Tuesday, September 4, 2018

Do not fall for Instant Gratification. Be Money Wise

Instant Gratification
When it comes to personal finance people tend to close their
minds. Those who spend hours hunting down best deals and discounts
refrain to spend some quality analysis of financial products. Instant gratifications to acquire luxury products, creates a
sense of urgency among masses. They spend and sometimes People overspend beyond
their means. Driven by the deal, they ignore the rate of interest they pay.

Indeed, it is not evident that "Discounts are expensive". Deals and Discounts urge you to indulge in an expenses which you were not supposed be incurred at first place. The fear of missing out on irresistible offers make one fall into such a expense trap.    

Never listen to your voice of “I want it now”. Its not an inner voice; it is the marketeer who designed such a temptation which runs his business. You are supposed to do charity for businesses; ask yourself “Do I really
need it?”. As a consumer we are segmented and categorized based on our income groups and buying behaviors. In this information age and advent of social media (read marketing platforms) we are bombarded with hidden commands to buy or indulge in product and services.

Last week I accidentally did factory reset of my phone. I realize that I spent so much of my time on the apps which were installed on my mobile. With lesser number of apps in my mobile I find my days peaceful. I am not missing out on anything. What is necessary, it is reaching me what may be the case. I forgot to reinstall Whatsapp. Still I am alive and communicating with my near and dear ones. Those who want to reach you will reach you. Technology is just a medium. Technology has equipped these marketers to reach us with innovative ways as well. Market leaders are creating a big lies of the aspiration in their products and services. The challengers to the market leaders are in constant attempts to get our eyeballs rolling. They seek our attention, they want our money and they want you to promote their products as well.      

Be it online or offline; you must ask yourself "Can I manage for a couple of weeks, I don’t buy this now?"

Buy Assets Not Liabilities

Personal Finance Simplified by VittVishesh

Sunday, August 26, 2018

How to calculate EMI for a loan amount using PMT formula in MS Excel

Watch this youtube video to see screen recording of EMI calculation in MS Excel using PMT formula.

Banks calculate your loan EMIs through two most common methods; Reducing Balance Method and Fixed Balance Method. Reducing balance method is based on time value of money concept. Whereas Fixed balance method is based on simple interest formula.

Reducing balance method calculates interest value at the end of every period (read month). Interest value is calculated on the outstanding amount (principle) at the end of the period. EMI amount is higher than the calculated interest amount. the difference between EMI amount and calculated interest is the principle contribution (pay off) towards your loan.

After this EMI payment against the loan; outstanding balance will be reduced by the principle pay-off above

At the end of next period interest will be calculated on the new outstanding loan balance. Since, the new outstanding balance is a reduced amount, interest amount calculation will be lower. With EMI amount being constant the principle pay off will be higher than previous period's principle pay-off. The decrease in interest amount equals increase in principle pay-off.

Every subsequent period (read month) outstanding loan balance will reduce, resulting decrease in interest amount and increase in principle pay-off amount

Let us take following example to further understand Reducing balance concept:

Home Loan Amount: ₹50,00,000 (₹50 Lacs)
Interest Rate          :      9.00%
Tenure (Years)  :      20

Reducing balance period of this loan is month. Hence, EMI will be paid every month. Annual interest rate of loan is 9%. Hence, per month interest of loan is 0.75%. If this loan began at the start of FY2018-19 (April 2018) the interest calculated on the loan of 50 lac was 37 thousand 500 rupees; as shown in below image.

50 Lac * 0.0075 = 37,500

Suppose the subscriber to this loan decided to pay Rupees 40,000 towards EMI, his contribution towards the principle was Rupees 2,500. Hence outstanding balance after the EMI payment was Rupees 49,97,500.

Next month, his loan book will have calculation as below

As you can see above interest outgo is reduced by 18.75 rupees and principle contribution in loan pay-off is increased by 19 rupees. This happened due to of lower outstanding principle amount in May 2018. This way, every subsequent month outstanding principle of the loan is reduced as seen below

If we drag these calculations; we will come to know when outstanding principle will become negative. As we see below 371st month will be when the subscriber will pay his last EMI of Rs. 40,000 and he will offset this loan in 372nd month by paying off 2513 rupees as outstanding principle and 19 rupees as interest.  Thus, the loan started in April 2018 will be closed down after 31 years in March 2049.  

In this example we have a constant interest rate of 9% and steady timely paid EMIof Rs. 40,000. 

In above chart amount was considered as the constant based on which tenure was calculated. If we make tenure as the constant; lets say 20 years we will need a method to derive on the amount which will help us to get outstanding amount as 0 after 240th EMI of the loan.

PMT formula in excel can help you to get EMI amount calculated. PMT is short form of payment which helps to know how much be paid towards servicing a loan with constant payment and interest rate. PMT formula needs following values to calculate.   

Rate of Interest 
Number of periods (read month)
Present Value (loan amount) 
Future Value (Take 0 to for loan closure)
Type of EMI calculation (0 for payment done at end of month, 1 for begin of month)

Lets take above data as an example to calculate EMI amount.
Rate of Interest as 9% => Monthly Interest will be 0.75%
Number of periods = 240 for a 20 year loan
Present Value (loan amount) = 50 Lacs.
Future Value = 0
Type of EMI calculation (0 for payment done at end of month, 1 for begin of month)

EMI Amount calculated as

Above amount calculated as end of period payment. For begin of period payment the amount will be Rs. 44,651. One can save more every month if they tie up with their lender for a begin of period servicing towards his reducing balance method loan.

With this arrangement, the monthly loan book chart of the subscriber will look as below


and his 240th installment will completely service his loan.

Above description was related to reducing balance method loan. Fixed balance method loan has a different mechanism to calculate EMI. Home loans are calculated using reducing balance method, whereas car loans from private lenders in India are serviced through Fixed Balance Method mechanism. Watch the video in below link to understand the major difference in two mechanisms.


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Saturday, February 3, 2018

Mutual Funds Simplified - Categories, Types, Options, Plan and investment method

There are several types of mutual funds. This becomes very confusing for a new investor who is just introduced with the concept of mutual funds. With so many types, options and plans available for each category; the basket of mutual funds is quite broad.

Let us simplify Mutual Funds

Mutual Funds have two broad categories
1. Debt
2. Equity

Each category has multiple types
1. Types of Equity Funds-
     Large cap, mid cap, small cap, diversified

2. Types of Debt Funds
     Liquid fund, dynamic bond fund, Gilt fund, short term

Each fund type is available in following options
A. Growth Option
B. Dividend Option (it has payout and reinvestment variants.)

A mutual fund selected in combination of above three dimensions can be purchased through a distributor or directly from the mutual fund house commonly referred as Asset Management Company (AMC). They are referred as fund plans.

Regular Plan - purchased through a MF distributor
Direct Plan - purchased directly from AMC

Note: considering the significance of benefits of direct funds, some mutual fund distributors like Zerodha have started offering direct plans through their portals. 

A mutual fund selected by deciding on combination of above category, type, option and plan; can be invested through following investment methods:-

1. Lump Sum investment
2. Systematic Investment Plan (SIP)

Let us discuss Mutual Fund classifications in detail

Mutual fund category

Debt Fund

Debt funds are those funds which invest in money market instruments. Money market instruments include short term treasury bonds issued by central and state government, long term bonds by governments, corporate bonds issued by companies and short term lending to financial institutions. Interest rate fluctuations are observed in money market financial instruments, fund managers of debt mutual funds try to increase yield of their holding by trading on coupon rates.

Types of debt funds

Short term or liquid funds: investing in short term debt instruments. Because of short term fluctuations in interest rates are negligible. Interest rates of liquid funds are aligned with prevailing repo rates. They are most safe mutual fund type. 

Long Term Bond Funds:

Dynamic Bond Funds:

Update in progress... Do visit this space 

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Friday, February 2, 2018

Post budget correction in Nifty and Sensex is an opportunity to buy quality stocks at discounted price

Introduction of LTCG (long term capital gain) tax on equity holding may create a sense of panic for many investors, who already  have long term holdings in equity. Even though the stock price on 31st January 2018 will be considered as benchmark price; people will rush to book tax free profit before 31st March.

In fact, Nifty and Sensex each had a fall of 2.3% each due to profit booking. Sensex fell 840 points and ended the day at 35066. Nifty fell 256 points and ended the day on 10760. In anticipation for a good budget equity markets rallied to 11000+ levels on Nifty and 36,000+ levels on Sensex.

Today's correction in share market was long overdue. There had been a buoyancy in equity secondry market due to enhanced support from domestic institutional investors. DIIs have outperformed Foreign Institutional Investors (FIIs) in past year. Another shocking revelation by Finance Minister was that the equity market performance lead companies to park their surpluses in form of shares and mutual funds. 

Markets are highly priced at this point of time. In next two months investor will sell to minimize future tax liabilities.  This bring the market down at least by 10% from current levels. 10% is my conservative estimation. For a value investor like corrections in equity market is a reason to cheer. People feel elated whenever e-commerce companies offer crazy discounts. In the same way lower levels of NIFTY and SENSEX will offer crazy discounts on your favourite shared. 

As a value investor, we should have an accumulate list. Whenever there are dips in equity market you should have enough cash surplus to go shopping into your demat account. Warren Buffet says hia favourite holding time for his favourite stocks is 'forever'. Next two months will give you opportunity to buy stocks from your accumulate list. Discount brokers like Zerodha do not charge brokerage on share purchase. They only charge for intra day and future and options trading which is a nominal Rs. 20 per trade. Value investing through discount brokerage like Zerodha is brokerage free. 

As a value investor, we should not be crazy to accumulate products and services which everyone desires or can't live without. Rather we should be crazy to accumulate stocks of those companies which sell such products and services. Personally, if I will get access to invest directly in USA stock exchanges, my first pick will be Apple Inc followed by Google and Facebook. 

Dividends will be tax free as they are now upto 10 lakh rupees. If your portfolio generates 2% of average dividend yield you would need a portfolio of valuation above 5 Crores rupees to get a taxable dividend. 

Capital gains from equity upto 1 lakh rupees in a financial year will be tax free. Hence, smaller value investors will still have tax exempt LTCG. 

Hence, we can summarize this post to conclude that LTCG tax on equity should not derail your plans to build wealth through equity. You can value invest with serenity, courage and wisdom.

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