Buying a house? Beware of builders' tricks
Urmila Rao, Outlook Money | October 22, 2007
Everybody wants a piece of real estate. The sector has been growing at 25-30 per cent a year since 2003, fired primarily by low interest on housing loans and the rising affluence of homebuyers. Those who had bought stocks of real estate companies, whose valuations have gone through the roof, are a happy lot. However, the same cannot necessarily be said of scores of financially and emotionally bleeding homebuyers. The developers play lord and master to middle-income individuals, who often live like monks to fulfil their dream of owning a house. Most sale agreements are heavily loaded in favour of builders in the currently unregulated market.
This disillusionment is reflected in the rise in the number of complaints that has accompanied the growth of the sector. In the first 25 days of August 2007, the Delhi-based National Consumer Helpline, a consumers' body, received 33 housing-related complaints. The Consumer Guidance Society of India (CGSI), Mumbai, says it gets two-three cases a day. In this scenario, what chance do you have of safeguarding your interests as a buyer?
In 1993, the Supreme Court ruled in favour of M.K. Gupta in his case against the Lucknow Development Authority for not delivering his flat on time. This landmark judgment brought housing construction under the purview of the Consumer Protection Act, 1986.
This, however, hasn't done much to change the unscrupulous ways of builders. Owing to the bonhomie between developers, the authorities and the contractors, projects get sanctioned easily but the quality of construction goes unquestioned. Supreme Court advocate C.M. Srikumar says: "Even in cooperative societies, the contractor, the
architect and the office-bearers of the society dupe the public."
Rahul Todi, managing director, Bengal Shrachi Housing Development, says: "Unlike other consumer products, here we sell a concept first. If there is a gap between expectation and reality, then we are not doing our job properly."
What are the most common games that developers play? Here are eight common tricks and ways in which you can guard against them.
I. When do I get my house?
Most agreements do not clearly specify the date of delivery. For instance, one says: "Completion of the building is expected to be delivered by the date mentioned in the covering letter of this allotment. The delivery of the possession is subject to force majeure." What this means is that you cannot hold the developer responsible if he does not stick to the promised delivery date.
There have been cases when the delivery has been delayed by 12 months or more. Typically, the buyer would have paid 95 per cent of the price by the time he reaches the expected delivery date. If he is living in a rented house, delays will drive his calculations awry as he would not have factored in this additional rent (see Double Bite). Mumbai stockbroker Bhupendra M. Pitroda, 58, fought a legal battle against Megha Property Developers for five years. Reason: delayed possession.
Pitroda was promised delivery of the flat he booked in 1998 in Navi Mumbai's Madhuri Cooperative Society Housing Project within 18 months. The builder later said that delivery would take another six months. When Pitroda visited the site six months later, he felt that the delivery would not happen soon. So, he instructed his bank to stop payment of the balance 37.5 per cent of the apartment's cost to Megha Developers.
The developer promptly sold off the flat. An aggrieved Pitroda then moved the State Commission in July 2000. Three years later, the commission asked Megha Developers to refund Pitroda the money he had paid with 15 per cent interest. Pitroda was also awarded a compensation of Rs 15,000 for the mental agony caused and Rs 5,000 for legal costs.
The developer appealed in the National Commission, which upheld the State Commission order but cut the interest to 9 per cent. The developer then moved the Supreme Court. "The Supreme Court judge flung the papers in the face of the builder's lawyer and asked the builder to compensate me immediately. The judgment was over in a minute," says Pitroda. Through the legal battle, Pitroda made 25 appearances in the State Commission, three in the National Commission and one in the Supreme Court.
Many agreements have penalty clauses for delayed delivery, but they are without bite. For example: "If the company fails to complete the construction of the said building/apartment within the period as aforesaid, then the company shall pay to the allottee compensation at the rate of Rs 5 per sq. ft of the super area per month for the period of such delay." What this means is that for a 1,000-sq. ft flat, you would get a compensation of Rs 5,000 per month�a pittance (see Double Bite).
In most cases, buyers put up with the delay quietly rather than 'antagonise' the builder. Most fear retribution, harassment and further delays in delivery. This is not entirely baseless. For one, agreement papers are designed to protect the builder. Two, your intention to fight the builder may look like a joke given your handicap in terms of financial prowess and influence. Three, there is no industry regulator you can turn to for redressal. Suresh Virmani of National Consumer Helpline says: "We generally encourage a dialogue between buyers and sellers to settle disputes. If that fails, the matter is taken to the regulatory body. But we can't even suggest this in real estate because there is no regulatory body."
What to do. Don't just take the builder's word on the progress of construction. Check it out from time to time, as Pitroda did. If you feel a delay is likely, start building up pressure on the developer. The best way to do this is to form a society, says Virmani. Usually, builders have many projects running at the same time and they push the ones where the pressure is higher. "The more the number of buyers, the greater is the pressure," says Bharath Jairaj of Consumer Action Group, Chennai.
II. Where are my papers?
A lot of builders are evasive about giving the completion certificate at the time of handing over the flat. A completion certificate is issued by municipal authorities and establishes that the building complies with the approved plan. A developer would not get the certificate if he deviates from the plan.
You cannot prove ownership over your house if you don't have the certificate as you would not be able to get the house registered. Also, you may not be able to get utility connections. You will have problems selling, mortgaging or reverse mortgaging the house as it will not be in your name. In the worst case, the unapproved parts of your house would be demolished by the municipal authorities. Not a happy state of affairs.
Businessman Mohammed Haroon, 45, got his flat in Tulip Garden, Gurgaon, six years ago, but he has not got the completion certificate yet. The same goes for the other 59-odd flat owners there. Together, they took Sarvapriya Developers, which built Tulip Garden, to the consumer court. "After four years, in mid-August this year, the court directed the builder to hand over the completion certificates within a month, or pay Rs 5,000 each as compensation to all the flat owners," says Haroon. "But we know that none of the two will come our way and are prepared to approach the Delhi High Court in this matter."
What to do. Sale agreements often don't mention the completion certificate. If yours doesn't and you notice it before signing the papers, insist on the inclusion of a clause that you will be given the completion certificate when the flat is handed over to you. Ask the builder for it as soon as he announces that the house is ready for possession. If, like Haroon, you move into the house without it, the court will probably be your last resort.
III. What's the guarantee of quality?
Within a month of moving into his apartment in Mahagun Manor, Noida, Rajiv Raghunath, 41, got trapped inside the house as the door lock failed. In six months, the plaster started peeling off and the fans stopped working. In another few months, water started seeping in as the pipes had corroded. "I felt cheated. This wasn't worth my money," says Raghunath.
As of now, there is no way for a buyer to check the building materials used or the quality of construction. Says advocate Anupam Srivastava, who is with law firm Chambers of Law: "Quality is a subjective matter. Buyers should enter into an agreement on the kind of material that the builder will use."
In October 2005, Pune's Gera Developments started a trend by providing a 5-year warranty on its buildings. The warranty, however, is subject to the conditions that no structural changes be made to the house and that there be no misuse.
What to do. Don't fall for the builder's glib talk. Insist on including the sanctioned plan of the building and the specifications of the raw materials to be used for construction in the purchase agreement. If you are already facing quality problems, you can go to the consumer court. Says Anand Patwardhan, a consumer activist and lawyer: "If you want to approach the consumer court, move it within two years from the day you take possession." Alternatively, flat owners can form a Residents' Welfare Association (RWA) and get the builder to fix the problems, as Raghunath, an RWA member, did.
IV. What is the price really?
Nishit Babyloni, 38, mech-anical engineer in BHEL, Bhopal, had booked bungalow No. 105 with Ansal Housing and Constructions (AHC) in Pradhan Enclave, Bhopal, in 2004. On a visit to the site five months later, he found that his bungalow was not being built. He asked AHC to give him bungalow No. 120 instead, as construction was in full swing on that. AHC formally changed the allotment in February 2005, but sent him a letter eight months later asking for Rs 3.15 lakh more.
Atit Arora, general manager (marketing) and project head, Ansals Pradhan Enclave, Bhopal, says: "The bungalow's specifications were changed. Babyloni was required to deposit the amount if he wanted the new specifications." Babyloni retorts that AHC did not tell him about the additional work and the changes in specifications. "We were not told that we would have to pay 25 per cent more for the new bungalow till 18 October 2005." He is thinking of moving the consumer court. But, it is not unusual for an agreement to say that a builder can ask for additional payments if specifications are changed or there are cost overruns.
There are legal loopholes as well. The Maharashtra Ownership of Flats Act, 1963, protects buyers against malpractices in the sale and transfer of flats. It gives homebuyers the right to inspect the builder's documents such as the specifications that he has obtained from the authorities. The Delhi Apartment Ownership Act, 1986, however, is a different story. Although it was published in the Gazette of India over a decade ago, brought on the statute book by Parliament and given the President's assent, it is yet to be notified.
What to do. The last stop is the consumer court. Says Srikumar, "Many malpractices are offences under the Indian Penal Code, for which the responsible party can be prosecuted." Keep checking with the builder if any changes are being made to the specifications mentioned in the agreement and the allotment letter. Also, try to get it mentioned in the contract that if a sum higher than the original price has to be paid by you, the builder would give you additional time for that. You must also ask for a copy of the sanctions that the builder has taken from the authorities to carry out the alterations.
V. What else do i pay for?
To make your house liveable, you will need electricity, water and sewage connections. You will also need electrical wiring, appliances like fans, lights and a water pump, which are unlikely to be part of the package and generally won't be mentioned in the agreement. These will be additional costs that you will have to bear. You might also have to keep some speed money aside for registration so that it gets done in a decent timeframe. In some cases, the builder may make a verbal promise to get it done for you.
What to do. Builders generally have a take-it-or-leave-it attitude with conscientious buyers while striking a deal. Even so, it pays to be scrupulous and to read the agreement and its fine print. "Get a lawyer, an architect or an evaluator to determine the correctness of the purchase," says Srivastava. Finally, do some quick math and keep aside some funds to get your house up and running.
VI. How big is house?
A typical home purchase agreement states: "The plans, designs, and specifications are tentative and the developer reserves the right to make variations and modifications..." Simply put, in most cases, you won't know the final area of
the house till you get it. The agreement will further state, "In case of change in area, the difference in cost of area shall be adjusted at the time of making final payment."
Shikhar Saxena, partner, Ace Equity Solutions, a leading housing finance franchisee of ICICI Bank [Get Quote], had booked a fully-furnished, air-conditioned service apartment measuring 650 sq. ft (super area) in Cabana Service Apartments in Indirapuram, Ghaziabad, which was being built by Assotech Realty. He got an allotment letter mentioning this area. However, when the builder offered possession, the super area of the flat had increased to 671 sq. ft. "Once the authorities approve of the floor space index, how can the builder change it?" he asks. After holding out for over 18 months, the choice before him now is to either accept all the terms of the builder or seek cancellation of his allotment. Further, he was informed that the maintenance charge, which was to be Rs 1.50 per sq. ft per month, has been increased to Rs 7 per sq. ft per month. The agreement shields the builder. It says "the monthly maintenance charges will be subject to revision from time to time".
Assotech's Elegante project, also in Indi-rapuram, was to have terrace gardens on the seventh and thirteenth floors. "There is only a patch of green; the developer has built units on these floors too," says a buyer. Srikumar says there is nothing one can do unless the size of the garden is specified in the agreement.
What to do. Builders usually follow the same practices through all their projects. So, before buying, check out the builder's earlier projects to see if he plays fair. Start a blog or join one to share your experiences with others, though this doesn't guarantee redressal. You can read about the mistakes and experiences of other people on websites like mouthshut.com.
VII. What's the carpet area?
Most residential units in India are sold on the basis of the super built-up area, which includes open spaces like space for lifts, staircases and parking, among other things. But, what you really get is the carpet area, which literally means the area that you can carpet. This can be 15-35 per cent less than the super built-up area. In 2005, HDFC [Get Quote] chairman Deepak Parekh had said the company would provide loans at cheaper rates to developers who sell their flats on the basis of carpet area. But, there has been little headway on this front. Some developers, especially in Bangalore, sell on the basis of carpet area. In Pune, too, the builders' association has decided to increase the carpet area by 25 per cent to arrive at the saleable built-up area charged to the buyer. In both these cases, buyers are aware of the area they will get. Though there is still a long way to go, experts believe that soon properties all over India would be sold on the basis of carpet area.
What to do. Buy property on the basis of carpet area, although the builder will not like the idea. Argue with him that if the super built-up area is mentioned on the basis of the approvals and sanctions, the carpet area can be quantified. Says Srikumar: "There should be a provision for termination of the contract and resumption of the property so that builders don't have an upper hand. However, in the absence of rules, buyers should be vigilant."
VIII. Will I get a well-managed property?
The developer may promise to maintain the building or complex in the initial years. The service, however, may not be satisfactory. Residents of Mahagun Manor in Noida have taken over its maintenance. "The homebuyers cannot even use the Right to Information Act, 2005, to their advantage because it doesn't apply to private builders or even group cooperative housing societies," says Srivastava.
What to do. You are unlikely to get relief through correspondence and phone calls. You can go the e-way to attract the builder's attention. For months, Delhi-based developer Unitech ignored the complaints of the residents of one of their premier offerings, Uniworld City. Then, a resident shot a nine-minute video that captured the visible flaws of the project, and posted it on YouTube.com, a broadcast site. Their grievances were soon attended to. You can use websites like www.consumerhelpline.in and www.cgsiindia.org to seek further guidance.
Though the dice is clearly in favour of the builder, the buyers can still fight back and many of them are doing so. Now, the government urgently needs to put a regulator in place to ensure proper disclosures and protect the buyers.
Monday, October 22, 2007
Thursday, August 2, 2007
Questions to ask before taking a home loan
Yes, it is important to get a few things clear at the very outset. Especially, when one is going in for any kind of loan. This is because of the high costs attached with them.
For instance, in case of home loans, there are administrative and processing costs, prepayment penalties and so on and so forth. Says financial planner Govind Pathak, "One must ask for different rates, compare them with market rates and then negotiate hard with the bank to get the best results."
Here are a few questions you need to start with.
What is my rate of interest? That is, ask for the benchmark lending rate. This benchmark rate could be linked to the bank's prime lending rate or be a mortgage specific rate like home prime lending rate. Then, ask for the spread that you will be getting.
Generally banks offer home-loan rates that are lower than the benchmark rates. As far as figures go, if the benchmark rate is say 18 per cent and your floating rate is 14 per cent, you get a spread of four per cent. Once you know this spread, you can check around in the market if this is the best spread that banks are offering.
What would be the additional costs? Banks will always impute small charges like administrative and processing fees under different heads. These charges may look small in nature but ultimately impact your overall cost of loan.
How fixed is fixed? If you are looking for a fixed rate of interest, then you need to know if this loan is fixed for the entire tenor or only, for say two or three years.
What would be the prepayment penalty? Most banks have clauses in the agreement that there will be some prepayment penalty imposed, if you pay more than a certain percentage of the loan at one go.
This is because the bank would lose interest income because of the payment. A bank may allow you to pay 25 per cent of the loan at one go and then charge two per cent, if you pay over it.
Finally, as Pathak puts it, "Constant monitoring is the key." You need to call the bank at least once in three months and find out the rates they are offering new customers. If it works out in your favour, go ahead and ask them to realign it to the present rates. Of course, it comes for a fee. But it may make sense, more often than not.
For instance, in case of home loans, there are administrative and processing costs, prepayment penalties and so on and so forth. Says financial planner Govind Pathak, "One must ask for different rates, compare them with market rates and then negotiate hard with the bank to get the best results."
Here are a few questions you need to start with.
What is my rate of interest? That is, ask for the benchmark lending rate. This benchmark rate could be linked to the bank's prime lending rate or be a mortgage specific rate like home prime lending rate. Then, ask for the spread that you will be getting.
Generally banks offer home-loan rates that are lower than the benchmark rates. As far as figures go, if the benchmark rate is say 18 per cent and your floating rate is 14 per cent, you get a spread of four per cent. Once you know this spread, you can check around in the market if this is the best spread that banks are offering.
What would be the additional costs? Banks will always impute small charges like administrative and processing fees under different heads. These charges may look small in nature but ultimately impact your overall cost of loan.
How fixed is fixed? If you are looking for a fixed rate of interest, then you need to know if this loan is fixed for the entire tenor or only, for say two or three years.
What would be the prepayment penalty? Most banks have clauses in the agreement that there will be some prepayment penalty imposed, if you pay more than a certain percentage of the loan at one go.
This is because the bank would lose interest income because of the payment. A bank may allow you to pay 25 per cent of the loan at one go and then charge two per cent, if you pay over it.
Finally, as Pathak puts it, "Constant monitoring is the key." You need to call the bank at least once in three months and find out the rates they are offering new customers. If it works out in your favour, go ahead and ask them to realign it to the present rates. Of course, it comes for a fee. But it may make sense, more often than not.
Thursday, July 19, 2007
Insurance Online
Want an insurance cover for your family, but don't have the time to run after the agents of various companies to decide on a product? Internet's the way to go for you. With policies and products available online, the cheapest deal could be just a click away.
Quick Facts
www.insurancemall.in is India's only insurance shopping website as of now
www.getmeinsure.com also deals with online insurance but is restricted to making comparisons among various plans
Only general insurance policies available online till now
Even among health plans, only those are available that don't require medical tests
Pension plans without life cover can also be accessed
Why online? At present, most people buy insurance products through an individual agent or a bank. However, these entities normally deal with products of only one company. So, you may not get the right deal at the right price from them.
The new insurance shopping websites act as online brokers and help you access and compare deals offered by various companies, and then pick the one best suited to you. Normal brokers, too, serve the same purpose, but their operations are largely restricted to high volumes and, hence, their main clients are corporate houses and big organizations.
Online bargains India's first insurance shopping website, www.insurancemall.in, through its associate firm, Bonsai America, has paved the way for the online insurance seeker. "We give customers the choice to buy any of the existing products," says Mahavir Chopra, chief financial officer (new businesses). Insurance Mall currently offers only general insurance products, but plans to start transactions in life insurance products by the end of July 2007.
Another entrant in the online insurance sector is www.getmeinsure.com. This site, however, is restricted to making comparisons among various plans. "As of now, we do not offer buying on our website but it will be introduced as and when the market is ripe," says Aditya Dwivedi, founder director and chief marketing officer.
General edge: For those looking for general insurance products, such as health, home, travel or car insurance, the online version can be a boon in the detariffed regime. Even pension plans provided by life insurers that come
without any life cover are ideal online plans to buy. In the detariffed regime, general insurance companies have been allowed to fix their own prices for products offered by them. Competition among insurers has led to falling prices. But, to zero down on the cheapest deal, one needs to know about other deals too. Buying insurance online makes the task easier.
"Post-detariffing, the premiums have fallen; they could fall further if online purchases pick up as the insurance companies would then pass on the agent commissions to their customers," says Dwivedi. Some past researches prove this. According to a study done in the US in 2004, the rise of buying on the Net reduced the cost of term life prices by as much as 10 to 15 per cent.
How to go about it: The process of online buying is as simple as it sounds. "Just a few clicks are all that is required," says Chopra. Once the applicant puts in the relevant information, the site lists the available options. The applicant then has to choose a suitable plan and purchase it online. Detailed brochures on each of the policies are also available.
Limitations. All life insurance products should not be bought over the Internet. Planning for retirement, or saving for children, needs focused attention of trained insurance professionals, which may not be available online.
Among the bouquet of health insurance products, only those are available that don't require medical tests. There are no life insurance products on offer yet. Also, the websites do not have all available offers from existing insurers as of now.
Words of caution: Always read the privacy policy carefully to make sure the site doesn't misuse the information you provide. Look for the little lock symbol at the bottom of your web browser screen to make sure that you are on a secure site.
Buying three policies-say a health plan, a car insurance and a term insurance-from three different insurers may make you end up running after three agents of various companies. A broker servicing all the three products and, that too, online, is the way to the future.
Quick Facts
www.insurancemall.in is India's only insurance shopping website as of now
www.getmeinsure.com also deals with online insurance but is restricted to making comparisons among various plans
Only general insurance policies available online till now
Even among health plans, only those are available that don't require medical tests
Pension plans without life cover can also be accessed
Why online? At present, most people buy insurance products through an individual agent or a bank. However, these entities normally deal with products of only one company. So, you may not get the right deal at the right price from them.
The new insurance shopping websites act as online brokers and help you access and compare deals offered by various companies, and then pick the one best suited to you. Normal brokers, too, serve the same purpose, but their operations are largely restricted to high volumes and, hence, their main clients are corporate houses and big organizations.
Online bargains India's first insurance shopping website, www.insurancemall.in, through its associate firm, Bonsai America, has paved the way for the online insurance seeker. "We give customers the choice to buy any of the existing products," says Mahavir Chopra, chief financial officer (new businesses). Insurance Mall currently offers only general insurance products, but plans to start transactions in life insurance products by the end of July 2007.
Another entrant in the online insurance sector is www.getmeinsure.com. This site, however, is restricted to making comparisons among various plans. "As of now, we do not offer buying on our website but it will be introduced as and when the market is ripe," says Aditya Dwivedi, founder director and chief marketing officer.
General edge: For those looking for general insurance products, such as health, home, travel or car insurance, the online version can be a boon in the detariffed regime. Even pension plans provided by life insurers that come
without any life cover are ideal online plans to buy. In the detariffed regime, general insurance companies have been allowed to fix their own prices for products offered by them. Competition among insurers has led to falling prices. But, to zero down on the cheapest deal, one needs to know about other deals too. Buying insurance online makes the task easier.
"Post-detariffing, the premiums have fallen; they could fall further if online purchases pick up as the insurance companies would then pass on the agent commissions to their customers," says Dwivedi. Some past researches prove this. According to a study done in the US in 2004, the rise of buying on the Net reduced the cost of term life prices by as much as 10 to 15 per cent.
How to go about it: The process of online buying is as simple as it sounds. "Just a few clicks are all that is required," says Chopra. Once the applicant puts in the relevant information, the site lists the available options. The applicant then has to choose a suitable plan and purchase it online. Detailed brochures on each of the policies are also available.
Limitations. All life insurance products should not be bought over the Internet. Planning for retirement, or saving for children, needs focused attention of trained insurance professionals, which may not be available online.
Among the bouquet of health insurance products, only those are available that don't require medical tests. There are no life insurance products on offer yet. Also, the websites do not have all available offers from existing insurers as of now.
Words of caution: Always read the privacy policy carefully to make sure the site doesn't misuse the information you provide. Look for the little lock symbol at the bottom of your web browser screen to make sure that you are on a secure site.
Buying three policies-say a health plan, a car insurance and a term insurance-from three different insurers may make you end up running after three agents of various companies. A broker servicing all the three products and, that too, online, is the way to the future.
Monday, June 11, 2007
Tax smart housing loans
Tax-smart housing loans!
When buying a house, you have two financing options; either take a loan, or use your own funds. Most of us obviously would not be able to afford the outright purchase of a house without availing of a loan.
However, even those fortunate few who have the money to buy a house off the shelf should consider going in for a loan. Let us see why.
Well, for starters, under Section 24 of the Income Tax Act:
Interest outgo up to Rs 150,000 on a housing loan is tax deductible for self-occupied houses.
In the case of commercial properties and let-out premises, there is no upper limit on the deductibility of the interest.
Anyone who has two self-occupied houses has the privilege of choosing any one of them as deemed to have been let-out.
Over and above this deduction on interest, repayment installments of the principal loan amount are also eligible for deduction under Section 80C, within the overall aggregate ceiling of Rs 1 lakh (Rs 100,000).
If one were to use one's own funds, all these benefits have to be forgone. There are absolutely no tax benefits available for someone who buys a property outright without taking a loan. This does seem a bit harsh and unfair, but that's the way the law is.
Also, interest rates payable on housing loans are typically about the same as the rate earned on a bank deposit. Therefore, it makes abundant sense to take a loan.
So, how much loan should one take?
The answer is obvious:
1. In the case of commercial, let-out, or deemed let-out properties, take as much loan as can be obtained.
2. First Cut: In the case of a self-occupied house, a housing loan of about Rs 15 lakh (Rs 1.5 million) would attract annual interest of Rs 1.5 lakh (Rs 150,000), which is the highest limit of tax deduction available. So, loan up to this limit is certainly beneficial; anything more would not offer any additional tax benefits.
For instance, if you take an additional loan of Rs 1 lakh (Rs 100,000) over and above Rs 1.5 lakh, the corresponding additional interest of Rs 10,000 payable would not be tax-deductible. Now, the same corresponding amount invested in bank FDs earns interest of Rs 10,000. This is subjected to tax at the rate applicable to the individual and will be as much as Rs 3,399 in the highest tax zone. This is certainly a loss that can be avoided by using one's own funds beyond the limit of Rs 15 lakh or so, the exact limit being governed by the prevailing interest rates.
It would, therefore appear that any loan where the annual interest exceeds Rs 1.5 lakh is not tax advantageous.
Second Cut: The above analysis is true for Year 1. Let us examine what the situation would in the subsequent years.
Suppose the loan is Rs 15 lakh and the capital repayment for the first year is Rs 1 lakh. The interest on Rs 15 lakh is Rs 1.5 lakh only for the first year. During the second year, the loan outstanding would have reduced by Rs 1 lakh, and the interest will also correspondingly reduce, so there is unutilised tax deduction in the second and subsequent years.
Therefore, it makes sense to take as much loan as is possible for as long a tenure as possible because while the entire interest in the first year, or a few initial years, might not be fully tax-deductible, total tax advantage over the life of the loan would be higher.
3. One important observation related with those who have two self-occupied houses. The second house will be deemed to have been let out even if it is not actually let out. The entire interest paid on the second loan is deductible, and this is over and above the limit of Rs 1.5 lakh for the self-occupied house.
Yes, at first glance this appears very attractive but there is a notional rent that will be added to the income, which dilutes the advantage.
Fine print, tax smart
Section 24 of the Income Tax Act allows for deduction -- "Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital."
Note that the word used is 'payable' and not 'paid.' Therefore, if the housing finance company adjusts the entire amount of EMI towards the principal first, and debits the interest to 'interest collectable' account, the borrower will derive the maximum tax benefit.
A certificate furnished to the borrower indicating the amount of interest payable gives him a handle to claim the deduction under Section 80C on a larger amount without losing deductibility under Section 24, by even a paisa. The actual interest payment can wait until the principal amount is collected. Some employers, especially PSUs and banks, follow this practice.
In such cases since the deduction of interest is already claimed on accrual basis, one cannot claim it once again when the interest is actually being recovered. Under such a scenario, the individual may be given an option to prepay the entire balance of interest without any penalty at one go when the capital is totally paid off.
We hope some of the financial institutions, especially the more dynamic ones like HDFC [Get Quote], take a lead in changing their structure of EMI. As a matter of fact, housing companies will do well by giving an option to the borrower of choosing whether to (i) treat the entire EMI as interest in the beginning or (ii) treat it as repayment of the capital or (iii) apply the normal reducing balance method!
Excerpt from:
Taxpayer to Taxsaver (F.Y. 2007-08)
By A N Shanbhag
Publisher: Vision Books
Price: Rs 235.
A N Shanbhag is a best-selling author and a very widely syndicated columnist on personal finance and taxation.
(C) All rights reserved.
To buy A N Shanbhag's Taxpayer to Taxsaver online, click here
When buying a house, you have two financing options; either take a loan, or use your own funds. Most of us obviously would not be able to afford the outright purchase of a house without availing of a loan.
However, even those fortunate few who have the money to buy a house off the shelf should consider going in for a loan. Let us see why.
Well, for starters, under Section 24 of the Income Tax Act:
Interest outgo up to Rs 150,000 on a housing loan is tax deductible for self-occupied houses.
In the case of commercial properties and let-out premises, there is no upper limit on the deductibility of the interest.
Anyone who has two self-occupied houses has the privilege of choosing any one of them as deemed to have been let-out.
Over and above this deduction on interest, repayment installments of the principal loan amount are also eligible for deduction under Section 80C, within the overall aggregate ceiling of Rs 1 lakh (Rs 100,000).
If one were to use one's own funds, all these benefits have to be forgone. There are absolutely no tax benefits available for someone who buys a property outright without taking a loan. This does seem a bit harsh and unfair, but that's the way the law is.
Also, interest rates payable on housing loans are typically about the same as the rate earned on a bank deposit. Therefore, it makes abundant sense to take a loan.
So, how much loan should one take?
The answer is obvious:
1. In the case of commercial, let-out, or deemed let-out properties, take as much loan as can be obtained.
2. First Cut: In the case of a self-occupied house, a housing loan of about Rs 15 lakh (Rs 1.5 million) would attract annual interest of Rs 1.5 lakh (Rs 150,000), which is the highest limit of tax deduction available. So, loan up to this limit is certainly beneficial; anything more would not offer any additional tax benefits.
For instance, if you take an additional loan of Rs 1 lakh (Rs 100,000) over and above Rs 1.5 lakh, the corresponding additional interest of Rs 10,000 payable would not be tax-deductible. Now, the same corresponding amount invested in bank FDs earns interest of Rs 10,000. This is subjected to tax at the rate applicable to the individual and will be as much as Rs 3,399 in the highest tax zone. This is certainly a loss that can be avoided by using one's own funds beyond the limit of Rs 15 lakh or so, the exact limit being governed by the prevailing interest rates.
It would, therefore appear that any loan where the annual interest exceeds Rs 1.5 lakh is not tax advantageous.
Second Cut: The above analysis is true for Year 1. Let us examine what the situation would in the subsequent years.
Suppose the loan is Rs 15 lakh and the capital repayment for the first year is Rs 1 lakh. The interest on Rs 15 lakh is Rs 1.5 lakh only for the first year. During the second year, the loan outstanding would have reduced by Rs 1 lakh, and the interest will also correspondingly reduce, so there is unutilised tax deduction in the second and subsequent years.
Therefore, it makes sense to take as much loan as is possible for as long a tenure as possible because while the entire interest in the first year, or a few initial years, might not be fully tax-deductible, total tax advantage over the life of the loan would be higher.
3. One important observation related with those who have two self-occupied houses. The second house will be deemed to have been let out even if it is not actually let out. The entire interest paid on the second loan is deductible, and this is over and above the limit of Rs 1.5 lakh for the self-occupied house.
Yes, at first glance this appears very attractive but there is a notional rent that will be added to the income, which dilutes the advantage.
Fine print, tax smart
Section 24 of the Income Tax Act allows for deduction -- "Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital."
Note that the word used is 'payable' and not 'paid.' Therefore, if the housing finance company adjusts the entire amount of EMI towards the principal first, and debits the interest to 'interest collectable' account, the borrower will derive the maximum tax benefit.
A certificate furnished to the borrower indicating the amount of interest payable gives him a handle to claim the deduction under Section 80C on a larger amount without losing deductibility under Section 24, by even a paisa. The actual interest payment can wait until the principal amount is collected. Some employers, especially PSUs and banks, follow this practice.
In such cases since the deduction of interest is already claimed on accrual basis, one cannot claim it once again when the interest is actually being recovered. Under such a scenario, the individual may be given an option to prepay the entire balance of interest without any penalty at one go when the capital is totally paid off.
We hope some of the financial institutions, especially the more dynamic ones like HDFC [Get Quote], take a lead in changing their structure of EMI. As a matter of fact, housing companies will do well by giving an option to the borrower of choosing whether to (i) treat the entire EMI as interest in the beginning or (ii) treat it as repayment of the capital or (iii) apply the normal reducing balance method!
Excerpt from:
Taxpayer to Taxsaver (F.Y. 2007-08)
By A N Shanbhag
Publisher: Vision Books
Price: Rs 235.
A N Shanbhag is a best-selling author and a very widely syndicated columnist on personal finance and taxation.
(C) All rights reserved.
To buy A N Shanbhag's Taxpayer to Taxsaver online, click here
Tuesday, February 13, 2007
What is PE Ratio
Decoding PE ratio
Thanks to the Internet era, we columnists receive instant feedback from you. It is both a joy, and a challenge, when you ask me to explain myself. In December, I said that buying and selling decisions were made easier if one had a target price, set by one's understanding of the company's business.
This led to a large number of email queries like "How do you set a target?", and "Is the P/E (price to earnings) ratio the only benchmark for setting a target?"
The answer to this question has filled many books. Yet as a stock-picker in the public domain, I must try and answer it. Please bear with me if you know all that I am saying, and also with the fact that my answer will spread over two issues. Let me start by saying that there is no escaping from P/E ratios.
Let's begin with 'E', or earnings. A share in a company is a share in its earnings as long as the company exists (of course, if you sell the share, this entitlement passes to the new owner).
The dividend, or what the company pays you, is only a fraction of this earning since most companies retain much of their profit to finance further growth; but then that growth leads to greater earnings, in which you still hold a share. 'P', or price, is what the market is asking you to pay for this stream of earnings.
Clearly then, when buying a share, we should calculate whether its price is justified by what the company will earn in the future.
This raises two issues -- one is estimating this future stream. The second question is -- what will you pay today for returns in the future? For example, what is the present value of Re 1 every year from now until the end of the century?
We know that the actual value of this sum is Rs 93, but clearly no one will pay this amount. For two reasons -- firstly, most of us would rather have Re 1 today than Re 1 tomorrow (and Re 1 to be received in 2100 seems practically worthless today); secondly, if the interest rate is 8 per cent per annum, I can 'buy' Re 1 per year by putting Rs 12.50 in the bank.
Now, if interest rates go up overnight to 10 per cent, that same annual income of Re 1 per year will cost only Rs 10. Since fixed income streams suddenly became cheaper, shares should also become cheaper. The inverse relationship between interest rates and share prices generally holds true, but in our markets, stock prices have not reacted to the recent hike in interest rates. This is because growth in earnings has been so strong.
This means that the amount we are willing to pay for a share depends firstly on its current earnings (the P/E ratio); but more importantly, it depends on our expectation that earnings will grow over time. As the Indian economy has gathered steam, companies across sectors have shown earnings growth year-on-year (and quarter-on-quarter). This has increased the willingness of investors to bank on growth, and value shares at higher and higher multiples of current earnings.
Thus, in May 2003, shares in the Nifty were valued at 10.84 times earnings. Today, the same index is valued at almost 23 times earnings. This is despite the fact that the price of a fixed income stream has come down (which is what happens when interest rates go up), as interest rates have climbed by about three percentage points in these three years.
This seems to be illogical, but is not because the investor in shares has seen the earnings in shares go up by over 25 per cent each year during the time period. Now this is only an analysis of the past. What about the future? And, moving from the theoretical to the specific, how do we decide what we are willing to pay for a specific company's shares?
These are questions I will attempt to answer in my next column.
The author is an investment advisor to a select group of clients. He can be reached at msatyanand@yahoo.com
In layman terms. Today if you put Rs 10 in bank, you would get Re 1 every year, compared to putting Rs 12 a few years ago. Compare that to the markets where people are putting upto Rs 23, which if the earnings are constant they would get Re 1 only every year. But surely people are expecting earnings to rise drastically (as has been demonstrated over the last few years), that they are willing to put upto 23 times earnings in the stock market.
Now, even if the interest rates were to go higher, so that say, you would Re 1 every year with only Rs 8 investment, still paradoxically, the shares are not becoming cheaper (which they should because of demand). That is people are willing to invest at and above Rs 23 although they may get only Re 1 every year, if the earnings are a constant. But because people are expecting more and more higher earnings, and if they invest Rs 23 in the stock market, they would get more than Re 1 in the years to come (and actually increase exponentially), they are willing to value the stock market at higher and higher prices, even though the interest rates are going up.
To know about P/E, it would be better to know about EPS first.
EPS (Earnings Per Share) - It is the Net Profit divided by total number of shares. If a company has 10,000 shares in total, and the company makes Rs.500,000 in profit (in a year), the EPS for that financial year is Rs.50.
P/E Ratio: You must take the stock price and divide it by the EPS, to get the P/E ratio. For instance the current market price of ABC company share is Rs.100 and its EPS is 50. Then the P/E ratio would be 2.
The P/E ratio (also called the "Earnings Multiple") needs to be compared in the same sector that a company is in. P/E of a sector is usually at similar levels - for instance, tech companies have P/E of around 35 - 45, PSU banks 5-10, Private banks 22-25 and so on.
Thanks to the Internet era, we columnists receive instant feedback from you. It is both a joy, and a challenge, when you ask me to explain myself. In December, I said that buying and selling decisions were made easier if one had a target price, set by one's understanding of the company's business.
This led to a large number of email queries like "How do you set a target?", and "Is the P/E (price to earnings) ratio the only benchmark for setting a target?"
The answer to this question has filled many books. Yet as a stock-picker in the public domain, I must try and answer it. Please bear with me if you know all that I am saying, and also with the fact that my answer will spread over two issues. Let me start by saying that there is no escaping from P/E ratios.
Let's begin with 'E', or earnings. A share in a company is a share in its earnings as long as the company exists (of course, if you sell the share, this entitlement passes to the new owner).
The dividend, or what the company pays you, is only a fraction of this earning since most companies retain much of their profit to finance further growth; but then that growth leads to greater earnings, in which you still hold a share. 'P', or price, is what the market is asking you to pay for this stream of earnings.
Clearly then, when buying a share, we should calculate whether its price is justified by what the company will earn in the future.
This raises two issues -- one is estimating this future stream. The second question is -- what will you pay today for returns in the future? For example, what is the present value of Re 1 every year from now until the end of the century?
We know that the actual value of this sum is Rs 93, but clearly no one will pay this amount. For two reasons -- firstly, most of us would rather have Re 1 today than Re 1 tomorrow (and Re 1 to be received in 2100 seems practically worthless today); secondly, if the interest rate is 8 per cent per annum, I can 'buy' Re 1 per year by putting Rs 12.50 in the bank.
Now, if interest rates go up overnight to 10 per cent, that same annual income of Re 1 per year will cost only Rs 10. Since fixed income streams suddenly became cheaper, shares should also become cheaper. The inverse relationship between interest rates and share prices generally holds true, but in our markets, stock prices have not reacted to the recent hike in interest rates. This is because growth in earnings has been so strong.
This means that the amount we are willing to pay for a share depends firstly on its current earnings (the P/E ratio); but more importantly, it depends on our expectation that earnings will grow over time. As the Indian economy has gathered steam, companies across sectors have shown earnings growth year-on-year (and quarter-on-quarter). This has increased the willingness of investors to bank on growth, and value shares at higher and higher multiples of current earnings.
Thus, in May 2003, shares in the Nifty were valued at 10.84 times earnings. Today, the same index is valued at almost 23 times earnings. This is despite the fact that the price of a fixed income stream has come down (which is what happens when interest rates go up), as interest rates have climbed by about three percentage points in these three years.
This seems to be illogical, but is not because the investor in shares has seen the earnings in shares go up by over 25 per cent each year during the time period. Now this is only an analysis of the past. What about the future? And, moving from the theoretical to the specific, how do we decide what we are willing to pay for a specific company's shares?
These are questions I will attempt to answer in my next column.
The author is an investment advisor to a select group of clients. He can be reached at msatyanand@yahoo.com
In layman terms. Today if you put Rs 10 in bank, you would get Re 1 every year, compared to putting Rs 12 a few years ago. Compare that to the markets where people are putting upto Rs 23, which if the earnings are constant they would get Re 1 only every year. But surely people are expecting earnings to rise drastically (as has been demonstrated over the last few years), that they are willing to put upto 23 times earnings in the stock market.
Now, even if the interest rates were to go higher, so that say, you would Re 1 every year with only Rs 8 investment, still paradoxically, the shares are not becoming cheaper (which they should because of demand). That is people are willing to invest at and above Rs 23 although they may get only Re 1 every year, if the earnings are a constant. But because people are expecting more and more higher earnings, and if they invest Rs 23 in the stock market, they would get more than Re 1 in the years to come (and actually increase exponentially), they are willing to value the stock market at higher and higher prices, even though the interest rates are going up.
To know about P/E, it would be better to know about EPS first.
EPS (Earnings Per Share) - It is the Net Profit divided by total number of shares. If a company has 10,000 shares in total, and the company makes Rs.500,000 in profit (in a year), the EPS for that financial year is Rs.50.
P/E Ratio: You must take the stock price and divide it by the EPS, to get the P/E ratio. For instance the current market price of ABC company share is Rs.100 and its EPS is 50. Then the P/E ratio would be 2.
The P/E ratio (also called the "Earnings Multiple") needs to be compared in the same sector that a company is in. P/E of a sector is usually at similar levels - for instance, tech companies have P/E of around 35 - 45, PSU banks 5-10, Private banks 22-25 and so on.
Sunday, January 21, 2007
Five mutual funds that one can invest in
5 mutual funds that you must own
January 22, 2007 10:50 IST
It's the start of a new year and maybe its time for investors to take a re-look at their mutual fund portfolios to ensure that they are invested in the right schemes. We outline the most "invest-worthy" equity fund schemes that investors should consider owning.
Given Personalfn's mutual fund research processes, the best funds for 2007 are unlikely to be very different from those we recommended in 2006. Its because our view on a fund is crystallised after considerable deliberation that involves scrutinising the fund's performance over the long-term (minimum 3 years, although with some exceptions, many of our recommendations have established themselves over close to 10 years) and even then over several market cycles, particularly the downturns.
Performance of course is the concluding point for us. We begin with the sponsor, the credibility it commands, fund management philosophy of the fund house, its investment approach and processes, whether it promotes a steady, team-based approach as opposed to a volatile, fund manager-based approach. This forms the first line of evaluation for us; if a fund house redeems itself on these parameters then we migrate to performance.
At Personalfn, in a lot of instances we come across clients with a high risk appetite who believe that the best way to invest is to stack your portfolio with as many mutual funds (or stocks) as possible. The idea is that there is safety in numbers so by being 'well-diversified' you can cover all your bases.
To counter the diversification rational we have a quote from Warren Buffet, arguably the leading authority on investments � 'Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing'. So rather than populate your portfolio with every second NFO (new fund offer), it makes imminent sense to invest some time researching mutual funds so as to pick the best funds. The Personalfn Research Team has selected the 5 diversified equity funds that investors with an appetite for risk must own.
Go for the tried and tested
Diversified Equity Funds NAV (Rs) 1-Yr (%) 3-Yr (%) 5-Yr (%) Since
Incep. (%) SD (%) SR (%) Launch Date
DSP ML Equity 45.29 51.6 47.2 46.7 28.9 8.35 0.41 Apr-97
DSP ML Opp. (G) 56.00 51.6 46.5 50.5 32.4 7.92 0.41 May-00
Franklin Flexi Cap (G) 20.95 48.0 - - 52.6 7.98 0.43 Mar-05
HDFC Top 200 (G) 109.47 43.8 45.3 49.9 35.8 7.28 0.43 Oct-96
Sundaram Select Midcap (G) 90.42 67.2 56.1 - 66.1 7.56 0.52 Jul-02
BSE Sensex 54.9 38.2 32.0
. DSP ML Opportunities Fund
DSP ML Opportunities Fund is an equity fund managed with a free flowing investment style, popularly known as an 'opportunities style' of investing. Launched in May 2000, it began poorly by making aggressive, ill-advised investments in technology stocks, but a change in the fund management team was just what the fund needed to effect a change in fortunes.
Although, an opportunities fund, DMLOF is probably one of the more conservatively managed, predominantly large cap diversified equity funds. It pursues a well-diversified investment strategy across stocks and sectors and is far from opportunistic given the consistency in its stock picks.
More than the fund, this is the mainstay of the well-defined investment processes and approach of the asset management company - DSP Merrill Lynch Fund Managers, a respectable name in the fund management business. The conservative fund management philosophy of the AMC is the reason we did not see any gimmicks being launched in the guise of NFOs when most other AMCs were gripped by the NFO frenzy.
In our view, investors with looking to invest in a well-managed, opportunities style, diversified equity fund with a large cap bias should invest in DMLOF.
2. DSP ML Equity Fund
Coming from the same pedigree as DSP ML Opportunities Fund explains DSP ML Equity Fund's (DMEF) steady track record as a well-managed value-style diversified equity fund.
The value style of investing, a popular investment approach in developed markets like the US, is lesser-known in the Indian context. This style involves investing in fundamentally strong companies that are trading at a discount to their fair values till such a time that their stock prices are fully valued. This is a departure from the growth style of investing, which involves investing in fairly valued companies in the hope that stock prices will rise even further.
DMEF scouts for value picks mainly among large cap companies. True to the investment approach of the fund house, it is well-diversified across stocks and sectors. Among its limited peer group, it has usually maintained an edge over competition by providing higher absolute and risk-adjusted returns.
In our view, DMEF is the first stop for investors looking for a well-managed value fund in the large cap segment.
3. Franklin India Flexicap Fund
An equity fund with as limited a tenure as Franklin India Flexicap Fund (launched in January 2005) would not usually have figured so high on our Research Team's list of recommendations. But FIFF is no ordinary fund; it is backed by a fund management team headed by K.N. Sivasubramanian and R. Sukumar, two very experienced fund managers who have given us Franklin India Bluechip and Franklin India Prima.
Both these funds, would normally have occupied the slot that FIFF now occupies, but as we mentioned right at the start, when we can do with one fund, we would not like to have two.
Franklin Flexicap was launched with a mandate to help it overcome the limitations of its illustrious predecessors (Franklin India Bluechip and Franklin India Prima). So unlike them, it can invest in companies regardless of the market capitalisation. So far, the fund has maintained a predominantly large cap portfolio recognising the risks of being over invested in mid caps.
In our view, investors looking for a fund that can invest freely across market capitalisation should invest in FIFF given the impressive track record of the fund management team that is managing it.
4. HDFC Top 200 Fund
Talk of well-managed diversified equity funds and HDFC Top 200 Fund emerges as an obvious option. The reasons are obvious - over the years HTF has established an impressive track record across time frames and parameters related to risk and return.
HTF has undergone a long journey from ITC Threadneedle to Zurich India Mutual Fund finally resting with HDFC Mutual Fund, one of the more respectable names in the AMC business. But a constant with the fund, for most of its existence, has been Mr. Prashant Jain, one of the more competent fund managers, who has directly or indirectly managed the fund. It was under him that HTF made the timely decision to exit technology stocks before the crash in March 2000.
HTF is one the earliest proponents of the index-plus investing style. It is mandated to invest at least 60% of its net assets in stocks drawn from the BSE 200. The fund is invested predominantly in large cap companies. It pursues a relatively well-diversified strategy as far as stocks are concerned but takes sectoral bets to score above-average returns.
In our view, investors looking for a fund that has consistently generated above-average returns at lower risk, must invest in HTF.
5. Sundaram BNP Paribas Select Midcap Fund
Having selected the regular large cap/flexi cap equity funds, it is time to move to a 'niche' fund that can give a boost to your portfolio. Look at Sundaram BNP Paribas Select Midcap for that edge.
Only 4 years in business and SSM has already assumed leadership position in this segment. Managed by Sundaram BNP Paribas Mutual Fund (a fund house known largely for its conservative investment style), SSM has adopted two measures to lower the risk in a relatively high risk segment.
For one, it diversifies its portfolio to include as many as 100 stocks. And two - it moves into cash (upto a maximum of 35 per cent of net assets) when it finds the market at uncomfortable levels. This particular feature held the fund in good stead during the crash in May 2006 when its fully invested peers witnessed significant erosion.
On the flipside, this has worked against SSM over the last few months when its peers have made the most of the rally from 9,000 points to 14,000 points, while it has been sitting on cash (31 per cent on October 31, 2006). However, over a market cycle, we believe SSM will still come out tops vis-a-vis its peers.
In our view, investors looking for a well-managed mid cap fund that has shown consistency in performance across parameters (related to risk and return) must invest in SSM.
Having selected the 5 funds is only one part of the investment process. The other and equally important step is to invest in the funds in the right allocation so as to make the most of what they have to offer investors. For instance, an investor with an appetite for risk who wants to avoid short-term volatility must consider investing a larger amount in HDFC Top 200 than Sundaram Select Midcap.
For the high risk investor, it could be the reverse. To add that element of customisation in your investment plan, you must get in touch with an experienced and competent financial planner
January 22, 2007 10:50 IST
It's the start of a new year and maybe its time for investors to take a re-look at their mutual fund portfolios to ensure that they are invested in the right schemes. We outline the most "invest-worthy" equity fund schemes that investors should consider owning.
Given Personalfn's mutual fund research processes, the best funds for 2007 are unlikely to be very different from those we recommended in 2006. Its because our view on a fund is crystallised after considerable deliberation that involves scrutinising the fund's performance over the long-term (minimum 3 years, although with some exceptions, many of our recommendations have established themselves over close to 10 years) and even then over several market cycles, particularly the downturns.
Performance of course is the concluding point for us. We begin with the sponsor, the credibility it commands, fund management philosophy of the fund house, its investment approach and processes, whether it promotes a steady, team-based approach as opposed to a volatile, fund manager-based approach. This forms the first line of evaluation for us; if a fund house redeems itself on these parameters then we migrate to performance.
At Personalfn, in a lot of instances we come across clients with a high risk appetite who believe that the best way to invest is to stack your portfolio with as many mutual funds (or stocks) as possible. The idea is that there is safety in numbers so by being 'well-diversified' you can cover all your bases.
To counter the diversification rational we have a quote from Warren Buffet, arguably the leading authority on investments � 'Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing'. So rather than populate your portfolio with every second NFO (new fund offer), it makes imminent sense to invest some time researching mutual funds so as to pick the best funds. The Personalfn Research Team has selected the 5 diversified equity funds that investors with an appetite for risk must own.
Go for the tried and tested
Diversified Equity Funds NAV (Rs) 1-Yr (%) 3-Yr (%) 5-Yr (%) Since
Incep. (%) SD (%) SR (%) Launch Date
DSP ML Equity 45.29 51.6 47.2 46.7 28.9 8.35 0.41 Apr-97
DSP ML Opp. (G) 56.00 51.6 46.5 50.5 32.4 7.92 0.41 May-00
Franklin Flexi Cap (G) 20.95 48.0 - - 52.6 7.98 0.43 Mar-05
HDFC Top 200 (G) 109.47 43.8 45.3 49.9 35.8 7.28 0.43 Oct-96
Sundaram Select Midcap (G) 90.42 67.2 56.1 - 66.1 7.56 0.52 Jul-02
BSE Sensex 54.9 38.2 32.0
. DSP ML Opportunities Fund
DSP ML Opportunities Fund is an equity fund managed with a free flowing investment style, popularly known as an 'opportunities style' of investing. Launched in May 2000, it began poorly by making aggressive, ill-advised investments in technology stocks, but a change in the fund management team was just what the fund needed to effect a change in fortunes.
Although, an opportunities fund, DMLOF is probably one of the more conservatively managed, predominantly large cap diversified equity funds. It pursues a well-diversified investment strategy across stocks and sectors and is far from opportunistic given the consistency in its stock picks.
More than the fund, this is the mainstay of the well-defined investment processes and approach of the asset management company - DSP Merrill Lynch Fund Managers, a respectable name in the fund management business. The conservative fund management philosophy of the AMC is the reason we did not see any gimmicks being launched in the guise of NFOs when most other AMCs were gripped by the NFO frenzy.
In our view, investors with looking to invest in a well-managed, opportunities style, diversified equity fund with a large cap bias should invest in DMLOF.
2. DSP ML Equity Fund
Coming from the same pedigree as DSP ML Opportunities Fund explains DSP ML Equity Fund's (DMEF) steady track record as a well-managed value-style diversified equity fund.
The value style of investing, a popular investment approach in developed markets like the US, is lesser-known in the Indian context. This style involves investing in fundamentally strong companies that are trading at a discount to their fair values till such a time that their stock prices are fully valued. This is a departure from the growth style of investing, which involves investing in fairly valued companies in the hope that stock prices will rise even further.
DMEF scouts for value picks mainly among large cap companies. True to the investment approach of the fund house, it is well-diversified across stocks and sectors. Among its limited peer group, it has usually maintained an edge over competition by providing higher absolute and risk-adjusted returns.
In our view, DMEF is the first stop for investors looking for a well-managed value fund in the large cap segment.
3. Franklin India Flexicap Fund
An equity fund with as limited a tenure as Franklin India Flexicap Fund (launched in January 2005) would not usually have figured so high on our Research Team's list of recommendations. But FIFF is no ordinary fund; it is backed by a fund management team headed by K.N. Sivasubramanian and R. Sukumar, two very experienced fund managers who have given us Franklin India Bluechip and Franklin India Prima.
Both these funds, would normally have occupied the slot that FIFF now occupies, but as we mentioned right at the start, when we can do with one fund, we would not like to have two.
Franklin Flexicap was launched with a mandate to help it overcome the limitations of its illustrious predecessors (Franklin India Bluechip and Franklin India Prima). So unlike them, it can invest in companies regardless of the market capitalisation. So far, the fund has maintained a predominantly large cap portfolio recognising the risks of being over invested in mid caps.
In our view, investors looking for a fund that can invest freely across market capitalisation should invest in FIFF given the impressive track record of the fund management team that is managing it.
4. HDFC Top 200 Fund
Talk of well-managed diversified equity funds and HDFC Top 200 Fund emerges as an obvious option. The reasons are obvious - over the years HTF has established an impressive track record across time frames and parameters related to risk and return.
HTF has undergone a long journey from ITC Threadneedle to Zurich India Mutual Fund finally resting with HDFC Mutual Fund, one of the more respectable names in the AMC business. But a constant with the fund, for most of its existence, has been Mr. Prashant Jain, one of the more competent fund managers, who has directly or indirectly managed the fund. It was under him that HTF made the timely decision to exit technology stocks before the crash in March 2000.
HTF is one the earliest proponents of the index-plus investing style. It is mandated to invest at least 60% of its net assets in stocks drawn from the BSE 200. The fund is invested predominantly in large cap companies. It pursues a relatively well-diversified strategy as far as stocks are concerned but takes sectoral bets to score above-average returns.
In our view, investors looking for a fund that has consistently generated above-average returns at lower risk, must invest in HTF.
5. Sundaram BNP Paribas Select Midcap Fund
Having selected the regular large cap/flexi cap equity funds, it is time to move to a 'niche' fund that can give a boost to your portfolio. Look at Sundaram BNP Paribas Select Midcap for that edge.
Only 4 years in business and SSM has already assumed leadership position in this segment. Managed by Sundaram BNP Paribas Mutual Fund (a fund house known largely for its conservative investment style), SSM has adopted two measures to lower the risk in a relatively high risk segment.
For one, it diversifies its portfolio to include as many as 100 stocks. And two - it moves into cash (upto a maximum of 35 per cent of net assets) when it finds the market at uncomfortable levels. This particular feature held the fund in good stead during the crash in May 2006 when its fully invested peers witnessed significant erosion.
On the flipside, this has worked against SSM over the last few months when its peers have made the most of the rally from 9,000 points to 14,000 points, while it has been sitting on cash (31 per cent on October 31, 2006). However, over a market cycle, we believe SSM will still come out tops vis-a-vis its peers.
In our view, investors looking for a well-managed mid cap fund that has shown consistency in performance across parameters (related to risk and return) must invest in SSM.
Having selected the 5 funds is only one part of the investment process. The other and equally important step is to invest in the funds in the right allocation so as to make the most of what they have to offer investors. For instance, an investor with an appetite for risk who wants to avoid short-term volatility must consider investing a larger amount in HDFC Top 200 than Sundaram Select Midcap.
For the high risk investor, it could be the reverse. To add that element of customisation in your investment plan, you must get in touch with an experienced and competent financial planner
Friday, January 12, 2007
How to benefit from HRA
Kairav Shah in New Delhi January 09, 2007 08:22 IST
Buying a house is probably one of the single biggest investments one makes in a lifetime. In today's complex financial market, buying a property requires a thorough knowledge of real estate. Also it is difficult to choose an appropriate loan given the intense competition in the home loan market.
Today, a 30-year-old professional can put down a deposit of 10 per cent of the cost of a house and easily raise a 15-year mortgage loan.
The home loan market in India is also growing at a rate of over 40 per cent over the last four years. The most important factor that has contributed to the growth is declining interest rates.
Here we can highlight two-way benefits on HRA (house rent allowance) along with home loans.
What is HRA?
It is an allowance given by an employer to an employee. The sole purpose of which is to meet the cost of renting a home.
Here, we hope to clear the concepts of HRA:
Please note, when we refer to salary in this article, it encompasses basic component and the dearness allowance.
You can claim HRA if you fulfil these three conditions:
HRA allowance as part of your salary package.
Staying in a rented accommodation and paying rent for it.
The rent exceeds 10 per cent of one's salary.
You can claim rent given to parents:
Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.
One cannot claim rent paid to spouse:
The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So the income tax authorities will not accept payment of rent to a spouse.
One will need to keep all rent receipts:
Since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement.
However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.
But it is wise to still keep them because, "at the time of assessment, the income-tax officer may demand the receipts/ agreement."
The actual HRA you will be entitled to get exemption for will be the least of the following:
The actual amount of HRA received.
40 per cent of salary. This increases to 50 per cent if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
Rent paid minus 10 per cent of salary (basic component + dearness allowance).
The HRA that does not get exempted is taxed:
Let's see how it works with an example (TABLE I).
Table I
ASSUMPTIONS
HRA per month
Rs 15,000
Basic monthly salary
Rs 30,000
Dearness Allowance
Nil
Monthly rent
Rs 12,000
TABLE II: Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.
RENTAL ACCOMMODATION IN MUMBAI
Actual amount of HRA
Rs 15,000
50% of salary
50% x (30,000 + 0) = Rs 15,000
Actual rent paid - 10% of salary
Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000 = Rs 9,000
If you took a home loan for a home in one city but reside in another you will be entitled to:
Tax benefit on Principal repayment under Section 80C
Tax benefit on Interest payment under Section 24
HRA benefit 10(13 A)
Or, even if the home is in the same city but is not ready forcing you to rent a place, you will still be entitled to all the above benefits.
Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops.
If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above.
However, in this case, the rent you receive would be considered as your taxable income.
Let's say you took a home loan and have bought a home but are not residing in it:
It could be that the home is at a considerable distance from your work place. Or, it could be that the home is rather small and your parents are living in it so you have to stay elsewhere.
Though your rental accommodation and home are in the same city, you can still get all the benefits.
Tax benefit on principal repayment under Section 80C as deduction of income
Tax benefit on interest payment under Section 24. Under the head of house property
HRA benefit under the head of salaries
However, it is necessary you have some of your belongings at your home (the one you own) and you stay there on and off on during weekends and holidays.
Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns.
Renting a house, on the other hand, is acceptable for the sake of convenience and financial constraints.
There are a few tax shelters available for rental payouts both for salaried employees by way of HRA deductions and for self-employed professionals under section 80GG.
However, the applicability is limited and there are some preconditions attached to it.
Thankfully, banks and housing finance companies are more than happy to finance our dreams -- no matter whether we are of any status or just another common man.
The writer is head, financial planning, Sykes & Ray Equities.
Buying a house is probably one of the single biggest investments one makes in a lifetime. In today's complex financial market, buying a property requires a thorough knowledge of real estate. Also it is difficult to choose an appropriate loan given the intense competition in the home loan market.
Today, a 30-year-old professional can put down a deposit of 10 per cent of the cost of a house and easily raise a 15-year mortgage loan.
The home loan market in India is also growing at a rate of over 40 per cent over the last four years. The most important factor that has contributed to the growth is declining interest rates.
Here we can highlight two-way benefits on HRA (house rent allowance) along with home loans.
What is HRA?
It is an allowance given by an employer to an employee. The sole purpose of which is to meet the cost of renting a home.
Here, we hope to clear the concepts of HRA:
Please note, when we refer to salary in this article, it encompasses basic component and the dearness allowance.
You can claim HRA if you fulfil these three conditions:
HRA allowance as part of your salary package.
Staying in a rented accommodation and paying rent for it.
The rent exceeds 10 per cent of one's salary.
You can claim rent given to parents:
Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.
One cannot claim rent paid to spouse:
The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So the income tax authorities will not accept payment of rent to a spouse.
One will need to keep all rent receipts:
Since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement.
However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.
But it is wise to still keep them because, "at the time of assessment, the income-tax officer may demand the receipts/ agreement."
The actual HRA you will be entitled to get exemption for will be the least of the following:
The actual amount of HRA received.
40 per cent of salary. This increases to 50 per cent if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
Rent paid minus 10 per cent of salary (basic component + dearness allowance).
The HRA that does not get exempted is taxed:
Let's see how it works with an example (TABLE I).
Table I
ASSUMPTIONS
HRA per month
Rs 15,000
Basic monthly salary
Rs 30,000
Dearness Allowance
Nil
Monthly rent
Rs 12,000
TABLE II: Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.
RENTAL ACCOMMODATION IN MUMBAI
Actual amount of HRA
Rs 15,000
50% of salary
50% x (30,000 + 0) = Rs 15,000
Actual rent paid - 10% of salary
Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000 = Rs 9,000
If you took a home loan for a home in one city but reside in another you will be entitled to:
Tax benefit on Principal repayment under Section 80C
Tax benefit on Interest payment under Section 24
HRA benefit 10(13 A)
Or, even if the home is in the same city but is not ready forcing you to rent a place, you will still be entitled to all the above benefits.
Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops.
If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above.
However, in this case, the rent you receive would be considered as your taxable income.
Let's say you took a home loan and have bought a home but are not residing in it:
It could be that the home is at a considerable distance from your work place. Or, it could be that the home is rather small and your parents are living in it so you have to stay elsewhere.
Though your rental accommodation and home are in the same city, you can still get all the benefits.
Tax benefit on principal repayment under Section 80C as deduction of income
Tax benefit on interest payment under Section 24. Under the head of house property
HRA benefit under the head of salaries
However, it is necessary you have some of your belongings at your home (the one you own) and you stay there on and off on during weekends and holidays.
Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns.
Renting a house, on the other hand, is acceptable for the sake of convenience and financial constraints.
There are a few tax shelters available for rental payouts both for salaried employees by way of HRA deductions and for self-employed professionals under section 80GG.
However, the applicability is limited and there are some preconditions attached to it.
Thankfully, banks and housing finance companies are more than happy to finance our dreams -- no matter whether we are of any status or just another common man.
The writer is head, financial planning, Sykes & Ray Equities.
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