2016 – Page 5 – My Money Streets

August 3, 2016

What is NCD and what makes it so attractive as an investment instrument

What is NCD and what makes it so attractive

NCD is a fixed income instrument Apart from taking bank loans Corporates, NBFCs raise money through issuing debentures. It is a financial instrument issued by corporates to support their business needs. There are two type of debentures, convertible debentures and non-convertible debenture. Convertible debentures are unsecured bonds and can be converted into equities or stocks at a future date as specified by the issuer.

NCD is financial instrument used for taking loan from the financial market. It cannot be converted into equity shares of the issuer in a future date, hence it offers higher interest rate. The NCD offers atleast 1.5 – 2% higher interest than any fixed deposit by a reputed bank and company deposits. NCDs come in both secured and unsecure form, secured #NCDs are backed by assets. Unsecured NCDs entails higher risk.

Added Edge

1. What makes it more attractive is, in the falling interest regime, the bond prices may surge, hence the value of the funds.

2. No TDS deducted on the demat form of investment (physical form does)

Points for the new investors

1. Once you come to know about a new NCD offer, check with your stock broker for online application.

2. Like any other IPO, it has a NCD comes with opening and closing dates

3. NCD offers coupon rate. Coupon rate is the interest rate paid on a bond by its issuer for the term of the security. For example, if a NCD issue comes with a face value of Rs. 100 and coupon rate 10%, the interest earned will be Rs. 10 per annum. However, in the tenure if the NAV price falls or surge, it will have no impact on the interest pay out, it will continue as Rs. 10 per year throughout the tenure. Hence, coupon rate is fixed on the offer price and continue through maturity

4. Check for the credit rating allotted by #ICRA, #CRISIL, #CARE (triple A rating Suggest good financial health of the issuer, double A may give higher coupon rate, triple A ensures safety of your capital)

5. NCDs are also traded on stock exchanges. Apart from the new offers, investors can also buy exiting NCDs through stock exchanges, however, one need to be double careful and seek guidance from financial planner.

6. Interests are generally paid through direct credit, RTGS, ECS and NEFT mode. It may offer monthly/ quarterly/ annually/ cumulative options.

7. Tax – The investment is taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor.

8. This is as liquid as a bank fixed deposit. However, there is no penalty fee for pre-mature withdrawal of this investment

9. Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholder.

Pros

1. It’s #liquidity is as good as any fixed deposit in bank, which has a specific tenure but can be withdrawn any time. However, FD may charge a penalty fee on interest accrued.. but incase of NCD, there is no penalty.

2. If it is compared with company fixed deposit, company deposits (a popular instrument in the senior citizen segment with 0.25- 0.50% extra interest)comes with various conditions for pre-mature withdrawal, for eg – lock-in periods, penalties etc.

3. NCDs come with Rating from #ICRA #CRISIL #IndiaRatings #CARE which gives a clarity to the investor on the risk involved, higher the rating, lower is the risk (AAA being the highest category, followed by AA, A, A-, BBB and so on)

4. Incase of bankruptcy, NCD holders get preference over shareholders

Cons

1. Incase interest rate increase, the value of the NCD may fall, sometimes even below the Face Value.

2. Though, the instrument can be traded on the exchanges, one may not find a buyer for NCDs if the trade volumes on bourses are low.

July 18, 2016

Be home loan Prepared – It is very easy

What suits their image.. The LION’s Den or The LOVE Nest- the fight doesn’t end between the newly married Rima and Manas. The search on websites, apps, newspaper ads and site visits was almost done. The discussions over coffee and drinks gradually took them to a more important topic- The budget, loan requirement and repayment processes. They knew they would need to take some bank loan but the mathematics seemed very difficult when they realised they would require 70% financing and which would take about 15 years to repay. They also realised as their monthly budget would leave them with less money in hand, a plan seemed necessary to tackle the issue of choosing the bank/ housing finance offers and monitor the repayment process carefully.

Rather than getting into the whole subject together in one go, I have decided to make three simple posts on the subject. 1. Preparation (Home Work), 2. Processes 3. Managing the repayment for smart benefits.

Prepare to get loan – Home Work

1. Keep at least last two years’ Form 16. (Tax return details)

2. Keep bank statement for last 1 year (minimum 6 months)

3. You may refer to #CIBIL website to check your credit score (higher the score, your negotiation power will be higher)

4. You have to fetch all your loan history and repayment record.

5. Once you decide your budget, remember bank will finance maximum upto 80-90% of the total amount. So, you have to be ready with the minimum down payment (10 – 20%)

6. If you are close to finalising the property, you may also apply for pre-approved loans. This come with various conditions as well as one need to closely look at.

7. Check for good offers in various websites and other websites for various offers on loan

8. Age – your current age is a factor for bank to consider interest rate negotiation, the preference is 24 -45. Higher the age risk factor for banks increase

9. Income – Bank/ institution not only finance upto 80-90% of the actual price, they also consider your present salary. For, eg. Certain bank can offer 20 times your monthly salary or 4 years of your annual income.

10. co-applicant – An earning co-applicant like wife/ father/ son can reduce the risk for the bank, also can give better tax benefits.

In the next post we will discuss about the processes

July 17, 2016

Financial planning simplified

#Personal finance is a very wide subject. Here I just want to simplify the basics, why we need to take care of our money, why the inflow and outflow of funds need to me managed.

Every person has their own perspective about life, income and expenses. However, we can start with the 5 constants of personal finance apart from the regular aspirations of education for your children, marriage and buying a home.

1. You are going to grow old

2. Prices will go up

3. Value of money will decrease

4. Financial markets will remain volatile

5. There will be unplanned emergencies

Now, what do we do? Start stacking up cash/ gold? Putting in Fixed Deposit? Buy stocks? Mutual funds? Insurance? What?

We need to simply the relation between the goals and financial needs. We need to come in terms with the purpose of the investment so that we allocate funds and plan in a right manner.

How to go about it?

Start as soon as you feel it is important; don’t wait for emergencies to teach you harsh lessons.

Chalk out your financial goals based on the event and the expected timeline. For eg

Own marriage/ buying property/ vacations/ children’s education and marrage/ second home/ retirement planning etc.

Keep in mind

1. Keep goals clear

2. Time in hand

3. Risk taking ability

4. Avoid mixing asset classes

Based on your age, current financial situation, priority and timeline you can plan your finance.

First, prepare an Emergency fund, ideally the most liquid investment like savings account/ Fixed deposit/liquid fund.

Your financial liabilities and dependants should determine the life insurance cover. Chose term plan, stay away from endowment and ulips. See Post to know more.

Health insurance is also a significant part of financial planning. A medical emergency can erode a significant portion of your wealth if not planned for emergencies.

Few goals which are 5 – 10 years away and more, a significant kitty can be built with a monthly investing a small amount into equity mutual fund. See post on wealth creation

Younger the age, risk taking capacity is more. Equity based mutual fund investment can yield maximum return in long term. Thumb rule of equity investment is (100-age)% of total savings can be kept in equity. With increasing age/ nearing the goal gradually shift the investment into debts or fixed instruments like Fixed deposits.

Retirement planning is one more aspect one need to start early. As, the value of money decreases with passing time, maintaining the same lifestyle as today will cost you much higher 20 years later. Hence, investing for retire is important. See post

In other posts will go into details

June 30, 2016

Friend of desires, enemy of bad money managers

All of 23, and first job in hand, Rashmi got a free credit card with her salary account. She was thrilled to have monthly salary and a credit card together. She felt it is a double salary for her. She was amazed at the 50 day credit policy, with awe she listened to the bank representative sharing the features of small monthly EMI schemes for bigger purchases, loan offers, money withdrawal, freebies, and so on.

Her joy was short-lived. She bought a Split AC and a pair of gold earring. The monthly EMI started eating up 80% of her salary forcing her borrow money from her mother for monthly expenses leaving no room for saving and investing for the next 10 months. But, at least she learnt the lesson easy and early life. There are many examples which had much difficult endings. Then why this phenomenon of credit cards such an in-thing. To understand the smart usage of Credit card, we must consider the topic dispassionately or objectively. Credit card is a high cost convenience tool and not a savings account. It should be used with caution.

How it impacts your budget “Buy now, pay later” doesn’t work that easy. Apparently it looks very convenient option, but it comes with a price. When we buy a product in credit, we shift the burden on the next month. So, the next month budget gets affected. If not paid within the stipulated time, the due amount escalates with high interest rates and heavy penalties every due date. So, relook at your monthly financial plan. Don’t over use. Stay within your monthly budget. You need to pay within 50 days/ monthly billing cycle while buying with credit card.

Consider – Is it absolutely necessary to make the purchase in credit. – Will you be able to repay within next due date. – If buying in EMI, consider the processing fee and monthly interest charges – Don’t fall for the “minimum payment” myth. It only saves you from penalty. You still have to pay the amount with interest, compounded every month on the remaining amount.

Withdrawing money with credit card is a financial blunderMoney withdrawal is a big NO NO in credit card. Please check with the bank representatives about the transaction fee, interest rates (compounding quarterly/ monthly in case of delayed repayment.) It can go as high as 40-50% and even double if done carelessly.

Beneficial for cautious people However, this product has its own advantages enjoyed by many smart money managers.
1. It helps you earn a little more interest in your savings account. For ex – If you have 10,000 Rs. In savings account, and the product you wish to purchase is within 10,000. You can buy the product in credit card and repay the amount in the stipulated 50 days of credit card billing cycle (interest free period). In this transaction, your money lies in the account for 50 more days and earns you interest for the said period. It also helps in keeping higher quarterly average in your savings account.

2. Good transaction/ repayment history in credit card earns you CIBIL score (helps in getting better terms for various loans)[will discuss CIBIL in details in another post]

3. The freebies come with it. With every swipe you earn some bonus points. On accumulation, these points can earn you some shopping vouchers/ discount coupons/deals apart from the various cash back offers. In the higher end cards, there are many more benefits like airport lounge access etc. In a whole, it’s a good product for people who can use it smartly.

It is just a convenience tool to be used judiciously.

Note – Please check the fine prints of terms and conditions when you are offered a free credit card from bank. If the joining fee is waived, there is a yearly fee attached, whether or not you use the service. Ask the bank representative about the costs involved in detail. Also, do look for various freebies, vouchers, bonus in detail to make the most of it.

June 27, 2016

Emergency Fund – Plan B at work when your Financial Plan A is at Risk!

Emergency Fund Plan B at work when your Plan A is at Risk!

It was middle of the month; Prakash was done with his loan EMIs, Car Insurance, son’s tuition fee, grocery shopping, and, like every month he could also save Rs. 7000/- in #taxsaving mutual fund and #PPF. As he was just a few clicks away from making the investments, his son came running and
informed him about the school trip, this had skipped his mind while planning. This time they have planned to go to Shimla for camping and the contribution was Rs. 25,000. He almost collapsed to even imagine how his investment plan will go haywire; he may need to borrow from a colleague or somebody to meet the extra expense which will also have negative impact on the budget for next few months. As he was thinking the best possible way to manage things, his wife came to his rescue and handed over Rs. 25,000 to Prakash and smiled. Prakash was in awe an shock as he only gave her money for grocery and some routine expenses each month. The intelligent lady explained as she was given the money, she removed a certain amount and kept in her piggy bank each month for emergency needs and she has been doing this since their marriage. And, today the fund is big enough to take care of family expenses for three months in an emergency situation.

We need an emergency fund

This event is an eye—opener. Many a times we bump into unplanned expenses on account of sudden medical emergencies, education, job loss, accidents etc. An emergency fund doesn’t only helps financially, it also offers a much needed mental peace to handle the situation better. The size of the fund could however vary depending on various factors.

Corpus size

Safer the better, so bigger the better. However, everyone has a risk profile of his/her own. While deciding the amount, keep few things in consideration –
1. Do you have funds to take care of 3-6 month of family expenses handy if you fall sick?
2. Are you confident to take the risk your current job for your dream profession?
3. Will you be at ease financially if your ailing parent need a sudden medical attention?
4. Do you have a child with special care needs? Consider the unavoidable monthly expenses – Loan EMIs, Insurance premiums, investment obligations and other family maintenance expenses

How and when to build that large liquid corpus

Good old days are gone when grandmother had hidden boxes with gold coins. Now, you have better options as your money can also earn. The best moment to start it is the moment you conceive the idea. The fund should only grow bigger as you age. Remember, it should be liquid (easy to withdraw). One can start with a simple savings account or a recurring deposit in any bank. A savvy investor with higher tax bracket (20-30% )can also opt for a liquid mutual fund. {I don’t suggest an equity mutual fund/ stocks here as every investment has its own purpose. Liquidity and safety of the corpus is the priority here}

How do you manage the fundOnce, the corpus achieves the desired level, it can be kept in form of a fixed deposit with a reputed bank or a liquid fund. It also should be reviewed periodically and increased as and when required. Whenever the fund is used, one should take effort to rebuild the corpus again in a planned manner with priority.

What to remember
~~Emergency Fund is a substitute for #health insurance, #life insurance, #retirement planning, #mutual funds.~~
Emergency Fund is not a substitute for #health insurance, #life insurance, #retirement planning, #mutual funds. Emergency fund is a Plan B to take care when the Financial plan A is in danger!