Growth or Dividend fund option-which one suits you!

When my mom had suggested me to start an SIP investment in mutual funds last year,i left it up to her to choose the fund house as well as deal with the other intricacies.But not everyone is as lucky as me,to have a mother who is connoisseur of all this stuff so that i don't have to fret over it.In this post i will list out some benefits of both the scheme options which might help a lot of investors to decide which one suits them better.There was an excellent article posted in economic times earlier, a lot of statistical data is presented from there in this blog.

                       To choose the right mutual fund is a fight in itself and then when you are asked whether you want the Growth or the Dividend option,you feel is it even worth the effort.Understanding these options is a one time effort and a little research here and there is all that is needed.Just as i mentioned in my previous post,an SIP investment in a good mutual fund is probably the best option you have to beat inflation in the long run.Keep investing and monitor your portfolio from time to time;you will reap the benefits sooner or later.
                       Three factors standout in your choice of growth vs dividend option : investment goals,financial needs and tax liability you would incur on your returns.Almost every mutual fund offers 3 options for a new investor - Growth,Dividend payout and Dividend reinvestment.If you don't choose an option , the scheme has a default option but you can switch to other option in future.
                       If you choose the growth option,the scheme does not pay you any dividends but continues to grow.The gains that are made by selling any holdings are ploughed back into the scheme.All the gains are reflected in the Net Asset Value(NAV) of the scheme which rises over time.Since no dividends are paid back to the investors,the NAV of the growth scheme is usually higher than the corresponding Dividend option.Investors under this plan earn returns by selling off their units at a higher NAV at a later date.
                      If you choose the Dividend payout option,the fund house pays you dividend at periodic intervals from the profits.The dividend paid to the investors is solely based on the performance of the fund and the company is not under any obligation on the regularity and the amount of these dividends.Thus,one can expect higher dividends if the fund is doing very well against meager amounts in not so merry situations.One thing to clearly understand is that there are no additional benefits offered under this scheme.The dividend returned is your own money;every time the company pays dividend to its investors the Net Asset value gets readjusted accordingly.In short this scheme can be termed a cash back option where you get the profits periodically but at the same time your investment corpus also gets readjusted which is reflected by a lower NAV.
                     In the dividend reinvestment plan,instead of paying the dividend to the investor,it is used to buy more units in the scheme.With every dividend the number of units held by the investor increases.The NAV of the scheme is readjusted once the dividend is paid to the investor.Once the NAV is adjusted,both the Dividend payout and Dividend reinvestment plan end up with the same NAV.Now one may wonder what's the difference between the 2 dividend options: in the Dividend reinvestment plan,each reinvestment is treated as a fresh investment and thus if the fund has a lock in period,the investment may remain locked in the fund.This is applicable to the close ended funds such as ELSS,FMPs,capital protection funds.Thus,it is imperative you are aware of the scheme's lock in period if you intend to invest in such a scheme with dividend reinvestment plan.
                     For some savvy investors the information presented above may be enough for them to decide which option suits them but for others,i reckon you can read on.Which option to choose depends on your needs and financial goals:if you are in need of regular income and cannot keep investing for long time,you can choose the dividend option.Be aware though,taking out investment and then keeping it in savings bank account is a waste.Thus you should choose the dividend option only if there is a need of regular income.In the Growth option,the power of compounding comes into picture.Since there are no dividends paid under this scheme,the invested amount is higher and is sure to fetch much better results if the fund performs well and you stay invested for a significant amount of time.So the rule is simple:
Is regular income needed - If Yes then dividend option,if No then Growth option.
                    Finally,you should know the tax implications of such schemes as well.Dividends from Equity funds such as Mutual Fund schemes are tax free but there is a Dividend Distribution Tax,also known as DDT,payable on Dividends from Non-Equity funds such as Debt,liquid and MIP funds.For MIP and Debt funds,the DDT is 12.5 % but in case of liquid funds it is 25 %.Based on this information here are some suggestions - if you invest in a debt fund for less than an year and fall in 10 % tax bracket,you can opt for growth option since the DDT will be 12.5 % for Dividend option.If you are in 20/30 % tax bracket,you should choose the Dividend option.The capital gains are added to your income for short term investments and then taxed as per you tax bracket ,so choose wisely.Choose the growth option,if you intend to invest in debt funds for more than an year.For such investments the returns are taxed at flat 10/20 % after Inflation Indexation,and thus better than investing in Dividend funds.Avoid Dividend option if you are investing in a liquid fund,remember the DDT is 25 %.For Equity and balanced funds,if you plan to invest for less than an year,you should opt for the Dividend option since the returns do not attract any DDT as of now.Even if the rules are changed under DTC,it is speculated that the tax will not be more than 5 %.If you plan to invest for more than an year in Equity/Balanced funds,go for the Growth option,since long term gains from such funds are currently tax free.

Keep investing prudently.
Cheers!!!!






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Retirement Corpus-few tips to build your retirement corpus

Most of us fail to save enough for our retirement,envisaging that the financial goal is in distant future and thus tend to focus on short term/mid term goals such as buying property,holidays,child's education,marriages and so on.As the saying goes - Rome was not built in a day,you need to understand that in order to build a size-able corpus for your retirement,you must start early and review your portfolio from time to time.A lot of statistical data is taken from an excellent article that featured in Economic times earlier.
                             Before you start with anything,it is very important to have your goal set.In this case you need to calculate a rough amount that you aspire to have in your kitty when you retire.You need to be honest with yourself : when do you plan to start saving,how much you can save now,can the investment be increased over time once the other financial goals are met,can some of the expenses be brought down and same can be contributed towards retirement funds,are there post retirement sources of income,will there be any liabilities even after retirement.Answering questions such as the ones listed above can aid you in your calculations. Simply put,it is you who has to decide what will be your needs and how do you plan to cater them.
                             As mentioned,building a retirement corpus is a long term goal and your investments will vary from time to time.The earlier you start,the better it is.Just because you cannot save say 20000 a month for your retirement currently does not mean that you should neglect this financial goal altogether.You can start with small contribution towards your retirement corpus but remember to increase it from time to time just as your income grows and other financial goals are met.Lets dwell into some figures now: If you are 35 years old,your monthly expenses are around 50000, and if you want to maintain this level for 15 years after your retirement,you will have to invest about 29000 a month at an annualized return of 10%,considering inflation to grow at 6%.On the other hand,a 45 year old has to invest about 93000 a month to arrive at the same figure.Again if you are 25 years old,you will have to invest only 10000 a month to build the same corpus.Again if you are investing early,you can contribute a major portion of your investment in equity,say 70 %, and the remaining portion can be put in debt.Debt funds can be Employers provident fund(EPF), PPF. If you do not have a risk appetite,you can balance out your investment with a 50-50 share in equity and debt funds.Personally,i would suggest to start with a high % investment in equity and then reduce this over time as you near your retirement.
                           The next step is to ensure that you repay all you debt before you retire.If you have taken a home loan,try and settle the loan before you hang up your boots,even if it means paying a higher EMI.In case of insurance,try and buy these policies early since the older you get the higher is the premium you have to pay.When you retire,chances are that you won't have a regular source of income.So it is necessary to repay all the debt since these will gnaw into your savings.
                         The next step is to monitor your portfolio regularly;by regularly i don't mean every hour/day.Pardon me for my bad sense of humor,but i thought all this financial talk can put off a lot of people,although such bad jokes could already have.Sad jokes apart,start with a high % investment in equity,about 70-75%.Equity funds are the only investment options that comfortably beat inflation.Remember to choose the fund houses carefully.Be proactive in monitoring the performance of the fund and change it if its not performing as per the expectation.SIP investments in well performing Mutual funds is the best option for equity investments for someone not willing to jump into Stock market.About 5-7 years from your retirement,change your portfolio to have higher % investment in debt funds such as bank deposits.Continue to have 20-25 % investments in equity.
                        It is also necessary that one builds a contingency corpus.A medical emergency can be disastrous for someone who has not planned for it.Buy insurance plans early since buying them late requires you to pay very high premiums.Term plans can be very helpful in such situations.Insurance should also be bought for all the earning members and not just one.Also plan to have about 5-7 % of the total retirement corpus as a contingency fund that can be used for paying off medical bills.This investment should be in liquid funds so that it is readily available.
                      Lastly,if you have a house,the safest way for a regular source of income is to reverse mortgage it.Under this scheme,home owners above 60 years of age can convert their self owned home into income without having to sell it.The bank calculate the value of your house,and then issues a loan of about 60-70 % of the value.Parameters such as the life span of the owners also affect the loan amount.This amount can be a good source of income in case you do not have a retirement corpus in place.After you and your spouse die,the house is sold by the bank to recover the loan amount and the balance is given to the heirs.The heirs can also opt to buy the house from the bank.This scheme can be an option for all those who haven't built their retirement corpus and also do not have a regular source of income post retirement.
   
A systematic approach for building your retirement corpus is all that you need.
                
Cheers!!!!
                                   


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Why,When and How to question your housing society

In my previous two blogs,i listed out some factors that one should keep in mind while rummaging for your dream home and also if you are looking at real estate as an investment option.In this post i will present some information not many property owners are aware of.A lot of information in this post is presented from an excellent article published in Economic Times earlier.

                             Search Google for property owner grievances and you can easily come across thousands of posts as :
"We've been living in this building where a handful of people, including me and my husband, have been questioning the way this building is run, and it has not gone down with the management."

                           This made me wonder whether there is a provisioning in our law that empowers the owners to question the working of the housing society and then i came across this wonderful article in Economic times that gives you in and out of such information.As a member of a housing society,you have the right to know about its functioning and call it into question if you observe any irregularities.Let me start off by presenting a statistical fact: approximately 500 crores is collected by housing societies across the country in a month from their residents.The housing societies collect money from its residents as maintenance charges and thus it is  paramount to know whether these are used for your benefit.You should ensure that the office bearers do not indulge in corrupt practices
                             Apart from financial dealings,there may be a host of other factors that may crop up from time to time.Issues such as whether residents are allowed to keep pets,levying of unreasonable charges,unreasonable penalty charges,fraudulent practices in society elections;the list just keeps growing.As a member,you should be aware of your rights and should know which forum to approach in case of any violation.Not many people have the fortitude to challenge and pick up a fight with the office bearers.After all we are mango people in a banana republic,aren't we.A lot of people would prefer to pay a few extra bucks rather than be involved in all these hassles;a few irregularities here and there,who really cares.
                            Few people who garner the courage to take the fight against the corrupt management find themselves in an unequal battle.While the individual has to use up his personal resources,management has opulent resources at its disposal.Quite ironically these funds are raised directly or indirectly from the society residents.A bit of awareness and knowledge of your constitutional rights can be your Bramhastra in such a battle.All the documents pertaining to the working of the housing society come under the provisions of Right To Information Act.As a member you have the right to demand for such information as cheques issued/received,bank account statements,tenders,contracts,share certificates,investments and so on.You can also approach the RTI officer if the society management refuses to furnish any information that you ought to know.
                            The rules that govern the housing societies vary across different states.The activities are regulated through the respective Cooperative Societies Act and Cooperative Societies Rules administered by the Registrar of Cooperative Societies appointed by the Government.These Acts lay down the basis on how the housing societies must function.That being said,individual societies are free to adopt these laws in total or modify them as per requirement.Thus,there is a level of flexibility offered to housing societies.What is inflexible is that all these modifications must be submitted to the Registrar of Societies.The society must clearly mention when and how the annual general meeting will be held every year.Further these laws mention that the society elections must be held annually and must be a fair process.All the members of the societies have the right to vote and can also nominate themselves to be elected as the chairman.
                           There are also specific regulations laid out on how the society funds shall be used.For instance,funds for maintenance and repair should be used for any repair work or alterations that are needed and if there is no such need immediately,should be used to create a corpus that can aid in future.More importantly,the society's accounts must be subjected to audits by third party,Registrar and even by the members of society on demand.An auditor can be appointed by the society from a panel of certified auditors maintained by the Registrar.The auditor is required for record keeping,compliance of the Act,rules and bye-laws, and the profitability of the society.This should be included in the annual accounts of the society and should be shared with the members during the annual general meeting.
                           Now the million dollar question is that once you observe any irregularities,what can you do about it.A list of common complaints are : Issues with the maintenance of the society funds, unreasonable fines levied on some members,issues with utilization and investment of funds,collection of unjustified charges,misuse of common areas,structural changes by residents especially by influential office bearers without any approval,no annual meetings held,denying information when required by members,proper procedure not followed in general meetings and so on.The first point of contact is the housing society itself.When a member has a problem with another member,he can lodge his grievance with the managing society.There is also a prescribed time within which the society has to reply.If the member is unsatisfied with the response, he can then take up the matter with Registrar of Societies.If the matter is still not resolved,an individual can approach a cooperative court.A Civil court can be the last option one can consider,but taking a matter to a civil court can be both time and resource consuming.Other institutions such as a Municipal Corporation can also be approached if there is any issue with the structure or construction of the building or use of resources such as water supply.It may also be very beneficial if you can involve a number of other residents before approaching any of the above mentioned institutions.A larger group of residents with a common grievance can only strengthen your case.
                          To sum it up,i feel the RTI Act when exercised properly is a great tool if you want to ensure that your housing society is free from any form of corruption.Also many of the problems can be resolved in the incipient stage if addressed properly by the society.If not you always have other authorities that you can approach with all your grievances.A bit of awareness and mettle is all that you need.

Cheers!!!!


Images courtesy Google images.

Did you know - Factors that affect the value of your property

About a month back i had written my first blog on some tips that might come handy for all the people searching for their dream home.In this new post i will list out some factors that affect value of your property over a period of time and needs due consideration if one is looking at it from an investment point of view.A lot of statistical data is presented from an excellent articled published in Economic Times earlier.

 Let me start off with this quote:

 “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
-Franklin D Roosevelt

If you are buying a house to resell it after few years then it is imperative that you consider the factors that affect its appreciation over a period of time.As mentioned,a bit of common sense as well as caution can help you make a good fortune for yourself.

The first and foremost factor to consider is the location of your property.It is arguably the most important factor that determines how much the value of the property will appreciate over the time.A location in the heart of the city, near the working hub of the city or even near scenic beauties such as sea, lakes are known to command a higher value than the rest.People don't mind paying slightly higher rent if the flat is close to their workplace.In fact the exact location of the house within an area further affects its resale value.A sea facing flat in Mumbai suburb will definitely have a higher value than the non sea facing flats even in the same building.The same rule applies on the flats in large housing societies where a flat overlooking  amenities such as swimming pool or landscape garden demands for higher rent or resale value than a non-amenity facing flat.Further corner flats are preferential to some since the flat will have better ventilation that the rest of the flats.Thus,it can be seen that the location of your property is of utmost importance and must be considered sagaciously.

                  The next factor to consider after location is the connectivity.A flat in a location with good public transport is always popular among people looking for resale property or apartments on rent .Also,proximity to a railway station or an airport further adds value to your property.The thing to look out here is that it should not be too close to them since then the noise and other factors can be a deterrent for future buyers.A flat that has schools,colleges,multiplexes,restaurants,market areas,malls,hospitals in its vicinity is also bound to appreciate in value consistently.A good location combined with good connectivity is a great combination to have and is bound to attract a lot of people in the future as prospective buyers.

                  Another factor that comes to my mind is the Infrastructure in the nearby area.Any major  infrastructure projects scheduled to come up in the future can increase the value of all the nearby areas and  become a part of the USP for the developers and property owners.The point to note here is that you should always be aware on any major infrastructure developments in your city if you are looking to invest in real estate.Investing at the right time in a property can fetch you returns more than any other investment options.Buying in a location,from an investment point of view,that does not have much scope for infrastructure development  is not fruitful.On the other hand an upcoming retail chain,a large scale government or corporate house infrastructure project can surge the demand for property in the nearby areas and subsequently the property rates in those areas.

                  Further,quality of the building and the quality of the house affects the current value of your asset.Both of these complement one another.A poor state of the building can put off a lot of buyers even though the flat may be well maintained.Similarly even though the flat may be in a lavish society with state of the art amenities,it cannot attract buyers if it is not maintained.An occasional renovation or a revamp can not only help you with higher value and better price for your property,it further improves your negotiation power.If a buyer believes that he will have to spend money to overhaul the house,he will pitch a lower offer or keep looking for a ready to move in home.

                 There are other minor factors that may also come into play besides the ones mentioned above.In case of realty,size matters a lot.It may be difficult to find a lot of buyers if the size of the property is either extremely large or small.Usually 2-3 bedroom houses are the ones with the highest demand.If the flat is in a housing society with designated security,parking space,recreational facilities,you can expect to find a lot of takers for it.

                To sum it all up there are a lot of things that you have to consider if you are considering real estate as an investment option.All the factors mentioned above complement one another.A good location combined with good connectivity is the ideal combination you should be looking at,but then the question pops up as to how much can we expect such an investment to appreciate since it will command much higher investment in the first place.Thus it is more important to consider all the factors and determine which ones work for you.I will like to mention one such case that i read about in Economic Times:
"Anand purchased a property in Mumbai suburbs for a rate that was about 30% less than the prevailing market rate since the flat was overlooking a huge dumping ground and had very few takers.But soon the state government shifted the dumping ground and built a park at the site.Such a change led to a rise in the demand for properties in the area and of course a spike in the property rates."
              If you are from Mumbai, you might be aware that there is a significant difference in the property rates between Bandra East and Bandra West : Bandra West is known for its heritage structures and the famous Mount Mary church.Also a lot of properties overlook the sea in Bandra East.Similarly property rates  in areas such as Koregaon Park,Aundh ,Baner are much higher in Pune due to a number of factors mentioned above.
           I firmly believe in the quote "The best investment on the earth is earth".The real estate is an imperishable asset ever increasing in value.I have never heard of prices of property going down in an area,barring a few exceptions.It is probably the most solid security that human ingenuity has devised,the basis of all security and about the only indestructible security.A shrewd approach to investment in real estate can help you achieve all your financial goals.

Hope this helps all you guys out there.Cheers!!!


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