FISCALLY FIT
Manage your money better
SHYAM P.
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This week’s column addresses some of the questions readers have sent in…
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I want to buy gold now to sell it around Deepavali time. Are there any studies of the general market pattern that traces the price from the Shraadh time to Deepavali time? In which form is it advisable to buy gold (Bars, Coins etc.) so that the depreciation is least and from which place (Banks or Local Jewellers)?
Sunil Suhag
Sunil, check out http://goldprice.org/gold-price-history.html for gold price history in INR, available over 1 year, 5 year and 10 year periods. This will help you to validate your thesis. The best way to buy gold for trading is to open a commodity account with a stock broking house and buy contracts. This way, you can buy or sell online.
I have a home loan of Rs. 35 lakhs that I took in March 2005. Went for a floating rate. The initial EMI was Rs. 28,700. Now it’s a hefty Rs. 35,700. Of this, less than Rs. 250 is accounted towards principal repayment. The tenor has increased to 400 months. I do not have readily available funds to prepay this loan. However, there is some land that I bought sometime ago. Would it make sense to sell this piece of land and prepay and retire, say, a good Rs. 20 lakhs of the outstanding amount? Would the money that I save be worth it, looking at the rate which land appreciates in Bengaluru these days? I can put up with the EMI hike up to Rs.40,000. How does one weigh such a situation? What are my options here?
Pramoth Kumar
Pramoth, a simplistic approach to help you arrive at a solution:
Step 1: Put an approximate value on your house (40 lakhs)
Step 2: Put an approximate value on your land (20 lakhs)
Step 3: If this is the only loan you have, then assume that the EMI that you are paying is the cost of owning both your house and land
Then the effective interest servicing cost of your home loan = RATE (400,-35700,6000000) = 6.2 per cent p.a.
Step 4: Do you think your house and land put together will appreciate by at least 7 per cent p.a? If yes, it is theoretically okay to keep the land and incur the interest.
Step 5: As to the practical side, you need to decide how much further interest increase (EMI increase) you can bear. Your limit of Rs. 40,000 implies you can withstand another 1.5-2 per cent interest rate hike. I don’t think anyone can predict the direction of interest rates...but let me just say that you have a thin cushion.
I have purchased an apartment in Hyderabad. The registration was completed in August 2006. Unfortunately, the project is still under construction. I have taken a housing loan with ICICI home finance. The loan executive told me that they would not charge any foreclosure penalty for this loan. Initially the interest rate was 9.5 per cent. Now it has increased to 14 per cent. In the meantime, I have opted for complete disbursement of the loan to avoid pre-EMI burden. Now as the other banks are offering loans at a cheaper rate than this bank, I wanted to shift to them. When I visited the Bank they are asking 2.5 per cent pre-closure penalty.
Upparapalli Sampathkumar
Please ask the bank for a copy of your loan agreement, which will contain the pre-closure terms. Typically, all banks charge a pre-closure penalty although the charges vary. As far as the interest rate differential goes, technically, even if you get a 1 per cent lower interest rate, it is worth incurring the 2.5 per cent penalty because in return you save 1 percent every year on the POS (principal outstanding) during the entire tenure of the loan.
But be sure to read the fine print before switching. Every loan scheme and every bank has its own terms and conditions. Also, remember that interest rate levels are based on the type of loan: pure variable< semi fixed/variable< pure fixed.
This is in reference to the article “To pre-pay or not” published in the Magazine on August 17. I don’t understand the calculation you have mentioned under “Alternate Investment Avenue” i.e. home loan interest rate multiplied by (1-tax rate). Can you explain this?
Peter Koillpillai
Peter, since the interest you pay on your home gets a tax waiver (up to a limit of 1.5 lakhs), tax savings = home loan interest rate * tax rate. So, the effective interest rate on your home loan is = actual interest rate - tax savings = actual interest rate - actual interest rate * tax rate = actual interest rate *(1- tax rate).
This is in reference to your column on Gold vs Sensex in the Magazine. I agree that the Sensex will outperform gold in the long term. I believe that the Sensex can go to 45,000-50,000 levels in 20 years from 15,000. Which means that large caps can multiply by 3-5 times during that time. Mid-caps can be 10-20 baggers during that time. Can mid caps give better returns than large caps?
B. Ravi Shankar
In theory, mid caps should give better returns over large caps due to the extra risk you are taking, but this is applicable only as a diversified portfolio and not for any single stock investment. But keep in mind that mid cap or small cap stocks are volatile. This means that it is easy to witness your stock drop in value by 50 -75 per cent. Not all companies in this space will be able to sustain growth and profitability due to high levels of business risk such as competition from larger firms, change in technology, low cash flow and reserves, poor business model and related scalability issues. So diversification becomes essential in order to spread your risk as an investor. At the end of the day what matters more than the decision of picking mid cap or large cap is the price you pay for your stock...this is largely dependent on the timing of your investment; e.g. had you purchased stocks during the index peak at 21,000, you would have lost significantly today. So remember to always “buy cheap”.
I work for the State Government and stay in the departmental quarters. I own a housing plot, but am yet to construct a house. I have 10 more years for my superannuation. Kindly offer your suggestions on whether I can go for construction of house now or do it after my retirement?
Dhanashekar Raju
Since you are staying in Government quarters, I assume there is no urgency to move to your own house. The answer to your question depends on the following factors:
1. Potential rental income if you construct a house in the vacant plot.
2. Finance for building a house in the vacant plot: will you invest your own money or will you take a loan? If you are taking a loan, then the rental income should at least compensate for the interest portion of your loan. If not you will be incurring interest charges for the building, which only depreciates in value over time. Also, if you plan to take a housing construction loan, it is better to wait until the interest rate falls by a few percentage points.
3. Do you plan to sell the plot at some point? If yes, then even if you don’t build a house on it, you may not lose much value because it is mainly the underlying land that appreciates. Moreover, the buyer might want the flexibility of building a house to his own taste.
Overall, the macro scenario today is that steel and cement prices have peaked and if the current levels of interest rate prevail, they are likely to come down in the near future supported by the slowdown in construction and automotive industry. So, if you have the luxury to postpone your decision to construct a house, you may save some money.
This is a fortnightly column on money matters. Post your queries to: shyamscolumn@gmail.com or www.shyamscolumn.com
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