Do you need personal loans?

Note: This article is meant for people with a steady source of regular income and a salaried bank account. Also the person is able to save more than 20-30% of his salary.

The top five reasons why Indians take a personal loan are:

  1. Medical emergency,
  2. Travel,
  3. Wedding,
  4. Investment (esp. stock market and speculative property investments),
  5. Helping a relatives and family.

And debt consolidation: Some people also use it to refinance their Credit Card dues or loans from informal sources. But in that case, one would realize sooner if not later that it was an expensive decision.

Most personal loans have 3 clauses –

  1. A regular EMI for the entire duration of the loan 6-24 months
  2. Processing fee from 2-4%
  3. Restrictions on prepayment. I.e. one cannot prepay in the first 3-6 months and not more than 50% of the loan balance outstanding in one payment.

These Terms and conditions often don’t match with the optimal debt repayment schedule for the individual. Hence given a choice, I always discourage people from taking a personal loan.


1. Bank overdraft: This is the easiest and the cheapest option for short term credit. If you have a salaried account, then just ask your bank and they would be more than willing to give you a generous 1-2L line of credit which you can repay at ease. Charges like account opening charges, commitment fee (0.25-0.5% of the line of credit) may look like a lot, but due to flexibility in repayment, the overall interest expense is much lower.

2. Credit Card: If you search the archives of enagar, you will find reference to an older article which tells you how one can draw money equal to the credit limit (which is higher than the cash limit) for 50 days at a cost of 3% (paid upfront) and 1.8% for subsequent months.

3. CrowdSourcing: Why do to an institution in the first place. Go online, dial a friend and fund yourself. P2P loans are cheaper, faster and simpler than most bank loans.

How to prevent pre-payment penalty on home loans

Most home loans in India have a covenant that restricts the number of times a person can make a pre-payment (usually 4 times a year) and the minimum amount. Also some of the banks charge a prepayment penalty. However if you read the fine print, most banks are relatively more flexible when it comes to changing the EMI (Equated Monthly Installment) amount.

Using this loophole, one can minimize the pre-payment penalty/charges by calling the bank one month to increase the EMI and revert it back to the old levels next month. Chances are that you would be able to stretch a little and continue paying that higher EMI for a few extra months. Hence reducing your interest expenses.

When it comes to debt, don’t ignore any processing charges, penalties or fines. It might put you in a debt trap.
For example
A 1M (10Lakh) INR loan for 15 years period at 8.75% has an EMI of 9,800/-

If you prepay 1EMI (9,800 on the first day), it will save you from paying about 3.5 EMIs 15 years later which is a net saving on 24,500/- in interest expense alone.
Please note that this calculation assumes that you would continue to pay the same EMI even though now your loan outstanding is (10Lakhs – 9,800/-)


Diwali night

I am a big fan of diwali. This diwali I invited about a 100 persons from 12 different countries to celebrate diwali. However what really amazed me is that while I could throw such a lavish dinner and enjoy the festivities, my friends at IIM-L could not. They have to write an exam on the next day and what is worse is that this exam is on the morning of a Sunday.

I agree when we sign up for a course at IIM, we practically write off all our vacations and free time. However keeping an exam on a Sunday morning is like being sadist. Who will teach our professors the meaning of “All work and no play makes Jack a dull boy”

Personal Financial Planning

A friend asked me yesterday how one should plan his/her finances. At what stage in life where should the money go and how best to plan my taxes.

After spending a couple of hours listening to his idea, this is what we came up with:
1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff……. 🙂
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?

Study Loan Subsidy

Yesterday GoI came up with a foolhardy 4000 CR (1 billion USD) scheme of subsidizing the interest on the study loans for all Indian students.

GoI has been recently collecting educational cess on all the taxes and financial transactions. This was a welcome move, because in a country where half a billion souls have never attended schools/colleges now the Human Resources Ministry has almost infinite funds to educate the masses. Or this is what I had thought.

All the tolls collected via cess went directly to the center. While Primary education was funded by state government and panchayat/local administration (Madhya Pradesh) So in reality, although a huge war-chest was build, the spending on education hardly increased over the past 3 years.

Another problem faced by the HRD ministry was that budget was to be presented in a few months. Traditionally, any department that does not spend the funds it had been sanctioned in the previous budget is penalized in three ways:
1)It has to answer why it had not been able to plan and execute efficiently
2)The funds are taken away from it
3)In the next year, the department will get lesser funds.

I have a feeling that this scheme is nothing more than a plot to squander away our taxes.

If government wants to do something for an “All Inclusive Growth”, then open a thousand primary schools, open vocational and technical schools. The higher education is already very subsidized (a engineering graduate’s first year salary would be more than adequate to cover for his entire educational expenses).

Also if you look at the fine print, it covers only the undergraduate/post graduate study loan taken from Nationalized Banks. Now if Government wants to help the poor but deserving students, then isn’t providing a scholarship/full tuition waiver a better way to help them. After all its general knowledge that students work harder and perform better when they get study grants, for these students need to display good academic achievements for continuance of the grants.

In short there is nothing new or significant in the scheme.


Do Big Alma Maters Matter?

This article in CNN describes some of the statistics about the correlation between good schools and colleges and entrepreneurship. It also tries to do some explanation

When it comes to success in the technology arena, entrepreneurs’ choice of schools isn’t nearly as important as what they study, and for how long.

That’s the down-to-earth conclusion of a report released in June by the Kauffman Foundation. Founding a tech company doesn’t require an elite university degree, whether it’s in the U.S. or anywhere else.

The study bases its findings on interviews with 144 Indian, Chinese, and Taiwanese immigrant company founders culled from surveys of 1,572 companies in 11 tech centers across the country.

“It doesn’t matter which university you get your degree at,” said Vivek Wadhwa, the study’s lead author. “What matters is the level and the field of education.”

The survey found that more than half of foreign-born entrepreneurs came to the U.S. solely for an education. Close to 40% came for work. Fewer than 2% came with the express purpose of starting a company.

Immigrant founders of U.S. tech and engineering companies are highly educated in what educators call the STEM subjects — science, technology, engineering and mathematics.

That was expected, says Wadhwa, a former entrepreneur who is Executive in Residence at Duke University’s Pratt School of Engineering.

Almost all immigrant founders in the study — 96% — had bachelor’s degrees. Forty-seven percent had master’s degrees, and close to 27% had doctorates.

Of those degrees, 75% were in STEM areas. Engineering accounted for 44% of the degrees.

Over half of the immigrant founders — 53% — earned their highest degrees from U.S. universities. But no top-tier university in the U.S. or abroad got particular credit for producing tech entrepreneurs.

That was a surprise, Wadhwa says. It’s good news for less prestigious schools and the students who attend them.

“From the U.S. perspective, M.I.T and Stanford didn’t have any advantage in developing successful entrepreneurs over some small university in the Midwest,” said Wadhwa.

The situation is similar in India, where tech success is practically synonymous with the subcontinent’s seven famed India Institutes of Technology. But the research shows that the IITs graduated only 15% of the Indian tech company founders.

“IITs aren’t what we feared,” Wadhwa said.

Institutions ranked below the IITs are exulting at the news, which got wide coverage in the Indian press, he says. Researchers at Duke and the University of California, Berkeley, conducted the study.

It follows a January report showing over a quarter of U.S. tech and engineering companies started between 1995 and 2005 had at least one foreign-born founder.

That a top-tier university education isn’t necessary for success shouldn’t be surprising, says Arthur Schwartz, deputy executive director of the 50,000-member National Society of Professional Engineers.

“It is absolutely the kind of education that the individual receives rather than the institution that provides it,” he said.

Education in certain fields are often a tried-and-true path to success, Schwartz says.

“Historically science, technology, engineering and mathematics have been social levelers for getting ahead for all groups,” he said.

Those looking at the tech professions from the outside in also agree that a particular university pedigree isn’t everything.

“There are certain critical thinking and higher order skills that can’t be transmitted via education,” said Forrester Research (NASDAQ:FORR) analyst Sam Bright. “So where you go to school is not the be-all and end-all.”

Whether study findings will affect investors who fund entrepreneurs is the bigger question, he says.

“The real test of this report is how open-minded angels or venture capitalists will be to expanding their filter beyond the brand of a particular school,” Bright said.

It also addresses what’s sometimes forgotten in the immigration debate, says Raman Unnikrishnan, dean of the College of Engineering and Computer Science at California State University, Fullerton.

“The discussion tends to focus on the negative aspects of immigration,” Unnikrishnan said. “Often immigrants are evaluated in terms of employment rather than entrepreneurship.”

But foreign-born entrepreneurs make a significant contribution to the U.S. economy, he points out.

“Immigrant-founded firms have created wealth and employment opportunities for all Americans,” Unnikrishnan said. “When political heat comes to bear, people forget that aspect of immigration.”

There are culture-specific reasons why foreign-born entrepreneurs are successful in the U.S., according to Unnikrishnan.

If the Indian tech and engineering graduates noted in the study had remained in India, they could not have taken the same entrepreneurial paths, he says.

“The U.S. allows failure,” Unnikrishnan said. “Older cultures like India do not.

“That is a profoundly important contribution that the U.S. education system and culture imparts to these bright foreign graduates who come here as immigrants.”

90,000 schools without blackboards

Everytime I pay a tax, I also pay a huge educational cess…. this sum was promised to be used in spreading education to the country’s 1/3 of the population which cannot read or write.
But here is the ground reality

Since the situation has not improved since 2004-2005 and has only worsen since then…. Where did my money go?
Don’t tell me it went in creating new IITs, IIMs, or AIIMS with the sole purpose is to create an army of professionals who would pay taxes and help US Government reduce its Social Security deficit. Because… we have not created a new one either in the past couple of decades.