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It makes sense for HNIs to have home loans

It makes sense for HNIs to have home loans
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First Published: Mon, Apr 04 2011. 12 00 AM IST

Investment talk: Manisha Natarajan (left) and Monika Halan hosting the Let’s Talk Money; Photo : Ankit Agrawal/Mint
Investment talk: Manisha Natarajan (left) and Monika Halan hosting the Let’s Talk Money; Photo : Ankit Agrawal/Mint
Updated: Mon, Apr 04 2011. 12 01 AM IST
Mint, along with the Hindustan Times and NDTV, brings you a personal finance show called Let’s Talk Money. The weekly call-in show, anchored by Monika Halan, editor, Mint Money, and Manisha Natarajan, editor and senior anchor, special programmes, NDTV, aims to answer viewers’ questions about money-linked issues. This is an edited transcript of the show that was aired over the weekend on NDTV Profit and NDTV 24x7.
Natarajan: Let’s welcome... our first guests:
Kush Kochgaway, 36, software engineer, New Delhi
How much of term insurance should I have so that my family is secure if something happens to me?... (What should be my) strategy to do away with liabilities like home loans?
Investment talk: Manisha Natarajan (left) and Monika Halan hosting the Let’s Talk Money; Photo : Ankit Agrawal/Mint
Halan: ...We will deal with this life insurance question first. It may make sense for you to buy two policies—Rs75 lakh to replace if you were to change jobs and Rs50 lakh to cover the loan, so at some point loan gets over and you prepay it, your asset build up which should be enough, you don’t need some life insurance. So buy two policies, Rs75 lakh and Rs50 lakh . Your option in terms of whether you should prepay your loan or not, for people like you, me and Manisha like the loan component. It gives you a tax break and also in times of high inflation, the purchasing power of every rupee you pay back is going down every year, even if you are on a base rate. So after 20 years, Rs100 you pay back will be Rs50, so it makes a lot of sense for HNIs (high networth individuals) to have loans. So leverage your money... He has got a very good stock portfolio; again, for people like you we will not recommend funds and if you want to prepay your loan, then you can milk your portfolio and then prepay in bits. But I think you should just continue with the loan.
Natarajan: There is no point in prepaying the loan. You are getting it at a very reasonable rate, and looking at the inflation as of date, you are in sort of a negative real interest rate scenario. I did take a look at your stock portfolio. I know you don’t ask for any recommendations.
There are two very good stocks and winners actually; there are two dull stocks in your portfolio. It’s a large cap portfolio so NHPC and Jai Prakash Associates, they are going to be very long stories...
So if you are planning to wait out, there is a opportunity cost in waiting for the stocks, which are not moving. Another thing... is that your stock portfolio is all large cap. So you do have a little bit in mutual funds and if you are looking still a bit more in mutual funds then I would say that go for an aggressive mid-cap to small-cap fund.
Then you would be able to balance your large cap stock portfolio. Individual stocks with a small mid-cap aggressive mutual fund let the fund manager do the hard work, and you can rest assured that the money will grow.
Asher Wesley, 23, software engineer, Coimbatore
I have recently bought a property for Rs13 lakh through loan. I have to pay an EMI (equated monthly instalment) of Rs15,000. I have leased my property for Rs5 lakh for a period of two years. Please let me know how to maximize my returns per month in such a way that I can pay the EMI by investing the Rs5 lakh. Keep in mind that I have to repay the amount to the tenant after two years.
Natarajan: Your capital of Rs5 lakh is too low to look at a monthly return product. The monthly yields even in a monthly income plan mutual fund will be not more than 6%, or Rs2,500 a month. To try and match your returns from the Rs5 lakh corpus to your EMI of Rs15,000 a month is unrealistic... If you want to protect your capital with zero risk... your choice for a two-year investment is limited to a bank FD (fixed deposit). A little more risky, but with more effective post-tax returns are FMPs, or fixed maturity plans, from fund houses, which get floated from time to time. Problem is you and I as retail investor have very little information on when these FMPs hit the market. Sometimes, they open and close on the same day.
Halan: ...These unrealistic expectations will lead you to investments which are very risky. If it would have been possible, everybody must be doing it.
Natarajan: If you’re willing to take a little bit more risk for higher gains, I would recommend a dynamic plan from a mutual fund. The fund manager shifts money between debt and equity gauging the markets and interest rate environment... You could get pretty smart returns from a dynamic fund...and in this category, Franklin Templeton Dynamic PE Fund is what you could look at. Its annualized three-year returns have been 11% and it’s definitely way more tax efficient than a fixed deposit. I think it’s worth taking that risk, it will give post-tax returns 3-4% higher than the FDs.
Amrit Kumar, 59, retired, Calicut, Kerala
Should I block funds so that I make the interest/income sufficient for my regular expenses, or should I invest the major portions in long-term income/capital appreciation investments and keep aside, say, a lump sum for meeting the regular expenses?... We have substantial cash deposits, great portions in bank deposits. Another question is related to insurance. I am close to 60 and my wife 55. We have little or no insurance for medical expenses. Is there any insurance we can get at this stage?
Halan: Your mother is there, she lives in her own house, and children are all now grown up. So Amrit, the corpus that you have got fairly covers you. You have more than enough money coming in, good news is that you are very well funded for your retirement... the only problem is structuring of money. I think it’s just lying in the savings deposit when the interest comes. If you choose carefully, senior citizen savings scheme, FDs for senior citizens are giving excellent returns, you will get around Rs60,000 per month. Your expenses are not too many and you will get rental income also. You need Rs20,000 from that Rs60,000, you have Rs40,000 surplus. Keep another Rs10,000 for emergency, with Rs30,000 start an SIP (systematic investment plan) into balanced funds. You can go on doing this for three-four years, when you think that inflation is biting your money, then you can decrease your SIP from Rs30,000 to Rs20,000 and when you think that your entire interest rate is getting soaked up by your expenses then you can start milking your mutual fund portfolio. You must get medical cover for you and your wife. It will not be cheap: you will be ready to pay around Rs25,000 a year. It will cover both of you...
Natarajan: Absolutely, balanced funds and monthly income plans is what I recommend for him. Among balanced funds, HDFC Balanced/ Prudence/Reliance Regular Savings Balanced/Tata Balanced...
letstalkmoney@livemint.com
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First Published: Mon, Apr 04 2011. 12 00 AM IST