Personal Financial Planning!

At what stage in life where should the money go and how best to plan my taxes.

1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff……. 
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?

Got this off a blog that I follow...Hope it helps

Zimbabwe - Its $500 million currency note and real estate market! and the huge crisis!

WOW! A $500 million currency note after a $100 million currency note has been printed in Zimbabwe which is facing hyperinflation. Zimbabwe’s highest inflation was last estimated in July at 231 million percent but is now believed to be much higher. And did we say we were at 8% and still dreading the effects! Scary, isnt it.

$100 million in Zimbabwe = $14 USD. Unbelievably true!! The highest inflation India has ever faced is 53.8% way back in the famine year of 1943. Many other Asian countries have done far worse than India over the years. (The less said about hyperinflation-prone Latin America, the better.) Inflation in China reached 1,579% in 1947, when there was a civil war raging there. Japanese inflation peaked at 568% in 1945, the year of defeat and economic collapse. South Korea saw inflation shoot up to 210% in 1951, when it was at war with the communist North.

All this thought about the hyperinflation led me to wonder what the property market in Zimbabwe would be like. As it appears, the rentals are revised very rapidly without any major developments. Surprisingly, there is huge demand from South African and Russian buyers for Zimbabwean property despite the global meltdown and the countrys problems.

Further research provided more information about the problems. The president Mugabe who has been at the helm since the country got independence in 1980 from the Britishers in 1980, has started a new land redistribution project that takes property from white farmers and turns it over to blacks. He has said that Britain should be responsible for compensating farmers, because British settlers took the land in the first place. Land redistribution has led to widespread food shortages and stratospheric inflation.

The situation is expected to get worse in the country with widespread cholera epidemic that has killed thousands of people. The country is facing a currency crisis and a political infighting is not going to help Zimbabwe resolve its issues. Either the United Nations or the United States need to intervene to bring this country out of a crisis.

Is the fixed 9.5% rate for home loans justified?

My previous post talks about the new government regulation where home loans below Rs20 laks will be available at lower than market rates at 9.5% (Read here). On second thoughts I was wondering whether it is fair on the PSU banks to provide loans at such a cheap rate. The gainers will be home builders who have till now made millions by charging exhorbitant rates for their properties. The losers will be banks whose profitability will be eroded or the government will bear the losses through subsidies. Hence, in this case private realtors will bag the profits and government will bear the losses! Should'nt the real estate builders be asked to reduce prices of their flats/ houses/ villas that they have been selling at exhorbitant prices.

Secondly, why is the government supporting only the real estate sector. There are equally hit rate sensitive sectors like automobiles, construction etc. Why arent these being protected with impending bankruptcies in US of the 3 auto majors - GM, Ford and Chrysler. Is it because real estate contributes over 10% to GDP with its forward and backward linkages with steel, auto, construction sectors etc. Then sectors like textile need equal attention as they generate employment. What about banking? A banking sector collapse can send ripples across the economy.

Lets see what measures are further taken by the government to prop up the economy or more specifically the stronger lobbying sectors!

Government plans to fix home loan rates for PSU Banks at 9.5% will be ineffective...Heres why?

Public sector banks are set to offer home loans of up to Rs20 - 25 lakh at a concessional rate of 9.5% for a period of five years as part of the government’s fiscal stimulus package to spur spending and bolster sagging economic growth. Read more

This would mean the cost of funds is greater than the return that these PSBs would be getting. As it is the profitability and efficiency of the Indian PSBs are dangling. Banks and housing finance firms are now charging between 12% and 14% for fixed-rate home loans and offering floating-rate mortgages at between 9.5% and 11.75%.

It seems the Indian bankers have not learnt the lessons of subprime crisis and option ARM pricing. Rates will stay at 9.5% until the loan resets to the market rate.This will greatly harm the bankers as it has done in the subprime crisis.

PSU Banks account for only 20% of the total housing market, hence limiting the scope of the stimulus package.

The obvious outcome of this policy will be that the homebuilders will price the houses at 20 - 25 laks in white and the remaining in black to increase sales. Moreover, they will build jodi flats, which will individually cost 25 laks and the affluent buyers can make use of this scheme to benefit.

One concern is what will happen once the interest rates fall below 9.5%, which seems to be happening in the next 2 years. Nothing has been mentioned and this makes the deal unattractive!

Summary : Credit Cruch of 2008!!

Advertising on weathering Market Volatility : Wachovia ;-)

Don't forget to see this ad in the front page of today's WSJ online. You are being offered "6 strategies for weathering market volatility" from a "120-year old investment firm." The name of the firm? Its called Wachovia Securities...hehe.. Sourced from A fellow bloggers page

Real Estate stocks at 52 week low!! Its expected to get worse

Realty stocks took a tumble on the bourses and many logged their 52-week low on Monday.

The BSE Realty Index closed at a 52-week low at 3,407.87, down 5.26 per cent. It had dropped 16.79 per cent over the week from 4,095.50, and 31.78 per cent over the month. In January, the index clocked a high of 13,848.09.

Over the week, almost all real estate company stocks have taken a hammering, dovetailing the Sensex’s fall with the negative market sentiment at an all-time high, which this week is compounded by the wait for the US congressional nod for the $700-billion bailout package for bankrupt investment firms there.

Delhi-based DLF Ltd stock closed at Rs 350. 60, 5.12 per cent lower than its previous close. The DLF issue was priced at Rs 525. (52-week high – Rs 1,225, low Rs 329)
Buyback

In July, the company announced its buyback intention of up to Rs 600 a share for Rs 1,100 crore.

On September 18, it informed BSE that its board of directors would meet on September 30 to consider and approve a public announcement with the proposed buyback of equity of the company.

Sobha Developers’ stock suffered a 9.59 per cent drop, closing at Rs 171.55. The issue price was Rs 640 (Rs 1,060, Rs 164.50). Puravankara Projects traded at Rs 154.05 at close, down 3.14 per cent. The IPO price was Rs 400 (Rs 535, Rs 132.05). At close, Omaxe stock traded at Rs 96.05, down 4.38 per cent, far below its issue price of Rs 310 (Rs 613, Rs 93.60). Housing Development and Infrastructure Ltd was at Rs 166.05, down 13.72 per cent lower than its previous close (Rs 1,432, Rs 160.20). Parsvnath Developers was down 7.04 per cent at Rs 89.85 (Rs 598, Rs 86.60).

Among the marginal declines, was Ansal Infrastructure at Rs 77.30, down 4.13 per cent, and Unitech, which lost 1.98 per cent at Rs 108.85, but recovered from day’s of low Rs 97.5, which is its 52-week low. Of the many investments Lehman Brothers made in India, Delhi-based Unitech received about $175 million (Rs 740 crore).

Mr Hardeep Dayal of Centrum Broking Pvt Ltd said it was a knee-jerk reaction as the medium and long-term story remains strong. Market sentiments were down and only need-based buying was happening. People have held back their decisions to purchase properties, in anticipation of a price fall which is real. Mr Dayal was however, hopeful of a turnaround in a year.
Liquidity crunch

Enam Securities Researchers pointed out that aggressive land acquisition at peak prices through short-term high cost debt and huge working capital mismanagement (short-term debt used for long-term projects) were some of the ills that plagued the industry. Moreover, developers had stubbornly held on to selling prices and high-cost inventories, hoping for a renewal of demand and hike in prices.

Enam said the realty business model consists of three stages of value creation — land acquisition/aggregation and conversion, construction and development, and the lease/sale of the property.

The whole business model depended on the ability to infuse cheap monies at the earliest stages, including additional infusion through exits at the end of each stage, to be able to funnel monies back to stage 1 — land acquisition. Further, as each project funds another in this working-cap intensive business, liquidity is the key exponentiator of the business.