Monthly Archives: September 2011

Where to Invest in Times of Inflation?

Posted on by
Reply

First, let’s demystify the jargon. Inflation is a situation where there is ‘too much money chasing too few goods’. In such times buyers bid up prices of scarce products/services. The scarcity could be caused by supply issues or a faster than expected rise in demand. Irrespective of what causes inflation, the impact is the same. The value of the currency you are holding declines.

Let’s explain this with the help of an example. Suppose the Indian Rupee was freely exchangeable with only one commodity - crude oil. Let’s assume the conversion rate is Re 1 = 1 barrel of crude (wish it were true!). Now there is tension in the Gulf region resulting in reduced supply. Due to the subsequent rise in price of crude oil in international markets, we would now have to pay more Rupees for every barrel of oil. Suppose crude prices rise by 10%. The new exchange rate will be Rs 1.1 = 1 barrel of crude. In real terms (i.e. in terms of the commodity) the value of the Rupee would have declined from 1 barrel of crude per Rupee to only 0.91 barrel of crude per Rupee. This is the erosion in the value of the currency that we are talking about. Also note that while the Indian Rupee may be appreciating vis-a-vis other currencies, in the ‘real sense’ there is an erosion in value.

Another important fallout one can expect due to rising inflation is higher interest rates. The central banks aim to reduce demand in the economy by raising the cost of money.

We are not going to debate whether or not interest rates will rise or the Indian Rupee will depreciate going forward. This we will leave to the experts. If you wish to have a go, click here for the What if Yield Calc. We will focus on what to do in times of inflation.

When making fresh investments or evaluating your existing holdings in potentially inflationary times you need to keep two things in mind:

  • the possibility of higher interest rates
  • the erosion in the value of the currency

What you should avoid?

1. Fixed income instruments life fixed deposits and relief bonds that have long maturities

2. Other long term debt instruments like long term debt funds

3. Shares of companies that are unable to pass on the rise in raw material costs to their consumers i.e. they are not price setters.

Where should you invest?

1. Commodities
The key factors that determine the price of a commodity like gold for example (mine output for one) are different from factors that impact the value of other investments like shares and bonds. Investing in commodities therefore helps in diversifying the risk element in your portfolio. Not to suggest that they will surely do well but in inflationary times, but people do increase their allocations towards commodities. (Read more on gold)

Furthermore, gold can now be deposited with institutions like the State Bank of India. While this will earn you a very marginal interest, it will nevertheless take care of storage costs etc.

Investing in a commodity takes care of the risk arising due to erosion in value of the currency (since most currencies are priced in US Dollars).

2. Stocks
When it comes to beating inflation, few asset classes can better stocks. For example, over the last three years stocks have returned in excess of 15% p.a. (the BSE Sensex), beating inflation, which averaged about 5% - 6% p.a., by a very large margin. If one were to use a diversified mutual fund as a benchmark for stocks, the difference would have been even larger!

However, stocks carry significant risk, especially if one is attempting to build his/her own portfolio of stocks. For those who wish to minimise this risk, equity mutual funds are the best option.

For the more adventurous type, two sectors that are relatively immune to inflation are pharmaceuticals and software.

3. Inflation indexed bonds
Such bonds compensate you for the rise in inflation (or the decline in the purchasing power of the currency). Unfortunately in India such bonds are not on offer for us individuals (though the RBI has spoken about reintroducing them in today’s policy). But with the RBI permitting Indians to invest abroad, one can always buy them in international markets.

4. Short term deposits and funds
These instruments will give you the required liquidity you need while ensuring that you do not lose out in case interest rates were to rise.

5. Property
Property is again a preferred avenue of investment as in such times prices tend to rise upwards in line with the increase in cost of construction. The only deterrent here is that the minimum amount you need to invest here is substantial and beyond the reach of most investors. An alternative can be real estate mutual funds, which are very popular in international markets. Apparently, SEBI is considering allowing such funds in India.

To conclude, it is important that at all times investors should ensure that their portfolios are well diversified, taking into account their needs and aspirations.

Get a Low Interest Rate Car Loan to Save Money

Posted on by
Reply

An online car loan is a loan, which is available online or on the internet. The borrower has to fill up a simple online application form online which is free of cost. The information on the form is kept confidential, and is not shared with other people. Once the application is processed a representative will inform about the documents needed to complete the loan application process. One has to visit a dealer, select a car of one’s choice and the deal is complete.

One has to buy a used car as one is short of finance. Hence, one applying for a loan must opt for lowest used car loan rate of interest. So the monthly payments can be easily disbursed. The car must be thoroughly inspected before buying to make sure it is not having many technical problems, which will cost a lot of money. A low interest car loan can be in form of secured or unsecured loan. A secured loan has a low rate of interest, but uses the home of the borrower as security. Whereas, in an unsecured loan doesn’t have any security against the loan, but a higher rate of interest.

Low interest car loans can be availed if one has a good credit history. The lender will be assured that the borrower will not evade the loan payment. Also if one wants an auto loan one should avoid buying from car dealers as their rate of interest is quite high. Such financing is offered by many financial organizations nowadays. One needs to make a down payment, when using used car financing. This has a verification of the loan. With a higher down payment one will get a lower rate of interest, and the monthly payment to be made will also be reduced. New cars are very expensive; hence people resort to buying used cars.

How to Become Rich - Pay Off Debt? Save? or Invest?

Posted on by
Reply

Recently, I was at a friend’s house party and one of my best pals and I got talking about debt, specifically mortgage debt. We were discussing whether he should put a lump sum toward paying off mortgage debt attached to an investment property or use his money for something else. The question was particularly apt as the value on this house had depreciated by c.40% over 2 years and was now in substantial negative equity.

Putting in Good Money after Bad

My take on it was that it makes no sense putting in good money after bad. If the debt we were talking about was non-mortgage debt (e.g. very high-interest credit card debt) then I’d have said pay it off pronto. But we weren’t. The way I figured it was, since the interest rate he was paying on his house is 4%, if he could get greater than a net 4% return from his investments than he was better off.

Paying Down Debt is a Sure Thing But…

One way of looking at the 4% mortgage interest is that if you don’t have to pay it you are essentially getting 4% net on your money. This is the equivalent of 5.2% pre-tax money (rounding off his effective tax rate to 30%)

Sure, paying down debt is a sure thing; there’s a certain comfort that comes from paying off debt. If this house was his home (his primary residence) and he lived there with his family and he absolutely loved the house, and his neighbourhood, and his kids went to school around the corner than my answer to him would have been different. So, the answer to the question of whether you pay off debt first or invest is not a straightforward maths question.

Savings Are Yours to Keep

It’s difficult to argue that paying off debt is not necessarily the right thing to do when jobs are not secure, house prices are down etc. It’s an understandable reaction but it’s important to note that it may not be the best for you financially. One thing I wouldn’t advocate is using savings, retirement savings or emergency funds to pay down mortgage debt. I think you need a minimum of 1 year’s income put aside in liquid cash for yourself and your family and for no one else to get their grubby little hands on…no matter what! And rather than hand over your savings I think you’d be better off investing so as to beat the cost of the debt you’re paying elsewhere. Ultimately, you can’t save your way to wealth so you got to be investing.

In Summary…

Whether you choose to pay off debt first or invest is really a question of priorities. You’ve got your priorities and they i.e. lenders have got theirs…they’re usually different.J In the case of high-interest personal loans then it is a good idea to pay down the debt fast. The bank will always see it as your priority to give them all your hard-earned money. Ultimately, it’s a question of understanding who it is that is getting more wealthy…them or you. The choice is yours!

Your 5-step Guide To Get A Car Loan

Posted on by
Reply

The majority of people cannot afford to buy their vehicles in cash. They will need to get a car loan to finance the purchase. As per this loan program, the amount can be borrowed from a lending institution, such as a bank, but the money thus borrowed can only be used to buy a vehicle. The most difficult however is to choose the right offer, as there are so many options available to you. Try searching for auto loans on Internet and you will be bombarded with thousands of search results, each company claiming to offer you the best deal. Because of the overwhelming choices, you may find it a very daunting task to make the right choice. However, you can take much pain out of the proceedings by keeping the following thing sin mind.

Understanding The Concept And Process Of Loan
If you want to get a car loan, the first step is to understand how these programs work. In this process, you borrow a certain amount of money (based on your chosen car and its price) from a bank or dealership. You will be required to repay this amount at a certain rate of interest within a certain period of time. In order to make things easier for you, the lenders provide you the facility to repay in easy monthly installments. The exact period of the loan may vary from one year to five years. Besides that, there are also provisions for penalty for late payment. It means if you do not pay the monthly installment in a given month, you will be charged a certain amount of penalty. Therefore, make sure that once you get a car loan, you make the monthly payments in a timely manner.

Choosing The Right Car
Now that you know how an auto loan works, the next thing that you have to do is to choose the right car that you want to purchase. You have to do it prior to approaching a lender because you will be required to tell the lender that which car exactly you want to buy. Once you know the type of car you want, you will be able to discuss the payment options and other terms and conditions with the lending agency. After all, it is obvious that the amount of monthly payment will be different for a $10000 car and for a $50000 car.

Set A Budget
Since the loan must be repaid, it is going to be a liability on you. Therefore, it is always wise to set your budget in advance in order to make sure that you will be able to pay the monthly payments in a timely manner. Always remember, missing a monthly payment will result in additional liability to pay the penalty, which will not only be extra financial liability but it will also adversely affect your credit rating.

While you are exploring your options to get a car loan, you should also be careful about your credit history. A good credit history will help you get the loan at the lowest rates and at much favorable terms and conditions. http://www.financeenquiry.com/Page-About-Auto-Loans_9.html

Things you don’t know about Credit Card Debt are the key to increase Credit score

Posted on by
Reply

Credit card companies use all kinds of tricks to make money but their most valuable tool is misinformation! What you think you know about using credit cards is probably the same knowledge that is taking money from your pocket and putting it into your card issuer’s bank account!

You’ve probably been told that the way to increase credit score and build credit is to use your credit card and pay off the balance over time, right? While that proves that you can make payments on time, you’re paying your card issuer interest and actually may be harming your credit score! Your credit history reflects payments made on time, certainly, but by carrying a balance on your card you are also showing that you have to take on debt in order to get goods. If you want to raise credit scores, running up debt is not the way to do it.

If you want to fix bad credit by starting to pay all your bills on time, beware of your credit card payment due date! If your issuer says that the payment is due on the 20th and you mail it on the 15th, it might get there on the right day but most issuers cut off posting payments at noon or some time in the morning. If your payment arrives in the afternoon mail it won’t get posted until the next day—making you late and giving the credit card issuer a chance to raise your rates!

You might also think your plan to move your credit card debt to a low or zero interest credit card is a smart move toward fixing credit card woes but read the fine print. What the issuer won’t tell you is that if you use that card for purchases, you could be violating the terms and incur a new, high interest rate.

Credit card issuers rely on misinformation and disinformation to wring out the highest rates possible from their card holders. If you are having trouble with credit card debt and wondering how to fix credit problems, your best bet is a non-profit credit counseling service that can negotiate your interest rate, payment plans and even reduce your balance.

The Steps To Becoming A Mortgage Note Pool Buyer

Posted on by
Reply

Given the current state of the economy and the foreclosure rate, which is at an all-time high, many banks have been in a state of disarray. As a result, mortgage note pools are available for purchase at just a fraction of their actual value. If the funds are available, this situation creates the perfect opportunity for a mortgage note pool buyer. However, in order to be a successful mortgage buyer, it is necessary to know the proper steps to take.

When a mortgage note pool buyer is interested in purchasing a mortgage note, the goal is to find a house mortgage that has not been shopped around for a long period of time. The reason, in most cases, that these notes are available is because, for one reason or another, they were undesirable to investors. For a mortgage note pool buyer to get the type of notes that they are interested in, they must place an order with the bank. Placing an order with the bank allows investors to purchase custom compiled pools that are tailored to meet their needs, to purchase them at a discounted rate and to save time and energy that otherwise would have been spent on unsuccessful bids.

Since there is a huge demand to purchase a mortgage note, a mortgage note pool buyer must be willing to play by the rules that the bank establishes. In order to complete the purchasing process successfully, it is helpful for an investor to know who they will be dealing with. They will need to work with the seller’s agent, who will pre-screen them before beginning negotiations. The seller’s agent will be their main line of communication with the bank or other lender. The mortgage note pool buyer may also need their own agent to establish a relationship with the seller and assist with the process.

When it comes to a purchase mortgage, big discounts are available for people who are willing and able to spend big amounts of money. If someone is interested in purchasing a house mortgage, they should be prepared to spend a minimum of $5 million. Most sellers’ agents require a minimum of $10 million and some require a minimum purchase of $100 million. The more someone spends, the better discounts they will be able to get on the purchase, but it is surely an expensive endeavor regardless of the discounts.

Once a mortgage buyer has the funds available, they will need to submit a letter of intent to the seller. This letter should include information such as the size of pool, region and property types they are interested in. It should also note the minimum or maximum loan that they are interested in purchasing. This information will assist the seller in determining the purchase price for the pool.

Since the cost of a mortgage note is so high, it is not surprising that sellers also require a mortgage buyer to submit proof of funds. This does not need to include any bank account numbers, since most sellers will accept a letter from a corporate attorney. This letter should include the name of the buyer’s bank, the name of the bank manager and a phone number where they can be reached. The banks will handle all further verification on their own.

Once these steps have all been taken, it will only be about ten days before the mortgage note pool buyer closes their deal. If someone has ever thought about getting into this business before, now is the time because it is possible to purchase a house mortgage for far less than it is worth. Take advantage of this amazing opportunity now before the rates begin to rise.