Five hacks to save money on your home loan

Five hacks to save money on your home loan

A mortgage is a great responsibility that you must bear on able shoulders for a long period of time. If you already have a mortgage or are planning to avail of one soon, you are obviously confident of your finances. Here are some tips to save money on a home loan.

A home loan is a long term commitment that you enter into with your lender. You must be completely prepared to take on this kind of a responsibility and be completely sure that you will be able to make timely repayments. But let the time frame not intimidate you! Here we are to save five important hacks that can help you save a substantial amount of money on your home loan and ensure that your life is stress free!

Check your CIBIL score and CIBIL report

Before you go mortgage shopping make sure that your CIBIL score is satisfactory and that you have not availed of any new credit at least six months ahead of applying for a home loan. Also make sure that all the other details in your CIBIL report are correct and you loan application does not get stuck on account of your CIBIL report. Once you are brandishing a CIBIL score of 750 and above you can go about home loan shopping.

The pre-purchase drill

Needless to say, you must carry out thorough and complete research before you decide upon the best home loan that there is for you. With the festive season having commenced, it will not be unusual for banks to entice prospective customers with teaser rates that may lure in to leap in, but do look before you leap! This is because most of these teaser rates are short lived and are meant to bind you in. But that is not necessarily a bad thing, as long as you are aware of what you are getting into. You can always take advantage of the lower rates even if it is for the first couple of years. Also make sure that you are aware of all the home loan features and the several fees and charges such as the processing fee, switching and pre-payment costs. Each bank has its own set of rules and you must ask all the relevant questions so that there are no rude shocks awaiting you later.

Negotiation is a powerful tool

Once your loan application has been approved on the basis of a high CIBIL score, you shall be assigned to a loan officer who will be your point of contact till you loan is approved and you get your cheque or the amount transferred into your bank account. While he or she is likely to be a glib talker, do not take his word as a word etched in stone. Make sure you have availed of every professional benefit you are eligible to avail of and get as many charges waived off as possible. A high CIBIL score gives you the power to negotiate, so make sure you make optimum use of the same.

Make a higher down payment

If you are ready to take a mortgage by now, chances are you have been saving up for a down payment for years at end. While making a down payment try and make the highest possible down payment that you can. Even if it means stretching yourself beyond your means, try and do so. A higher down payment will substantially reduce your EMI burden, so it is definitely worth your best shot!

Pay the same EMI despite a falling interest rate regime

As you may well be aware now that the central bank has surprised the market with a untimely rate cut a few days back. This is a clear indication that banks will have to slash their rates too. If you are on a floating rate of interest, it obviously means that your EMIs will be smaller and your monthly outgo will be lesser. While the temptation to make lower payments can indeed be alluring, it is not the best option to avail of. On the contrary if you keep paying the same EMI, you shall end up saving on your interest payment component and will have saved money in the long run.

A roof over one’s own head is much cherished by everyone, and there is no denying that paying off a home loan is a big burden that you will shoulder for the better part of your youth. Of course, things are not going to be easy and if you are a middle class salried individual you will find yourself struggling to meet all your expenses every once in a while. But if you follow these home loan hacks, you will realise that you have internalized good repayment habits and have saved money on your home loan over the long term too. Once your loan is fully repaid, there is indeed no feeling like finally “hitting home!”

Happy Investing

Source:Moneycontrol.com

Looking to buy property in 2015? Here's help

Looking to buy property in 2015? Here's help

In 2015, overall property markets are expected to continue edge further into recovery. There are several factors that can be considered as key drivers for the sector in 2015, such as easing pressure of downside risks for rupee and current account deficit, improving export.

For the Indian real estate market, 2014 was an action-packed year. The overall economy represented a tale of two halves. The first half witnessed an uneventful economy coupled with political ambiguity resulted in poorer business confidence while the second half saw overall sentiment rehabilitated explicitly with the formation of new stable Government. The first budget presented by the new Government was having a slew of measures for real estate. This was the first time in last couple of years when real estate was given so much importance in Union Budget. Perceptibly, the industry reacted positively and started imagining a recurrence of 2009 where formation of new Government followed by a turnaround in market. Taking cues from the overall economic sentiments, the institutional investors both domestic and overseas exhibit increased appetite and enthusiasm to re-engage with the Indian realty business and commercial sector shown positive absorption however, the residential sector has not picked up the way market players expected.

The commercial market saw a few big ticket deals as occupiers started taking long pending real estate decisions. There were strong transaction volumes witnessed in cities like Bengaluru, Pune, Chennai and Gurgaon, on the other hand markets like Delhi, Mumbai and Kolkata remain disappointed in terms of absorption. Total office absorption until 3Q 2014 was recorded at 23.73 million sqft across the eight major cities in India, which is marginally less than the figure of 25.24 million sqft for the same period last year. Bangalore captured the lion’s share of the total absorption. Transaction volumes in Bangalore were constituted more than 50% of the total absorption in the top 6 cities of India. Gurgaon at 14% and Pune at 13% reflected the robust demand for Grade ‘A’ office space from technology companies. Also tenants that are expanding took the decision to relocate from their current space and leased larger office spaces with overall favourable rates in these cities. For instance,Flipkart, KPMG and Honeywell together absorbsapproximately 5.0 million sqft in Bangalore alone. Accenture pre-committed to around 0.9 million sqft in Pune and Samsung took up around 0.5 million sqft in Gurgaon.

In residential real estate, there was an increase in enquiries for residential properties but transaction volumes have not yet started picking up in most of the cities. Colliers Research data shows that the sales volume in cities like Gurgaon, NOIDA, Mumbai, and Kolkata remained almost stagnant in the last four consecutive quarters, as restricted investor activity pulled down the overall demand. On the contrary Chennai and Bangalore witnessed improved demand.

In terms of new project, developers launched various new projects during festive season to harness the benefit of improved economic sentiments and seasonal demand. Developers were expecting increased traction during the festive season though, the demand in most of the cities remained lack lustre. Interestingly, despite lower demand, developers did not seem to reduce their base selling prices but were offering various innovative payment plans, such as possession linked plans where one has to pay only 10 to 30% up front and the rest can be paid at the time of possession. This shows that market is definitely facing the heat due to unsold inventory. In the secondary market, a substantial discount was available on under-construction properties. The primary reason of this lower transaction volume is un affordability. Residential real estate prices have traversed the affordability levels in most of the cities due to various reasons such as escalation in input costs, high interest rates and burgeoning land prices. Because of high price points the incentives have not proved to be much of a booster in the current environment.



Way Forward- 2015



The Indian market is vigilantly enthusiastic with the new government proactive approach and business confidence has already started picking up. Various agencies such as Moody, IMF, World Bank predicted handsome GDP at 6.3 to 6.4% and forecasted Indian outlook as steadily growing at lower risk. Although, it is difficult to forecast the real estate market which is highly sentiment driven in India. In 2015, overall property markets are expected to continue edge further into recovery. There are several factors that can be considered as key drivers for the sector in 2015, such as easing pressure of downside risks for rupee and current account deficit, improving export. In commercial real estate, REITs will remain the hottest topic. Real estate funds like Blackstone, Brookfield, Xander and Redfort have already started planning to launch REITs in India. Also large developers like DLF, Prestige Estates, RMZ Corp, Embassy, and Phoenix Mills Ltd.are queuing up to tap into the REIT opportunity. In residential segment while absorption in the luxury segment is expected to remain under pressure due to high price points, the launches in the mid-end and low-end segments will continue to have traction at the introductory prices. What middle income home buyer actual wants is project with basic amenities with the price point which he can afford. It was observed that even during the recession time, projects with right price point witnessed high absorption level. Overall, capital values are expected to remain stable in most of the market in short to medium term due to ample stock availability in both primary and secondary markets. 

Happy Investing

Source:Moneycontrol.com

Three money lessons learnt this Dussehra

Three money lessons learnt this Dussehra

On the auspicious occasion of Vijayadashami it pays to begin with a disciplined approach towards your money matters, if you have not done so already.

Dussehra is one of the major festivals in Hindu tradition. It’s considered auspicious for new beginnings in family and finances. And to facilitate such rituals and associated formalities, celebrations, we often incur unnecessary expenses. Once we deep dive into our finances post Dusshera celebrations, we realize the implication of such expenditure on our personal financial life. So, how about revisiting our goals, evaluating our misses and converting them into instruments for materializing your eventual goals?

To get started, consider the following points that concern your financial health-

1.Get that debt away Like we’ve discussed above, Dusshera expenses can influence our financial health more in negative ways than positive irrespective of their religious and emotional entitlement. Once we have burnt all those crackers, and done with the brouhaha of festivity, we are startled to see the repayment figure on your credit card statement. But let us take it on our stride, let’s focus our energies in the repayment of such debts and sooner we clear it, better it is on us. Such steep rate of interest and high cost can only have evil impact on our credit score.

2.Put on the gear of self-discipline We all know that there is no overnight policy that can make us rich save windfalls which are rare to come by. So, the only way of accumulating wealth is by self-discipline; being financially upright and responsible. Particularly, if you are the breadwinner of your family, financial discipline is a must. And yes, it is not only limited to taking care of the current needs of your family but to protect their future as well. Learn to have minimum overhead costs, live in less than what you earn and don’t bother if Mr/Mrs Neighbour has got a swanky new car.

3.Get the right financial diet To protect our finances, we should have enough life, health and asset-related insurances. But again, do not go overboard with insurances and draw a fine line to allocate funds for investments as well. People are often so caught up in their daily work that there’s not much focus on having a balanced portfolio. Easy way out is to find our family’s insurance needs first and then, the extra can go into investments for maximizing gains.

The one very important aspect of Dussehra is to do away with the past and get a new grip of life. So, instead of fretting over the misses that took place this Dusshera, look ahead to implement the lessons learnt to prevent your finances from bad expenditure. And if you need help, look out for a financial advisor who may help you rebalance your financial planning for a safe and secured tomorrow.

Happy Investing

Source:Moneycontrol.com

Considering a home loan? First know how much you can borrow

Considering a home loan? First know how much you can borrow

In addition to your income multiple factors such as loan to value ratio, your retirement age, your employer’s profile and your co-borrower’s profile determine the amount of money to be lent to you.

Traditionally Dussehra is the beginning of the harvest season and many associate beginning of non-farm activities with this auspicious occasion, also known as Vijayadashami. Beginning construction of a new house was one of the important non-farm activities for most of our ancestors. And many still follow it. Of course, barring a few, most of us buy our dream homes from developers and Dussehra is a good day to begin your home buying process.

Buying the first dream home is a big moment for all of us and involves a lot of planning and euphoria. Yet, it can be taxing as a lot of steps are involved even after identifying our dream house, especially as it involves dependence on a home loan as well. After all, it is the lender who is going to decide how much loan amount you can borrow and therefore, it is advisable to get a pre-approved home loan in hand and then finalise the property.

Buying a home is an expensive yet a rewarding affair as getting a home loan sanctioned can be a daunting task. A borrower cannot simply walk in and request a loan amount and obtain it unless he/she has made sure that he is making enough money to borrow that amount from the lender. The capability to get the right loan amount at the right price is crucial to buying a home and how much loan amount one can borrow can be analyzed before one even begins to consider talking to a lender. There are many factors that lenders consider to determine the amount an applicant is capable of borrowing. Unfortunately, it is not based on how well a borrower thinks he/she can handle the funds. Instead, it all depends on factors regarding the borrower’s financial situation. So before making a decision to acquire a property and diving into the process of getting a home loan, it’s important to consider some of the factors that have a direct impact on the amount of home loan you are eligible for:

1.Take home salary: Home loans outline a major chunk of debt for a person and it becomes very important to understand the factors which decide how much home loan you can get. Your monthly salary is perhaps the most important factor that determines your home loan eligibility because the higher your income, the higher will be your chances of paying the liability back to the lender. The lenders generally give a multiplier of 50-60 % on the take home salary to determine the repayment capacity of the borrower.

2.Loan to Value (LTV) ratio: Though your salary may support a big home loan, loan to value ratio may pull down the actual loan the lender is willing to offer you. Loan-to-value is used to calculate the maximum borrowable loan amount for any loan applicant based on the value of the property in question. While the borrower’s income plays a key role in determining the loan approval or rejection, LTV also plays a crucial role in the disbursement stage of loan processing. The value of the property will be assessed by the lender, based on the market value of properties in that area.

3.Existing loans or monthly outflows of borrowers: Once a borrower’s eligibility for the home loan is determined on the basis of one’s monthly salary, lenders will further securitize his/her bank statements and savings account that will reveal the monthly expenses and any other outflow towards any loans or other regular outflows. The same is deducted from the repayment capacity of the borrower to determine the net payment capacity of the customer. Usually, the expenses and other loan payments or outflows should not exceed 55-60% of the monthly income. If this is higher, the eligibility goes down.

4.Retirement age of the borrower: Age is an important consideration for a home loan application and the quantum of the loan. Since 60 is the age of retirement at most companies, it is also the age limit for repayment of a home loan. Lenders determine the loan amount on the basis of the tenure of repayment. Keeping in mind the other monthly payments of a borrower, lenders offer high loan amount considering whether the borrower has the longest possible tenure to be able to pay the home loan EMI comfortably.

5.Co-borrower profile: A joint home loan also allows the loan amount eligibility to go up substantially, which might even help in buying a bigger or better house. The lenders will be ready to offer higher loan amounts by considering the income of all the applicants if one opts for a joint home loan. The reason for it is that the borrowers’ repayment capacity increases and there is more than one person to repay this loan. How much loan eligibility increases depends on the income of the co-applicant. Hence, the lenders would need the profile of the co-borrower the profile wherein documents like the Permanent Account Number (PAN) card copy, address proof, income proof, bank statements and credentials relating to the property must be submitted for getting the loan processed. It is to be noted that many lenders scrutinize the relationships between co-borrowers to determine the bond between them. They may not accept co-borrowers who are brothers, recently-married couples, etc. If it’s a joint home loan account one is opting for, it is advisable to add a younger co-borrower for the home loan. For example, spouse, son, daughter etc, who has visible earnings.

6.Employer’s Profile: The employer also carries a strong weight as lenders have special schemes at times for employees of certain premier organizations. This is as per the policy of the lender but better rates and fees are available for certain employers so checking with the prospective lender will be a good thing to do.

Being hammered back for a home loan can be extremely discouraging but fortunately getting on top of your debt and paying off any owed balances will help you get back on track and closer to your dream of home ownership. Meanwhile, there is no hard and fast rule on how much you should borrow, but you must simply follow a general theory wherein your home loan repayments must not exceed 50% of your gross income.

Happy Investing

Source:Moneycontrol.com

CIBIL Scores: Common Myths and Misconceptions

CIBIL Scores: Common Myths and Misconceptions

A good credit score by CIBIL is necessary to gains loans on favorable interest rates. Here's what those scores reflect and how they can be improved. The following article is an initiative of Credit Sudhaar and is intended to create awareness amongst the readers.

The CIBIL score is a 3 digit number which denotes how credit healthy a person is.

This score ranges from 300 to 900. More than 40 crore people in India have a credit score.

There are several misconceptions surrounding the CIBIL score. Some of these are a result of an acute lack of awareness while others are carefully cultivated myths based on a limited understanding of the subject.

With the concept of a score now gaining recognition and usage increasing, there are some myths and misconceptions surrounding it. Here, we give you the lowdown on what separates myth from fact.

Read on! CIBIL is the only credit bureau

There are four credit bureaus in the country today, namely CIBIL, Equifax, Experian and CRIF High Mark that are licensed to operate by the Reserve Bank of India. However, with CIBIL being the oldest of the four, the term CIBIL score/ report is used interchangeably with a credit score/ report. All bureaus provide individual reports.

Help! My loan was declined by the bureau

Credit bureaus do not make the lending decision; it is the lenders who obtain and review credit reports provided by bureaus. In this sense, the bureau only generates information basis data received from financial institutions. Hence, if your application for a loan or card is declined, you need to check with the lender as to the reason.

I’m blacklisted by a credit bureau!

It is important to know that bureaus or credit information companies do not create or maintain blacklists. If your application for a loan is turned down, it could be because of your previous repayment history and how much you already owe by way of existing loans.

Restoring a poor score is impossible

Having a low or a bad score may not have an immediate quick-fix solution. It is advisable to take the assistance of professional credit health management companies should you wish to better your score. However, this does not mean that over time with financial discipline and judicious planning it cannot be restored. Pay your outstanding in time; any delayed or late payments will negatively impact your score.

Factors that do NOT generally Impact your Credit Score

Income level

Education level

Religion, race, nationality

Gender or marital status

Age

Employment or occupation history

Inquiry made by you to obtain your own credit report

Location of residence or length of stay at one place

Wealth levels

Closing outstanding accounts enhances your score

The best way to maintain a good score is by paying off any outstanding card or loan dues in a timely manner, on or before the due date.

Let us assume you have an auto loan outstanding of Rs. 2.50 lakhs. With an additional inflow of funds by way of a bonus from work, you choose to foreclose the loan. While this will indeed make you more solvent, remember that it may possibly have a negative impact on your score. How so? This is because old ‘good’ debt actually enhances your score! With a longstanding timely payment record, your credit history gets a boost.

Therefore, it may be wise to continue with an old loan, providing you make payments on time.

No loan equals a good score

In fact, this could prove to be just the opposite! Having a healthy credit history is a good indicator of your creditworthiness to a lender, and will in fact enhance your score. Of course, the key to a good repayment record is timely payments and avoiding CIBIL defaults , so do keep that in mind!

A good score guarantees fresh credit

It is important to note that a good score can help you get a new line of credit (be it a loan or card) at competitive interest rates and terms. However, it in no way is a guarantee or confirmation that a loan will indeed be extended to you. This is because while the score is a very important piece of information for a lender, it is not the sole deciding parameter on which a decision of whether to approve a loan is taken. Factors such as your income, repayment capacity and existing debt are also taken into account.

Hence, your score definitely needs to be healthy for the best deals, but getting a loan is not carved in stone as an outcome of the score.

Multiple enquiries do not affect your score

In actuality, applying for multiple new lines of credit can make your score take a nosedive, and fast! This is because each prospective lender will make an enquiry against your report, and each such ‘hit’ brings down your score. What this indicates is credit-hungry behaviour, and the possibility of your being insolvent – which in turn will make lenders stay away, even when you genuinely do require a loan!

I’ve checked my own report and my score went down.

While as mentioned above multiple enquiries affect your score, this does not apply to your own requests for a report. Each bureau offers you a copy of your report at a nominal fee, and you are free to obtain reports from any or all of them. In fact, it is a good practice to keep track of your score at regular intervals, to ensure that your report is an accurate record of your credit health.

Knowing the facts behind scores, a good practice would be to obtain a copy of your report at periodic intervals and staying credit healthy. It would also help you to take appropriate measures and rebuild your score, should it need attention.


Happy Investing

Source:Moneycontrol.com

Looking for cheap properties? Here is a lesser explored option

Looking for cheap properties? Here is a lesser explored option

Looking for cheap properties? Here is a lesser explored option

One might think that living beside or on a graveyard could be really frightening. However, it might be actually be beneficial for you. Here is what you need to know if are considering purchasing such a property.

Listed below are a few things you might want to keep in mind before buying such a property

• Due to the decomposition, the leachate could ruin the water table

• If the property is an individual house then forget about rebuilding the house. You might not be allowed to dig the site

• If you are living in an urban jungle, the cemetery might be a blessing! You will not be able to find a quiet and serene environment elsewhere

• Because your house overlooks a graveyard, you are likely to own a property that has a generous living space and fits well within your budget

• If your property over looks an active cemetery ensure you have a green path segregating it

• According to the principals of Feng Shui- a cemetery is a big no no. The strong and dark energy from the graveyard could lower your energies in due course of time and individuals residing there might feel oppressed

• The cemetery could have debilitating effects on home owners’ mood and could likely cause depression

• Graveyards where cremations take place have a more neutral environment when compared to cemeteries. So residing close to the former could be ideal.

While the concept of ‘quite neighbors’ might lure you, some wouldn’t want to reside close to or on a graveyard as it might sound spooky. However, such properties are always priced lower thus making this an investment that is quite fruitful. If you are planning to sell a house that overlooks a cemetery, because you bought it at a discounted price, it wouldn’t be difficult to sell it at a lower price and if the neighborhood is witnessing rapid development- the property is likely to witness a price rise as well.

Happy Investing

Source:Moneycontrol.com

Midcaps: Don't overstay your welcome

Midcaps: Don't overstay your welcome



One thing which now stands is that clearly there is foreign institutional investor (FIIs) buying and domestic institutional investor (DIIs) selling which means that the near term set up for the market continues to look good.

Tomorrow is a market holiday, so today is going to be a bit of a tricky day because global markets have now turned a bit iffy. Yesterday you saw the way European markets were reacting and we were part of that as well. In a sense that we also reacted in the second half though the market did pickup from the low point of the day yesterday. One thing which now stands is that clearly there is foreign institutional investor (FIIs) buying and domestic institutional investor (DIIs) selling which means that the near term set up for the market continues to look good. However, in the medium-term, there is a risk of this turning out to be a counter trend rally because the domestic institutions have the sense of getting the medium-term trend right.

Happy Investing

Source:Moneycontrol.com

MUTUAL FUNDS : UNDERSTANDING CHARGES AND TAXES

MUTUAL FUNDS : UNDERSTANDING CHARGES AND TAXES

 

 

Your returns as an investor depend not only on the performance delivered by your chosen asset class but also by the taxes and expenses that you incur in the transaction. Two factors that an investor must consider before redeeming are exit loads and capital gains tax as per Income Tax Act, 1961.

 

1. Exit load: Exit Load is an amount charged by mutual fund schemes on redemption of investments before a specified period. It is charged as a percentage of the Net Asset Value (NAV) as on the date of redemption. Such exit load could range from 1% to even more. For example, let’s say a scheme charges an exit load of 1% on redemption of investment within one year. Suppose the NAV of the scheme is `100 on the date of your redemption, you will get only `99 on your units after application of exit load, if

redeemed within 1 year. Exit Load is imposed in order to discourage short term investing.

2. Taxation: All market related investment products are subject to capital gains tax owing to appreciation in their prices at the time of sale/redemption by an investor. Depending on the holding period, they are classified as long term or short term as depicted below. Long term capital gains typically enjoy lower tax than short term capital gains.

 

	SHORT TERM CAPITAL GAINS		LOND TERM CAPITAL GAINS
	PERIOD	TAX RATE	PERIOD	TAX RATE
Equity oriented mutual fund schemes	Up to 1 year	15%	More than 1 year	Nil
Other than equity oriented schemes or liquid schemes	Up to 3 years	Gains added to taxable income and taxed at applicable slab rate	More than 3 years	20% after providing indexation

 

Note: Surcharge at 12% to be levied in case of individual/ HUF unit holders where their income exceeds Rs 1 crore. Education Cess at 3% will continue to apply on tax plus surcharge. Illustration valid for domestic (resident) investor.

 

CUMULATIVE IMPACT OF EXIT LOAD & CAPITAL GAINS TAX ON RETURNS

 

(A) Equity Mutual Fund :

The following illustration shows how investors’ returns are impacted by exit load and capital gains tax. Let us take the example of Mr Niveshak who invests Rs.1 lakh in an equity mutual fund scheme. Eleven months later, let us say the investment value has increased to Rs 115,000. Mr Niveshak planned redeeming his investments considering the appreciation.

Unfortunately, returns from the Scheme reduced after calculating the impact post exit load (assuming exit load period of 1 year) and short term capital gains tax. Mr Niveshak’s investment return of 15% reduced to 11.71% owing to the impact of exit load and taxation. This loss can be minimised by holding investments for the long term and if such favourable market conditions persist. Had the investor held on to his investments for more than a year his returns would have been 15%. (Assuming no change in market condition).

 

ILLUSTRATION of Mr Niveshak’s investment gains

 

		EARLY EXIT	LONG TERM INVESTING
S.No	Category	1 year or Below	Above 1 year
A	Amount invested	1,00,000	1,00,000
B	Gross Return	15%	15%
C	Amount Before Exit Load	1,15,000	1,15,000
D	Exit Load Applicable	1%	Not Applicable
E	Amount Post Exit Load	1,13,850	1,15,000
F	STCG Rate	15.45%	Long Term – Nill
G	STCG	2,140	Not Applicable
H	Net Amount After Tax	1,11,710	1,15,000
I	Net Investment return	11.71%	15.00%

 tal gains Long term capital gains

FORMULAE : E = C x (100%-D), G = F x (E-A), H = E – G, I = (H-A)/A

 d Tax rate Period Tax rate

Short Term Capital Gains Tax rate is as per tax slab applicable for the financial year 2016. For illustrative purpose to explain the impact of exit load and capital gains tax and benefits of investing for long term. There is no assurance or guarantee of returns on investments in mutual funds. Investments in mutual funds are subject to market and various other risks and it is advisable to consult with financial advisor before investing. Securities Transaction tax has been ignored for the purpose of illustration. Illustration valid for domestic (resident) investor

Early Exit Long Term Investing

(B) Non-Equity Mutual Fund (Other than liquid schemes)

 

Let’s say Mr. Niveshak invests Rs.1 lakh in a debt mutual fund scheme. One year later, let us say the investment value has increased by 12% CAGR (Compounded annual growth rate). Mr Niveshak considered redeeming his investments owing to good returns from the Scheme. Unfortunately, returns from the Scheme reduced from 12% to 7.52% owing to the impact of exit load and taxation. This loss can be minimised by holding investments for the long term and if such favourable market conditions persist.

 

Now, if Mr Niveshak had held on to his investments for the long term (more than 3 years), he would not have incurred exit load (assuming exit load period of 15 month) and he would have paid lower capital gains tax post indexation. In addition, long term investing could be beneficial with an opportunity for increase in scheme NAV. Assuming investments held for just above 3 years and a CAGR of 12%, his Net investment return would be 11.46%.

 

ILLUSTRATION of Mr Niveshak’s investment gains

 

		EARLY EXIT	LONG TERM INVESTING
S.N	CATEGORY	SAY AFTER 12 MONTHS	SAY AFTER 3 YEARS
A	Amount Invested	1,00,000	1,00,000
	Gross return (CAGR 12%)	12.00%	40.49%
	Amount Before Exit Load	1,12,000	1,40,492
	Exit Load Applicable	1%	Not Applicable
	Amount Post Exit Load	1,10,880	1,40,492
	Tax Rate on Gains	30.90%	20% with Indexation*
	Tax Applicable	3,362	2,009
	Net Amount After Tax	1,07,518	1,38,483
	Net Return (CAGR	7.52%	11.46%

 

xit Long Term Investing

FORMULAE : E = C x (100%-D), G = F x (E-A), H = E – G, I = (H-A)/A

 

* Assuming investment in FY 11-12 and Redemption in FY 14-15

Cost Inflation Index = 785 for FY 11-12 and 1024 for FY 14-15

Indexed Cost of Capital = (1024/785)*100000 = Rs 130446

Tax on Gains = (140492-130446)*20% = Rs 2009

 

^Short Term Capital Gains Tax rate is as per tax slab applicable for the financial year 2016. This is assuming the investor falls in the highest tax slab. For illustrative purpose to explain the impact of exit load and capital gains tax and benefits of investing for long term. There is no assurance or guarantee of returns on investments in mutual funds. Investments in mutual funds are subject to market and various other risks and it is advisable to consult with financial advisor before investing. Illustration valid for domestic (resident) investor.

 

INVESTING FOR THE LONG TERM IS BENEFICIAL

Happy Investing