Buying Land in GOA

(Source

a) If you intend to buy land;

  v Check ownership documents (I & XIV form, registered sale Deed, partition deed of inheritance etc.

  v Check/ask of nil encumbrance certificate issued within /less than 6 months.

  v Check land use of the property as per Regional Plan or Outline Development Plan as the case may be.

OR

 Ask for land use/zone certificate from Town and Country Planning Department , Government of Goa/Planning and Development authority of respective area in which said property is located.

v Check whether the land has tenants or Mundcars. 

F Tenanted lands cant be used/developed for non Agricultural uses, as per the land use Act,1991.

v Check for any encroachments on the land.

v Check for Forest Conservation Act’s application to said land .

v Check for whether the land is classified as “Rice” in property document such as I & XIV form. (Paddy fields are generally not permitted for development.

(b) If you are buying sub divided plots;

v Check for approved sub division plan by Competent Authorities of Goa such as PDA, Town and Country Planning Department, Village Panchayat.

v Check for Final NOC issued by Competent Authority.

F (There is a practice of issuing provisional NOC for sub division to allow the developer to carry out works like roads, gutter, water lines and electric lines and also obtain Conversion Sanad from Dy.Collector etc., and then submit for Final NOC for division. Finally approved plots are ready for construction of houses/Bungalows).

 Buy only Finally approved plots

v Check for NOC for Sale plots to be procured by the seller from the PDAs. This is applicable to PDA areas only section 49 (6) of TCP Act which makes it mandatory to produce NOC for sale at the time of Registration of Sale Deeds/documents).

a) Buying flat/House/Bungalows?

v Check for approved plans from Competent Authorities;

Town and country Planning Department, PDAS (If it is located in planning areas of Panaji, Margao, Mapuca, Mormugao and Ponda town areas), Village Panchayats, and Municipal Authorities.

v Check for licence from village Panchayat/Municipal Council of the respective area in which the property is located.

F If it is an old house/bungalow of more than 25 years, the above may not be insisted.

v Insist with the builder to give a set of all land related documents and full set of approved plans.

v At the time of Final possession check for occupancy certificate from Village Panchayat/Municipal Council.

b) Constructing a House/Bungalow/any building

F You need to make an application to local Village Panchayat or Municipal Council depending on location as the case may be. 

The application shall be made in prescribed form (schedule-II). 

The application shall be accompanied by ownership documents such as (i) I & XIV form (ii) Registered Sale deeds (iii) Partition deed (registered). Building plans prepared by a registered Architect or Engineer, RCC drawings, survey plan approved sub division plan ( if the plot is from a sub divided property), Sanad copy. 

F (Some areas/ buildings of historical importance Socio-cultural importance are earmarked as “Conservation area/zones” and Preservation areas”. The details of such zones can be obtained from notified Outline Development Plans of Planning and Development Authorities. As per PDA (Development Plan) Regulations 1989/2000, applications for construction/development in Conservation zone/areas have to be referred to a designated Conservation Committee appointed by the Government by the TCP Department/PDAs after scrutiny of proposed as per regulations applicable to these zones depending on the areas/towns in which they are located.

vd) If the land is located within 500 mts from High Tide Linefrom the sea or 100 mts from the river banks, the area is classified as “Coastal zone”. This coastal zone attracts CRZ regulations.

All approvals for any construction/development has to precede approval from “Goa Coastal Zone Management Authority” located at Saligao plateau, Bardez Taluka, Goa. It is advisable to check and confirm CRZ status of the land before buying any land and if it is a premises offered by any seller, you must check its approval status.

F (Currently there is a ban on any kind of developments in the CRZ areas due to a direction issued by the Hon’ble High Court of Bombay at Panaji. A survey is under way for determining the unauthorized developments in this zone).

e) Conversion Sanad from Dy.Collector/Addl.Collector.

-Application to be made in prescribed form to Dy.Collector or Addl. Collector in triplicate.

-Documents to be enclosed.

Survey Plan.

-I & XIV form or ownership document

-Location and site plan of the area proposed for conversion.

a. F Cutting of any Hilly land or filling of low lying fields is an cognizable offence under Section 17-A of TCP Act. However, you can obtain an NOC before cutting any Hilly land or filling of low lying land from Chief Town Planner.

b. F Developing any sloppy land having slope of more than 25 % is prohibited in Goa.

c. 200 mts from High Tide Line along the coast of Goa is totally prohibited.

d. F Areas along rivers and creeks on both sides of the banks are covered under CRZ regulations up to 100 mts from the river bank or width of the river/ creak, at respective point, which ever is less.

e. F Forest Conservation Act and Tree Act are applicable in Goa. Other than Government forest lands, even privately owned lands with certain density of forest trees are considered as “Private forests” which attracts F.C.A. (please consult Forest department for details).

f. F “Farm house” is permitted in a holding up to a built up area of 5% of the holding is 4000 m2 (This is permitted even in orchard zones and Agricultural zones, except wet paddy fields).

g. F For any further clarification/consultation/advice on any individual case/land/application, you may approach the Senior Town Planner of North Goa and South Goa at the address given below:

(1) Mr.S.T.Puttaraju,

Senior Town Planner,

South Goa District Office,

Ocia Complex, Margao

Phone Nos.

(O) 0832- 2705785,

0832 – 2734089 & Fax.

( 2) Mr James Mathew,

Senior Town Planner,

North Goa District Office,

Mapuca.

Phone nos.

(O) 0832 – 2262444

financial Planning Blogs

http://bachhat.blogspot.com/2010/11/should-life-insurance-be-taken-from.html

http://www.tflguide.com/2011/03/best-term-insurance-plan-india.html

http://www.onemint.com/2011/03/09/claims-data-for-life-insurers-in-the-december-2010-quarter/

http://freefincal.com/ - good financial calender

www.fundsindia.com - mutual funds 

Stocks
http://kiraninvestsandlearns.wordpress.com/tag/sanjaybakshi/

Rules of Thumb

Source

Saving & Investing rules of thumb

1. What should be my asset allocation or how much equity should I have?

This is the most common rule of thumb which is used in investment world. Rule saysEquity percentage in your portfolio should be equal to 100 minus your age or in other words debt should be equal to your age. For eg if you are 30 you should have 30% of your investments in debt & 70% (100 – your age) in equity. This doesn’t take care of riskappetite, risk tolerance or how far your goals are.

2. How much emergency fund I should have?

Emergency Fund helps people in case of sudden loss of income, medical emergency etc. Thumb rule says one should have emergency fund equal to 3 to 6 months of monthly expenses. You can keep it at 3 month if you are a government servant but in case of private job or profession you should keep it on the higher side of the range. Make sure you don’t use this amount for day to day needs/wants. For retired person emergency fund should be equal to 1 year of expense.

Retirement rules of thumb

3. How much money will I need in retirement or how much corpus I should build?

You should have 20 times your income saved for retirement and plan to replace 80 percent of pre-retirement income. But here retirement means a retirement at age of 60 & life expectancy of 80 – and a conservative lifestyle. But now things have changed & you would have dream/planned lot of things for retirement.

4. How much I need to invest every month to achieve retirement goal?

“Indians are great savers” sorry “Indians were great savers”.  New generation is in some different mood they would like to enjoy the present & have no idea about future. If you have just started to work & would like to have a very simple lifestyle & retirement at age of 60 you can do it with saving (read investing) 10% of your income. If you are planning for an early retirement start with 20% savings. Other rule says if you are in early 30s Save 10% for basics, 15% for comfort, 20% to escape. If you are late by decade add 5% more in each category.

Insurance rules of thumb

5. How much insurance should I have?

Here insurance means insurance. Rule says one should have sum assured of 8-10 times of his yearly income. I think this rule is far from perfect but still can be used as starting point. This does not take care of any of your goals, liabilities & even complete expenses. Some modified version of this rule says that if you are in early 30s insurance should be 12-15 times of your annual income & if you are in 50s take 6-8 times.

Loan/liability/home rules of thumb

6. How big should be my House?

The value of house should be equal to 2-3 times of your family annual income. So if you & your spouse are earning total Rs 20 lakh – you should buy a house in Range of Rs 40-60 Lakh.

7. Maximum EMI that I can have?

Ideally 0 will be the best answer but few of the big assets like home require some loan to buy them. Experts agree that your EMIs should not be more than 36% of Gross Monthly Income at any point of time. It should be even lesser when you are close to your retirement. If you want to talk about home loan EMI, it should not be greater than 28% of your gross income. Now TENURE of loan is missing here – for tenure read No. 6 & 8 rules of thumb.

8. Rules of thumb for buying a car

This is one of the biggest purchases after your home. And this is depreciating asset – today morning you purchase a car for Rs 10 lakh & by the evening it will be worth Rs 8-9 Lakh. After 5 years it will not be even of half value but still you keep buying cars regularly – buy at 10, sell at 4 & loose 6. (repeat the cycle) There are few rules that you can follow:

• Value of car should not be more than 50% of the annual income of the owner.
• Purchase a used car or buy a new & use it for 10 years.
• While buying car with loan stick to 20/4/10 – Minimum 20% down payment, loan tenure not more than 4 years & EMI should not be higher than 10% of your income.

Rate of return Rules of Thumb

9. In how many years my amount will double?

It’s a very simple & most common rule – if you divide 72 by rate of return you will get the number of years in which your money will double. For Eg. If you expect a rate of return of 12% you money will double in 6 years (72/12=6) & what about if rate of return is 8% – 72/8=9 years. This can also be used in reverse order at what rate your money will double in 5 years – 72/5=14.4%

Rules similar to rule of 72:

Rule of 114 & 144

These can help you in how many years your money will be triple (114) or quadruple (144) at some rate of returns.

Rule of 70

You know it or not but inflation is your biggest enemy – rule of 70 will tell you in how many years value of money will be half. You just need to divide 70 with rate of inflation so if rate of inflation is 7% – 70/7=10 years. So in 10 years your Rs 100 note will be worth Rs 50.

10. Rule 10/5/3

This is a US rule of thumb which says in long term you can get 10% return from equity, 5% return from bonds (let’s say FDs) & 3% from the t-bills (liquid funds – these returns are more or less close to the range of inflation). Indian economy is growing at some different pace & even inflation numbers are different. Can we safely say if inflation is 6% (t-bill rates) we can get 8% from the fixed deposits & 12% from the equity or in other words – in long term equities will deliver twice the return of inflation. Try combining Rule of 72 with this rule – you will get some amazing numbers.

Some time Rules of thumb will give you false sense of security or wrong guidance – so take them with pinch of salt.

Term insurance policy riders

Choosing Term Insurance -- Good

Insurance Companies Claim/Settlement Ratio

1. Accidental Death Riders- This means you will get additional life cover but only if you get death from accident

2. Critical Illness Rider- This will help you to get additional life cover if you die due to the illness mentioned in the policy while buying it

3. Disability Rider- This rider covers you for disability and pays you life cover in some predefined installments in the case where you become permanent disable

4. Waiver of Premium- In case you become permanently disable due to some accident, you would be waived off for the future premium payments while your term insurance policy will remain in continuation

Finally while choosing the term insurance plan, one can recommend choosing HDFC Life Insurance which has high claim settlement ratio though it has high premium, this option may be one of the best term insurance policies in India.

Source : life-insurance-riders

What are Riders in Term Insurance?




Riders are the extra benefits that can be purchased and covered for under the life insurance policy. Apart from the basic Life insurance cover, you can choose to add some extra benefits to the life insurance cover, but you will have to pay extra premium to get such add-on benefits. The basic premiums will then increase. Note that the base policy features are always there and you get the base Sum Assured in case of death. Addition of these riders has nothing to do with the original rules of the policy. Let us see all the riders one by one.

1. Accidental Death Rider

In this rider, you get additional sum assured if the death occurs due to an accident. The biggest myth which investors have is that they will get the money if death is due to accident only if this rider is added, else not. This is not true. If you don’t take this rider, still the base Sum assured will be paid to you. This rider is only for the extra sum assured in case of death due to accident at additional cost, nothing else. So if you take a policy of 50 lacs sum assured with accidental rider of 25 lacs. You will get 50 lacs in case of death other than accident and 75 lacs in case of death in accident. A lot of policies cover you from disabilities which arise out of accidents. See Accidental Insurance Policies

2. Permanent & Partial Disability

This rider is helpful in case you are disabled permanently or temporarily due to accident. In that case most of the policies pay periodically for next 5-10 yrs a certain percentage of Sum Assured. For example, 10% of Sum Assured per year for next 10 yrs. This way this rider acts like an income generation insurance most of the times. However note that the rider is helpful only incase the disability happens due to accident only. Read the policy document of the company for exact wordings. Most of the times, this rider is combined with Accident Death rider.

3. Critical Illness

This rider gives you a lump sum amount if you are diagnosed with an illness which is pre-specified and is mentioned in the policy. Generally all the major illnesses are covered in Critical Illness cover. Some of the examples of critical illness mentioned are Heart Attack, Cancer, Stroke, Coronary artery by-pass graft surgery (CABG), Kidney failure and Paralysis for example. After the critical illness is detected, the policy might continue or terminate as per the policy document. At times, the policy coverage reduces by the amount paid to you. So better read the policy document to know exactly what will happen in this rider.

4. Waiver of Premium

This rider makes sure that in case you are not able to pay future premium due to disability or income loss, the future premiums are waived off but your policy is still in force like always. This is in a way insurance of the premium payment till your policy expiry date. In case this rider is not present and you are disabled and not able to pay the premiums, then the policy will expire and you will not get any benefit later when you die because due to non-payment of premium the policy expires and the cover stops.

5. Income Benefit Rider

This rider is present in some policies and it’s mainly for the income generation after the death of the policyholder. If this rider is present, the policy holder’s family will get additional income per year for 5-10 yrs along with regular Sum Assured. For example, 10% of Sum Assured for next 10 yrs will be received by the policy holder’s family.

Riders come with cost and exclusions



Note that riders come with cost, so just because they are present in the policy as add-ons, don’t jump and include every kind of rider possible. Ask yourself why you need a rider and if there is really a need for it. Read about the rider rules in details and read what is not included in that rider. Also compare the cost of riders from different companies to take a better decision.

How much can you lose in equity?

How much can you lose in equity?
 
 
Posting in Full :
 
People, sometimes, have no rules, limits, and have no clue on how to invest in equities. These people can, should and do lose their shirt, pants and undergarments and full well deserve it.



Let us say you are a well qualified, sensible, boy or girl and wish to invest in equities. Well if you do not want to be an active participant, you could choose a mutual fund. If you do not trust fund managers (I trust only 5 out of the 100 odd that I would have met), choose an index fund – the cheaper (and with lesser tracking error too) the better.
But if you want to be a little more adventurous and wish to invest in direct equities follow these rules so your losses are limited to the minimum.


Let us say you are 35 years and wish to create a portfolio. You are a woman, earning Rs. 8 lakhs, and are not the primary provider of the house. So you can take a little more risk than a man, who is the primary provider.
So let us say you have Rs. 10 lakhs to invest, and influenced by this site, you decide to put Rs. 8 lakhs in equities.



Rule No.1: NOT more than 80% of the SECONDARY earner’s portfolio will be in equities.


Rule No. 2: NOT more than 5% will be invested in ONE Company, as an initial investment. In case the share does well, we will LET it go up to 25% of one’s EQUITY portfolio. Anything in excess will be constantly sold off.
Let us say you are able to add Rs. 20,000 to the equity portfolio every month, and this share is also going up every month, it will take a real long time to breach the upper limit (unless you have picked one diamond and all other duds!).


Rule No. 3: Industry diversification I will learn or copy from a good fund manager’s portfolios, and I will buy only in group A, or B1. I will NOT touch a share in group B2, or T2T….even if someone says these are future blue-chips.


Rule No. 4: I will keep a 25% trailing stop loss. Let me explain. You have bought Rs. 40,000 worth of Carborundum Universal (my examples are obviously from my portfolio, and my cost of this share is Rs. 3.59 per share, thanks to split and bonus, so if you want to copy me, go to 1990, or create your own portfolio). Suddenly the shares value falls to Rs. 30,000. You will do nothing. However on the day it falls below 30,000, you will sell. Knowing how to cut losses is as important as knowing how to let profits run.

Rule No. 5: I will review my portfolio on a quarterly basis. I have no business managing my own portfolio unless I can beat the index. Clearly if you beat the index for the first year, then the second year, then the third year…you are doing well. If you do not beat it for the first four quarters – and are trailing by a huge margin, sell and go to a good fund house.



Now, With all these rules in place how much can you lose?

Rs. 800,000 is the total investment, Rs. 40,000 is the maximum exposure to one stock, 25% is the trailing stop loss- so you can lose about Rs. 10,000.

Considering your liquid net-worth is Rs. 10,00,000 you stand to lose about 1% of your net-worth. Not an amount you need to lose sleep over.

Investment in stocks- An old fashioned way

Investment in stocks- An old fashioned way

Gist of the Post

In other words, I rule out companies with these characteristics:
  1.Absence of dividend. A genuinely profitable company should pay out dividends. If the company does not pay dividends in spite of showing profits year after year, I avoid it
  2. Non-tax paying or low tax paying. A company that pays no tax or very low tax year after year is ruled out. If the profit is real, the company ought to be paying taxes;
  3. Companies with very high debt worry me. In a good year, the business will earn a rate of return higher than the interest cost, but could be in trouble in a bad year. If the company passes muster on all other criterion, then maybe I will probe further, but in general, high leverage is a red flag;
  4. Third generation family owned and managed companies. Indian companies are generally family owned and are passed down from father to son, like heirlooms, corporate governance be damned. Typically, in the third generation, the number of claimants increase and lead to a combination of poor management, siphoning and lack of focus;
  5. Companies that show profits year after year, but do not pay dividends and yet keep raising equity regularly;
  6. Change of auditors is a red flag.
 Investigate thoroughly. If not satisfied with the reasons, avoid the company;
  7. Companies that keep advertising even if they are not in the consumer space;
  8. Companies that are managed by so called professionals, but treat it like a fiefdom, engage in random diversifications that do not make any sense and award huge stock options;
  9. Companies where the promoter has several other unlisted companies which siphon profits. (I believe most Indian companies do this, so the level of check required to ascertain this may not be possible for everyone);  10. Suspect management integrity. This is the most subjective one and in most cases, it would be turn out to be a question of degree rather than one of principle. I have hardly come across any company which will pass total muster on this score, so have decided to be a bit practical and take my chances; 
11. Super normal profitability is another worrying sign. In most cases, this happens at a nascent stage, just around the time a company goes public and is planning further fund raising. If the whole industry is making 10% of sales as profit and someone is making 25%, my first instinct is to be sceptical. This is certainly a ‘red’ flag;
12. A ‘me-too’ company is one to be avoided. The company I choose should be clearly number one or two in its business. Only when you pick up companies that are in new segments (so called ‘sunrise’ industries like bio technology etc) can you look at small players. There is no point in looking at a small player in the textile business or in the FMCG business;   13. Companies in industries that are overly regulated by government. This is a debatable point, but I believe that given the circumstances, it will not be possible to dismantle controls on industries such as fertilizer, oil etc., Whilst ultimately it should happen, I prefer to keep away. In general, government interference (like in PSU banks) generally makes an investment less attractive whereas the event of government getting out completely from any company would make it more attractive.  14. In today’s funny accounting world, I am also wary of this thing called “consolidated’ accounts, when it includes profit shares of entities that are not 100% owned by the company. And, the companies do not even show the accounts of the subsidiaries on their websites!

After this, I use some financial screens of which I hold the ROE (Return on Equity) to be perhaps the most important criterion. I would like it be steady to improving. Generally, my attempt is to focus more on cash flows rather than mere earnings. For instance, in any industry, you can NOT provide for bad debts and show earnings. However, the cash flow picture would be terrible. I give high importance to management in terms of competence and integrity. I also like to see companies that have the potential to grow at more than the pace at which economy grows. For instance, if we expect industry to grow at 10% and inflation to be 5%, then the company has to grow at more than 15%. Financial analysis is simple, but needs time and effort. I usually like to sit with at least three years annual reports. Unfortunately, today I see the annual reports getting more opaque. Financial information shared with the investors is getting less and less. I get a lot of useless diatribe from the management under the head “management discussion”. Here, no company is going to openly admit its faults. You will get to read only good things or blame on external factors for poor performance. Real issues are buried. 

Pension Plan Basics

What are pension plans?




A pension plan is designed to generate regular income for individuals once they retire. Insurance companies offer various pension plans (also called as retirement plans or annuity plans) where a person has to initially invest either a lump sum amount or regular annual installments/ premiums over a period of time in return for regular income either for life or for fixed number of years depending, upon the plan. For example, Rita received Rs. 10L superannuation benefit upon retirement. She was interested in getting regular income out of this fund in order to meet her routine daily expenses. So Rita started exploring her options and stumbled upon the idea of investing her money in a pension plan. Rita researched the different types of pension plans offered by insurance companies and here is what she found:



Deferred Annuity Plan: Under this type of plan, the pension is not paid immediately but deferred for a time period as required by policyholder. If the policyholder survives the term of the policy, then the accumulated amount (consisting of sum assured, guaranteed additions and bonuses) is invested to generate regular income. For example, LIC has Jeevan Nidhi plan which is a deferred annuity plan. Rita concluded that this option is suitable for an individual who is still working and has many more years before he/she retires.



Immediate Annuity Plan: Rita found this plan interesting. This is because this plan can be purchased for a lump sum in return for fixed payments throughout her life. Insurance companies offer various options under annuity plans. There are different categories of Immediate Annuity plans:



Annuity Certain: Here the insurance company pays a fixed sum of money for a certain number of years.



Guaranteed Period Annuity: Under this plan, Rita will be paid pension for a certain number of years as stated in her plan (say 10 years) even if she does not survive this period. So, if Rita dies after 4 years of purchasing the policy, her nominee will receive the pension amount for the remaining 6 years. If she survives through the 10 years then she will receive the pension amount throughout her life.



Life Annuity: Rita will be paid a specified amount regularly through her life. This plan also comes with the option of 'return of purchase price' to the beneficiary upon the policyholder's death. In case Rita opts for this plan, her nominee will get the maturity amount plus any bonus upon her death.



For example, LIC has Jeevan Akshay annuity plan for annuity payable for 5, 10, 15 or 20 years or for the lifetime of policyholder. There is also a life annuity plan where 50 percent of the annuity is payable to the spouse in case of death of policyholder.

Picking Stocks

Good Method Site

If you want to study findamental analysis this is how I do

Findamental Analysis
1. Capial expenditure < 50% of profit is good.
2. Positive Free Cash FLow to The Firm is good.
3. ROE>20, GPM>50, OPM>NPM, NPM>15 is best.
4. Debt should not be more than 3 times of profit.
5. 5 year EPS Growth > PE

Good Mutual Fund

how_i_find_good_mutual_funds

Go to Lists in each of the major fund categories. Find the top 25 performers over several different periods: 1 year, 3 years, 5 years, 10 years, 15 years and some even shorter term.

Let's say you're fairly young and you're looking for a growth fund, something with the chance of high returns but also a bit riskier.

Go first to the 1 Year tab on the "Growth" list. Print it out. Go to the 3 Year tab, print it out. Go to the 5 Year tab, print it out. Go to the 10 Year tab, print it out. Go to the 15 Year tab, print it out. Now you've got a lot of paper in front of you.

The first thing you are going to do is compare the 1-Year list to the 3-Year list. Find any mutual funds on the 1-Year list that are also on the 3-Year list and highlight them. Cross out the rest of the mutual funds listed on the 1-Year.

Now compare the 3-Year to the Five-Year, and don't completely forget the 1-Year. Look for the funds on the 5-Year that also made the 3-Year. Highlight those and cross out the rest of the 3-Years (except any 3-Years that had overlapped with the 1-Year, those might be under consideration).

Do the same comparing the 5-Year list to the 10-Year list, and comparing the 10-Year list to the 15-Year list.

What you want to do is find the funds that have the most overlap between these different time periods. I've never found any fund that was a top 25 performer for all the periods listed. More often you'll find overlap in the first, shorter-term periods or the longer-term periods, but not both.

Now, rank the funds that have made multiple lists. If any funds showed up on three lists, rank those first. If you have multiple funds that showed up on three lists, rank the ones that showed up on the long-term lists higher--for example, a fund that showed up on the 5-10-15 lists beats a fund that showed up on the 3-5-10 lists. Likewise with funds that show up on two of the lists. A fund that shows up on the 10 & 15 lists beats a fund that shows up on the 5 & 10 lists.

Make a list of the top 10 funds based on this criteria. Then you have to do a little more investigation.

First, some of these funds may be closed to new investors, especially those that have been successful for 10 or 15 years. So you first have to find out what you can even buy.

Second, check fees & loads. Some of these funds are going to have high management fees, which is OK since they're highly successful funds, but I still steer clear of those with higher fees. In the same way, I steer clear of funds with loads--a fee upfront or at fund selling that eats into your returns. Even with a track record of success, paying fees and loads will eat into your return without a guarantee that these funds will continue to perform as well as in the past.

Then, make your choice and send in your money.

I just did this exact exercise with growth funds and ended up buying into the Value Line Preferred Growth Fund (previously known as the Special Situations fund). It was not the highest-ranked fund under my system, but it was top 25 for both 10 & 15-year growth (at an average 12.92% for 10 years and 12.51% over the last 15 years). The expense ratio is 1.13% which is very low for a managed fund, and there are no loads, so you're not giving away your gains. Plus, you can actually buy into it, which I couldn't do for some of the other potential funds that had closed to new investors.

It takes more time explaining this method than actually doing it. Give it a try and I think you'll be happy with your long-term results.

http://money.outlookindia.com/article.aspx?87530

Should borrowing be only a last-resort option to raise money?


AMONG THE many questions that clients raise with a tax consultant, one of the most common is: "I need funds for such and such purpose. Given the fact that loans are available, should I borrow or would it be better to encash my investments and raise the money?" Tough decision on the face of it, but one that can easily be taken if one carefully assesses various qualitative and quantitative factors.
Among the qualitative factors, one would look at liquidity, the possibility of reinstating the investment out of future income, restrictive conditions attached to the borrowing and such like. But, of course, the crucial deciding factor will be the quantitative aspect, that is, the loss of post-tax returns from the investment and the post-tax cost of borrowing.


If the post-tax cost of borrowing is higher than the loss of post-tax returns from the investment, it’s better to disinvest your holdings, rather than borrow. If, on the other hand, the post-tax returns from the investment are higher than the post-tax cost of borrowing, it’s a better option to take a loan, than encash your investments.

Post-tax edge. So how does one compute the post-tax rate of returns and post-tax cost of borrowing? In computing the post-tax rate of returns or the cost of borrowing, one has to first compute the annualised rate of return or the cost of borrowing, and then adjust it for tax payments or savings.

To understand this better, let us consider a simple computation in a situation where an individual wants to buy a residential house for Rs 15 lakh. Let’s say he has Rs 5 lakh in hand, Public Provident Fund (PPF) investments that he can withdraw to the extent of Rs 10 lakh and company deposits of Rs 10 lakh that yield 11 per cent per annum compounded quarterly.

So, he has three options.
Option I: he can withdraw Rs 10 lakh from his PPF account.
Option II: he can break his company deposits, but in doing so, he will incur a penalty of 1 percentage point for premature encashment.
And Option III: he can take a home loan from a housing finance company at the rate of 11.5 per cent per annum (payable in equated monthly instalments with monthly reductions in the principal amount).

In the last case, he will have to pay a processing fee of 2 per cent of the amount of the loan.

Option I. In the case of the Public Provident Fund, after the recent reduction in interest rates on small savings, it will yield a return of 9 per cent per annum. Since this interest is paid annually, and there is no charge for withdrawals, the effective rate of return is equal to the coupon rate. Besides, since this interest payment is not taxable, this will be the post-tax rate of return as well.

Option II. At a rate of 11 per cent per annum compounded quarterly (2.75 per cent per quarter), the effective yield is 11.46 per cent. Since we are computing the loss of post-tax interest that arises due to disinvestment, we will also have to factor in the penalty for premature encashment.

The real rate of interest that has been lost due to premature encashment will, therefore, have to be computed by deducting the percentage of the penalty from 100, and dividing the annualised rate of return by this figure. In this case, by dividing 11.46 by 99 (100-1), the adjusted annualised rate of interest will be 11.58 per cent. Since this interest would have been taxable, and as the premature payment penalty would also be tax-deductible, this rate of interest will have to be discounted by 31.5 per cent (30 per cent plus surcharge of 5 per cent, which is the marginal tax rate applicable to the house buyer). Thus, the post-tax loss of interest would be 7.93 per cent.

Option III. In the case of the home loan, by compounding the monthly interest payable, the annualised rate of interest works out to 12.13 per cent. If we factor in the processing charge, we can deduct the charge of 2 per cent from the total loan amount (that, 100 per cent) to arrive at a net borrowing of 98 per cent. The adjusted annualised rate of interest thus works out to 12.37 per cent.

Since interest paid on housing loans is tax-deductible, this payment needs to be discounted by 31.5 per cent, giving us a cost of 8.48 per cent. The rebate available on the repayment of the principal amount of the housing loan will also need to be factored in. Since the rebate is available at the rate of 20 per cent to the extent of repayments of Rs 20,000 each year, and the rebate is to be computed before surcharge, the effective tax saving would be Rs 4,200 each year. On an average outstanding loan of Rs 5 lakh, the effective percentage of rebate works out to about 0.84 per cent. Thus, the post-tax cost of the housing loan from the finance company will be about 7.64 per cent (8.48 per cent minus 0.84 per cent).

What’s beneficial? Comparing the options we find that the post-tax cost of the loan is lower than the post-tax loss of interest in the case of the company deposits or PPF. And so, an individual will be better off taking a home loan to buy a house, rather than encashing either the PPF or the company deposits. If, however, the individual does opt to encash some investments, the company deposits are a better option than the PPF, since the loss of interest is of a lesser magnitude.

In the case that we have taken up, since the loan was being taken to buy a residential house, the interest was tax-deductible. Therefore, before you take a loan it makes sense to take a look at how you are going to utilise the borrowing and whether the interest is deductible for tax purposes. There may be many instances where interest will not be deductible for tax purposes. In such cases, the effective cost of the borrowing is generally far more than the rate of return that one could earn on most investments, and borrowings may, therefore, not be cost-effective.

The computation in the case we have looked at assumes that the eligible deductions on interest repayments and rebates on principal will continue to be available, and that the rates of interest will remain unchanged. In real-life situations, you will need to consider the prevailing tax laws and rates of interest to arrive at your best-case scenarios.

Of course, one can always use other similar methods of computation to compare the merits of various investments. Although other methods such as internal rate of return or net present value of cash flows are often superior decision-making tools, this method offers a simple and quick comparison for a person who is not a finance professional.