Tag Archives: personal finance

(Early) Retirement Planning in India – A Practical Approach

28 Feb

Today is my last working day in my fulltime Software career. Yes, I decided to retire at my current age early retirement is nothing bad!of 43 years after careful deliberation and planning for retirement over the last few years. I worked for exactly 19 years in the IT Industry which thought is equivalent to some 30 years of efforts in the Indian context; that is, when you consider the first ten years of hard work and extra hours that we all had to put in during those years.

Nevertheless, I decided to call it quits mainly due to the following reasons:

  • I was kind of getting bored with the IT office routine – while Software still excites me, the industry quite doesn’t anymore
  • I thought I have planned my finances reasonably well till today after initial years of spend-thrift lifestyle. At the moment though, I have no loans, have some decent savings and fixed assets, and I have further plans to appreciate whatever little wealth I have)
  • I do not want to improve my lifestyle or living standards further or better than what it is now. In fact, I already froze my lifestyle some five years ago
  • I plan to leverage on my secondary skills and hobbies in order to earn some income from home. This, at the moment, cannot immediately match the high salaries that IT professionals command – it is more about doing what you like the most and have huge potential to outsmart the IT salaries
  • I see the need to spend more time with my family with my kids (a special one too) growing up – I believe that after certain age, one’s sole goal should be grooming the next generation and giving back all your learning to the society

The reasons may be reasonable but can one really retire so early without having some planning and backup? Well, that’s what we are going to discuss in this post. I am writing this post because I thought it might help a younger guy out there who wants to plan for his retirement. It is very obvious that one needs quite some money to retire and hence it needs careful planning! I shall also share here the little Excel sheet that I made sometime back to help with my retirement planning.

How to plan for your early retirement?

Disclaimer first: I am not a financial adviser nor planner myself. However, based on the personal finance articles that I got to read in newspapers and online over the past several years, I kind of figured out how much money I might need to retire early and more importantly, if that money is not sufficient, how can I supplement it further? (In fact, that’s more like my situation now). In my case, the plan was laid out almost 8 years ago and I kind of executed it more or less along the expected lines. I must however admit that I didn’t fully reach my financial goals yet, and hence it is all the more important to discuss the management of post-retirement savings as well. We will discuss both these aspects in the post.

If you ask me about retirement planning, the following will be the logical steps involved.

  1. Decide at what age you want to retire from your full-time job; Do that at least 10-12 years in advance so that you don’t miss any wealth creation opportunities.
  2. Project your typical monthly expenses post retirement (without considering inflation parameters; planning tools will take care of adjusting for inflation) and hence the amount you want to retire with for a longevity of say 80 years
  3. Execute your plans to save up that much money – The plan should include foreclosing any pending loans before retirement, a clear strategy for pre and post retirement investment, onetime big expenses etc. Also, do special planning for high-inflationary expenses such as medical (You need a good medical insurance for your family post retirement) and a term-life insurance well in advance
  4. If the return on retiral investment do not seem sufficient, plan for a backup part-time job or go for alternate investment instruments (often high-risk, high-reward ones if you are retiring at a younger age)
  5. Retire peacefully and enjoy those little things in life!

Now, that sounds easier said than actually done but it’s not that easy! Let’s now take a closer look at our planned steps. I shall try to explain these steps in detail using the little Excel sheet that I was talking about (download link below).

[ Download my Retirement Calculator Here ]

Step 1. At what age do you want to retire?

To begin with, you need to make up your mind to arrive at a reasonable retirement age. This has to be done very well in advance. For example, when you are still in your early thirties, you may plan for a retirement at 45 if you are sure of saving up enough. Be careful not to be super-confident here. In my case, I started thinking about retirement about 7-8 years back itself after seeing a few ups and downs in the industry as well as the financial markets. More often than not, people won’t take a retirement call out of fear or social reasons – because it may be seen as a sin by old thinkers!

Your readiness for retirement again can be checked using my sheet. If you are not ready yet, use the sheet again to decide how can you accelerate your investments towards achieving your retiral goals (i.e. the money with which you can retire. Remember to add additional investments for special needs such as kids education or marriage, if such events are likely to happen post your retirement. You may use the third sheet in the workbook for such goals and add up to your systematic investment goals)

Step 2. Project your monthly expenses

This is reasonably easy if you have the habit of tracking your monthly expenses. If not, do the following:

– From all your bank statements, find out your annual account outflow (withdrawals, bills payments,credit card payments)

– Deduct the expense types that won’t happen post retirement (e.g. kids schooling expenses – not always though, fuel adjustments when you don’t commute that often, shopping budget as applicable etc)

– Add any additional expense that might recur after retirement (e.g. medical insurance)

– If there are things that repeat every couple or few years, add those expenses on an annualized basis as well (e.g. family vacation abroad once in two years)

– The resultant value divided by 12 would be roughly your monthly expenditure.

– If you want, more accurate values (advisable) please track your expenses from today itself.

Now, this monthly expenses should be on as-is basis. i.e. if you decide to retire today, how much you will need after cutting anything that’s not applicable in retirement life is this monthly figure we are talking about. Don’t worry about any inflation parameters at this moment.

Step 3. Execute your plan based on your particular sheet

Now, it’s time to take a closer look at your sheet. After entering the mandatory fields of your current age, retirement age and expected monthly expenses, you may adjust the inflation parameter and the expected returns on your savings after retirement. The inflation parameter in Indian conditions can be anywhere between 6 to 10 percent over a long period of time. The rate of returns on your investment can be as low as 3% for savings banks, 7 to 10 percent in long term deposits and 8 to 12 percent typically in equities (and as high as 15-20 percent in certain time horizons in the bull market).

I suggest to leave the longevity at 80 years as that’s typical life expectancy number that one should plan for. The life expectancy in India is slowly going up thanks to advancement in medical facilities and health standards.

With that plan in the sheet, you now know how much you need to save up. You need to document that somewhere and not keep it transient in the sheet (and you forget your planned numbers later).

Now, the preparation steps start. Some of the activities you need to undertake during this 8, 10 or 15 year period is to close all your loans, take care of major one-time expenses or allocate further money for that, and take a term insurance policy at a good age (typically before 40 years and preferably in early 30s).


(Note: As a thumb rule, one should de-link insurance and investments. There’s no point in having an old style endowment policy like the one LIC used to offer. Instead, earmark most of that money into high-return investments and use only a fraction of the cost for a high value term deposit. These days, taking a 50L or 1 Crore term insurance policy is not a big deal!)

Living frugally and investing wisely should be the motto towards the retirement age. Especially, one should go for things that add long term value than disposable/expensive items (e.g. smartphones, electronics, changing cars frequently etc).

No matter what, your end-goal on retirement day should be having that magic figure that you want to retire with.

Some of the wise things to do on retirement is to dispose illiquid assets such as real estate, gold* etc. Also, try to invest 20-25% of your take home salary in equity market (blue chip) and mutual funds prior to your retirement. One good thing to do is to allocate 10 to 15% of your take home salary towards EPF (Pension Fund or Provident Fund) on top of the employee+employer contribution. This comes as a big savior at the end because it’s all tax-free amount that returns at an average of 8.5% over the past several years. It’s as good as getting 12% annualized returns before tax. I was doing exactly the same since 2004-05 and it really helped me!

* By the way, responsible citizens should avoid gold as an investment instrument as this illiquid and stagnant wealth – while giving you good returns – will spoil the country’s economy. Our biggest curse is the trade deficit caused by Petroleum and Gold imports.

Step 4: Special risk planning

Now, what if you slogged it out till your retirement day and you still are not going to make the money you wanted as per the planning sheet? (Don’t worry, that will be the case with most people)

You have to either (1) Go with some high-risk, high-reward schemes or (2) Plan for a part time activity that earns some money to supplement your retirement savings returns with which you can make a living.

(1) is where I disagree with the old school of thought. Yes, it’s ideal to invest all your post retiral savings into risk-free and fixed return instruments AS LONG AS you retired with a handsome amount in your bank. And that’s indeed the recommendation for those who retired rich. What if you didn’t and you are still rather young?

In such cases, you need to maximize your returns from your post retirement money by investing part of it into the equity market. Why? Because it returns like 10% or 12% annually on your retirement savings and you are going to beat the inflation big time.

Also, please note that the risk scenario mentioned here is applicable ONLY when you couldn’t take that risk before retirement. It is always better to take this kind of risky investment before retiring itself, as much as possible.

Negating the bad effects of Inflation is the key to be successful in Indian conditions!

You may compare the two sample screenshots below to understand what I am talking about.

retirement plan - 1

Retirement Plan 1 : Minimal returns on Post-Retirement Savings means You have to save up a LOT!

retirement plan 2

Retirement Plan 2 : Better Returns post retirement means, you need to Save up less


If that’s not your preferred route, you need to definitely do some kind of part time activity that earns money (in my case, that’s the plan!)

Step 5: Happily Retire!

No explanation needed here, but all that you have to do is to go for a good medical insurance coverage, bifurcate your money into the right investment instruments and enjoy life! Because you have done your planning part really well, you deserve to enjoy life to the fullest till the very end!

Early Retirement Hassles (Non-financial)

When somebody decides to retire so early in their life, the biggest worry is to manage and convince the family members. In the Indian context, you will invariably have an argument with your spouse on your decision. Even worse will be the nosy friends and the family people who will be waiting for an opportunity to prove you wrong for not thinking like the most! At any point of time when things don’t seem to go well, you have to remind yourself that your conviction is better than the conventions you see around!

Further, some people might develop boredom and depression after an early retirement decision. That’s why it is very important to find a post retirement activity to keep you occupied and happy. Retirement life is a very good time to reconnect with your family, friends and rediscover yourself. You will also find a lot of time to take care of your health.

The above are some of the non-financial aspects that you need to manage and figure out to lead a peaceful life, after having done the financial part perfectly right!

Enjoy your life!

PS: This article was written in a hurry as I really wanted to post it on my retirement day itself! Any suggestion, corrections are welcome and let me know if the Retirement planning Excel sheet that I shared has any bugs or calculation issues!

5 Reasons why Systematic Investment Plan (SIP) is the better, safer approach

29 Jun

When it comes to investments and personal finance management, there are a number of options available in India. Based on your risk profile, risk appetite and liquidity requirements there are options like fixed or term deposits, postal deposits, recurring deposits, mutual funds, equities, gold investments, properties, bonds, commodity trading etc.

As for the equity market linked investment opportunities, open-ended mutual funds are probably one of the easiest to pick and dispose (liquidity). Though, investing in mutual funds still has stock market linked risks, you are allowing your fund manager and fund house (e.g. HDFC, Reliance Capital, SBI etc) to manage and reduce that risk for you.

Investing in mutual funds through SIP (Systematic Investment Plan) for longer term will reduce these market linked risks further. Just in case you do not know what a SIP is, here’s the definition:

SIP is a method of investing regularly in a mutual fund. It’s very similar to a recurring deposit whereby the investment amount is the same for each deposit, but you get a varying number of mutual fund units based on the current market price of the particular fund.

For example, when you open a SIP with Reliance Growth Fund for 2 years with a monthly recurring deposit of say Rs.1000/-, the amount that you invest per month is always fixed. But for a particular month, the Reliance Growth Fund’s market price (called NAV or Net Asset Value) may be Rs. 450 and some other month it may be Rs. 250 based on the equity market fluctuations. Hence, the number of units that you receive per month also varies. For example, when the mutual fund NAV is 450/- you get only 2.22 units for your thousand rupees where as when the NAV is 250/- you get 4 units (1000 / 250 = 4).

In other words, when the mutual fund NAVs are cheaper, you are getting more units and hence you average out your prices. e.g. based on the above two transactions for two months you are getting 6.22 units for 2000 rupees or your per unit cost is 2000 / 6.22 = ~321.54

My current Mutual Funds Portfolio

The following is my actual mutual fund portfolio as of June 28, 2010. I am not specifying the number of units or amount invested.

Fund name Investment Date Overall Gain
Reliance Growth Fund 22.02.2007 (SIP) 65.67%
HDFC Tax Saver Fund 15.01.2007 (SIP) 47.44%
Reliance Vision Fund 15.01.2007 (SIP) 27.44%
HDFC Equity Fund 08.08.2007 44.19%
SBI Magnum Global Fund 08.06.2007 16.43%
Franklin Prima Plus Fund 07.09.2007 5.65%
DSP Blackrock Focus 25 Fund 14.05.2010 3.08%


Off the above, the first three were done on Systematic Investment Plan with monthly contributions for at least 24 consecutive months. You will notice that despite, the Sensex hitting 21,000 in December 2007 and correcting big time all the way to 8000 two years back, the funds invested via SIP are still returning a handsome positive figure. On the other hand the other funds which I invested also in 2007, returned digit figures the only exception being the HDFC Equity Fund which was like a fluke when it comes to timing.

The moral of the story is that SIPs for long term always return well.

Advantages of SIP

The following are some of the major advantages of investing via Systematic Investment Plans.

#1 You don’t need to time the market

One of the key problems of investing in equities (or even mutual funds other than the SIP route) is that unless you time the market, you are in trouble. In the case of SIPs you don’t have that issue – Just keep a fixed amount per month (or biweekly) fixed via the SIP route for long term and the rest is taken care of. When the market is down you get more units and when the price is high you automatically buy smaller amounts.

#2 It’s not a crime, if you miss one SIP installment

Unlike your bank loan EMIs, nobody will come after you with legal notice even if you miss one SIP installment due to lack of funds or you just forgot it. However, in order to make the best out of SIPs, you should have the disciplined approach of investing at the predetermined frequency without fail.

#3 Highly liquid and you can terminate any time

If you are investing in open ended mutual funds, you can terminate your investment at any point of time and get your deposited money in the bank within two business days. Unlike fixed deposits, there is no penalty for terminating a SIP earlier. Please note that tax saver funds usually have a lock in period of three years. This is not specific to SIP but about the nature of the tax free funds.

#4 Relatively low risk

Investing via SIPs offer reduced risk exposure to the stock markets as compared to putting money in bulk via funds or stocks. Basically, in long term you do the risk leveling without even you knowing about it and there is a automatic cushioning against the volatility of the stock market.

#5 No special fees

Investing in SIPs do not need any special fees per month or at the time of opening. The entry load of the underlying instrument (i.e. the fund), if applicable, will be the only charges.

Summary

I hope you got some ideas about the Systematic Investment Plan. Sorry, if you already knew it but this post was mainly meant for the newbies in personal finance. I shall talk about another investment mechanism – the Systematic Withdrawal Plan – in yet another post.

Start your SIP today because any day is a good day for SIP…

Happy Investing!

PS: It is highly advised to pick only the best and stable funds for SIP investment from well known fund houses such as HDFC Asset Management and Reliance Capital. Also, it’s not a good idea to enter SIPs on new fund offers (NFOs). There are a number of funds with proven track record of 5-10 years to choose from.

Are you selling your stocks at the wrong time?

23 Jun

First of all, let me take disclaimer that I am not an expert in the equity markets nor a qualified personal finance professional to advise anyone. However, since I have been doing online share trading for almost 12 years now, I thought of sharing my experiences on how I could have made more profits by exiting stocks at the right time (By the way, I never made huge profits but fortunately I am not at loss)

Stock selling strategies and tips

Most people are good at making the right calls when it comes to picking the right stocks at the right time. However, more often than not, after they sell they will be shocked to see that the shares that they sold are moving up faster. This is because they never had a proper exit plan for that particular stock. The following are some tips for you to help you sell your stocks at the right time.

Have a target price when you buy

When you buy a particular stock or share, you should have a target exit price in mind already. This has to be arrived on the basis of the valuation of the stock, prevailing sector conditions, momentum etc. Even if you are investing for five days or five years, this is very important and more over you have to record that planned exit price.

Your first analysis is almost always the best

When you set a target price while buying, that exit price is probably based on thorough analysis and hence the best exit price. You should not keep changing that figure unless the valuation of the stock or the sector it belongs to dramatically changes. If that is the case, you have to re-rate the stock after further analysis and keep an additional exit point and make it a point to sell at this price. If there is no change in prevailing conditions around the stock or the company, it is always advised to sell at the original exit price.

Never sell a stock that is peaking day by day

If a stock is flying on a momentum and hitting 52-week highs day after day, then you may get a better price. Keep putting higher stop losses and change your sell price (above original exit price) to get maximum profits. As a thumb rule, never sell a momentum stock that has just hit the 52 week high.

Sell ASAP if the company falters

If there is negative news on your invested company, it is a call for immediate sell at whatever loss or profit. You have to always keep track of the stock news of your favorite companies via online stock news alerts and not through news papers. By the time you read your financial news papers, you are already very late.

Sell early to balance you portfolio

Another situation where you might exit a stock prematurely is to balance your overall finance portfolio or equity portfolio alone. In the first case, you have decided to keep say 30% in equities and due to several recent transactions if that proportion has gone way up, you may want to de-risk your portfolio by selling a few stocks. Similarly, within your equity portfolio, if a particular sector is over represented you may want to adjust it via further selling of some existing entities.

Sell early for any tax benefits

At times, especially towards the end of the financial or taxation year, you see that your capital gains may be offset via booking loss on certain non-performing or turtle stocks. This is sometimes good to reduce your taxes – based on the existing rules of course – as well as to give further and better buying opportunities in the next financial year.

…and finally…

Never listen to analysts on TV

These are the bunch of foxes who basically wants to play with the sentiments of investors and keep changing their stand from time to time. If necessary, you may have a paid financial adviser, who is interested in making money for you because he gets paid by you but never take those analysts’ free advice. But as I mentioned in one of the tips above, keep track of all news related to your stock and be smarter.

By the way, the tips mentioned here are applicable for those who are investing in stocks and not trading.

Happy investing!

Investment strategy in a volatile market

7 Nov

Indian bourses have been setting new and new index highs every other week amidst heavy volatile trading. There are many arguments in favour of the Indian growth story. Some believe that what we are seeing here is a fundamental move where as some others swear that India is a special case compared to other emerging markets and we will keep going up. Some wisemen and analysts even predict targets for the ‘Sensitive Index‘ for not just 2008 but for 2010 and 2020 as well. The weakening dollar combined with the huge market capitalization gains have made Mukesh Ambani the richest person on earth in less than two months time. However, it may be a matter of couple of months before 9 out of 10 retail investors loose out in the market after being exposed to the high-risk game in the volatile market. Having seen and experienced three huge market falls in my investment life, I would like to advise the inexperienced retail investors to be very cautious at this point of time.

Good, bad and ugly…

There are a couple of things that are going really good in India recently. The first and foremost thing is the consistent economic growth rate of 8% and above that the country has been achieving of late. The other good thing (which resulted in the first one) is that there are couple of wise men sitting on top
who are driving the Indian economic story – P, Chidambaram and Y.B. Reddy being the prominent ones supported by other organizational leaders of SEBI etc. Strengthening rupee, low inflation rates, increase in foreign exchange reserve, turned-around PSUs, focus on futuristic infrastructure planning etc are some of the positive results of good overall leadership. The current Indian finance ministry, Reserve Bank of India and SEBI are almost always prompt in rolling out policies for positive growth and also to curb abnormalities like credit or sub-prime issues and indirect FII inflows.

However, there are couple of other things that are not really in favour of a stable economy – the first being the fact that we are having a very unpredictable political alliance at the center that can fall anytime. Many of the economical reforms, tie-ups with developed countries and global capital institutions etc are often thwarted by one or the ally. Secondly, the inability to manage (appreciate/depreciate rupee!) the rupee value at an optimum level against the US dollar has badly affected the export houses and industries like Software, textile and jewelry. Third biggest factor is that the huge FII money that is coming as foreign exchange is not really used for any long term planning. Due to the high volatility, this kind of money is not being used for developmental activities.

Some myths associated to the volatility

India is a special case and the bull run has to continue: Wrong! I personally believe that the fair value for the sensex should be around 13000-14000 at the moment as compared to the PE multiples of other stable emerging markets. The market has been fueled by the FII inflows and it can reduce anytime and India is
not really a special case.

Sensex is so high that I cannot enter now!: Wrong! Sensex is only an indicator of a small set of 30 stocks. At any point of time there are enough value stocks available in the market that you can buy.

PE valuations don’t apply any longer: Stupidity! If a few stocks are shot up because of momentum, it doesn’t mean that we are in a special situation and we can forget the valuations. If Educomp and RNRL are currently being traded at 400 or 500 times forward earnings, they are dangerously risky trading bets and not
any good for investment. Another example: Majority of IT stocks used to trade at 30 to 40 PE multiples for almost ten years now. This does not mean that, going forward Infosys is still fairly valued and be a multibagger!

Momentum trading is better than value buying in a volatile market: Wrong! Value buying is always the best mechanism to invest. Momentum trading may not be there for ever and can wipe out your money at any time.

It’s better to keep booking profits regularly to reduce risk: Wrong! If you have done your homework about your investment portfolio (See long term portfolio below) you don’t need to do this. In fact, booking profits at regular intervals will badly affect your returns. However, it is also a good option if you maintain your investment portfolio and trading portfolio altogether separated. For fun and high risk gambling you could use the trading path while the investment portfolio is probably for your retirement life.

I should book profit on my mutual funds now: No, unless you are in urgent need of money. Mutual funds are long term instruments for wealth accumulation and an ideal way to enter them is via Systematic Investment Plans (SIPs). It is not investor’s job to time the market for MF investment but your fund manager will take care of that part. So never trade a mutual fund.

A few investment tips

If you are in doubt whether you should enter the market now or not, opt for the SIP route of investment via mutual funds. Ideally SIPs should be for subscribed
for a longer investment period of say greater than two years.

Never buy your stocks in bulk: The self managed SIP route can be taken for buying even stocks. ie. You buy larger quantities when the prices go down and smaller quantities when you feel that the prices are a big high. In other words, build your portfolio over a number of months and years and not overnight. Please note that this rule is applicable only to fundamentally strong long term portfolio stocks.

Avoid playing momentum stocks. 8 out of 10 traders make losses on such trading opportunities.

If you want to play volatility then opt for some of the best exchange traded index funds. One great example for the same is Benchmark Nifty Exchange Traded
Scheme. This is a fund that invests in NIFTY stocks and is pretty much reliable in terms of low tracking error.

Don’t buy a stock due to market or analyst pressure or rumours. Do your homework before entering each and every counter.

Avoid having more than 25 or 30 percent weightage on mid and small cap stocks in your long term portfolio.

Identify sectors that have long term value and those sectors and companies that are often affected by government policies, weather, margin pressure etc. For example, textile stocks and software companies are affected big time by the rising rupee and hence they may not yield the same kind of returns as in the past. Another sector which should be almost always avoided is the airlines which are always under margin pressure.

Periodically (every three months or so) inspect your long term portfolio for any fundamental changes or external parameter influence.

Try to diversify your investment across at least four to five sectors and six to ten different stocks. Never put your bulk investment into one or two stocks alone.

Try to diversify in terms of investment instruments. One should have a good mix of Post Office deposits, equities, mutual funds, fixed/term deposits, gold and real estate in their long term portfolio. For long term, gold may be an excellent investment. Again Benchmark’s gold exchange traded fund (ETF) and DSP Merril Lynch’s World Goldfund are excellent picks for low risk investments.

My long term portfolio picks (In the order of portfolio weightage and large cap to small cap order)

L&T
Grasim
BHEL
Punj Lloyd
Reliance Communications
Crompton Greaves
Tata Steel
Bajaj Auto
ACC
SBI
NTPC
HCL Technologies
Voltas
Britannia Industries
Cipla
Kesoram Industries
Bharati Shipyard
EIH Ltd
Apollo Hospitals
NIIT Technologies
Glaxo Smithkline Consumer
Ballarpur Industries
Orient Paper
City Union Bank
Hanung Toys

Note: Some of the above stocks are already fairly valued while some others should be entered during the next correction.

Disclaimer: As a retail investor I may or may not have vested interest in some of the scrips mentioned here. Readers are advised to do their homework and exercise discretion before attempting any investment.

Homeloan rates heading north – What to do?

29 Apr

Home loan rates are skyrocketing following several hikes in the rates (repo and reverse repo rates) and cash-reserve ratio, by the RBI. While the central bank’s main agenda is to provide enough liquidity for the banks and to help the government control inflation rate to an ‘acceptable’ limit, nothing seems to be in the vicinity to save the middle-class from the home loan headache. In this scenario let us analyze what are the best strategies for you in planning your debts for long term financial stability.

First of all, let us not forget the thumb rule that if you have good enough funds – either as loose cash or parked in other investment instruments – with you, it is always better to pre-close the loan, either fully or partly. Two years back the scenario was different, where a tax-free and risk free 8% return from the provident funds like investments complemented a long-term home loan at 7.5% or 8.0% rate. The case now, however, is that if you want to maintain both the home loan and liquid investments, then the before tax returns from the investments should be at least 12%. And if you would like to make a part payment, make such decisions faster before the next interest hike is effected.

Secondly, if you are in no position to pre-close or part-pay the loans, you need to work out the best possible loan options for you. First and foremost thing to do is to call up your bank and check the fresh loan interest rates for your kind of loan amount and tenor. Usually, there will be a disparity of 0.25 to 0.50% between fresh loan rates and already running ones. You need to correct it via personal requests made to the bank, without fail every quarter. Also while the rates are going up opt for an increased tenor against increasing the EMI option. If not, knowingly or unknowingly it could affect your monthly budget (could even run into higher risk debts like credit cards over usage). Also you don’t want to shell out more money early enough when the rupee has more value. In the long run, the interest rates will anyway come down to bring the tenor back to your original term or even lesser. However, there is an exception here. You should know that your interest part of your EMI will steadily be coming down every year while the contribution to the principal goes up. If the annual interest portion has fallen far below 1.5 lakhs, you might want to opt for an increase in EMI option (once in a while) to avail maximum tax benefits on interest. Care should be applied here to make sure that you don’t end up paying a lot more than 1.5 lakhs an year, via adjusting the EMI. Another thing not to be done at all at this point of time is to convert your floating loan debt into fixed rates.

Thirdly, owing to the new monetary policy of the RBI, loans below 20 lakhs are likely to get some sops from the banks. This is due to the fact that risk weightage of loans below 20 lakhs have been reduced from 75% to 50% which might result in banks offering marginally lower interest rates for this category. If your current outstanding balance is slightly above 20 lakhs, you might want to check with your bank (or another bank) for a switchover option. This should be, however, done with care after working out the processing fee factor etc.

Next, be aware of the hidden charges and the penalties that banks might be revising from time to time. The home loan market for them will be coming down by 15% to 20% due to the rate hikes and other parameters in the construction industry. Banks will try various ways to make money to keep their bottom line intact. Fresh loan seekers too should be more careful now than ever before.

It is a good time now to sit back and think of own expenses structure of your monthly salary. Ideally, you should not have more than 25% of your take home
salary going towards the payment of loans. This figure is probably optimal if it’s below 20%. If this is the case, you should be in a position to save 30% of your income into various short and long (mixed with high risk and low risk) investment instruments. If you are a young (less than 40 years) borrower, you might want to restructure your investments now. You might want to convert up to 60% of your savings into high risk instruments like equities or equity oriented funds for long term investment horizon (>5 years) in mind. Another great option is to put up to 20% of your investments in gold with an investment horizon of three years. The gold is sure to return 15% or more annualized returns for the next three years (Visit http://www.forecasts.org/). Investments like this will surely compensate for the money outflow caused by high interest loans.