Thursday, September 19, 2013

How Can Used-Car Finance Help You Realize Your Dreams

Has the dream of owning a car always remained an illusion? If you have always wanted to own a sedan or a hatchback or that nifty little small car but could never shore up the budget, why not go for quality pre-owned models that are available at a significantly lower cost.Quick and easy finance options help you achieve this.  Read on to know how owning your dream machine is easier than you thought.
A Brand New Car is an impossible dream for some
We all aspire to have assets that we are proud of.Yet, very often the divide between our capacity to own and the actual value of assets deters us from achieving our own dreams and buying a car is no different. Owning a car today is no longer a luxury but has become more of a necessity.   Yet, the real value of the car we aspire to own can push our goals further. But in today’s world of abundant options, owning a pre-owned car can help streamline your aspirations and savings. With auto finance options from Mahindra Finance, one can easily knock-off owning a car from the list of things to own.

Buying a used car - Here’s what you should know
If you are planning on buying a used car from your friendly neighborhood dealer, then think again. While it is better to get a recommendation on used cars, it is always advisable to follow the advice given by a certified authority.

While it may be logical to go for a better deal price-wise with a local dealer, it isalways advisable to go with an authorized dealer.

The reason why authorized dealers score better than local ones is that they provide all the relevant paperwork that includes a complete record of ownership and maintenance. Authorized dealers offer warranties, pre and post sales services, certified repairs and maintenance, replacement of car parts and even insurance. These are the same level of services offered on the purchase of a new car.

When you are choosing a used car, ensure that the dealer is registered or authorized.Although searching through classifieds or other sources for an authorized used-car dealer is good enough, it would always be preferable to go for options that distinctly offer pre-certified cars.   It’s generally quicker and easier to avail a pre-owned car loan if the vehicle is pre-certified as the quality of vehicle is assured and the documentation is always in order.

The choice of an auto finance company is yours
Conduct a thorough search online to find the best interest rate for used car loans.Finding second hand car finance is easy when you have zeroed in on the type of car you are interested in buying. Identify the amount of loan you intend to avail of and your preferences from the finance company before you finalize your purchase.

Owning a dream car need not be an illusion with secured and trusted car finance.

Author: Anupama Sughosh, an independent financial blogger

Disclaimer: The views, opinions and investment tips expressed by the author are her own and not that of the website or its management linked within the document. We advise users to check with certified consultants or experts before venturing into any investment decisions.

Wednesday, September 18, 2013

What Does A Mortgage Mean & How Is It Different From Home Loan?

Home buying can be a life changing purchase for anybody. And when you’re dealing with a major purchase like this, one needs to have a clear idea about the terminology. Most of the buyers confuse the terms "mortgage" with "home loan". Most of us are used to calling our home loan a mortgage, but that isn't an accurate definition of the term.
What Is Mortgage Loan?
A mortgage is a loan to finance the purchase of your house. It a kind of security instrument that you as a buyer give to the lender. Mortgage is a legal document that secures the lender's interests in your house. It is a kind of debt instrument that gives conditional ownership of your property. A mortgage on your home gives you the choice of not having to pay off the entire amount of property at one go.  Most first–time home buyers do not have instant cash available to buy a house. Thus, obtaining a mortgage to acquire a loan is the right option. You can also obtain a loan against property disbursed against the mortgage of your property, if you need funds to acquire a new property or for anything else.
What Is A Home Loan?
A home loan is the debt you incur when you are about to buy a house. In banking terms, a loan is sum of amount approved for a borrower. This money that’s borrowed has to be repaid to the lender/bank in regular installments. The bank or the lenders usually charge the borrower with interest, in addition to the due amount. A bank approves a loan followed by a legal procedure and a contract stating that both parties agree to this deal. There’s no notable difference between mortgage loan and a home loan. You'll find that the application process for both loans is similar. Both of them use your home as collateral. Just like a mortgage, if you default payment on your home loan, you can lose your home.
So what’s the difference then when both ways individuals are obliged to mortgage their property?
In mortgage, the property serves as collateral whereas a home loan may or may not be secured. Unlike a home loan, where you actually receive money to purchase a house, a mortgage is a legal document that you will offer to your lender in exchange for a legal claim of your property. It’s like a security instrument agreeing to make regular payment with interest against your property.
A home loan is provided for the restricted end use of any property. The payment has to be made to either the seller or the builder of the property. On the other hand, a mortgage loan is offered for an open end use. It is given against the lien of a property. The lien is removed when the debt is completely paid off. In both cases, the property is mortgaged to the lender.
How Are The Two Different From Loan against Property?
There is a striking difference here - Home Loan or Mortgage loan is taken only for the purpose of purchasing a property. Mortgage loans or home loans usually fund home purchases whereas a Loan against Property can be taken for any purpose.

Sunday, September 1, 2013

Choosing your mutual fund

Mutual funds are amongst the many investment options available to an investor. Mutual funds are investment funds managed by a fund house. These funds are traded on stock exchanges and the money that is collected by way of issue of these funds is invested in other securities, the returns of which are paid to the investors. Mutual funds help investors in diversifying their portfolios and the professional management of these funds helps investors take advantage of any benefits and preventing themselves from potential losses in the stock markets. However, it becomes necessary to evaluate these mutual fund schemes objectively to invest money in the fund that will be most beneficial to the investor.

The following steps must generally be followed to evaluate and choose the perfect mutual fund

  • Category of Fund

The first and the foremost choice of mutual funds involves the category of funds to be chosen. There are broadly these categories: Equity funds, Debt funds, Liquid Funds and Hybrid Funds. These categories must be analysed as every category has an associated risk, objective and maturity period, which must be matched with the preferences of the investor. After the category of funds has been chosen, the next step is to analyse the objectives of various fund schemes within that category.

  •  Objectives

Every mutual fund is formed with a pre-determined objective.  These objectives can be capital appreciation or regular income. Thus, an investor investing in these funds for speculative purposes should go for a fund that focuses on capital appreciation, whereas a household investing in a fund with the aim of getting a sum of money regularly, must invest in those funds, whose objective is to generate regular income. The investment strategy and the benchmark set by the fund scheme should also be taken into account. The fund manager will have a predetermined strategy to invest the fund in a number of securities. The investor of a fund must have knowledge of where the money of the fund is being invested in. After the funds have been shortlisted, their expenses ratio must be calculated for further filtering of funds.

  •  Expenses Ratio

Owning a mutual fund involve various expenses like sales load, exit load, mutual fund management fee, office leases, analyst salaries, etc. These expenses can eat away earnings even before they reach the investor. Thus, investors must always go for a fund with a lower expenses ratio. However, not only the expenses ratio, but the turnover rate is also significant in choosing the fund.

  • Turnover rate
Turnover rate refers to the number of times a fund is bought and sold. A higher turnover rate not only leads to higher transaction costs, but also generates taxable gains. Thus, the investor will end up paying more taxes than on a fund with a lower turnover rate.Thus, investors must always go for a mutual fund with a lower turnover rate.

After the above analysis has been undertaken, its important to figure out whether there is a need to diversify or not and whether the investor must go for an index fund or an actively managed fund.
  • Diversification

Whether an investor must diversify or not depends on his risk tolerance and knowledge of investing. If the investor does not have a lot of knowledge about economic sectors and markets and his risk tolerance is low, he must diversify his funds across different sectors to lower risk.

  •  Index Funds vs. actively managed funds

Index funds are those mutual funds which tracks market indexes. They are known to provide a broad market exposure, low turnover rate and low expenses ratio.  Past performances have revealed index funds perform better than actively managed funds. Index funds rise and fall with the market, but actively managed funds may even rise when the market falls depending upon the decision taken by the fund manager.

In the current scenario of a depreciating rupee, the industry experts are vouching for the investors to keep a 12 month period in mind in case of short term investments and an 18 month period in case of long term investments to beat volatility in the markets. 

|Simran Ahluwalia|

Sunday, August 4, 2013

Tax free bonds in India

Bonds are one of the many investment strategies used to manage personal finance. Bonds are debts given to entities for a fixed amount of time at a fixed interest rate. There is a special category of bonds which attracts eyeballs every time they are announced because of the benefits attached to them. These are tax free bonds. As the name suggests, these bonds enjoy tax exemption on the interest income earned from them. They generally pay lower coupon rate than corporate bonds, however the tax exemption feature puts them at a better bet than corporate bonds.
The following features must be kept in mind before opting for these bonds:
  • The after tax interest income is higher than those offered by corporate bonds.
  • There is no benefit of compounding or reinvesting as in fixed deposits.
  • They are listed on stock exchanges which makes them liquid as can be sold in a secondary market.
  • Have higher maturity periods than most other investment options. The investment horizon is from 10-15 years.
  • Bonds are listed in the market, due to which they give the benefits of capital gains when interest rates go down.
  • Holding of bonds in demat form makes it easier to handle them.  
  • Retail investors are sometimes given a 0.50% higher interest rate if they are new investors in the scheme.
  • Enjoy high credit rating as are generally offered by government entities.
  • There is neither any tax exemption at the time of investment nor at the time of sale in a secondary market. There is a tax exemption only on the interest income earned from such bonds.
  • Effective yield is generally used to depict these bonds.
Effective yield = Coupon rate/(1-tax rate)
         However, this may not be a fair indicator of a bond because it differs with different tax rates.
  • Generally those investors who are looking for long term investments should invest in these bonds and not those who are looking at capital gains.
  • Investment in tax free bonds can be made at the time of their public issue by filling up the required form or at a later stage when they are listed on a stock exchange

Some of the latest tax free bonds issued in India are:

  • India Infrastructure Finance Company
  • Railway Finance Corporation
  • National Highways Authority Of India
  • Hudco
  • National Housing Bank
  • Power Finance Corporation
  • Rural Electrical Corporation
  • Jawaharlal Nehru Port Trust
  • Ennore Port
  • Dredging Corporation of India

The coupon rates of these bonds lie in the range of 7-8% with a long term investment period ranging from 10-15 years. Most of these bonds are issued under multiple tranches and multiple series, each offering different coupon rates. The issue of these bonds was closed in March, 2013. Most of the bonds trade on Bombay stock exchange and their current prices can be viewed at

Government of India has granted permission to a few other corporations to issue their tax free bonds as well.  Some of them are:
  • NTPC is set to raise Rs. 2,500Cr from tax free bonds this fiscal to support its capital expenditure. NTPC has requested the government for a maturity period of 10-20 years. These bonds will also be issued in tranches.
  • The importance of the issuance of tax free bonds by Municipal corporations has also been raised due to Detroit’s debacle and the degrading financial health of Indian municipalities.
  • NHPC is also planning to raise Rs. 1000Cr via tax free bonds but is awaiting Finance Ministry’s nod.
  • AAI is set to launch tax free bonds to raise Rs. 1000Cr to develop airports across the country.

The benefits of tax free bonds must be weighed against the benefits of other attractive and similar investment avenues like fixed deposits before investing in them. The following points must be always compared before opting for an investment option:  
  •  Liquidity
Analyse your own liquidity needs and match it with the liquidity provided by various investment avenues. For E.g.: Liquidity of investing in equity is the highest as compared with tax free bonds and fixed deposits. Tax free bonds will be generally considered as being more liquid than fixed deposits because taking out money from an FD before the maturity period generally lowers the interest rate offered by the bank. An exception to this is IDBI, which does not lower the interest rate being offered on its FD on withdrawal of money.

  • After tax interest rate/coupon rate
Compare the after tax interest rate being offered by an FD, dividends offered by an equity investment and the coupon rate of a tax free bond.

  • Maturity period
The maturity period of an equity investment is the shortest, followed by that of a fixed deposit and then a tax free bond. 

  • Capital gains
Capital gains are the highest in equity as compared to fixed deposits and tax free bonds.

|Simran Ahluwalia|

Saturday, June 29, 2013

What is Quantitative Easing?

Quantitative easing has begun.
Quantitative easing has stopped.
The Federal Reserve makes a statement on quantitative easing.
The IMF expresses concern regarding quantitative easing.
QE is affecting all currencies.
Signal to the end of QE led to stock markets plummeting.

But wait, what is quantitative easing exactly? 

Quantitative easing has always been a favourite with the news papers and news channels, but confuses the common man.
Let us try to understand and grasp this concept.

What is QE?
QE is an unconventional monetary policy of the central bank of the country to stimulate liquidity in the economy. Just like CRR and interest rates are reduced by the central bank to increase loans and thus stimulate spending, QE is a similar policy to achieve the same purpose. QE involves purchasing of government bonds by the central bank from commercial banks or other private institutions like pension funds or insurance companies in order to increase liquidity in the economy. QE was first performed by the Bank Of Japan, and has now been adopted by the Federal Reserve and the Bank Of England.

When is QE undertaken?
QE is undertaken only when the conventional monetary policies prove ineffective to stimulate liquidity in the economy. For e.g., when the interest rates have been dropped to a point below which they cannot be dropped further, the central bank has to resolve to QE to further solve the problems of the economy.

Where does the money come from to buy government bonds?
There is a misconception that QE involves printing money. Such transactions are performed electronically. For example: Bank ABC’s assets consist of 30 bonds, 20 loans and 60 reserves. The assets of the central bank consist of 80 bonds. When the central bank purchases all the bonds of the Bank ABC, the total bonds of the central bank become 110(80+30). The change in Bank ABC’s balance sheet will be to swap the reserves with the bonds. Thus Bank ABC will have 0 bonds and 90 reserves (60+30).

How this mere swapping of bonds with reserves affects the economy?
As the reserves with the banks increase, their capacity to lend loans increases simultaneously. Thus, the banks lend more loans, stimulating liquidity in the economy. This will pull up the inflation rate. For example, the Bank of England is practising QE to achieve an inflation rate of 2%.
If more loans are injected in the economy and as liquidity increases, people tend to set up new businesses and expand existing ones, increasing employment. For example: Federal Reserve has planned to continue QE3 till the economy achieves an unemployment rate of 7%.
When the central bank buys government bonds from private institutions like insurance companies and pension funds, they get more money, which they are likely to invest in other companies rather than buying more bonds. This is because, the central bank’s demand of government bonds will push up their prices, reducing their yield, making bonds an unattractive investment. Thus, the companies will prefer to invest in other companies or expand their own businesses with this extra money rather than buying more government bonds. This will further expand economy and boost employment rates.

What are the negative impacts of QE?
QE increases inflation, which if goes out of hand, can be pretty difficult to control. It also puts pressure on the consumer, who faces the brunt of rising prices. The value of the home currency also drops because of the increase in supply of the currency.

Thus, quantitative easing is indeed an unconventional monetary policy, which should be resorted to only when the other policies become ineffective. The duration and the extent of QE must be carefully determined to prevent the negative impacts of the same.

|Simran Ahluwalia|