Pre EMi V/s Full EMI

Lower prices of under construction homes over ready to move in houses have always been an attractive selling point if there is no burning need to find oneself a shelter. Another common feature of any under construction property is buying on an home loan. The lender disburses the loan amount in trances as demanded by builder on different stages of construction. Here ,most of lenders give a choice to the borrower if whether he wants to start repayment in a Pre–EMI mode or pay the entire EMI before the possession of property is received. Although, many borrowers are aware of these terminologies , most of them consider that it a facility provided as a discount by their lender to them.

What is Pre – EMI?

Pre-EMI is simply repayment of interest payable on the amount disbursed by lender, as per the number of days of usage, payable to the lender regularly on a specific day of every month. The interest amount keeps on increasing with the additional amount disbursed and till he receives the possession of the property. The borrower then has to repay as per the EMI schedule. i.e. Repayment of Principal plus interest.

Let us consider an example, if you have taken a loan of Rs. 50 lakhs @ 11% for next 20 years for an under construction property and the lender disburses loan in 4 trances as following:

Month	Stage	Amount disbursed	Pre – EMI – (Rs./pm)
January 1st	On agreement	10 lakhs	9167
June 1st	On completion of foundation work and ground level	10 lakhs	18333
Oct 1st	On completion of next three floors	20 lakhs	36667
Dec 31st	On possession	10 lakhs	51609(actual EMI)

This means you pay (9167 * 5)+(18333*4)+(36667*3) = Rs. 2,29,167 of Pre – EMI towards the disbursed loan amount. After that you would pay an EMI of Rs.51,609 for next 20 years towards your loan.

Who should opt for Pre – EMI mode ?

Pre – EMI is useful for people who due to constraint of funds cannot afford to pay the principal amount of the loan. In case, if the project gets delayed or stalled , you don't have principal to be repaid. It has no other additional benefit.

What are the drawbacks of Pre – EMI?

a) No repayment of principal in the construction period. Thus, the loan tenure is not reduced.

b) In case of delay of project, the interest paid on loan disbursed, where the amount is almost 90%, the borrower ends up paying interest on entire loan amount.

c) If you are paying the EMI from the under construction stage;you can claim all the interest paid in a spread of 5 years, after getting the possession. You can not do so for payment of Pre-EMI in under-construction stage.

d) Sometimes the lender include the under construction phase of Pre – EMI in the loan years. Thus, the amortized value of your EMI increases. For example, if you have a 3 year under construction phase and you have a 15 year loan period, the loan amount is amortized over 12 years. (i.e. 12 loan tenure +3 years of under construction).

Hence, we would like to summarize that don't opt for Pre – EMI in under construction property, unless you are looking to sell off the property on possession or are cash strapped to pay the full EMI.

Financial Planning for Women

It is surprising that in a country like ours, where we have women leading some of the big names in banking and financial industry, the financial literacy among women is as low as 16%. (survey by National Centre for Financial Education). Women who manage their home expenses and emergencies so well, feel intimidated by the investment jargon and strategies.As a financial planner, we might treat both gender on parity but the truth remains that women need more emotional connection and simplicity on planning over men.

Why this difference?

Women in addition to planning for her family goals has to shoulder responsibilities for her own individual identity. In India, we have a lower women working force between mid 20's to mid 30's. In this period, women tend to take a back seat on her career front to manage her home, start family and above all be a dutiful mother to up bring a well mannered child. Women have always remained in shadows of their male counterpart- initially the father, later her husband and lastly her son. This has made women so financially dependent that they are never able to take decision for themselves.

So, what if any catastrophe was to remove any of our sheltered provisions? What if you have to shoulder the responsibility of your widowed mother or up bring your children alone due to your spouse death, disability or divorce? Are you ready to balance the dual roles of a money earner and investor? Do you know the basic plan to be kept ready if you have to start from zero?Today,we shall be focusing on some of these pointers to be kept in mind for any women fending for herself and her family.

a) Identify the working hands and mouths – It is necessary to list out in case if you have any additional source of income from previously made investments. Ask all sort of questions to your insurance agents regarding the policies of deceased person to confirm the same. There could be any pension amount to be made available over the death of Provident fund member. In case of divorce, are you expecting any alimony? Is it one time or regular over time? 
 

Once, you have answer to these questions, add what is your monthly income going to be. List out all the essential expenses and other ad hoc expenses. The best way to identify them are to read previous cheques book descriptions, bank account narration or study credit card bills. This simple exercise would help you prepare monthly cash flow requirement.

b)Put aside emergency funds – Out of the lump sum funds received on happening of any of the above incidents, keep out 3-6 months expenditure funds aside to act as contingency for some emergency requirement. It can be parked in a Bank FD, Liquid Funds or in separate savings account.

c) Revise your life cover- Previously, as a women you might not be the primary income provider. Hence, it is now necessary to raise/avail your life cover to support your entire family needs.

d) Re work on your goals- It is possible that you had previously planned different goals towards family and for yourself. However, now with different situation, it is reshuffle the goals – in terms of priority, allocation of surplus and lump sum amounts. Also, include the new lump sum made available. It is necessary to note that unlike men, women prefer to prioritize family over rest. So if you plan to take a break for your sibling or children's education landmark years remember to save for these years.

e) Plan your estate distribution – List down all your assets, personal valuable belongings , pieces of jewellery or even expensive designer wear and make a plan to give out to your next generation. Don't leave any loose ends, which can cause uproar after you in your family.

Thus, we wold like to say that although men or women are equally capable of making good decisions, women mostly don't exercise their right. It is necessary for women to now be prepared for any catastrophe.

How Different Color Affects Our Spending

Last week we celebrated HOLI, the festival of colors. Colors are very important in life or else the life will be like a Black & White TV of 80s. Colors impact all part of life and they have lot of psychological impact on human’s brain. Our various decisions are impacted based the colors. At the mall, we can spot nearly every shade of the rainbow on signs, labels, doors, shopping bags—you name it and its there. They are not just put for the hack of it but those colors have been strategically placed to influence our spending. Various studies shows that people subconsciously associate specific colors with specific social or cultural messages. Knowing this, retailers carefully select the colors they use in an effort to get us to loosen our purse strings. Let’s understand how different shades affect your purchasing habits.

Black

Black is associated with power, elegance, formality, death, evil, and mystery. Black is a mysterious color associated with fear and the unknown (black holes). It usually has a negative connotation (blacklist, black humor, 'black death'). However Black is also the signature color of sophistication or royalty (the black party-wear), it dominates high-end makeup packaging and can even make inexpensive blushes and lipsticks seem more upscale.

 White

White is associated with light, goodness, innocence, purity, and virginity. It is considered to be the color of perfection. White means safety, purity, and cleanliness. As opposed to black, white usually has a positive connotation. In branding, white suggests simplicity and purity. (Seventy-five percent of top skin-care brands are packaged in white.) It also stands for modernity and honesty, which may be why Apple swears by it.

Red

Red is the color of fire and blood, so it is associated with energy, war, danger, strength, power, determination as well as passion, desire, and love. Red is a very emotionally intense color. It enhances human metabolism, increases respiration rate, and raises blood pressure. Although plenty of shops embrace this color (and still find financial success), market experts warn that, just like a stop sign, a red placard can make consumers hit the brakes. It serves as an alarm, triggering a more careful consideration of our outlays.

Pink

Pink, a delicate color that means sweet, nice, playful, cute, romantic, charming, feminine, and tenderness, is associated with bubble gum, flowers, babies, little girls, cotton candy, and sweetness. The color pink is the color of universal love of oneself and of others. This is the favorite color of ladies especially the young girls.  It has calming effects, according to research published in the Journal of Orthomolecular Psychiatry. Scientists found that seeing pink slows people’s endocrine systems and tranquilizes tense muscles. How that might influence your wallet: Feeling relaxed may make it less painful to part with cash.

Orange

It is associated with joy, sunshine, and the tropics. Orange represents enthusiasm, fascination, happiness, creativity, determination, attraction, success, encouragement, and stimulation. To the human eye, orange is a very hot color, so it gives the sensation of heat. Nevertheless, orange is not as aggressive as red. The color is associated with equality and affordability, which is why you’ll find it at stores offering good value, like Big bazaar etc.

Green

Green, the color of life, renewal, nature, and energy, is associated with meanings of growth, harmony, freshness, safety, fertility, and environment. Green is also traditionally associated with money, finances, banking, ambition, greed, jealousy, and wall-street. This is the color of people who have eco-friendly and environment preservation in mind. Shoppers keep this color to impress eco-minded clients. However please keep this in mind that: Just because an item is green doesn’t mean that it’s environmentally friendly.

Blue

Almost everyone (especially men) likes blue. Blue is the color of the sky and sea. It is often associated with depth and stability. It symbolizes trust, loyalty, wisdom, confidence, intelligence, faith, truth, and heaven. Blue is considered beneficial to the mind and body. It slows human metabolism and produces a calming effect. No wonder it signifies trust and dependability and is a favorite logo color for financial institutions to assure its customers for safety. Blue also improves customer loyalty: Patrons are more likely to return to stores with blue color schemes than to those with orange color schemes, according to a 2003 study published in the Journal of Business Research.
 

Burgundy

Burgundy is a deep shade of red. It is named after Burgundy wine. This wine is named after the Burgundy region of France. This color reminds us of all things rich and refined (just like red wine), so don’t be surprised if a dress in this color costs more than a white one in a similar style. Its prismatic cousin, brown, has similar connotations of luxury.
 

Violet

Purple combines the calm stability of blue and the fierce energy of red. The color purple is often associated with royalty, nobility, luxury, power, and ambition. Purple also represents meanings of wealth, extravagance, creativity, wisdom, dignity, grandeur, devotion, peace, pride, mystery, independence, and magic. Purple reigns in the beauty industry, especially in the category of anti-aging products. When people see it, they think of royalty. Consequently, a purple box may help persuade us that the product has special properties and is worth a princely sum.

 Yellow

It's associated with joy, happiness, intellect, and energy. Yellow produces a warming effect, arouses cheerfulness, stimulates mental activity, and generates muscle energy. Yellow is often associated with food. Bright, pure yellow is an attention getter, which is the reason taxicabs are painted this color. A mainstay at fast-food restaurants, yellow evokes energy and increases appetite, perhaps explaining why your stomach may start to growl when you pass those golden arches.

Residential or Commercial Property – Where to invest

People when buy property as an investment always face this dilemma – whether buying a residential property would be better or purchasing a commercial property would be a good idea. However the decision is not only based on the buyers' preference but on lot of other things too. Some of the factors that influence this decision include :

a) Money Involved – The cost of commercial property are usually higher than residential properties. So, if you want to earn some really good rental income on these properties, it is necessary that the commercial property is central located of a business zone. Otherwise, the only possibility is to own a small area of shop or individual office in any semi – commercial zone. On other hand, with the same amount, you can buy a better rental income fetching residential property.

b) Lease duration – The lease duration in case of commercial property is usually around for 3-5 years whereas the residential property have mostly an annual contract. The clause of annual rent increment is made a part of the contract at the time of signing it in commercial property. However, the residential properties mostly do not enjoy this flexibility. Thus, many times we see that the residential property are unoccupied for months till a buyer is ready to pay the new rent. However, it is more easier to rent a residential property versus commercial one. The simple reason being excessive demand for any kind of residential property.

c) Other costs involved- In a commercial property the rate of maintenance is higher for per unit. Also, the recently introduced property tax could also prove to be a dampener. In some cases, the tenant is asked to bear a percentage of these expenses. Also, usually tenant would well maintain the property as it is also his place of business operation. In residential property, all some to big expenses related to home appliances and furnishings are borne by owner. The tenant may or may not chip in his contribution unless specifically mentioned in contract.

d) Rental Yield – The rental yield on most of residential properties fall in the range of 3-4%. However, the yield of commercial properties can be as high as 9%. Thus, it is easier if you looking to pay off your loan on property. Although, the loan value would be only up to 60% of the asset value.

e) Economic Market- A commercial property demand surges in a economic boom. It has positive correlation with country's growth. People usually prefer starting a new territory of business with rented property to gauge the market response. However, with the slow down of market, the prices of commercial market slip further fast then residential properties. On other hand, the residential properties are always in demand although the rental yield could fluctuate.

Hence, we can summarize saying that property investment is never a standalone decision. It depends on many factors including capital available, location of property, purpose of buying a property or even the economic condition of the nation. If you are looking to simply buy a property for capital appreciation with small investment it is better to look at residential property. If you intend to buy a property with huge regular income for a longer term, with low management, it is better to look at commercial properties.

Create your own Family office

Multiple responsibilities, different roles in limited time takes up most of our mind space leaving little time for taking up something new. Higher posts comes with more responsibilities at work. So, when it is actually time to give attention to your earned money, we remain busy we tend to neglect it. So, is it fair to leave our money unattended and let is rot in a bank account? Identifying this lacuna, the concept of Family Office was initiated.Family Office is nothing but a firm that helps in daily administration and management of the funds of a super wealthy family. It can be from paying your utility bills, your children school fees, managing your home expenses, planning your vacation, buying a stake in any company,making purchase of fine art as investment,estate planning or even planning your taxes. In short, it a group of people especially hired for managing your wealth ,headed by Chief Financial Officer, with intention to preserve it, grow it and pass it on to next generation.

Till now, it is only the wealthiest lot of people, who use this kind of service. Also, it still has to gain momentum in India, in western countries, this concept is already flourishing. India has a handful family offices for the creme dela creme. Like Premji Invest takes care of Azim Premji's wealth, Catamaran Ventures for Narayan Murthy of Infosys.

But the main intention of our discussion today is who all actually needs this kind of services? Who needs services of experts to manage their lives? A probable list could go like as follows

Kind of People	Probable Reasons
Senior Citizens/ Retired Individuals	Unstable Health, Limited knowledge of new technologies
Wealth received in Inheritance	Lack of knowledge, disinterest, habituated to easy access to everything.
Single Parent	Limited time, Limited knowledge of probable requirements for children
Single Women	Majorly disinterest in money matters, high spending.
Anyone else who prefers to focus on his/her work	Prefer expert services for their requirements at a small price.

So,how can we create a concept of similar to family office for this kind of people by applying any of the following:

a) Set up an automated payment channel for all our expenses like home bills, utility bills, monthly investments or reminders for other expenses.

b) Appoint an Investment officer to take care of all investments.

c) Get an Accountant to oversee bank accounts and taxes.

d) Appoint a Financial Planner to plan your goal requirements and oversee your taxes, investments and in future, estate plan.

Thus, family office is nothing but a service, which lets you have complete focus on your business or service, while they care of your personal wealth.

However, this comes with a word of caution as money belongs to us,so timely review is also necessary to see if the arrangement is really working for us.

Pension Society- a need for tomorrow

After the budget announcement there was a loud noise made against the taxation of partial EPF proceeds on withdrawal.Although, this decision stands revoked now by the finance ministry, lets understand what is the logic behind the earlier proposal made and how it would have impacted the EPF subscribers.

The announcement:

At the time of withdrawal, 60% of money contributed to an EPF account after April 1 2016 would be made subject to tax, unless it was re-invested in an annuity. Also, only the interest earned was to be taxed and not the entire corpus. This proposal would apply to those drawing salary over Rs 15,000 pm.The number of subscribers to be affected by this announcement were very low. Also, the contribution made by employer towards EPF more than Rs.1.5 lakhs in a year would also be taxed in hands of employee.

The intention :

To create a pension society, to reduce the dependency of non working population on the working class. This is in line with our growing older population and increase in social spending in our national budget. The government wanted people to save for their old age. Hence, the annuity was made as the option. This would ensure that a person gets guaranteed amount every month after retirement.

Our verdict:

The taxation on EPF proceeds was a positive step but made in a rush. It didn't prepare proper ground for people to relish the fact that the intention of government is to create self dependency. As per current sources of finance ministry, out of 37 million subscribers of EPF, only 7 million have salary more than Rs 15000 pm. Also, currently out of employers 12% share to PF only 8.33% is sent out for pension. Thus, to accentuate this saving in pension it was intended to have made compulsory savings in an annuity kind of pension product. Also, it could bring parity to the other existing retirement product of National Pension Scheme, where an individual is partially taxed at retirement. But since it gave exposure in equity the returns expected on it are better than regular pension. 

 

India’s retirement system ranks last in the 2015 Melbourne Mercer Global Pension Index (MMGPI) report. The index value of India stands at 40.3 based on review of reduction in household savings. This index compares around 25 economies on 40 indicators under sub indices of sustainability,acuracy and integrity. To improve our situation,we need to make the pension market more competitive, what we need is more annuity like products. Currently, we just have handful insurers selling to us expensive pension products. Having a narrow approach to the intended benefit is not befitted for a tension free retirement.

ELSS - An attractive investment avenue

Among the various tax saving products which gain popularity and achieve maximum sale in last financial quarter is the Equity Linked Saving Scheme (ELSS). ELSS is like any regular open ended equity mutual fund with an additional feature of tax saving under sec 80C of IT ACT 1961. However, unlike other equity funds it has a lock in period of three years.

Some of attractive features which makes it an interesting product for investment is :

• Only investment avenue in 80C with an exposure in equities except the market linked ULIPS.
• As compared to other tax saving avenues, it has lowest lock in period.
• The investment in ELSS can be made both in SIPs or in lump sum mode as per our suitability.
• The returns also vary and can be high over conventional debt and small saving schemes.
• If the senior citizen falls under taxable income slab, he can invest his money in ELSS dividend mode. Although this could depend on his risk appetite.

The selection of ELSS scheme should be based on past performance of at least 3 years of scheme. (matching to its lock in period). Also, if an investment is made in any NFO it is wise to check the past performance of the fund manager and the corpus managed by him.

As on 2 March 2016, the following ELSS are the top performing funds

Fund Name	3 year return	5 year retun	Net asset value (Rs in crore)
Axis Long Term Equity Fund	24.91%	18.45%	6886
Birla Sun Life Tax Relief 96	20.75%	12.68%	1928
Reliance Tax Saver Fund	20.18%	14.42%	4289

(Source: www.valueresearchonline.com)

Although, financial planning does not advise last minute investments, we shared the above information to make mistake of wrong investment less grave.For any other information contact us at saarthifp@gmail.com