Make The Most of The Lower Housing Interest Rates

The New Year kicked off on a happy note for home loan borrowers with State Bank of India slashing its lending rate. The bank has cut the marginal cost of funds based lending rate (MCLR) by 0.9% from 8.90% to 8%. As more lenders are likely to follow the suit, here is a quick recapitulation for borrowers who want to make the most of the lower housing interest rates. 

Loans with Banks - Post April 1, 2016, Banks have been asked by the Reserve Bank of India to change from base rate to MCLR. This means that all the new floating rate bank loans disbursed after March 31, 2016, are automatically covered under MCLR. Those who have taken loan before this deadline have the option to either switch to MCLR or continue with the base rate. Since MCLR is a more transparent rating system, therefore, it is advisable to switch to the same. 

Loans with NBFCs or HFCs -MCLR is not applicable for Non-banking financial companies (NBFCs) and Housing Finance Companies (HFCs). These lenders follow a static Retail Prime Lending Rate or base rate and a variable spread to fix applicable interest rate. Home loan borrowers can convert to lower housing interest rates by paying a conversion fee that varies across lenders. On the higher end, the fee can go up to 1% of the outstanding principal amount. 

Cost vs Savings - Before executing the switch or conversion, analyse the costs against savings that you make from reduced interest rate. If the conversion fee is higher than the overall savings on interest outgo then it makes little sense to switch. At the same time, if you are in the final years of repaying your home loan then switching to will negligible impact. This is due to the fact that significant part of interest rate stands paid within the initial loan tenure. 

Here’s a table to illustrate optimal scenarios when switching to lower rates makes sense.  

Home Loan Amount	Existing Interest Rate	Current EMI	New Interest Rate	New EMI	Yearly Savings	Conversion Fee	Case For Switch
30 Lakh	10%	₹ 28,950	9.10%	₹ 27,185	₹ 21,180	₹ 15000	Yes
30 Lakh	9.75%	₹ 28,455	9.10%	₹ 27,185	₹ 15,240	₹ 15000	No
30 Lakh	9.50%	₹ 27,963	9.10%	₹ 27,185	₹ 9,336	₹ 15000	No
30 Lakh	9%	₹ 27,476	9.10%	₹ 27,185	₹ 3,492	₹ 15000	No

Home Loan Balance Transfer - Inconclusive negotiations with existing lenders can be fixed by balance transferring the loan to the new lender. However, the process will be mean starting fresh right from the beginning. Also, this option is best suited for loans that have a residual tenure of 8-10 years. Again analysis of cost vis-a-vis savings needs to be taken care. There has to be a significant gap like 75bps or more to consider this option. 

Home loan accounts for the biggest monthly expenditure of Indian households. A systematic adoption of the above-mentioned steps along with planned prepayments can help you speed up the debt repayment process.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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How Credit Utilisation Ratio Impacts Your Credit Score?

Holding a credit card has much more significance than just being a means of payment. Your credit card transactions and its usage directly impacts your credit utilisation ratio. Before delving deeper into the subject, it's critical to understand - “What is credit utilisation ratio?” 

In simple words, credit utilisation ratio is the sum of outstanding balances of your credit cards divided by the total outstanding of all your credit cards. This means that if your credit card limit is Rs. 1,00,000, which has an outstanding balance of Rs 40,000 then your credit utilisation ratio is 40%. 

Why Credit Utilisation Ratio Matters?

Credit utilisation ratio constitutes 30% of the CIBIL score report, which explains its significance in deciding your credit profile by lenders and financial institutions. High credit utilisation ratio for an extended number of months is a red flag to lenders and can hurt you're borrowing abilities. Even timely monthly payments fail to justify the high credit usage against a credit card and continues to dampen one’s credit score. According to set guidelines, a credit utilisation ratio of 30% and less is seen as an optimum percentage to keep. 

After knowing the threshold, it is only natural to ponder on ways to keep it in line with the number, particularly during those times when credit card spends could surge due to sudden expenses. Here are some handful of ideas that will help you to manage your credit card spending in the best possible way. 

1) Splitting up expenses across multiple credit cards - Plan your expenses wisely to balance the amount across credit cards. It should not happen that one credit card is over utilised while the other remains under utilised. Credit utilisation ratio is calculated both collectively and separately on each of the credit cards. Therefore, if two credit cards have a credit limit of Rs 50,000 each and a total of Rs 25,000 is spent on both cards, then the ratio is well within the limit of 25%. 

2) Making part payments - If splitting up expenses does not lower the credit utilisation ratio then consider making part payments before the billing cycle ends. Part payments will immediately reduce the outstanding balance, which will bring down the ratio as well. However, this will also reduce the free credit period that you are entitled to. 

3) Increasing credit limit - If the above two methods fail to work, then boosting credit card limit could be another way to handle increased credit utilisation ratio. Remember that it will be difficult to get another credit card as high credit utilisation ratio may not make a case for issue of a new credit card. In such a scenario, it will be prudent to ask for an increased limit on one of the credit cards against a valid reason. 

Meanwhile, take time to learn you're monthly spending patterns and cut back on those expenses that  seem to be avoidable. Further, consider dividing expenses among credit and debit cards to lessen the credit score hassle. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Transferring Home Loan? Be Ready For These Hiccups

Any hint of a drop in interest rates prompts home loan borrowers to review their existing debt and transfer it to another lender in a bid to reduce interest outgo on loan. However, the entire process is not at easy as it sounds due to the amount of paperwork and time involved in transferring an existing loan to a new lender. In fact, transferring the loan from one lender to another implies going through the same formalities as applying for a new home loan. 

It is recommended that borrowers should first try to negotiate with their existing lenders to bring the interest rates down in line with the offered rates for new borrowers. But, if there is no point in negotiating then be prepared to transfer it to a new lender. This requires one to be careful of few hurdles that can hit them along the process. 

1. Responsibility of submitting originals lies with borrower - An existing lender will be reluctant to hand over the original property documents to the new lender and rather assigns this responsibility to borrower. It will be the onus of the borrower to collect originals and submit it to the new lender to complete the disbursement.
2. Fee for reduced rates - Few lenders charge a fee to reduce rates on an existing loan and it is best to avoid such lenders for continuing your home loan. In such a scenario, switching lender is the only alternative. 
3. Foreclosure letter skips basic details - A ‘foreclosure letter’ is issued by an existing lender, specifying the amount required to foreclose the loan. However, many times, banks release foreclosure letters that are not clear in terms of interest applicable per day, thereby, delaying the process itself. Also, a foreclosure letter should not be time-bound, i.e., it should not give a time-frame of foreclosing the loan. Borrowers should carefully take note of these points before proceeding to transfer their loan to a new lender. 
4. Letter of confirmation for originals - A lender is obligated to provide a letter of confirmation to the borrower for the original title documents that it holds against a loan. Several new buyers, being unaware of the process, miss to collect this letter in the beginning, which could turn out to be a major roadblock later. 
5. Careless approach - An existing lender can become extremely careless when it comes to co-ordinating the loan transfer process as it translates into a loss of business for them. Therefore, a borrower should actively participate in carrying out the transfer formalities himself in order to save much of the time.  

To avoid these hurdles, it is only prudent for an investor to be clear with the requirement and formalities of transferring a home loan. Better to get a written advice from both current and new lender on their own requirements to steer clear of any verbal confusions later. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Five Mutual Fund Myths That You Should Overcome

Mutual funds, despite a well-regulated way of investing, continues to be engulfed with several myths. It is these misconceptions that prevent potential investors from investing in this asset class. 

Here are some of the common mutual fund myths listed out to empower investor fraternity in overcoming them. 

Image Source - Ognian Mladenov via Flickr 

Myth 1 - Meant for big surpluses

Many individuals believe that investing smaller sums into mutual funds is futile unless they have a sizeable surplus to spare. However, this notion is downright misplaced because mutual funds work as effectively for smaller sums as they do for larger sums. In fact, postponing investments might mean eroding the true value of investment surplus itself. 

Let’s understand, how delaying investments can hurt return potential.

Investment Amount Per Month	Postponing 1 Yr	Postponing 3 Yrs	Postponing 5 Yrs
INR 500	₹ 6,323.64	₹ 21,341.56	₹ 40,185.05
INR 1000	₹ 12,647.29	₹ 42,683.12	₹ 80,370.10
INR 2000	₹ 25,294.57	₹ 85,366.23	₹ 1,60,740.20
INR 5000	₹ 63,236.43	₹ 2,13,415.58	₹ 4,01,850.51

Myth 2 - Expertise 

Investors shy away from mutual funds due to lack of expertise or knowledge about mutual fund offerings. Questions like ‘What if I have chosen a wrong scheme’ or ‘If I will lose money’ limit their exposure to mutual funds. The only way to deal with this myth is to seek advice from a qualified adviser and ask more questions to steer away from doubts. 

Myth 3 - Ratings are the best tool to judge performance

Ratings or rankings of a fund do provide information on a scheme’s historic performance but it does not guarantee sustainability of performance. A top-ranked fund could drop to the bottom if there is a change in fund manager, portfolio holdings or any other key aspect directly related to its performance. Ratings should not form the sole basis of choosing an investment but other factors such as investment goal, fund manager, risk, expense ratio, etc. should also be evaluated.

Myth 4 -SIPs are always better than lump sum

Drive to channelise even smallest of investments into mutual funds through SIP gradually led to a myth that SIPs are superior to lump sum. However, it is not the case always and there are several pros and cons of both modes of investment. SIP investment are susceptible to market losses like lump sum investments, perhaps in a less volatile way. But, this fact alone should not render lump sum as an unworthy mode of investment. Scenarios, where lump sum can be appropriate over SIP, has already been discussed in our previous blog. 

Myth 5 - Mutual Funds are only equity-oriented

It is not uncommon that investors interpret mutual funds synonymous to equity investments. This is the reason why those who have burnt their hands in stocks prefer to stay away from mutual funds as well. However, this is not true as mutual funds offer various schemes including debt and liquid schemes. Mutual funds serve not only as an alternative to equity stocks but also to fixed deposits, savings account and gold. 

If you have been gripped by any of these mutual fund myths then its time to break away from it and start investing.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Shift From Cash To Cashless Transactions With E-Wallets

As cash-driven economy finds itself crippled in the aftermath of demonetisation, it is the digital savvy citizens that continue to attend to their daily chores without spending time standing in serpentine queues outside ATMs and banks. 

While many of the millennials had started shifting to digital transactions already, the demonetisation is expected to speed-up the process. As per the Boston Consulting Group (BCG) report, digital transactions in India surged by 50% per year in 2013, where bill payments and mobile plans occupied the highest share. However, the recent step to discourage cash hoarding will see many Indians transitioning to digitalised economy in many ways. 

Digital Age Solutions

Internet banking, debit and credit cards continue to be a common mode of completing transactions, e-wallet services are growing as another alternative. Now, most of the payment gateways accept e-wallet as a mode of accepting payments. At the same time, a range of services are covered under the e-wallet payments such as mobile bills, insurance premiums, taxi services, grocery bills, etc. 

How e-wallet functions?

A user has to load money into e-wallet in advance to use it later for making various payments. Unlike other payment modes, e-wallet does away with the need of sharing bank details every time you do a transaction as money directly gets deducted from the pre-loaded amount. 

Even payments to offline merchants, who support e-wallet, can be made by scanning the QR code through the phone’s app. In these transactions, you have to enter only the payment amount and the transaction is done in a jiffy. 

How secure are e-wallets?

E-wallets are embedded with an additional security layer as payments made through it does not require sharing of bank or card details with merchants. In this way, you have no worries about losing your bank or credit/debit card details to anybody. 

How to create an e-wallet? 

To access e-wallet services, you can either download the app or visit the service provider’s website, where you can register using your email ID and mobile number. Before start using your e-wallet, you will need to enter your debit, credit or net banking details to fund your e-wallet account. 

There are several third-party e-wallets available in India whereas few banks have also launched similar services. You will need to check the tie-ups of various businesses with an e-wallet service provider to choose best-suited one for yourself.

How e-wallet is beneficial?

An e-wallet not only lets you pay for various services but it also allows you to transfer fund to family and friends by just keying in their phone numbers. You can request money in a similar way too. 

Secondly, e-wallets offer discounts as well as cash backs on certain transactions that automatically gets credited to your e-wallet account, which is a big plus.

Lastly, e-wallets also help you to keep track on your spending irrespective of the size of the spending amount, which otherwise remains unnoticed in cash transactions. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Decoding Demonetisation Impact On Key Asset Classes

Over the last one week, ‘Demonetisation’ has suddenly become the most used word in India. Everyone, right from day labourers to celebrities are not shying away from analysing the impact of this phenomenon as per their own understanding. Everyone has a say on the subject, which in itself, proves the widespread impact of this drive on the general public. 

Before moving ahead on the outcome of demonetisation exercise on various financial assets, it will be relevant to know what exactly is demonetisation. 

“Demonetisation is withdrawal of currency as an official mode of payment.”

Although demonetisation could disproportionately affect the various income groups of India in many ways, the recent one was mainly targeted at unaccounted cash holders. Also, the move was to disrupt fake currency circulation by terror groups. 

Let's take a brief look at the impact of demonetisation across key asset classes. 

1. Equity Market - Demonetisation could have eroded the optimism from equity markets on short-term, but it may not hurt equities over long-run as the market digests the uncertainty triggered by the move. However, some of the sectors are likely to underperform, given their dependency on the unorganised economy. Despite this, the move should not at all deter long-term equity investors, who might come across several buying opportunities in the coming days and months. 
2. Real Estate - Real estate sector, which is notoriously known for high-value cash transactions and involvement of black money in tier II and III cities, is certainly going to take a hit, following the Demonetisation move. This asset class might see a steep correction as many of the investors, who would have planned to reap profits by investing unaccounted cash, would withdraw from the system. However, projects undertaken in Metro cities are not likely to face the heat as this fragment has already shifted to the organized system long back.  The liquidity crunch might haunt the sector for a while, but transparency in the sector is apparent that will benefit legitimate investors in future.Over and above, expected drop in home loan rates following demonetisation is also seen positive for the sector. 
3. Debt Market - The return potential and attractiveness of debt market has only improved following the demonetisation move. Inflation is likely to ease, which will provide room for the Reserve Bank of India to cut policy rates, thereby, leading to higher bond prices. Under the present scenario, debt investors might benefit the most from several positive aspects that come into play for this asset class alongside rate cuts. 
4. Gold - The asset class made the most of the Demonetisation move and is likely to retain its glitter in the upcoming days. The sudden abandoning of high-denomination currency by the government has once again reinforced the public’s faith in the yellow metal. Gold will continue to be among the most preferred investments for Indians, who await more bold steps from the Government during its tenure. 

In a gist, the cessation of currency will have only little impact on digital-savvy investors and they can continue to move ahead with their planning as usual, unfazed by the recent chain of events. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Why Nominations Are Must In Any Financial Transaction?

While most of the financial institutions have made it mandatory for investors to fill in the nomination details, yet it has been the most ignored aspect of investment than anything else. The urge to complete documentation and proceed with investments force investors to simply ignore the need and basic requirement of nomination. 

At the same time, people continue to nominate same person for years without considering the life changes that one goes through such as marriage, becoming a parent or death of existing nominee. Despite being a powerful tool to help transfer of assets, it is seldom used by anyone. 

Understanding Nomination

Nomination is a process of authorizing a person as a nominee by the owner or prime holder of the asset. This authorization is meant to ensure that the asset is duly received by the nominee in the event of the death of the owner or holder of the asset. A nomination simplifies the claim process for the authorized person in case of an unfortunate event caused to the owner. In absence of these details, a legal heir is required to complete lengthy legal formalities even if he/she is the rightful claimant of the wealth. Thus, nomination is the best mode to keep things simple throughout the investment tenure. 

Function of Nomination

It should be noted that a nominee does not necessarily become the owner of the asset. Rather nomination empowers nominee to receive funds from financial institutions or banks as a trustee, after which, a will or Indian Succession Act, decides the lawful distribution of those assets. 

At times huge sums of money remain unclaimed due to the absence of nomination or unawareness of legal heirs about the whereabouts of investments by the deceased owner. This can be understood from the glaring unclaimed amount of Rs 4,426.72 crore as on December 31, 2015, with Life Insurance Corporation of India (LIC) that in itself should be an eyeopener. 

Nomination Does Not Supersede Will

It is important to underline that nomination only facilitates transfer of asset, whereas Will takes precedence over nomination during distribution of assets. Let’s understand the functioning of will and nomination using this example. 

• Case A - Raj nominated his brother Rajeev to receive all of his mutual fund holdings in case of his death. However, Raj also made a Will, where he clearly stated that all of his mutual fund holdings should be distributed equally among his children and wife. In this case, Rajeev will only have the right to receive mutual fund proceeds, which is required to be distributed in accordance with Will. 

• Case B - Raj nominated Rajeev and died without leaving a will. Now, in this case, the assets will be distributed in accordance with the Indian Succession Act. However, if there are no legal heirs of Raj then Rajeev will qualify to retain the assets with himself. 

There is an exception to the rule that nominee under shares and debentures gets the entitlement to the assets, unlike other financial assets. 

Final Takeaway

After knowing the above points, the importance of having a nominee is well understood. After all, it is better to enable legal heirs to have rightful ownership of assets rather than leaving them into years of struggle to claim the same. Lastly, do not forget to review and update nominations wherever required to match it with changed life circumstances, if any. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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