumer goods that were earlier exempt from certain indirect taxes.

All this means more money outflow.

Foreigners can Invest in Indian MFs

The budget allows foreigners to invest in Indian equity oriented mutual funds if they fulfill the SEBI KYC norms. Till now they could invest only in foreign funds which had India in their emerging markets theme. However, how the KYC norms will be fulfilled for these customers remains to be seen.

There were no policy reforms or initiatives introduced to alleviate inflation, address infrastructural concerns. All in all, the budget without making any major dent is seen as just retaining status quo.

Author: Daisy Fernandes

Create Your own Budget by using this monthly budgeting tool. Use this tax calculator to calculate your post budget tax liability for the Assessment Year (2012 – 2013).

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Expectations from Union Budget 2011

Yogi — Fri, 25 Feb 2011 05:55:10 GMT

Heave ho! Its budget time once again. Time for putting on our scrutiny hats and building up expectations of what will Mr. Mukherjee present to the country on Monday!!

Bursting with enthusiasm, I asked my neighbour Chakradhar Malpani, a quintessential “Aam Aadmi” on what was he expecting from the budget?

He squinted and gave me a glare which was enough to tell me, “Are you out of your head?”

What do you think I should expect for? Look at the prices of aloo, pyaz, dals, pulses and vegetables. I have to think twice these days if I have to take my Bajaj scooter to leave my children to school or shop in the market, price of petrol is sky rocketing. And as if inflation is not enough, I am even worried on how to make sure that, my children; Chintu-Bintu’s education is not affected with all this….

And as he continued my mind drifted and I realized this was indeed the truth for all common people like us. The common man today is neck deep, fighting food inflation, rising prices of petrol and diesel, inflated education costs, et all. In short, trying to make all ends meet within his salary.

Indeed, there is no room for expectations. There is only hope that the budget will be a little realistic and not just an election winning manifesto (considering that the elections are just around the corner).

Gone are the days when India’s booming consumerism was the talk of the town. With inflation and rising costs of essential services, eating into our barely increasing salaries, a little more money in our hands to enjoy those small moments of life is what we are looking for.

With this thought, here is the wish-list if I may call it, of what I expect from the Budget 2011. Mr. Mukherjee please make a note:

1. Please do something about Inflation. This is not only affecting me but my poor farmer brothers and fellow entrepreneurs (small businesses). I am not even talking about luxury items. Please put in measures to alleviate artificial hoarding of grains. Don’t give subsidies which only benefit rich farmers. It is difficult today for a middle class family to think beyond dal-chawal because of the rising costs. Make a sincere attempt to alleviate this inflation misery.

2. Please give a little more money in the hands of the common man. Make the personal income tax structure beneficial to the common man. Let us not wait for the Direct Tax Code (DTC) implementation in the next year. Some proposals of the DTC beneficial to us should see implementation beginning this year.

- There should be a move towards the revised slab structure.

To give you a glimpse the slab structure in the DTC which will be effective April 2012, is as follows

Annual Income	Tax Slab
Up-to INR 200,000 (for senior citizens 250,000)	Nil
Between INR 200,000 to 500,000	10%
Between INR 500,000 to 1,000,000	20%
Above INR 1,000,000	30%

- Increase in the limit for 80 C investments. Like our wise readers have also suggested, encourage more savings. Realistically, the savings structure should move in line with inflation. The Rs. 1 L limit is completely outdated.

- Increase the limit for Public Provident Fund (PPF) investments, the common man can atleast plan his retirement in peace

- Infrastructure bonds were a good move last year which created a direct linkage between tax payers money and infrastructure growth. We want more options which will help us see the fruition of our hard earned monies for the good of the country.

3. Bring more efficiency in the government management. Fiscal deficit should be brought down. We cannot expect windfall auctions like 3 G last year to bail us out. There has to be effective and efficient management practices in place. The least I can expect is to manage my (tax payers) money better. Let me, an honest tax payer not incur hardships to pay for corruption, inefficient governance and dishonest non-tax payers.

4. Mere reservations have not benefitted anyone. Let’s create an open environment to encourage meritocracy. Sarva Siksha Abhiyan is good, but there has to be focus on us middle class people as well. We work hard to ensure that our kids get the best education, that they no longer are the victims of poverty, that education is their bailout towards a better life. But the cost of educating our children is sky rocketing. Fees seem higher than household salaries. Better infrastructure and reforms in areas of healthcare, roads, electricity, education, water and sanitation is the urgent need.

5. Create an environment for industry growth. Let not monopolistic intentions lobby and mar the environment for growth. Make it a fair playing ground for all.

In short, we as the citizens of this glorious country, look eagerly for better control measures, reforms and policies that will lead us onward and channel us back into the fastest growing economies of the world.

Mr. Mukherjee, it is our earnest request not to let this budget be an election manifesto, but a strong strategy map to lead us onto our desired growth path.

We look forward eagerly.

Yours sincerely

The common Man.

Want to know if you are saving and investing wisely? Use this calculator and find out. Click here to use other such calculators.

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Understanding Credit Card Numbers

Yogi — Tue, 01 Feb 2011 12:46:47 GMT

Have you ever given a second thought to the importance of the numbers on your credit card and what they might mean to you? You might be surprised to know that each number has a specific meaning. By knowing the meaning of the numbers and following a simple test, you can avoid credit card fraud. Read on to find out more.

International Standards

Credit card numbers are basically drawn up by the International Standards Organization (ISO). All credit cards share many similar characterisations due to the ISO; such as the size and the placement of the numbers, emblazoned across the front. ISO is a standard-setting body of international representatives that help produce global standards, both commercial and industrial.

Why is ISO so important in our global market? They not only create standards for credit cards but magnetic-striped ID cards as well, allowing for easier processing and recognition. Not only do credit cards across the board share the same material that they are made from (PVC), they share a common numbering sequence.

Understanding the Numbers

A credit card can be up to a maximum of 19 digits long according to ISO standards. Below is a breakdown of the numbers.

1) The First Six Digits: The first six digits of your credit card is the Major Industry Identifier (MII) and the Issuer Identifier Number (IIN). The first number, MII, represents the category or system in which your credit card was issued. The MII together with the other five numbers identify the exact issuer, IIN. Hence, the first 6 digits of a credit card are known as the Bank Identification Number (BIN). The numbers lets the merchant know what type of card you are using and with some cards, even the currency that will be used. An example of the most popular cards are:

3-Travel and Entertainment
    American Express-34xxxx-37xxxx
    Diners Club-38xxxx
4-Banking and Financial
    Visa-4xxxxx
5-Banking and Financial
    MasterCard-51xxxx-55xxxx
6-Merchandising and Banking
    Discover- 6011xx

2) Account Number: The account number can be up to 12 digits. Each issuer has trillions of possible account numbers. The credit card account number is used to identify you. Each bank or card issuer will have various lengths and number sequences. In some cases, your account number can be broken down in to when your card was last issued, if it has been lost or stolen, how many cards have been issued to an account, etc.

3) Check Digit or Checksum: The checksum is an algorithm that was awarded a US Patent to an IBM Scientist named Hans Peter Luhn (1896-1964). The checksum is called the Luhn algorithm.

The checksum is used to confirm the initial digits of the card number. Benefits of using a checksum is that it prevents casual attempts to invent credit card numbers, as only one in ten will be valid. If the credit card needs to be manually recorded, the checksum will help to prevent mistakes.

How to Use the Checksum

Step One: Take the credit card number below and double every other digit from the right (i.e. every odd no. digit).
5424 1801 2345 6789

5x2=10; 2x2=4; 1x2=2; etc.

(You should come up with the following sequence of numbers – 10, 4, 2, 0, 4, 8, 12, and 16.)

Step Two: Add the new numbers to the un-doubled numbers. All double digits should be added as a sum of their digits. An example would be a 12 becomes 1+2.

1+0+4+4+4 + 2+8+0+1 + 4+3+8+5 + 1+2+7+1+6+9 = 70

Step Three: If the final sum is divisible by 10, then the credit card number is valid. If it cannot be divided by 10, the number is invalid or fake.

70÷10 = 7

As you can see, the number I got is a valid number. Grab a credit card out of your wallet and try this simple and fun test.

In Addition

Additional numbers on a credit card are the issue and expiration dates and CVV, CID, or CVC codes, which are security codes for various credit card companies. Not all credit cards will have the same sets of extra codes to identify if the card is authentic.

With a little bit of knowledge, you can find out a lot about your credit card.

Written for InvestmentYogi by Lisa Chanamolu

Do you want to know if you are saving enough? Try out this FREE financial health check

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Track that Buck!

Yogi — Mon, 10 Jan 2011 07:58:15 GMT

Having bid adieu to 2010 and looking forward to 2011, one thing I would like to do better is “Fiscal prudence”. Be it in learning inflation management wiping off the tears chopping onions (getting dear at Rs. 50) or reading about the disaster management in the Euro zone.

And with it come my must-dos for 2011

Track those expenses - Microsoft Excel Rocks!

The credit card is a marvellous evil. Where 10 years back I used to tag along with my Mom dutifully ticking off the grocery list as one by one our bags were filled by the grocer and should the billing exceed the amount in hand, some items had to be simply done away with.

Today, all I do is stroll along with my super-sized cart and fill it with the vaguest of items which in some corner of my shopaholic mind, I feel I need and after I see them lying in dust for months, I think I could well have survived without those! Such is the recklessness brought in by the credit card and to fend against it is a challenge, not completely insurmountable though.

All you need is a tracker. Take 5 minutes off and scan all credit card monthly statements, make rows of expenses clubbed into categories with each column dedicated to a month and this will give you a picture where you are overspending. Although this is post facto but if you keep tracking those expenses zealously, the next time you visit the shopping market you will think twice before picking that bottle of unwanted sauce.

What this will also give you is a snapshot of how your various expenses have fared over time and any aberration will be noticed quickly. A simple snapshot can look like this.

What this will help you do is

Keep a track of your expenses category wise and send you alarm signals where you need to deep dive further
Give you an estimate of your expenses. When you want to draw up your detailed financial plan and keep 6 months worth of expenses handy, you will exactly know which number to look for.

Make Saving a Discipline

Fiscal prudence means in simple terms Inflow > Outflow and in simpler terms means that you save some portion of your salary in a timely disciplined way. Heard of “Systematic Savings!” SIPs, Recurring deposits all enable you to save bit by bit and you can bring that force discipline yourself by setting up an SI (standing instruction) in your account to ensure that within a week of you salary hitting your account, your savings have been shifted out and what is remaining is then the expense management zone.

Here again an excel can come in handy. A simple snapshot is shown below

Practice Goal Oriented Investment

Saving money by itself will be no good if you don’t know what you are saving for. This brings forth the question of what are your life’s goals. If you know that then how much you need and when will determine how much you need to save and where!

Simple terms, plan for retirement today! And keep those vehicles of investment distinct and different. Apportion a percentage of your savings to PPF, EPF and pension schemes such that they take care of you retirement corpus in a systematic manner. Likewise, Child care, education needs etc can be planned by investing through equity oriented SIPs, Gold ETFs etc. and your Recurring deposits or multi deposits can take care of liquidity needs.

By keeping your investment vehicles separate for different goals you can manage them better.

Actually, if you think about it all three points are a no-brainer, so are all tips on healthy eating and weight management. What is difficult about them is the ability to be consistent and disciplined and that is what makes any tracker/diet plan effective!

So Cheers and wishing you all a “Fiscally” Glorious Year Ahead!

You can also do expense tracking online by using InvestmentYogi’s monthly budgeting tool. It’s a great way of keeping your expenses in check and have all the records at one place. Here are some useful calculators for you.

Author: Daisy Fernandes

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Now Fund Transfer Need Only A/C Numbers

Yogi — Wed, 05 Jan 2011 12:43:35 GMT

Online fund transfer has become easier w.e.f. January 1^st, 2011. The RBI ,in its circular, has directed banks to henceforth take the customers’ account number only for transfer of funds electronically ignoring other details like names.

Reason? The earlier process involved cumbersome back-end processing for the banks that required manual interference for matching customers' names and other branch details. There were many instances of people writing their names in different manners. Such process provided scope for error and fraudulent intent.

The new system will be applicable for all electronic payment gateways, such as RTGS, Neft, NECS and ECS, besides fund transfers initiated by customers at bank branches or over the internet.

As all the banks in the country work in a Core Banking Software (CBS) environment, no two customers have similar account numbers across banks and as such, the RBI observed that account numbers could easily considered as the sole criteria for transfer of funds electronically.

Although it would still be mandatory for the customers' name to be mentioned while making electronic fund transfers, only the account number will be relied on for the purpose of affording credit, the RBI said. The banks would use details such as the customers' names for post-credit checking, as well as in the case of customers falling in high-risk categories.

In order to keep the account numbers error-free, the customers would need to input the account number information more than once while conducting electronic fund transactions either over the Internet or at bank branches, the RBI said.

5 Hazards of Online Shopping

Yogi — Thu, 09 Dec 2010 08:01:08 GMT

Like most everyone I know, I am happy with online shopping and the convenience that it provides. I like the wide variety of choice that internet companies can offer me, the cheaper prices and the ease of comparison shopping. The fact that I can get all this shopping done in my most comfy pants, while sitting on my couch, is not so bad. Some of my favourite purchases have been internet purchases using the ‘couch potato’ method. Yet, as the old saying goes, “all that glitters is not gold”.

While shopping online has many advantages, it can also come with some hazards that customers need to be aware of. Here are five categories for you to watch out for.

1. Item Issues

One of the biggest item issues you may face while online shopping is inaccurate sizes. Keep in mind that different countries have different ideas of the perfect fit. Before you order that amazing New Year’s Dress, check to see the comments of what other customers have said about their experiences regarding sizing.

Other issues you may face while shopping online is receiving items that have been used, are in poor condition, or the item has been damaged in shipping. To make the most of your shopping experience and avoid these problems, research the return policy. Are returns free or is there a cost? If you need to, can you return the item to a brick and mortar location?

2. Hidden Cost

Occasionally, while shopping online you get hit with unexpected delivery charges for shipping and handling. Make sure you understand the shipping cost. Is each item shipped separately, therefore, increasing your overall expenditure? It that is the case, you may want to reconsider your small purchase items.

Watch out for discounts and coupons. Some sites make it look like you will get big savings for buying more. Make sure you read the Terms and Conditions (T&C) of the offer. Most items are very specific and you may find it hard to match your needs with the coupon/discounts requirements. Know the return policy, once you hit the order button, you may not be able to exchange, return or cancel your order. Don’t get in a hurry. If you are too quick on the order button, it may take awhile for the site to process your purchases. By hitting the order button again, you may be billed twice. Patience is a key factor in online ordering.

Note - You can usually find all site and return policies, postage and shipping cost, etc., on the back page.

3. Payment/Currency Issues

Before you give your payment information, make sure you understand how the payment page works. Most sites will usually allow a final review of your payment page before you buy. Take the time to review this page before you hit submit. If the site does not allow you this option, consider using a different site for your purchases.

Be clear on the type of currency/rate of exchange that is being charged. The internet is far reaching and prices appear in all kinds of currencies. You can find currency convertors on the internet that are updated regularly. While exchanging currencies find out if there are any charges made for the conversion.

Note - Most companies will use a higher conversion rate.

4. Timely Delivery

Given the vastness of the internet, you can order from around the world. Find out if the site you are using has a guarantee on their delivery time. If you need the item in a specific time frame, give yourself plenty of time in advance for unexpected surprises (i.e. delayed or lost packages, damaged/return times, etc.).

If you do have any questions regarding the items, is there a link for a contact person/department? If you are making a large purchase, try sending an email before your purchase. If you don’t get a response, try another site.

5. Frauds

Unfortunately, the most common type of fraud from online shopping is credit card fraud. Use only secured sites to avoid this happening to you. Look for the following to make sure the site you are using is secure.

1) A small lock icon in the lower left hand side of the page.
2) Urls starting with https instead of http.

Every time you use your credit card online, you run the risk of credit card theft. A few tips are to NEVER, give your credit card information in an email or any other personal information for that matter. There are a lot of scams that will ask you to update an account such as PayPal; this is a way to find out if your account is active. These emails are fraudulent.

The second kind of fraud you may run into is vendor fraud. The product being displayed could be completely false or defective. The vendor may take your payment and not send the product. The best idea is to use only trusted sites. Look at the vendor rating and consumer reviews to discover the reputation of the vendor.

In Conclusion

Using the internet for shopping can be a fun and rewarding experience. Be smart and protect yourself by using only trusted sites, know the site policies and review payment forms before submitting.

Written for InvestmentYogi by Lisa Chanamolu

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Mental Money and Mental Accounting

Yogi — Thu, 02 Dec 2010 16:44:34 GMT

At one point in time or another, we have all had a ‘windfall of cash’ come into our lives. What I mean by that is you have gotten unexpected money, such as a bonus, inheritance, gift, etc. What you might not know is that how you relate to this money is different than how you relate to money you get from a paycheque. Let’s take a closer look at ‘Mental Accounting’ and why you think like you do.

What is Mental Accounting?

Mental accounting is the equivalent of financial accounting, said Richard Thaler, an economist at the University of Chicago who was the first to describe the concept of Mental Accounting/Spending and how it works. Basically, we all have tendencies to separate accounts based on the source that the money came from and what we intend to use it for. According to Thaler’s theory, individuals assign different functions to each account and different values (i.e. Rs 1,000 from a cash gift is easily spent, compared to Rs 1,000 from a job related source). The effect is usually irrational and detrimental on purchasing decisions and other behaviours.

Here is a simple example of how people determine the importance of each account and the negative affect it can have on their bottom line. You bought a TV and the price was Rs 20,000. The amount you had planned on spending was Rs 25,000. Thrilled with saving Rs 5,000 do you a) put it in a savings/mutual fund to earn you even more or b) you celebrate your extra Rs 5,000 with a new pair of fancy name brand shoes and a nice dinner for you and your friends? According to studies you will be dancing your way to a fancy restaurant with your friends.

The Down Side of Mental Accounting

As shown in the example above, the down side of mental accounting is that you categorize items without fully thinking things through. People relate to extra savings or cash gifts as ‘free money’ and use it ‘freely’ while still carrying around credit card debt. When a billionaire was asked what he would do with a Rs 4,600,000 windfall, he said he would pay off any outstanding debt and invest the rest into savings.

I am not saying you should not/cannot treat yourself to something special or nice. Mental Accounting does not have to have a negative impact on you. If you train yourself in thinking logically about your money and treat each dollar as hard-earned money, you will soon find that your ‘free money’ is making you a lot more ‘free money’.

Re-categorizing Mental Money

A great way to re-categorize your thinking or re-train your brain is to start asking yourself simple questions. For example, if you are getting a bonus, you can calculate the hours that you had to work in order to get that bonus, any overtime you had to put in, weekends worked, etc. It will get you in touch with the fact you have ‘earned’ this money, it was not just given to you. Make a spending plan for it. How much are you going to save and how much are you going to reward yourself with? Use InvestmentYogi’s Financial Planner to help you in defining your goals.

Thaler said, the alternative to having mental accounts is to ‘consciously’ ask yourself what every purchase is worth, than compare it with every other purchase.

Keeping the End Rupee in Mind

Regardless of the source of your money, keep in mind that money, is money, is money, is money. Get the picture! Money is money, regardless of the source. The value of it does not change. Being smart and sensible with ‘every’ rupee that ‘falls’ into your lap, you can steadily increase the ‘windfall’ that comes to you by investing and saving all aspects of income (gifts, lottery wins, and bonuses), which will add up to HUGE ‘winnings’ in the end.

Written for InvestmentYogi by Lisa Chanamolu

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And with it come my must-dos for 2011

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Mental Money and Mental Accounting