Saturday, June 17, 2017

EMI Jhatka...

A man chooses to buy a house for investment.

House value 1.25 cr

Loan amount 1 cr

Interest rare 10%

After 5 years the value of the house is say 1.6 cr based on 5% compounding

He decides to sell it.

While closing his loan he has to pay up approx Rs 1.5 cr

So his total cost turns out to be

Rs 5 lac registration

Rent 25 lac initial amount

It all equals to Rs 1.8 cr

Against this his house fetches Rs 1.6 cr

Les capital gains would be say approx 3 lac

Add his rent income approx of Rs 15 lac

Add tax saving 3 lac

Total income is equal to 1.75 cr.

So in the end he incurs a loss of Rs 5 lac

If the house had appreciated at even 10% he would be left with a profit of Rs 20 lac

So between 5 lac loss to 20 lac profit is what he makes

On the other hand had he invested the 25 lac in an Equity mutual fund and had done a SIP of Rs 1 lac (approx EMI amt) he would have earned Rs 1.6 cr

(Assume Equity returns of just 12% in this period.)

Net profit would be 1.6 cr less

investment of 85 lac
( 25 lac + 1 lac SIP for 60 months)

= to 75 lac.

He could also earn tax rebates in ELSS schemes upto 2.5 lac taking his earning to Rs 77.5 lac

Now compare Rs 77 lac profit with Rs 2 lac loss or at best Rs 20 lac profit.

Even a bank FD would have provided a net profit of 40 odd lac

Next time think a 1000 times before saying house investment is smart thinking.

The equation will only get worse for longer periods of investing.

Without taking a loan if one were to invest in a house then at best case scenario the returns from the house may come close to that of a mutual fund.

But remember that is without taking a loan.

How many people ever buy a house without taking a loan.

Friday, June 16, 2017

Hum kaale hain toh kya hua cricketwale hain...

Hum kaale hain toh kya hua cricketwale hain
Although England invented the game of cricket they seem to have lost the plot.
They have never won the world cup or any big tournament even though they host many of these tournaments.
England has very little sunshine and mostly inclement weather throughout the year.
Cricket or for that matter any outdoor sports requires a lot of practice.
Perhaps, England had planned India as the colony with all the Sun for practicing and training.
But alas that was not to be.
They left us alone and we made a lagaan team that is now turned the tables on our erstwhile masters by taxing them on the cricket field.
No wonder all Asian teams who were their slaves are left to contest the CHAMPIONS TROPHY.
The clear message from this is the need to practice, practice and practice in a conducive environment.
Now did you get your investment lesson. If not, read on.
In investments too, wealth championship can be won by SIP, SIP, SIP in a conducive economic environment.
Yet again, India seems to be offering the environment where you can win big time by SIP, SIP and SIP.

Kal kya hoga kisko pata...

Kal kya hoga kisko pata
The Champions Trophy has some interesting lessons. When Thissara Perera dropped Sarfraz Ahmed of the bowling of Malinga,

1) He probably dropped the Champion's Trophy that Sri Lanka could have won

2) He gave Pakistan cricket a new lease of life. Winning the Champions Trophy can provide the stimulant that Pakistan cricket has been longing for years.

Any analyst would have predicted a Pakistan loss by the way the game was going.

Who could have thought that Sri Lankan would drop sitters and give away runs as overthrows.

But things don't go the way one often expects. The nature of the unpredictable beast is such.

Likewise, in an economy too unpredictable clouds can suddenly emerge, a tsunami could suddenly rear its ugly head. The best of Fund Managers too would not be able to have an intuition of such impending unpredictablity.

Donald Trump, the world's most powerful leader is so unpredictable that perhaps he also does not know what would be his next move. Who knows what will Kim Jong of North Korea will do tomorrow etc etc.

Any impact on world economy or Indian economy can either have a short term impact on the market and your returns or even a medium to long term impact.

The best of the fund managers forecast based upon realistic and scientific assumptions.

But even the best of the best can be left surprised. There are just too many moving parts.

The macro environment is 50% responsible for your future returns and if that itself is 100% unpredictable, what can the best Fund Manager say about the future.

At best he may guide you to an astrologer.

Still, I would say consult professionals be it a Fund Manager or a Financial Advisor because at least they make the best assumptions.

Kal kya hoga kisko pata

Mera ilaaj kaun karega...

Mera ilaaj kaun karega
Imagine you are a doctor. One day you wake up with a fever. You take some common stuff but the fever does not subside.
What would you do?
Keep changing the medicines and take some tests which you believe may be appropriate or would you consult a another doctor or doctor colleague and take his opinion.
While self medication seems an option it isn't one.
Even a doctor needs reassurance even though he himself has a lot of knowledge.
Bouncing off ideas, using another person as sounding board, an external opinion etc are all a necessity.
However it is an irony that most people think that they are capable of managing their money.

Tuesday, June 13, 2017

Romance with FD but marry SIP...

Romance with FD but marry SIP


Imagine you are moving at 10 km per hour and your friend is moving at 11 km per hour.

After 6 minutes they are only 100 m (1/10th of 1km) apart which is not very significant. You can literally see each other.

After an hour you are 1 km apart. You can no longer see each other but still you aren’t all that far from each other. If you wish you can meet each other easily.

But after 10 hours you are 10 km apart and after 100 hours you are 100 km apart.

Now you are in two different cities. It’s too far to meet each other. Perhaps you have to speak over phone.

Likewise investing in a fixed deposit of 6% per annum or investing in a mutual fund of 10-15% per annum does not make a huge difference when invested for a period of 1 year or even for that matter for a period of 2 years.

However, if you were to invest for a period of 10 years to 15 years, the 4-9% difference but nearly 100-200%.

Hope this explains why even a 4-9% difference in returns cannot be ignored in the long term  and moreover why Equity mutual fund is a more appropriate asset to invest in rather than a Fixed Deposit. 😊

Home Loan...

This is the % of interest paid for a 20 years housing loan over the period.
1) By the 5th year 35% interest is paid,
2) By the 10th yr 66% interest is paid
3) By the 12th year 75% interest is paid.
For a 1 cr loan at 10% interest is not 10 lac which is the interest amount but a whopping Rs 1.7 cr.
After 7th year paying off the loan is an exercise in futility.
Most people do so; pre-pay and smile to themselves even whilst the bankers laugh all the way to their bank and banks.
Banks make a killing out of this tendency of pre-paying of loans.
As an investor invest in bank stocks till such time people are ignorant and take long term loans but as a borrower never ppre-pay after 7 years have passed.
The irony is there was a time when banks charged prepayment fee.
This is business of the Banks.
Ethics Gaya tel Lene
Another interesting aspect is that for a 1 cr loan at 10% the interest isn't Rs 10 lac but a whopping Rs 1.7 cr which is 170%.

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