SEBI Circular no. SEBI/HO/IMD/DF3/CIR/P/2019/166 dated December 24, 2019 has prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian. Based on recommendation of Mutual Fund Advisory Committee, it has been decided as under:
1. In partial modification to the above SEBI circular, it has been decided as under:
i. Para 1(a) shall read as under:
“Payment for investment by any mode shall be accepted from the bank account of the minor, parent or legal guardian of the minor, or from a joint account of the minor with parent or legal guardian. For existing folios, the AMCs shall insist upon a Change of Pay-out Bank mandate before redemption is processed”
ii. Irrespective of the source of payment for subscription, all redemption proceeds shall be credited only in the verified bank account of the minor, i.e. the account the minor may hold with the parent/ legal guardian after completing all KYC formalities.
iii. All other provisions mentioned in the aforesaid circular shall remain unchanged.
2. All AMCs are advised to make the necessary changes to facilitate the above changes in mutual fund transactions w.e.f. June 15, 2023.
3. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
National Pension System (NPS) Exit Rules 2023: The Pension Fund Regulatory Development Authority (PFRDA) has decided to allow NPS subscribers to purchase multiple annuities on exit if their corpus is over Rs 10 lakh and they utilize at least Rs 5 lakh to buy each annuity.
“The option of multiple Annuities shall be provided for those Subscribers who earmark the annuity corpus more than Rs 10 lakhs wherein Rs 5 lakhs utilized to buy each annuity scheme,” the regulator said in a circular dated May 10.
Under NPS, subscribers are allowed to buy immediate annuities from Annuity Service Providers (ASPs) under the enabling provisions of Exit Regulations of PFRDA. Till now, the subscribers were allowed to buy only one annuity scheme from the ASP at the time of exit.
The regulator said that it has taken the decision to allow the purchase of multiple annuities in the interest of subscribers.
“In the interest of subscribers’ retirement income optimization and to provide them with a wider range of annuity options, PFRDA is pleased to inform that the choice of multiple annuities from the same ASP will be made available,” the regulator said.
What’s new
As per the regulator, the option of multiple Annuities will be provided for those subscribers who earmark an annuity corpus of more than Rs 10 lakhs wherein Rs 5 lakhs is utilized to buy each annuity scheme.
The regulator has advised CRAs to build the necessary system-level functionality to facilitate the implementation of this change.
“Until this feature is developed, ASPs can handle the requests for multiple annuities received from subscribers and provide the necessary information to CRA through Reverse Information Flow (RIF),” the regulator said.
“PFRDA believes that this change will greatly benefit subscribers by providing them with a wider range of annuity options and optimizing their retirement income,” it added.
In 1983, the excitement was palpable as Kapil Dev hoisted the Prudential trophy after the limited-overs World Cup held in England. The 1987 event, initially set for England, was moved to India and Pakistan due to the financial woes experienced by the United Kingdom’s (UK) pension providers, including Prudential, the World Cup’s sponsor then.
The pension industry was struggling because pensioners were living longer, investment returns were lower than estimated, and pension payments were fixed and payable for the pensioner’s lifetime. Ultimately, the UK government took over the liability. Some individuals, who were eligible for a higher pension, experienced losses as the government capped the maximum pension amount.
A similar situation unfolded in the wake of the 2008 Great Financial Crisis, when General Motors (GM) faced bankruptcy due in part to high pension liabilities towards former employees. The US government nationalised GM, took over the pension liability, again capping the maximum pension amount. Pensioners eligible for a higher pension again suffered.
These events show that reckless pension schemes eventually fail. Another lesson is that when the government steps in, it focuses on protecting those who need the pension the most. Those receiving higher pension amounts often suffer.
This leads to the current debate among executives about whether they should opt for a higher future pension by diverting a portion of their existing Employees’ Provident Fund (EPF) corpus.
Let’s say an employee, whose salary is Rs 1 lakh per month, contributes 12 per cent (Rs 12,000) to his EPF account. The employer contributes an equivalent amount (12 per cent of salary or Rs 12,000) over and above the salary. Of this 8.33 per cent, subject to a maximum salary limit of Rs 15,000 (or Rs 1,250 per month) has to be contributed to the Employees’ Pension Scheme (EPS).
The balance Rs 10,750 (Rs 12,000 less Rs 1,250) is transferred to the EPF account. The employee’s EPF account receives a total of Rs 22,750 per month (Rs 12,000 from the employee and Rs 10,750 from the employer). The accumulated balance in the EPF account is tax-free, and can be withdrawn fully on retirement.
The EPS fund receives Rs 1,250 per month from the employee. Additionally, the central government tops up with a proportional contribution to enable EPS to meet its pension liability. This contribution is Rs 174 per month (1.16 per cent of salary, with a maximum salary cap of Rs 15,000).
The pension on retirement is based on the number of years of contribution and the salary at retirement. The maximum salary assumed on retirement remains Rs 15,000 per month and the maximum pension is Rs 7,500 per month (for those who have contributed for 35 years or more).
The retirement pension is available only if the employee completes 10 years in the scheme. Those who don’t can withdraw their EPS contributions. Many employees don’t withdraw this EPS amount even though they are eligible to do so. This unclaimed amount is exceptionally large and is likely to be never claimed back. The interest earned on this “surplus” powers many of the unsustainable pension promises, like a minimum pension of Rs 1,000 per month.
A Supreme Court decision has allowed some EPF subscribers to receive a higher retirement pension without the constraint of a cap on maximum salary of Rs 15,000 per month. To be eligible, however, they would need to transfer significant amounts from their EPF accounts to EPS, sparking a debate on the advisability of such an action.
A valuer assesses whether the resources can meet the liabilities. The latest valuation for the year ended March 31, 2017, revealed a deficit of Rs 15,000 crore. The deficit is expected to grow even larger with the removal of the cap on retirement pensions and growing life expectancies of Indians.
Truth be told, employees hoping for a larger pension in the future by contributing more from their EPF corpus are betting on the government stepping in to cover the deficit. However, history has shown that when a government intervenes, those receiving higher pensions often suffer losses. Employees with higher salaries would be better off investing their tax-free EPF corpus in suitable financial instruments upon retirement rather than trusting that money to an uncertain future pension.
All data taken from EPFO annual accounts of 2021-22
Till some years ago, the pension that subscribers to the Employees’ Pension Scheme (EPS) received after retirement was not worth talking about. The cap on the annual contribution meant that the pension was too low. A person who contributed the maximum Rs.1,250 every month to the EPS for 30 years would get a monthly pension of Rs.6,857. Little wonder that three out of five respondents to an online survey by ET Wealth in 2013 were not even aware that they were eligible for pension after retirement. Fast forward to 2023, when a Supreme Court ruling has transformed the EPS pension from a peripheral benefit into potentially the principal source of income in retirement.
The apex court has removed the cap on contributions to the EPS, so subscribers can opt for a higher pension equal to 50% of the basic pay. ET Wealth looked at three subscribers from different stages of life to understand the impact of opting for a higher pension. On the face of it, the prospect of getting an assured pension equal to 50% of your basic pay for life seems very tempting. Someone with a basic pay of Rs.1 lakh will get Rs.50,000 every month for life. It can easily become the principal source of income in retirement. Of course, this enhanced pension will come for a price. If a subscriber wants to get a higher pension, the contribution to the EPS has to be 8.33% of the basic pay.
Till now, the contributions to the EPS were capped. Members were contributing as little as Rs.5,000 a year (`416 a month) till November 2001. This was raised to Rs.6,500 a year and currently stands at Rs.15,000 a year (Rs.1,250 a month). To get the higher pension, a person will have to increase his contribution to the EPS as well as deposit the deficit payments as well as the interest earned on that since the time of joining the EPS. A person who joined EPS at 28 in 1995 when his basic salary was Rs.10,000 per month will have to deposit Rs.20.5 lakh in the EPS if he opts for higher pension. His monthly contribution to the EPS will also increase more than five-fold from Rs.1,250 to Rs.8,200, which means the inflow into the EPF will be that much lower. The calculations assume that the salary increased by 8.5% every year. Interest deficit has been calculated using historical interest rates offered by the Provident Fund.
Should you go for it?
Financial planners are divided on whether one should opt for the enhanced pension. Some say the higher pension is a good opportunity for subscribers. “Retirement planning is the most neglected financial goal in India. The option to get an enhanced pension would help individuals get an assured income in retirement,” says Amol Joshi, founder of Plan Rupee Investment Services. “It will be especially useful for those who may not have been able to save enough for retirement,” says Dheeraj Sharma, a Delhi-based wealth adviser. As our calculations show, opting for the higher pension makes perfect sense for subscribers in almost all situations. “The lump sum amount that will shift from the Provident Fund to the EPS will come back within a few years. The return is much higher than what a regular annuity offers,” points out Sharma.
Boomer aged 56 who will retire soon
Opting for higher pension seems like a golden opportunity.
Note: If opting for higher pension, monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.8,200
At the same time, some financial advisers say that EPS takes away flexibility from the individual. “A young person with a long-term investment horizon may be better off investing in more lucrative options where he has greater control over where and how much to invest,” contends Deepti Goel, Associate Partner of wealth advisory firm Alpha Capital. For instance, if someone aged 25 years with a basic salary of Rs.50,000 opts for higher pension, he will have to put Rs.4,165 in the EPS every month. Assuming his income increases by 8.5% every year, he would put some Rs.81 lakh into the EPS over the next 33 years and get a pension of Rs.3.4 lakh.
“The option to get higher pension from EPS would give individuals an assured income after retirement. Everybody should opt for it.”
AMOL JOSHI
FOUNDER, PLANRUPEE INVESTMENT SERVICES
Instead of putting in the EPS, if that money is put in a mutual fund to earn 10% returns, he would have a retirement corpus of almost Rs.3.2 crore in 33 years. But this 10% return is not assured while the pension from the EPS comes with government assurance. Another key difference is that the EPS guarantees pension even in case of early death of the member. If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension. If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.
Gen X employee aged 46
Even more compelling reason to opt for higher pension.
Note: Monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.7,200. This will increase 8.5% every year with rise in income.
Interestingly, the development would help individuals realise the advantage of compounding and patience. The EPS pension is linked to the number of years a member contributes to the scheme. People who withdrew their Provident Fund corpuses and pension contributions every time they changed jobs will not get as much as those who kept their retirement savings untouched. The withdrawn amount is often blown away on discretionary spending and disrupts the compounding. As the legendary investor Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily.” What’s more, if a member has contributed to EPS for 20 years or more, two bonus years are added to the calculation. So, if a person with a pensionable salary of `1 lakh has contributed for 19 years, he will get a monthly pension of Rs.27,142. But if he contributed for 22 years, the pension calculation will give him two bonus years and give him Rs.34,285 per month.
Rs.6,89,210 cr: was the corpus of the EPS as on 31 March 2022. The scheme receives inflows of roughly `4,200 crore every month.
Rs.37,327 cr: was the deficit projected in the EPS as on 31 March 2019. In November 2022, EPFO appointed actuaries for valuation of the scheme.
72.73 lakh: pensioners were drawing pension from EPS as on 31 March 2022. 66% of these were members, while 33% were spouse and children.
What could go wrong
But subscribers need to keep in mind a few things before they click on the option. First, the EPS pension will not be linked to the last drawn salary but to the average salary in the last 60 months. In most cases, this would be much lower than the last drawn salary. Secondly, there are concerns about the viability of the EPS scheme. In the past, various actuarial studies have projected very high deficits in the scheme. As on 31 March 2019, the deficit was projected to be Rs.37,327 crore. “With the increase in the number of pensioners, the amount disbursed as pension has also shown a steady increase over the years. However, the fund has not witnessed any cash flow problems till now, in spite of there being a projected actuarial deficit in the valuation of the fund,” notes the annual report of the EPFO for 2021-22.
“Pension equal to 50% of salary is tempting but the amount will remain constant. Inflation is one reason why EPS alone will not be enough.”
RAJ KHOSLA
MANAGING DIRECTOR, MYMONEYMANTRA
“A young person with a long-term horizon may be better off investing in more lucrative options where he has greater control and flexibility.”
DEEPTI GOEL
ASSOCIATE PARTNER, ALPHA CAPITAL
In November 2022, the EPFO appointed actuaries for the valuations of the pension scheme. The report is not out yet but it is not incorrect to assume that the higher pension option may further dent the sustainability of the scheme. The changing demographics of India only adds to the problem. Right now, there are more contributors than pensioners to the EPS. But as the population of the country ages and more contributors turn pensioners (with many of them drawing a higher pension), the scheme could face more difficulties in the years to come. This is already reflected in the decline in contributions to the scheme. Annual accounts for 2020-21 indicate a drop in contributions to Rs.50,562 crore from Rs.51,953 crore in the previous year.
Millennial worker who just joined
The long-term sustainability of the EPS is a major concern.
Note: The projected monthly pension looks enticing. But over 27 years, even 6% annual inflation will reduce its value to Rs. 51,400.
This is not to say that the EPS would default on pension payments. The scheme is managed by the government and will continue to pay the pension as promised. Even so, financial advisers ring a note of caution. “People who have retired or are just about to retire may not face any problem, but those who will retire 15-20 years from now should be wary,” warns Sharma. Another problem is that the EPS is for life but there is no option of return of principal to the nominee or the legal heir after the death of the subscriber. After the member dies, the spouse gets 50% of the pension for life. So the risk of early death, within a few years of retirement, would mean very low returns on the money that flowed into the EPS. On the flipside, living longer till the age of 85-90 or beyond would prove bountiful.
Don’t rely on EPS alone
Experts say while the EPS could provide a tidy income in retirement, one should not depend solely on this income. “Inflation is one key reason why even the enhanced EPS pension may not be enough in retirement,” says Raj Khosla, Managing Director of MyMoneyMantra.com. Unlike the pension for government employees, the EPS pension is not linked to inflation and will remain constant. This means its purchasing power will decline over time. Even a modest 6% inflation will reduce the value of Rs.1 lakh to less than Rs.54,000 in 10 years. In 20 years, it would be worth only Rs.29,000. “The EPS pension can be an important but not the only pillar of your retirement plan. The retirement savings should be spread across various instruments, including annuities, fixed income and equity based investments,” says Joshi.
Benefits offered under EPS
The Employee Pension Scheme offers the following benefits to private sector employees covered by the Employees’ Provident Fund.
Pension for life to member and spouse
Pension starts at the age of 58 and is based on the number of years of service and the basic salary.
Pension to widow
If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension.
Pension for orphans
If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.
Disability benefit
If a member is permanently and totally disabled during service, he will get full pension for life.
Early pension
A member can opt for early pension after 50, but he will have to take a cut of 4% for every year before 58.
Bonus years for long-term contributors
If the member has contributed to EPS for 20 years, two bonus years are added to the calculation.
Investing is NOT Hectic. Investing is calm and measured.
Today you can check the value of your investments on a minute-by-minute basis if you want. But just because you can doesn’t mean you should. Investors who trade more have lower returns, as Brad M. Barber and Terrance Odean demonstrated years ago. And checking your portfolio more frequently will inevitably lead you to trade more.
Doing nothing and sticking to selected funds for the long term can be a significant source of alpha in the long run. Of course, this requires something that many investors find very difficult to implement: patience and discipline.
Resisting that urge to adjust your portfolio becomes particularly difficult when you’re faced with losses. Loss aversion means you suffer losses more than you enjoy gains. And what’s still the best way to avoid losses? Don’t look at your portfolio.
Assume an equity portfolio with a 10% annual return and volatility of 15%. The probability of a positive return over any given year is 93%. As a result, an investor who evaluates the portfolio once a year will experience a loss once every 10 years or so. If the same portfolio is evaluated quarterly, a loss will occur about once every four quarters, or once a year. And if that portfolio is evaluated daily, roughly 120 days a year will register losses.
It takes superhuman discipline not to change a portfolio when you are confronted with losses 120 times a year. But the best returns in the long run are achieved by adhering to a well-diversified investment strategy that lets you reap the benefits of the different risk premia available to long-term investors.
To stay calm and measured, you need to turn off the noise and look at performance only sporadically, and avoid the temptation to tinker too often with your portfolio.
Investing is NOT precise. Investing is rough and dirty.
Investing isn’t watchmaking either. As an investor or portfolio manager, you cannot precisely manipulate the mechanics of the market the way a watchmaker can the mechanics of a wristwatch. If a stock or a bond has a portfolio weight of less than 2% or an active weight of less than 2% compared to the benchmark, it is almost guaranteed that the effect on the overall portfolio will not be meaningful in any practical sense.
And now think about the time spent analyzing the details of stocks that will end up with an allocation of 2% or less in the portfolio. Each of these details has a miniscule influence on the overall stock performance, and the overall stock performance has a miniscule influence on the overall portfolio.
Just because you can calculate risk exposures to the second decimal place and adjust portfolio positions to the basis point doesn’t mean you should. Fighting for every basis point is best left to money market fund or government bond fund managers who have to because of current central bank policies.
If you work in the equity space, across asset classes, or in any asset that has some volatility, always remember that even the best model can only explain less than 50% of the variation in returns when applied out of sample — and out-of-sample tests are the only ones that count.
What does this mean? Over 50% of your returns will be noise. And that noise will inevitably drown out any benefits accrued from fine-tuning a model or investment portfolio.
Investing is NOT rational. Investing is emotional.
The financial industry is incredibly innovative — mostly when it comes to reinventing the wheel. For most investors, the simple and transparent solution will do just fine most of the time. But every once in a while an innovation comes along that benefits investors as a class. Just think: Where would we be without the limited liability company, the stock exchange, diversification, the mutual fund, the index fund, options, or futures?
Thanks to all of these inventions, investing has become cheaper, risk management more effective, markets more liquid, and access to investments more open. Ultimately, financial markets are among the most democratic institutions in the world today.
But very often financial innovation is a recipe for disaster. Investing may be rational, but money is emotional, and when risks — or opportunities — materialize, emotions take over and investors make crucial mistakes.
I have made it a rule to recommend only those investments that I have experienced myself. If a new innovation comes along, I tend to add it to my own portfolio with a little bit of money just to know what it’s like to live with it. Experiencing a new innovation firsthand will elicit the same emotions in me as it will in my clients. And only then can I judge if the investment is appropriate for a specific investor.
Emotions cannot be imagined. As a portfolio manager or adviser, you have to experience them to improve your recommendations and decisions. Research shows that fund managers who invest much of their personal wealth in their mutual funds generally outperform. Similarly, advisers who eat what they cook tend to cook better.
Investing is NOT entertaining. Investment is boring.
Is there a television on nearby turned to CNBC, Bloomberg TV, or any other financial news channel? If so, please get up and switch it off.
Let me explain why you shouldn’t watch what I call “Bubble TV.”
The people working at Bubble TV and their counterparts at financial newspapers, investment newsletters, etc., are not in the business of providing good advice. They are in the business of selling airtime, newspapers, and newsletters. And the best way to attract attention is to appeal to the emotions and instincts of their viewers and readers.
“If it bleeds, it leads” is an old saying in the news business. Spectacular earnings surprises and cratering stock markets generate more viewers and readers than stories about meeting earnings expectations and stock markets grinding their way up.
“Experts” who want to be mainstays on Bubble TV have to entertain. And it is much easier to accomplish that by stoking people’s fears of a crash or their desire to get in early on the next superstar investment. As a result, Bubble TV is full of “news alerts,” “breaking news,” and pundits predicting imminent doom or eternal bliss — often both at the same time.
TV experts make bad investment advisers. So keep your TV switched off and focus on what really matters in investing: having a thorough understanding of each investment and how they interact in a diversified portfolio.
The Finance Bill, 2023, with 64 official amendments, was approved by the Lok Sabha without discussion on 24 March. The key amendment that will affect all fixed income investors is about debt mutual funds. These funds have been stripped of the long-term tax benefit if they invest less than 35% of their assets in equities. Such mutual funds will attract short-term capital gains tax.
I would still invest in target maturity funds even after 31 March because fixed deposits (FDs) don’t give me these flexibilities. Here are my three simple reasons.
If I were to decipher the key amendment in simple words, all the gains will now be taxed as income and you will have to pay income tax. This is a big jolt, especially for debt investors.
There is a chatter that a few categories of debt funds, especially the recently introduced and hugely successful target maturity funds, will not attract investors now as they will move to FDs. Few will but I will still look at investing in them for these reasons:
Higher returns if yields come down
The data on 10 years government security yield from 1998 points out that yield mostly moves in a tight band of 5.5%-7.5%. In fact, over 80% of the time, it’s between 7%- 8.5%. The bond price is inversely co-related to yields. This means if the yields go down, the bond prices go up and if the yields go up, then bond prices go down potentially leading to capital losses too.
Our view is the yields offered by government securities are near their high. So, if I capitalize on higher debt yields and the yields fall, I can make higher returns than just the expected regular yields.
The yields have fallen from high before too and happened in 2008, 2014, and 2019. The total returns from debt funds were close to double the returns of the yield.
Deferral of tax
Investing in target maturity funds that have maturities matching my retirement age or post-retirement age is a smart way of reducing the tax impact. As per the current law, one must pay income tax on accrued interest income out of the investments made in FDs.
Many of you will fall in the 30% tax bracket and this would mean low post-tax returns. My deferral of tax point was more to do with my income levels. If I am, let’s say 50, and plan to retire at 58, where I would have no income, I would invest in debt funds as the redemption will come to me as an income only after I retire thereby helping me reduce my tax liability. Here I pay taxes at much lower rates than what I would have paid during my prime working years leading to higher post-tax yields.
Longer duration
Many banks offer attractive FDs rates only for a maximum period of five years. I also have seen the pattern where the longer the duration of deposits, the lower the rates. For example, the difference in rates between a 1-year FD and a 5-year FD is over 25 basis points. One basis point is one-hundredth of a percentage point.
In the case of a few target maturity funds, the holding duration can go up to 15 years holding too. I think India’s interest rates currently are high enough and hence I would like to lock it in for longer years.
The final point which is applicable to all asset classes that have been forgotten in the last 4-5 days is the fact that the investors can smartly avail the benefits of setting off.
Set off is an option where investors can use the benefits of any losses that they carry to be adjusted against the gains made during the same or different financial year.
While it is mandatory that short-term gains can be set off against short-term losses, for long-term gains both short- and long-term losses can be set off. This can be a big reason for investors to invest in debt mutual funds if they carry some short-term losses or create during the years of investment to adjust later. The losses can be carried forward for seven years. So, the immediate worry of debt mutual funds seeing huge outflows is just a mere exaggeration. Now it’s a level playing field, and this augurs well for the industry and especially target maturity funds.
Buying a house is a significant investment and a major milestone that provides us with a place to call our own. In the long run, property prices generally appreciate, which can increase our wealth over time. However, since owning a house is a big investment, many of us explore borrowing options to make a home purchase. A home loan is an ideal financial solution that can help you achieve your dream of owning a home with manageable monthly payments and a choice of repayment terms that suit your needs.
Nevertheless, for first-time home loan borrowers, certain aspects, such as interest rates, processing fees, down payments, loan agreements, etc., may be bewildering, which can make getting your first home loan to seem like a daunting task. This article serves as an ultimate guide for first-time home loan borrowers to help streamline the home loan process and ensure a smooth borrowing experience.
What Are the Types of Home Loans?
First of all, understand that there are several types of home loans that cater to specific purposes. Here are some of the commonly seen home loans in India:
1. Regular Home Loans:
This is the most common type of home loan in India, where an individual avails of a home loan to buy a newly constructed or pre-built property. While almost all the banks and housing finance companies in India offer this type of loan, the interest rates and loan terms may vary from lender to lender.
2. Land/Plot Purchase Loans:
As the name suggests, this loan is availed to purchase land or a plot where the borrower intends to construct a home. Lenders typically provide up to 85%-90% of the land’s cost, while the remaining 15% needs to be arranged by the applicant.
3. Home Construction Loans:
Banks and HFCs offer these loans to individuals who plan to construct a house on their own land. The application and approval process for a Home Construction Loan can be complicated to understand for a layman.
4. Home Renovation Loans:
These loans are ideal for individuals who cannot gather sufficient funds to renovate their existing homes. The maximum amount that one can borrow for a home renovation depends on several factors, including the applicant’s repayment capacity and debt-to-income ratio.
What Are the Eligibility Criteria for a Home Loan?
Before applying for a loan, it is crucial to have a thorough understanding of the loan basics and eligibility criteria to avoid any surprises. It is advisable to equip yourself with knowledge of banking procedures to prevent any discrepancies from arising at the last minute.
Each bank and NBFC has its own eligibility criteria for home loans. Here are the primary requirements that typically remain constant with all the lenders:
Age – The applicant must be between 21 and 60-65 years old.
Employment Status – The applicant must be either a salaried or self-employed individual with a stable income.
Minimum Income Requirement – The applicant must earn more than the minimum income set by the bank. For example, HDFC Ltd. has minimum salary criteria of Rs 10,000 per month and minimum business income criteria of Rs 2 lakhs per annum.
While these factors make you eligible for a loan, there are many other additional aspects that decide the final application approval, such as the applicant’s repayment capacity, debt-to-income ratio, down payment, present and future income, credit history, credit score, etc.
You Can Enhance Your Home Loan Eligibility By:
-Including a family member who earns as a co-applicant
-Making a larger down payment
-Opting for a structured repayment plan
-Having a steady income and regular savings
-Providing information on your additional income sources that are regular, e.g. such as income in the form of rent
-Fixing any mistakes in your credit score
-Paying off your ongoing loans and short-term debts
What Are the Documents Required for a Home Loan?
Personal Documents:
-Application form
-Passport size photographs
-Photo ID proof, such as PAN Card, AADHAR Card, Passport, etc.
-Current residential proof, such as AADHAR Card, Passport, Driving License, Voter ID, etc.
-A cheque for the processing fee
Income Documents:
For Salaried Individuals:
-Last three months’ salary slips
-Form 16
-Bank statement for the last 6 months
For Business Persons:
-Proof of business existence
-Educational certificates
-Bank statement for last 6 months (both; business account and personal account)
For Professionals – Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements
For Business Owners – Business profile, Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements
What Are the Types of Home Loan Interest Rates in India?
The home loan interest rates are based on the Marginal Cost of Lending Rates (MCLR) and the bank’s base rate. While the MCLR is decided by the RBI, the banks set a base rate based on their cost of lending. The banks can quote a home loan interest rate above the base rate considering the borrower’s risk factor. If the RBI makes significant changes to the Repo Rate, banks and financial institutions adjust their base rate accordingly.
There are primarily two types of interest rates available for home loans in India: Fixed Interest Rates and Floating Interest Rates.
Floating Interest Rate: A Floating Interest Rate, also known as a variable interest rate, is linked to the current lending rates and hence, can fluctuate during the loan period. Consequently, your EMIs will change accordingly. Since home loan interest rates have been increasing for a long time, they are expected to stop rising soon. Hence, it makes sense to choose a floating interest rate.
Fixed Interest Rate: A Fixed Interest Rate home loan has a consistent interest rate throughout the loan tenure, which means that your EMIs remain the same. Opting for a fixed interest rate loan is advisable when the interest rate is low, and an upward trend is expected in the future.
What Are the Things to Consider When Applying for a Home Loan for the First Time?
1. Interest Rate:
The home loan interest rate plays a significant role when it comes to determining whether or not to take out a loan and which lender to select. We all are aware that you should conduct thorough research before settling on a lender. In addition, as discussed earlier, you should have knowledge about the various interest rates charged by banks and HFCs.
2. Loan Amount:
Your home loan amount has an impact on various factors, especially the rate of interest. The interest rate typically differs for the loan amount up to 30 lakhs, between 30 and 75 lakhs, or over 75 lakhs. Since a home loan is a long-term financial obligation, it is advisable to choose a loan amount that you can comfortably repay over an extended period.
3. Loan Tenure:
Home loans can typically be availed for a longer duration of up to 30 years, depending on the applicant’s eligibility. Opting for a longer loan tenure can lead to smaller monthly repayments but will result in higher overall interest payments. Alternatively, selecting a shorter loan tenure may result in larger EMIs, which can create a financial burden. It makes sense to choose the appropriate loan tenure to facilitate easier monthly repayments and avoid spending huge sums on interest payments. If the property is still under construction, the loan will be disbursed in stages based on the developer’s instalment schedule. During this time, only the interest amount, known as pre-EMI interest, needs to be paid. However, if you wish to begin repaying the principal amount, you may choose to pay the EMIs.
4. Down Payment:
Let’s say you have applied for a home loan worth Rs 70 lakhs, but the bank only approves Rs 50 lakhs due to your eligibility. In this case, you will be required to pay Rs 20 lakhs on your own. This payment made by you is referred to as a down payment. It is advisable to make the highest possible down payment that is feasible for your budget, as it will reduce the loan amount. A lower loan amount means lower interest payments. While some banks may offer 100% of the property value as a loan based on your eligibility, it is recommended to make a down payment of at least 20% to avoid excessive interest charges and ensure manageable repayment.
5. Processing Fees And Other Charges:
When you apply for a loan, the lender will charge you a processing fee for handling your application. Generally, for a home loan, the processing fee falls between 0.5% to 1% of the loan amount. However, certain lenders offer a flat processing fee regardless of the loan amount. As home loans typically involve large sums of money, even slight variations in the percentage charged for the processing fee can lead to a significant difference in the total fee amount.
For many people, buying a home is a significant financial commitment, and as a result, they are emotionally invested in owning a debt-free property. Individuals often prefer to repay their home loans as soon as possible to reduce the debt burden. This can be achieved through either part-payments, where a lumpsum payment is made towards the principal amount, or foreclosure, where the entire loan amount is repaid before the end of the loan tenure. By making part payments whenever feasible, you can significantly reduce the interest payments and become debt-free sooner. Most banks and housing finance companies do not charge pre-payment or foreclosure fees after a specific period or once a certain percentage of the loan is repaid. However, some lenders do charge a certain amount for pre-payments and have restrictions on the number of pre-payments allowed and the amount that can be prepaid. Therefore, it is essential to understand the pre-payment charges before taking out a loan and select a lender that offers pre-payments with little to no charges.
6. Home Loan Insurance:
Home Loan Insurance Plan or Home Loan Protection Plan offers financial protection against an unpaid home loan amount to your family in the event of your untimely demise. The insurer repays the outstanding loan amount for which the insurance policy was purchased. This ensures that your family is not left with the financial burden of unpaid dues. Many banks and HFCs require borrowers to purchase a Home Loan Insurance Policy to avoid any defaults that may arise in case of an unfortunate event.
To conclude:
Purchasing a house is a significant financial and emotional decision. Hence, before taking a home loan, it is crucial to understand all the aspects of it and take into account the important factors mentioned above so that you select the appropriate loan type and the amount that will not cause financial strain in the future. Additionally, it is advisable to conduct comprehensive research online to find the best deals on interest rates and fees. However, it is also recommended to consult with your primary banker as they may offer the best deals and services. This will help you make an informed decision and ensure that your first house purchase is a positive and financially sound experience.
If cricket is a religion in India, the Indian Premier League (IPL) is surely its Kumbh mela or Maha Kumbh. Millions of people in India and beyond will watch the cricket carnival that begins March 31.
Lots of talent to watch and cheer for; many current players and many more emerging cricketers who hope to crack the tournament and make it to the national team.
But what is in IPL to do with personal finance? There’s much in common; in fact here’s what IPL can teach us all about how we should manage our money.
1. Past success is past
Mumbai Indians, the winners of IPL 2021, did not qualify for the playoffs of 2022. Three-time champions Chennai Super Kings, have not played the final for two consecutive seasons.
What does this suggest? The fact that past performances count for nothing in IPL. It’s the same in personal finance. Many investment options may have performed well in the past. But that doesn’t necessarily mean they will perform as well in the future.
2. The best cut out the noise
There is a lot of glamour involved in IPL. It’s all about fame, money, endorsements, media, fans, cheerleaders and so much more.
A new player may be overwhelmed by all the hype. But have you noticed how the best players keep their cool and go about their job quietly and efficiently? The best players, often, perform by cutting out the noise around them.
That’s what wise investors do with their money. Often, we are overwhelmed by all the advice, tips and suggestions from our parents, friends, colleagues and the social media. For instance, our parents may recommend the age-old life insurance policy they’ve been investing in for generations to save tax. Never mind if such policies yield returns of only up to 4-5 percent. Or tons of money-making advice about the next best stock to buy or tips doled by social media influencers.
Turning a deaf ear to such noise and understanding our needs is important to achieve our goals.
3. Wait until the last bowl is bowled
IPL is a classic example of matches that go down to the wire. If there is one truth that cricket lovers have learned, it is that the game goes on until the last ball is bowled. IPL has its fair share of last-ball climaxes or even super overs where one over decides the fate of the match.
Similarly, in personal finance, it’s never too late to start. Just because you didn’t start investing in the first 10 years of your working life doesn’t mean all is lost. Just because your salary is low doesn’t mean you cannot build wealth.
Never give up on your financial planning until your objectives are achieved. Sticking to your plan and consistently implmenting it until you reach your destination is the only way to success.
4. Hard work pays off
Two years ago, very few people knew players like Ruturaj Gaikwad, Arshdeep Singh, Umran Malik and Rahul Tripathi. Today two of them have made it to the national team.
Every year, IPL introduces us to a new cricketing sensation who made it because of hard work, perseverance and patience. Be it IPL or personal finance, hard work is rewarded at some point of time.
Here’s a tip: If your salary is low, start a systematic investment plan with as little as Rs 500. Patient, regular and disciplined investing with small amounts to begin with can build a sizeable corpus; you’d be surprised to see how much money you’ve accumulated after a few years. Try it out.
5. Review your finances regularly
From winning the toss to setting your field and choosing the line-up, IPL is a game of strategy. Each match has two strategic time-outs wherein the captain and coaches combine to design a strategy — one at the beginning and one near the end.
In personal finance, with factors such as age, risk appetite, income source and dependents, each individuals needs to ascertain his or her needs and save and invest in different instruments.
Over a period of time and depending on personal milestones such as marriage and birth of a child, you will need to alter your strategy.
6. A good start is work half done
IPL being based on a T20 format, a good start to the game makes the win nearly certain. If it is batting and the batting team scores 200 runs without loss of any wicket or if it is bowling and if half of the batting team is sent to the pavilion within the first 10 overs, the spirit of the team soars and their supporters are jubilant.
Similarly, in personal finance, early financial planning not only ensures early achievement of your objectives but also results in greater returns.
We don’t know who will win this year’s IPL, but if you start saving early, plan your finances well and be disciplined, you will end up the winner in achieving your financial objectives.
SIP step-up strategy: Systematic Investment Plan or SIP is one of the most convenient and effective methods to invest in mutual funds. This feature in mutual funds helps investors in planning their financial goals and slowly working towards them. There are various strategies used while investing through SIP — one of them being step-up strategy.
What is a SIP step-up strategy?
A step-up SIP entails automatically increasing monthly SIP contributions on a periodic basis. According to Tanvi Kanchan, Head Corporate Strategy at Anand Rathi Shares and Stock Brokers, with a ‘Step up SIP’ strategy or a ‘Top Up SIP’ plan, investors can gain the benefit of increasing their contribution in SIPs, either by a fixed percentage or a fixed amount.
She added that investors can do this in line with their current income, expected yearly increments, and financial goals. This lays down a set plan for the investor to reach the predetermined investing amount over a period of time and increase their investments in a systematic manner.
How does SIP step-up strategy work?
For example, if an investor starts with a monthly SIP of Rs 5000 with an annual step-up of 10 per cent, at an expected rate of return of 12 per cent and an investment horizon of 10 years:
That is the impact of systematic investments and gradual increase in the same.
According to Tanvi, investors can also put a cap on the maximum amount they wish to invest per month. For instance, if an investor’s current SIP is Rs 5000 per month, then they can define in the step-up SIP plan that they wish to step up the monthly investments in SIP to Rs 10,000 per month. So, as soon as the step-up plan reaches this amount, it stops adding any further and the normal SIP amount continues.
When is the right time to step up the SIP?
According to experts, these are the best times to step up the SIP:
-Post-appraisal time
-When there is an increase in compensation or reduction in expenses
-When markets are going through a bad phase
“Increasing your monthly SIP installment in proportion to investors’ income boost is wise, especially if their expenses are yet to increase correspondingly,” said Varun Girilal, Managing Partner at Scripbox.
How does SIP step-up strategy benefit investors?
Experts believe that following are the benefits of the SIP step-up strategy:
-Getting inflation-beating returns
-Building a more substantial investment corpus to achieve future financial objectives.
-Achieve your goals sooner than anticipated
-Helps in translating increased earnings into their already ongoing SIPs
He believes that increasing the SIP amount by 10 per cent for a 15-year investing period can help investors get a corpus that is 70 per cent higher for the same time frame of 15 years of SIP investing.
What are the drawbacks of SIP step-up strategy?
– Increased complexity: The SIP step-up strategy requires more planning and preparation than a standard SIP strategy because investors must periodically change the amount of their investment.
– Higher costs: Depending on the investment product used for the SIP, higher investment amounts may attract higher fees, leading to increased costs.
– Market timing risk: The SIP step-up strategy is dependent on the market continuing its upward trend; but, if the market experiences a downturn, then the investors may compound their losses by increasing their investment in a market slump.
– Behavioral biases: Investors may be tempted to stop or reduce their investments during market downturns, which could lead them to miss out on potential gains in the long run.
– Limited liquidity: The SIP step-up strategy typically involves committing to regular investments over a set period of time, which can limit liquidity and flexibility in the short term.
Do you wonder whether you need to make a financial plan with a financial planner to achieve your life goals? Some individuals believe that saving regularly through bank recurring deposits or investing in mutual funds through SIPs qualifies as financial planning. However, such ad hoc allocation of savings and investments is insufficient to accomplish your financial goals and may result in inefficient utilisation of financial resources. If you want to become wealthy or achieve various life goals such as purchasing a dream home, going on a foreign vacation, or funding a child’s higher education, solely relying on salary or business income may not be enough. This is where financial planning becomes valuable. With a financial plan, you can create a roadmap to fulfil all your financial goals, including building a contingency fund for unexpected expenses. This article elucidates why financial planning is necessary and why you should work with a financial planner for effective financial planning.
What is Financial Planning & Why it is Necessary?
Financial planning is a process that assesses your current and future financial situation, enabling you to systematically achieve all of your goals. This process includes creating a roadmap to cover all of your expenses; both anticipated and unforeseen. To achieve this, financial planning involves budgeting your expenses, setting S.M.A.R.T. goals, selecting the appropriate asset allocation, creating a retirement plan, and more.
Even if you have savings, you need to have a financial plan because inflation can significantly erode the value of your money over time. Inflation refers to a general increase in the prices of goods and services over a period, which can reduce the purchasing power of your savings. For instance, a chocolate bar that costs Rs. 100 today could cost Rs. 110 tomorrow, and the cost will continue to rise over time. A financial plan can help you combat inflation by developing a sound investment strategy.
Financial planning also involves setting and achieving specific life goals, such as retirement, children’s education and/or wedding, purchasing a house, buying a car, and family vacations. Your planner will assess your cash flow and quantify your goals, creating a plan to allocate your funds towards achieving them in a systematic manner. Finally, the plan will recommend suitable investments, which may also include tax-saving investments.
Why Do You Need a Financial Planner to Manage Your Finances?
Now that we know why financial planning is necessary to achieve your life goals and create wealth in the long term, the question arises, how to start financial planning? Well, if you have been reading our articles, you might have come across several articles we published that are about how you can start financial planning by yourself. However, the majority of investors either lack the required knowledge to make a such crucial financial decision or do not have sufficient time to do the intensive research necessary to make informed financial decisions.
By sticking to the fundamentals, you can achieve your life goals. You might assume that if this is true, then there is no need to hire a financial planner and that financial planning is just another task you can handle on your own. However, that’s not entirely true.
A competent and honest financial planner can play a crucial role in helping you reach your financial objectives sooner than expected. With their guidance, the financial planning process can become much easier and more manageable.
However, having a trustworthy financial planner who always meets high fiduciary standards is very important. They should handle your money with care and responsibility, just as they would handle their own personal finances. Their recommendations should be based on research, and their approach should be unbiased. Nevertheless, there is a fee associated with this service that you would need to pay.
In India, financial planners operate under one of three revenue models:
1. Pure commission model – Financial planners are compensated based on the commission they receive from the financial products in which you invest.
2. Pure fee-based model – Financial planners are compensated solely by the fees you pay for their advice and services. They do not earn any commissions on the financial products in which you invest.
3. Fee + Commission model – Financial planners are compensated by both the fees you pay for their advice and services, as well as the commissions they earn on the financial products in which you invest.
Here Are 5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning:
1. Managing finances can get increasingly complex:
With time, managing finances can become more complex, even without major life changes. It can become overwhelming to keep track of your income, investments, insurance policies, debts, etc. This is where a financial planner comes into the picture. A competent financial planner will aim at optimising your investment returns while reducing your investment risk.
Managing money can be like having a second job that you may not have the time or desire to handle on your own. If you do not have time to research and monitor your investment portfolio, you can hire a financial planner to do it for you. He/she will take care of the tedious work, and you can get involved when it is time to make decisions.
Furthermore, you might not feel comfortable making financial decisions due to the confusing nature of investing. A good financial advisor can support sound decision-making and help educate you on best practices for money management.
2. The one-size-fits-all approach does not work in financial management:
Personal finance advice is often presented in an oversimplified manner, especially by conventional agents and commission-based planners who give the same investment advice to each of their clients. However, you need to realise that a particular financial strategy or recommendation may not be suitable for everyone. This is because we all have our unique objectives, aspirations, and challenges that require personalised financial solutions. Additionally, after the emergence of COVID-19, there has been a lot of instability in the markets. With the abundance of financial information available, it is easy to react impulsively to the news and the fluctuations in the value of our investments. Unfortunately, this can lead to unfavourable outcomes. Engaging the services of a financial planner can help you manage your finances from the right perspective.
3. You will receive unbiased financial advice:
If a financial planner is charging a fee for creating a financial plan without any obligation for you to invest in it, the advice they provide will likely be impartial and unbiased. However, if an agent or advisor is offering a free financial plan, you may need to be wary. There may be underlying motives for this free service, such as a desire to earn commissions from recommending certain financial products. As a result, the recommendations provided may not align with your investment objectives and financial goals.
It is essential to understand that nothing comes for free, and a free financial plan may pose a risk to your financial well-being. It is possible that the planner offering this service is pushing unsuitable financial products that are in their interest to sell, resulting in a disadvantage for you.
To ensure that commission income does not influence the advice provided, it is advisable to choose a fee-based financial planner. This will guarantee that the recommendations made are solely in your best interest.
4. A financial planner will maintain a professional relationship:
Our emotions often influence how we handle our finances, thus, leading to unconscious biases. A financial planner can make informed decisions based on rationale and prioritise our financial well-being.
In addition, financial planners are experts in their field. They have the necessary qualifications to handle financial problems and unexpected situations. Financial planning goes beyond simply investing in a few products. It’s like a test match in cricket, where patience is key and finances must be managed for the long term. You need to navigate short-term volatility, economic downturns, and favourable periods to build your wealth. Working with a professional who can manage your assets under different circumstances and variables is the best approach.
Financial planners guide and support you in the journey towards building wealth and improving your financial health. They uphold strong ethical standards and professionalism, which helps to establish trust in a time when it can be difficult to trust others. When you work with a fee-based financial planner, you can ask important questions and they will be happy to answer to the best of their ability, always keeping your best interests in mind. This can be challenging to do with friends or relatives, and there is also no emotional bias when working with a financial planner.
5. You will need guidance even after investing your money:
It is important to remember that investing is only the beginning – it is crucial to evaluate whether your financial planner offers reliable and sensible support after the initial investment.
Typically, a financial guardian who is readily available and guides you throughout the process of achieving your life objectives with the necessary care and understanding is the most favourable choice.
To conclude:
Finding a competent, experienced, and trustworthy financial planner may seem like a difficult and nearly impossible task. However, it is not. You just need to be patient and willing to take responsibility in the financial planning process. Before hiring a financial planner, ask for references and verify their credentials. Ask relevant questions about how they plan to help you achieve your goals, question their recommendations, and ask for alternatives and backup plans in case their plan fails to meet your expectations.
Furthermore, it’s important to stay actively involved in the investment process. While it’s important to have confidence in your financial planner’s abilities, it’s crucial not to blindly trust them. Always stay within the realm of confidence and avoid crossing over into blind faith.
