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Is it a good time to buy a home now?

Author: Col Sanjeev Govila (retd)/Monday, May 29, 2017/Categories: Ask the Finapolis

Is it a good time to buy a home now?

Q1. I have read reports which assign top marks to ICICI health insurance policy but would like your unbiased comment. I currently have a health insurance policy of National Insurance but the same is ranked very low in that report. Could you offer me some recommendations? 

- Ramesh Vyas, Mumbai

There are many parameters while choosing a good health insurance provider. The most prominent of these are – diseases covered, branch and hospital network, insurance cover, premium charged, claim settlement, loading, out-patient department cover, room rent cap, sub-limits/co-pay clauses, and other policy riders. Some of the above factors may be more important and others less important for you. Hence, while rankings help, it entirely depends on the parameters that fit you, the weightage given to each one of them in the overall ranking and whether it meets your requirements. The rankings may or may not be partially or fully in line with your requirements.

As far as ICICI Lombard’s health insurance is concerned, it is definitely a good insurer to go ahead with, provided your requirements are met. Hence, my suggestion is to take an insurance company, which has the kind of policy you wish to have, is affordable to you, has a good hospital network in your area where you reside and caters to the diseases that you wish to cover yourself against. The rankings provide a good starting point for your hunt for a good policy but cannot be the sole criteria for deciding it.

Q2. How much should my saving be to attain the following goals: Currently I am paying EMI of 26,500 and my personal expenses total 52,000 per month (including house expenses and travel)? My monthly salary is Rs 1,10,000. Could you also break-up the savings in terms of the following parameters?

1.     Education fund

2.     Marriage Fund

3.     Health Fund

4.     Travel Fund

5.     Retirement Fund

- Neenad Kadam, Mumbai

Answer: You have not stated your age and your child’s details. Hence, I am assuming that you are 32 years old, your child is 4 years old, you are likely to retire at 60 years of age and you are amenable to investing in mutual funds (equity and debt). Further, I’m assuming inflation at 7.5% per annum, approximately 12% annualised returns from equity funds in the long run and about 8.5% returns from debt funds.

If I give it out in figures, then you need to keep aside approximately Rs 11,500 per month for your child’s graduation, considering cost of graduation to be Rs 3,50,000 per annum for four years currently and assumingthat the costs grow at about 10% per year on a compounded basis. In this, you also have a very good option of increasing your mutual fund Systematic Investment Plan (SIP) amount at a rate of 5-10% every year. If you increase by 5% per annum, then you need to start with Rs 10,000 and if you increase by 10% then begin with Rs 7,500.

Similarly, for post graduation expenses, you need to invest per annum Rs 9,500 in SIPs. If this amount is increased at 5% per year, then Rs 8,000 per month needs to invested, while Rs 6,000 would be enough if you increase it by 10%.

For your child’s marriage, we may assume that Rs 15 lakh is required in today’s terms. You need to thus put Rs 17,500 in SIPs (or Rs 15,000 if you increaseby 5% per year or Rs 11,500 for a 10% increase per annum).

For travel expenses of Rs 50,000 per annum, you need to invest Rs 18,000 in SIPs (or Rs 17,000 considering a 5% increase and Rs 14,000 factoring in a 10% increase per annum).

For retirement, you need to keep aside Rs 38,000 per month. If your SIPs are increased at 5% per year, then Rs 30,600 are to be invested per month and if it is increased regularly at 10% per year, then Rs 18,500 in enough. Here I’ve assumed that you would wish to maintain your lifestyle even after retirement, i.e., expenditure equal to Rs 52,000 per month (in today’s terms).

As you can see above, everything requires a lot of money and you will have to prioritise your requirements, costs and savings pattern, while making sure that you have a reasonable life style currently too.

Q3. I am a self-employed senior citizen, with an income of up Rs 5-6 lakh. As I am not a salaried employee, I do not have the regular set of tax deductions such as HRA, LTA and provident fund. As to investments, I am a bit risk-averse. Could you kindly recommend some tax-saving-cum, risk-free investment options that reduce my tax outgo and create income for me?

—R. Sivaramakrishnan, Mumbai

Under Income Tax Section 80C, you can save up to Rs 1.5 lakh for tax concession. Considering your age and your comfort towards risk-taking, you have a few options:

1. Tax-saving FD: This is a five-year FD. The interest earned is taxable and TDS is deducted. Senior citizens are eligible for slightly higher returns. Different banks have different interest rates, which can be easily checked from the banks’ websites or through their customer care numbers.

2. National saving certificates: The money will be locked in for 5 years. The interest earned is deemed to be re-invested and TDS is applicable. The return is 7.9% per annum right now.

3. Senior Citizen Savings Scheme: This scheme is for senior citizens with a 5 year lock-in. The rate of interest is 8.4% per annum and you can invest maximum Rs 15 lakh in it at any time. Interest is paid on a quarterly basis and is taxable.

4. PPF: This is an option but we will not recommend this as it has a lock-in period of 15 years, which you may not prefer. It earns 7.9% currently. Subject to certain conditions, you can withdraw part of the money after 6 years and the interest is tax-free.

5. ELSS: Equity Linked savings schemes are tax-saving mutual funds (100% equity funds), investing in stock markets. Hence, they are subject to market risks. They have a lock-in period of 3 years but you may continue as long as you wish in it after lock-in. You can invest through monthly SIPs and the gains are all tax-free after lock-in.

In addition to IT Section 80C, you can also save tax on health check up costs (Rs 5,000 per year) and on medical insurance (Rs 25,000 per year for own family and additional Rs 30,000 per year for dependent parents) under Section 80D.

Q4. I have a query regarding investment made in my daughter's name. At her birth, my father-in-law had gifted her a national savings certificate (NSC), which has now matured. I would like to know what would be the tax treatment on the interest received

- Pravin S, Pune

Interest received from National Savings Certificate (NSC) is fully taxable. However, if you re-invest the accrued interest of a year back into the NSC taken by you, you get the benefit of deduction u/s 80C of Income Tax upto overall limit of Rs 1.50 lakhs. It will get counted under the heading of ‘Income from Other Sources’ while filing the Income Tax Return and as the amount is reinvested; credit can be taken for the reinvested amount by way of deduction u/s 80C.

However, in the last year of the NSC, deduction u/s 80C will not be available as there will be no reinvestment and interest for that year will be offered to tax. Interest of this last year for a minor’s NSC will be clubbed with the income of parents - mother or father – whosoever’s income is higher as per Section 64. Please remember that this 80C limit is the limit of the parent that is being considered.

For example, if you have made an investment of Rs. 20,000 in NSC and interest for following 5 Years is Rs 1580, Rs 1705, Rs 1839, Rs 1985 and Rs. 2141, all interest will be tax-free except for the last year’s interest (Rs 2141) as it will not be reinvested.

Q5. Is it a good time to invest in international funds; for e.g. the US or European Feeder Funds, wherein, in the current market scenario, developed markets are doing well?

- Sheetal Kubadia, Mumbai

Investing in international funds brings you the advantage of geographical diversification.  Hence, concentration risk arising due to ‘home bias’ gets diluted to a large extent. While other markets may offer better returns at various points of time, this may be the major criteria only if you understand those countries’ economic, social and political issues fairly comfortably. Investing in mutual funds to take exposure to other countries’ markets is, of course, a better recourse in terms of financial risk than attempting to invest in their direct equity.

Investing abroad has its own challenges. There would be currency risks which might come into the picture. If the foreign currency in which your fund is invested falls in value vis-a-vis the rupee, then your investment returns will suffer despite the gains your fund mayhave made in the markets there.Political instability will also increase the risk exposure. Also remember that international funds are taxed like domestic debt funds – hence, exit prematurely from such fund can have large tax implications.

Q6. I had taken a break in my career for four years, post which I want to restart my investments. It is critical, as I also have a home loan to service. Kindly provide some clarity on how I could build my investment portfolio on the following pointers. How much of total income should I set aside?

  • What should I opt for: insurance (LIC); mutual funds, direct equity, tax-free bonds?
  • Is it advisable to invest in equal amounts or a lump-sum at a time?
  • Which MF is good for small-time investors, offering good returns over 10-15 years?
  • Which is the best plan for retirement and kids’ education?

- Harshini Keshariya, Mumbai

Assuming that you are fairly young and somewhere at the beginning of your career, it is great that you have thought of investments early on in life. Generally speaking, you should save at least 30% of your gross income. The rest depends on your cash flows and lifestyle expenses. Regarding your queries, below are the replies:

Undoubtedly, you must opt for mutual funds as they are well diversified for both short-term and long-term requirements. Also, they provide a combination of safety, liquidity and returns. Insurance policies should never be considered as an investment avenue as combining insurance and investment will neither give you good insurance cover nor invest your money in a profitable manner. Insurance policies will generally generate poor returns. Direct equity requires a lot of analytical skills for fundamental and technical analysis to choose correct stocks at the right time, which only comes with experience. For tax-free bonds, liquidity is an issue. If you wish to avail the full benefits of tax-free bonds, you need to hold them till maturity otherwise they could be subject to price fluctuations.

Investing the amount in lump-sum or in lots depends on its availability. Obviously, if you have bulk money, you have to invest in bulk and if you don’t have it bulk funds, you have to choose the SIP route. If you’re investing in bulk in mutual funds, you have a great facility of using the systematic transfer plan (STP) route for equity investments.

There are a large number of good funds available. However, selection depends on your risk profile and asset allocation for which I recommend you to consult a good financial advisor. In general, for a time horizon of 10-15 years, equity funds would be most suitable, giving you very good tax-free returns, but then the portfolio choice will depend on what suits you.

For retirement savings, you can look at the National Pension Scheme (NPS) or at retirement plans offered by mutual funds. Using public provident fund (PPF) or employee provident fund (EPF/VPF) for saving for retirement would not be the best option for now. Both options have their pros and cons and your financial advisor would be able to guide you on a good choice.

For kids’ education, Mutual Funds would be the best alternative again. There are good schemes specifically meant for children, which have a very good track record. If the investment horizon for them is more than 5 years or so, take equity-oriented balanced schemes. Alternatively, even a good equity heavy portfolio specifically made for this purpose would also do the job.

Q7. With the government passing a new real estate law, and banks giving low home loan rates, is it a good time to buy a house now? Should I book a house individually, or go for a joint ownership? How much should I set aside before buying a home? My annual household income averages Rs 8-9 lakh. Kindly advise.

—    Vishal Sharma, Mumbai

There are number of changes coming homebuyers’ way which are in their favour. If you are planning to buy house for personal residential purposes, you should go ahead; one, because interest rates are at an all-time low and two, due to slump in real estate which is giving buyers the same houses at a lower price tag compared to just a few years back. You should go for joint holding with your spouse for the purpose of easy succession in case of any mishap as also to avail benefit of Rs 1.5 lakh under IT Sec 80C for both you and your spouse. Similarly, interest deduction is available upto Rs 2 lakh for both under Sec 24(b). Some states encourage women to own property individually or jointly by offering lower stamp duty rates. While you may have saved some bulk amount for this purpose, which will obviously be used up, if you have to take a loan, make sure that the EMI, in fact total of all EMIs if you already have more loans, should not go beyond 30-40% of your gross monthly income.

The expert is a Certified Financial Planner and a SEBI Registered Investment Advisor. He is CEO, Hum Fauji Initiatives.

 

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Col. Sanjeev Govila(Retd)
Col. Sanjeev Govila(Retd)

Col Sanjeev Govila (retd)

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