photo by faeryboots

Received this via email, thought it’s interesting to share with you all — It’s an interesting article by Yogesh Chhabria.

LATELY, I have been thinking a lot about the Lehman crisis. Spending money that they didn’t have and going beyond their means is one of the main reasons for their situation today. In fact that is the cause for the current economic crisis in the US.

When I see all this happening, I can only remember the good old days. Then, karz was bad. People looked down upon those who took loans. Parents would not give their daughter’s hand in marriage to a man with loans.

But of course, the times have changed now. Everyone I know has a loan. The buzz word is EMI (equated monthly installment). Today, you can buy everything on EMI - a house, a television, even an i-Pod. In fact I know of someone who just bought a fancy BMW 3 series on EMI, instead of buying a cheaper car outright with cash. I mostly prefer to take public transport, but then I am an old man with old thoughts!

Anyway, coming back to what caused the crisis. Imagine having Rs 2 lakh in your bank account, no regular income, yet buying a house worth Rs 65 lakh, in the hope of selling it for a higher price. Even if the price of the house fell by just 5 per cent (that is Rs 3 lakh), you will go bankrupt. This is what Lehman Brothers did; with around USD 20 billion they went and bought assets worth over USD 600 billion. Isn’t it suicidal and simply foolish?

I am sure things would have been different, had I been the head of Lehman Brothers. But who wants an old conservative man like me to head a complex financial institution.

But there are a few lessons that we can learn:

1. Live a balanced life and avoid overspending.

2. Don’t buy things we don’t need.

3. Don’t buy branded goods.

4. Don’t buy excess food, cloths, cosmetics, footwear, electronics and fashion accessories. Just think before you buy.

Tip: World still has a lot of growth ahead and the future holds immense opportunities for us. Let us make the most of it and save and invest it wisely instead of wasting our precious little on things we don’t need.

5. Try to balance life with work (No one is happy to work in their professions).

6. Don’t stress out yourself, after work try to do some extra activities like swimming, yoga, walking, running where you can divert your mind from stress.

A thumb rule: Health is more important than money.

7. Try to understand each other (Wife and Husband) in financial matters and help each other.

Tip: As soon as you get your monthly salary, set aside a fixed amount, usually 35%, for insurance, savings and investments. You can then spend the rest.

8. Not all loans are bad. Loans that are ‘need based’ (home loans, education loans) can always find a place in your finances against those that are largely ‘want based’ (credit cards, personal loans, car loans).

9. Borrow only if repayment is financially comfortable.

A thumb rule: Keep EMIs within 35 to 45% of your monthly income.

In that respect, there is one American who I really respect - Warren Buffet. He has lived in the same ordinary house for over three decades, drives his own medium sized car and leads an extremely regular ‘middle class’ life. If that’s all it takes for the richest person on earth to be happy, why do all of us need to take extra stress just so that we can get things which aren’t even essential?

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

9 Lessons To Learn From Lehman’s Crisis

However it isn’t only mutual funds and non-banking financial companies that are facing redemption pressure. The government-run Public Provident Fund (PPF)—the single-largest fixed-income scheme in the country—has also suddenly registered a spurt in withdrawals. PPF deposits have shrunk by over Rs 6,700 crore in September alone. Contrast this with the deposit inflow of Rs 5,072.39 crore for the first five months of this fiscal.

Read more

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Public Provident Fund In RED

photo by RedAgenda

In recent times builders have been offering residents of old buildings a handsome amount to get a refurbished flat with additional space.

Who will not grab such a tempting deal? The flat seller not only gets the cash, but also gets a monthly rent for his temporary accommodation. Once the new property is ready, he gets a refurbished, newly-constructed flat, in place of his old one.

Builders do so to redevelop the property and add additional floors to a particular building. They earn money by selling the additional flats. The money paid by the builder to the existing residents depends on whether he asks the resident to shift temporarily or permanently.

If temporary – the builder would give money for the alternate accommodation, until reconstruction is completed. Sometimes builders also issue post-dated cheques only if the money provided in advance is sufficient for a minimum of 18 months of the rent. Calculate whether the sum provided would suffice until you enter the refurbished home.

If permanent – the builder would provide a larger sum, which depends on the valuation of the property. Make sure the amount, minus the tax payable, is sufficient for you to buy another flat.

To avoid being cheated, ask for a bank guarantee. This is an amount deposited by the builder with the bank, which would be provided to the resident if the builder fails to complete the project within the time frame promised. No builder can, however, redevelop a building or a society unless 100% of the residents agree for the same.

But, before handing over your home keys to a builder, make sure your future needs are met. One should know how to cut a redevelopment contract according to one’s need. In redevelopment deals, the resident decides the terms and conditions.

But, to do so, the flat owners or the housing society need the professional guidance of a lawyer as well as an architect. The lawyer would ensure that legal issues – present and future – are dealt with in a transparent way. He would help formulate the deal papers in accordance with the law.

Also, an architect would help the residents determine how much the property is worth, popularly known as valuation of property.

The valuation would be an important criterion in bargaining the amount offered by the builder. The architect would act as a watchdog in the later reconstruction period. The architect would ensure that the builder doesn’t use sub-standard material for construction.

But, before handing over the project, check the track record of the builder. May be you can take the help of the architect appointed to know whether the selected builder has completed his earlier projects within the promised time and has paid the amount he assured in the contract.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Redevelopment of Property

Check out some really interesting articles at the 79th edition of the Carnival of Money Stories hosted by LAL. Hoping these stories will give you some great personal finance ideas and distract your mind from the market.

LAL will also be even hosting the Finance Fiesta this week, so feel free to submit a post here.

The Orange Paper’s post Power of Compounding has made it in the Investing section of the carnival

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

79th Carnival of Money Stories: Cartoon Edition

photo by Gaeten Lee

You might be aware of the recent rumor on the street regarding ICICI Bank and how people queued up at the bank/ATM to withdraw their money.

Customers queue up at an ATM of ICICI Bank in Hyderabad in the wee hours.

There have been several instances of banks turning sick. As a result, it is the common man like you and me who despite having money in our account are unable to access it.

How much is insured?

In order to protect the small and marginal account holder, the Indian government has made it mandatory for banks to insure each account up to Rs. 1,00,000 (Rupees One Lakh).

Did you notice the asterix in the title? Yup, you got that – Conditions apply.

Here’s the condition – the insurance amount becomes payable ONLY when the bank goes into liquidation.

When does the bank go into liquidation?

Well, there’s no time frame for that because the Reserve Bank of India (RBI) tries to prevent the winding up of the bank and instead tries to revive it by granting protection, which often runs into years. So, this insurance protection does not really help and the account holder is left high and dry with neither his own money nor the insured amount.

Is this delay justified?

Certainly not, as per a recent ruling given by the National Consumer Disputes Redressal Commission on July 24, 2008, in the case of Reserve Bank of India v/s Eshwarappa & Anr. In Revision Petition No. 2528 of 2006 and other connected matters.

What happened in this case?

The Maratha Co-operative Bank Ltd. (MCB), Hubli, had run into trouble. The RBI granted protection to MCB by issuing a prohibitory under Section 35A of the Banking Regulation Act 1949. The order stated that from the close of business in 2004, MCB shall not, without prior approval in writing from the RBI, transact any business. Consequently, the account holders were not allowed to withdraw funds from their own accounts. Frustrated, several individual account holders filed separate complaints before the consumer forum against the MCB and the RBI.

The commission noted that the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) provides insurance cover to small depositors, but this Act remains on paper because it is framed in such a way that the insurance cover would come into operation only in case of winding up or liquidation order. Since RBI neither permits the bank to operate nor does it pass a liquidation order, the whole purpose of extending insurance cover to small depositors is frustrated in the hope of reviving the bank.

The commission noted that while the RBI’s prohibitory order is binding on the bank, the pertinent question is whether it would be justifiable to continue the order beyond a reasonable time, given the hardship imposed on customers. The commission observed that the established law is that administrative powers are required to be exercised within a reasonable time so that they are not abused. The RBI has the duty to act as a watchdog of the finance and economy of the nation and act in the public interest and prevent the affairs of any bank being conducted in a manner detrimental to the interest of the depositors. A failure to do so would constitute a deficiency in service.

Relying on various decisions of the apex court, the commission held that where the law does not prescribe limitation, the court would import the concept of ‘reasonable time’.

If a bank cannot be revived within a reasonable time, the banking license should be cancelled and the bank should be ordered to be wound up. The DICGC must pay the amount covered by the insurance as soon as such liquidation order is passed without waiting further orders from the liquidator. Otherwise, it would be torturous to the poor depositors who may have to wait for years for the cumbersome procedure by which the liquidator crystallizes the amounts due to such depositor.

The commission directed that payment in accordance with the order of the consumer forum would have to be paid by the DICGC. However, if the bank is revived later, the amount paid by the DICGC may be recovered from the bank.

Bottom line…

This landmark judgement will help the small depositor to approach the consumer forum to recover claims of up to Rs. 1 lakh from the insurance coverage provided by DICGC. It is also hoped that the RBI will now do its duty so that depositors do not suffer.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Bank Gone Bust? Don’t Worry, Your Account Is Insured*

photo by coloros

In January 2008 SEBI abolished entry load on Indian equity funds if you’re investing directly. However, it is mandatory to pay an entry load of 2.25 percent if you transact through intermediaries, better known as distributors who take this charge to service investors.

Suppose you are investing Rs 1000 and the NAV (net asset value) of the scheme that you are buying is Rs 10. This NAV is multiplied by 1.0225 (2.25 percent of Rs 10) to factor in the entry load and operative NAV for you becomes Rs 10.225 (Rs 10 as the actual NAV and Rs 0.225 as the entry load).

This takes the number of units allocated to you to 97.79 and the money invested is Rs 977.50 instead of Rs 1000. The remainder Rs 22.50 (1000 less 977.50) goes to the distributor and to meet other administrative expenses incurred by the mutual fund company. However, if you invest directly through that mutual fund company’s website then the whole Rs 1000 is invested and you hold 100 units.

While you lose this money upfront, this charge literally multiplies. For example, even on a conservative basis, Indian equities can double in the 5 years. Since 2.25 percent has been deducted upfront and not been invested, what you have lost is 4.5 percent (double of 2.25 percent) from your returns.

Consequently, it is a simple decision that you should invest directly and not pay this significant charge. If you can choose your fund on your own and want to save on entry load you have these options:

a.    Visit the AMC/CAMS/ Karvy investor centre, fill the transaction form, and also fill the KYC (know your client) form [if you’re investing Rs. 50000 or more].

b.    You could even download the transaction form, print it, fill it and mail (post) it along with your cheque/demand draft to the Mutual Fund’s Investor Centre. You’ll also need to attach a photocopy of your PAN card (must be attested).

c.    Invest online through the mutual fund’s website.

I personally prefer Option C because it gives me the freedom to invest in mutual funds whenever I wish. Investing online also saves me time — if I were to go to the Mutual Funds office I’d spend minium 60 minutes getting there.

I wanted to invest in one of Fidelity’s mutual funds so this time I chose to do it online.

To begin with, I visited Fidelity’s website to find out the procedure for investing online through their website.  Found out that I should have an online account with them to be able to invest online. So, I filled out an online registration form and at the end of the registration process they email you a copy of the Registration Form (pdf) which is pre-filled with data you entered in the online registration form. You (or anyone you can send) need to either visit the Mutual Fund’s office (Investor Centre) to submit your form or you could mail it to them.

I had a meeting on Friday and Fidelity’s office is just a 5 minute walk from that place so I carried along my user registration form and related documents to submit it — hoping the process would be completed in a day or two and will be getting my online account ready to use I was told it takes around 15 days to get the online account setup process to be completed. How sad!

As I was there and did not want to wait for another 15 days to make my investment I picked up a transaction form, filled in and along with the cheque made my submission over the counter. It hardly took 5 minutes to complete the process but the sad part was — the time — it was 15:10 hrs which meant I could not get Friday’s closing NAV (cut off time is 15:00 hrs). Now my transaction form will be processed on Monday’s closing NAV.

Anyways, I look forward to receiving my Fidelity online account details in about 2 weeks.

For your convenience, listed below are website links of those mutual funds who are able to offer online investing to their customers.

Birla Sun Life Mutual Fund
CAMS Online Transaction Service
Fidelity Mutual Fund
Franklin Templeton Mutual Fund
HDFC Mutual Fund
ICICI Pru Mutual Fund
Karvy Online Services
Kotak Mutual Fund
Mirae Asset Global Investment Mgmt (India) Pvt. Ltd.
Principal Mutual Fund
Quantum Asset Mgmt Co. Pvt. Ltd.
Reliance Mutual Fund
SBI Mutual Fund
UTI Mutual Fund

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Stop Paying Entry Load, Go Direct

Punj Lloyd has won 2 orders this week. The first,  to engineer, procure, install and commission a 211km pipeline with associated stations and infrastructure in Qatar — an $800 million contract (Rs. 3636 crore) from Qatar Petroleum for a gas transmission project, while the second order is much smaller at $42 million (about Rs. 190 crore) for an onshore drilling project in Libya.

The Middle-East has been one of the key business markets for the company and 27 per cent of its current order backlog constitutes of orders from this region.  Sharekhan believes the investments planned in the Gulf Cooperation Council countries over 2006-12 spell a great opportunity for the company. Punj Lloyd’s increased foothold in these geographies will further enhance the company’s capability to win larger and more important projects in the Gulf Cooperation Council nations.

With this, the order backlog for the engineering and construction firm stands at Rs. 24,063 crore, which is 3.1x its 2007-08 earnings, imparts ample visibility to the company’s future revenues.  In the June 2008 quarter, the order book stood at Rs. 20,162 crore a growth of 32% year on year. While the top line will get a boost, typically margins for international projects tend to be lower due to higher cost viz., contractor charges and staff costs.

Since June this year, the stock has outperformed the market, gaining 6 percent compared with a 16 percent fall in the Sensex. Sharekhan believes the stock is attractively valued at these levels given that the company’s earnings are estimated to grow at a compounded annual growth rate of 51.2 per cent over FY2008-10E and has thus maintained ‘buy’ on Punj Lloyd with a 12-18 month price target of Rs 532.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Buy: Punj Lloyd, target Rs. 532

photo by The Consumerist

A credit card can be an excellent tool for saving money and getting discounts. If one goes haywire it can lead to additional costs and penalties. Credits cards are often blamed for debt woes as well as other consumer-related ills prevalent in society. But, in reality, most of such woes result from the misuse of plastic money or the ignorance of consumer himself rather than keeping a credit card in your wallet. Here are some tips to make the most of your credit card:

Use your cards smartly

These days some credit cards offer discounts in tie-up with lots of commercial establishments, where getting 20-30 per cent discounts (even more) is an usual affair. Besides, credit card purchases are usually paid after a lag of one month. You, thus, save interest cost of around one month when you use credit cards. Moreover, credit card spending sometimes earns reward points which may be redeemed at any point of time in return for useful articles.

Got Virtual Card? Use it

Banks such as HDFC, Kotak Mahindra and Axis offer a virtual card which can be used for online shopping. You have to fill some personal details along with the card number on the bank’s home page and you will be given a card number along with the CVV number for a one-time use. You have to key in these details, which is exclusive to that transaction. In a virtual card, you should also specify the transaction amount. So the virtual card will be loaded with the required credit limit. You can pay for this virtual card either through your credit/debit card.

Know the features of your card

For instance, if your card (e.g. Gasoline Credit Cards) offers reward points on buying fuel through it, it is no use paying cash at petrol filling stations. Instead use your card as much as possible, accumulate reward points and get free fuel after some time. But remember to clear the total card dues in time, otherwise you will end up paying more for the same fuel.

Cash back rewards

Some credit cards these days offer cash back rewards (usually 3 to 5 per cent) on your spends. But you could do better if you could find a card that will deduct the cash back right off the credit card statement or find one with a higher cash back.

One such card that offers a higher cash back is Kotak Trump Gold Credit Card. You get a 10% cash back on movie tickets, plays, food and drinks at coffee shops, fast food joints, restaurants, pubs & bars all through the year. 2.5% Fuel Surcharge Waiver across ALL fuel pumps. Zero charge EMI. Railway surcharge waiver for offline (2.5%) & online (1.8%) transactions. A max of Rs. 800 is the limit of cash back you could receive in month, so you can save upto Rs. 9600 in a year. Calculate your annual savings here.

Also, cash back credit cards are useful only if you have high money turnover. If you don’t buy much, you would loose on APR. Because rewards credit cards have higher APR (annual percentage rate) than other credit cards. Besides, the cash back game makes sense if you pay your credit card bills in full and on time each month. You should also be aware of the fact that to get cash back rewards, your card has usually to be swiped on the issuer’s machine itself. Otherwise you won’t get any reward.

Leverage your credit history

If your credit history is good, that can also be leveraged while negotiating loans with banks. You can get a cheaper loan from the credit card issuing bank itself or some other bank. Sometimes only your credit history is enough for getting a loan of your choice.

Fraudulent transactions

Nine times out of 10, retailers accept credit card payments without a second glance at the signature. Given the long queues at the billing counters, many merchants overlook signature verification despite the gravity of this issue.

However, the liability always lies with the merchant if he processes a fraudulent transaction. Hence, always keep a photocopy of your credit card (along with the signature) to help you in case of disputed transactions which has to be reported within 60 days. If the signature on the charge slip mismatches with yours then the merchant has to bear the liability and you get your money back. Most card issuers have dispute forms either online or in their branches.

The most important — Always pay in full and pay in time

But all said and done, you should never delay the credit card payments or make part payments. Plastic money rewards are useful only if you pay off your card in full every month. Simply because the interest charges from a single month of spending can easily wipe out the benefits of any rewards you earn!

Remember when you rollover, you get no free credit period. Just stop the use of card in that case. Thus, as with other debt tools, credit cards just need to be managed effectively and used smartly, and no one can stop you from emerging a winner in this game.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

7 tips to make the most off your credit card

photo by orangeacid

Investment experts keep advising us to “invest for the long term,” mainly so that we may benefit from the power of compounding.

Take an individual who decides to invest Rs. 50,000 for 20 years. Assume that he earns a constant return of 8% per year. In the first five years, the Rs. 50,000 invested grows to Rs. 73,466. (see table) This means, he gains Rs. 23,466 in absolute terms in the first five years.

compounding

From the sixth to the tenth year, he earns Rs.34,880, almost 50% more than what he did in the first five years. From the eleventh to the fifteenth year, he earns Rs. 50,662 and between the sixteenth and the twentieth years he earns Rs. 73,439.

The point is simple. Over longer time frames, the impact of compounding in absolute terms only gets more visible. And that is why investment experts say what they say.

Now, how does an investor implement such a strategy? A simple way of going about it is by opening a Public Provident Fund (PPF) account, which can be opened at a post office or any of the branches of State Bank of India. It pays an interest of 8% per annum. One can invest any amount between Rs. 500 and Rs. 70,000 in the account every year. The investment typically matures in 15-16 years and can thereafter be extended indefinitely in chunks of 5 years at a time.

The other strategy that can be applied is investing in tax-saving fixed deposits. An investment of a maximum of Rs. 1,00,000 can be made in such deposits. The tenure of the deposit varies from a minimum of 5 years to a maximum of 10 years. Currently, banks are offering rates of as high as 9% on these deposits. However, after 10 years, the individual will have to look at investing again in these deposits or look at some other mode of investing.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Power of compounding

Buy land. They’ve stopped making it. - Mark Twain.

Banks and housing finance companies (HFCs) in India provide loans for purchase of plots (land). Usually, the banks/HFCs insist that the plot of land is purchased from a recognized authority like a development authority, from a society, or from a recognized developer. Financing purchase of plots is a bit risky because of difficulty in documentation.

The main requirement is that the land should be developed and clearly demarcated, and should have been approved for residential purposes. In addition to the general documentation, some additional documents are required to avail land loans. The site should not be categorized as an agricultural site as per the land records. In case it is so, permission to convert land from agricultural use to non-agricultural use should be obtained.

Documents needed to get a loan include:

• No encumbrance certificate from the registrar’s office certifying that the land is not already mortgaged.

• Layout and drawing (as approved by the city development or planning authority) of the location where the plot of land is, giving details of the precise location and its surrounding areas.

• No objection certificate (NOC) from the society for sale and transfer of land.

• Revenue receipts confirming payment of land dues to the government and tax receipts for taxes paid by the owner of the land.

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

Buying a plot of land?