Home loans for contract employees

All housing finance companies have certain guidelines to help determine the home loan eligibility for individuals. One such set of norms happens to be for individuals who are employed 'on contract basis'.

This note explains how these individuals are evaluated by HFCs and the rationale behind it.

Let us take an individual who has just completed his graduation and is working 'on contract' with a company. This is the individual's first job. In such a scenario, the HFC may have an issue in granting a home loan to this individual.

The reason behind this is that the HFC is not sure if the employment is of a permanent nature. And therefore, it doesn't want the loan repayment to suffer in case the employment contract is terminated thereby rendering the individual unemployed.

The HFC may also feel insecure about the fact that in case of termination of the contract, the individual may not be able to shift jobs/careers smoothly.

However, HFCs will consider such cases if the same individual were to have a work experience of say, 4-5 years behind him. The said work experience will speak for the individual; it will tell the HFC that although he may have been employed 'on contract', there's a degree of continuity in his career.

This assures the HFC that the individual's income is of a 'permanent' nature, which in turn will help him duly repay his home loan EMIs.

HFCs will also consider individuals who are graduates and have been employed only for a couple of years, but haven't shifted jobs in that time. In this time span, the individual's salary has been revised upwards while also being promoted. The HFC in this case, will not have any problem in considering this individual for a loan.

Let us take another example of an individual who has a professional degree like chartered accountancy for instance. He is in his first employment and working 'on contract'. He wants to take a home loan.

Keeping in mind his professional qualification, HFCs will consider granting a loan to this individual. That is because the additional degree lends credibility to the individual's capability to generate a stable income stream.

HFCs take a stand that even though the individual may be in his first job, he is unlikely to face difficulties in finding another job if and when the contract is terminated or if the individual decides to shift to another employer.

Another case in point is individuals who are in the higher age bracket and have been working 'on contract'. Suppose an individual aged 40 years, is working on contract with a certain organisation.

If this individual has been working here for say, 4-5 years, then the HFC may not have any problems in granting him a loan. However, if history suggests that he has changed jobs often, then the HFC may be apprehensive about granting him a loan.

The primary concern many HFCs have in such cases is -- why has the individual not been able to get a permanent employment at that age? This is a negative against that individual, which could prevent him from getting the loan.

Home loan seekers must appreciate that HFCs are concerned mainly with timely and regular payment of EMIs. If the individual's qualification and employment history suggests that he can be expected to pay his EMIs on time, then the HFC should not have an issue granting him a loan. Individuals should keep these factors in mind while approaching the HFC for a loan.

The criteria for home loans in the article are illustrative. They may differ across housing finance companies.

How to find right insurance broke

Sanjana Singh, a mother of a newly born, wanted to buy an insurance policy for her kid. She tried searching on the Web, but with so many players in the market, her search turned out to be more agonising than educative.

Her friends and relatives could not help her zero in on any policy either, as every person had a different story to tell. Sounds familiar? Well, it is.

Almost every other person trying to buy an insurance policy would relate to Sanjana. So, what's the simplest option in this case? Contact an insurance broker. Such a broker can be of three types -- direct, reinsurance and composite.

A direct insurance broker can, in turn, be for life insurance, or general, or both. The job profile of a direct insurance broker involves getting detailed information on the client's needs so that he can explain the same properly to the insurance company.

He has to keep track of the insurance markets so that he may be able to give the client proper advice regarding the insurance cover, pricing terms etc.

The broker also has provide the client with services such as insurance consultancy, negotiation for claims, keeping proper records of claims and risk management.

A reinsurance broker, on the other hand, renders advice on the reinsurance covers available in the international insurance and reinsurance markets.

A broker can also function as a composite broker, that is he is both a direct and a reinsurance broker. But, are insurance brokers qualified to give such advice? Yes, registered insurance brokers are.

The Insurance Regulatory and Development Authority has stipulated certain conditions in this regard.

Now, how much does a customer require to pay for the services of an insurance broker? Nothing. The broker gets paid by the insurance company from which the client takes the policy.

According to the Irda, for a general insurance broker this can go up to 12.5 per cent of the final premium for tariff business based on the paid-up capital of the client. For motor and other statutory insurance like public liability insurance, the compensation is limited to 10 per cent.

On non-tariff products, the broker can get a compensation of up to 17.5 per cent.

So, for instance, a broker, who gets an annual premium of Rs 1,00,000 from a client for a motor insurance policy, can get a compensation of Rs 8,750 (10 per cent of the final premium, i.e. Rs 1,00,000 - service tax of Rs 12,500) from the insurance company.

In the case of life insurance, the percentages differ based on whether it is individual, group or annuity scheme. For instance, in individual life insurance business, the compensation is 30 per cent of the first year's premium and 5 per cent of each renewal premium. For reinsurance business, the rates differ as per the market trends.

A broker licence lasts for three years; he has to undergo another 25 hours of training for renewing his licence. It won't be out of place to note that the Irda on October 19, 2005 issued 312 insurance broker licences in the country.

How to choose an insurance plan

The presence of a life insurance policy is essential in every individual's financial portfolio. For it is life insurance that provides financial security to the nominees in case of an eventuality.

But with so many insurance companies vying for a position in the individual's financial planning exercise, how do individuals go about evaluating the various insurance plans on offer? Here, we present a few guidelines on the various aspects which individuals should look at while assessing an insurance plan.

Term plan evaluation
A term plan is a pure risk cover plan where only administration expenses and mortality charges are covered in the premium. There is no savings element in the premium being charged to the insured; as a result the insured does not receive anything if he survives the entire term. Hence, it makes sense to opt for a term plan that has the lowest premium for a given set of parameters.

Since premiums across life insurance companies differ, the individual should ask for a 'quotation' from the agents/advisors of all companies. This makes sense because although one company may be cheaper at a given point in time, it may not always be the case as the premium amounts differ over various tenures, ages and sum assured for individuals. An illustration will help in understanding this better.

As the table shows, a term plan for an individual aged 25 years, for a sum assured of Rs 1,000,000 for a 20-yr tenure will cost him Rs 2,424 if he buys it from Company A Ltd; this is cheaper than the cost incurred on buying the same plan from Company B Ltd (i.e. Rs 2,720). But at age 35 and 45, other parameters remaining the same, the same plan works out to be cheaper if bought from Company B Ltd as opposed to Company A Ltd.

How to evaluate ULIPs
ULIPs are probably the most aggressively marketed financial product today. But individuals often buy ULIPs without understanding the intricacies of the product. ULIPs have to be evaluated on various aspects; annual expenses and fund management charges being a few such parameters.

The lower the FMC and annual expenses, the higher will be the returns and vice-versa. Also, FMC plays an important role in judging ULIPs; because unlike the annual charges, which are levied on the premium, which remains the same throughout the tenure, FMC is levied on the corpus, which keeps fluctuating each year.
Investors would also do well to enquire about the equity allocation in the ULIP options. This assumes importance when evaluated in conjunction with investors' risk appetites. If say, an investor has a propensity to take above-average risk, then considering a ULIP which has an 80% cap on equity investments in say, their 'Aggressive growth fund' wouldn't make much sense.

Some other parameters for evaluating ULIPs include the reputation of a particular ULIPs' fund management and how well the company's ULIPs have performed over time. Also, evaluating ULIPs from across various insurance companies helps individuals in mitigating risks as well as holding a diversified portfolio. However, diversification shouldn't be at the cost of fund management expertise or performance criteria.

Click here to know more about ULIPs

Child plans
While evaluating child plans, it is important for individuals to first define their child's needs. If individuals feel that they would be best served by a money-back child plan, then they should opt for the same from a company that offers money-back child plans; conversely if they feel that an endowment child plan would be better, then they should look at such plans. They can also opt for children's ULIPs as equities are best placed to accumulate wealth over the long term.

Pension/retirement plans
As for pension/retirement plans, some companies allow individuals to withdraw 1/3rd of the maturity amount while some others allow only upto 1/4th of the maturity amount. At a time when an individual probably needs money the most, any 'extra amount' will always be welcome.

All in all, individuals need to bear in mind that buying insurance is not only about a particular life insurance company per se; one also has to look at the various options available from within the same product category and evaluate the 'best fit'. Hence, it makes sense for individuals to take a look at insurance products from across various life insurance companies and hold a diversified insurance portfolio if need be.

How to multiply your profits

Let's assume you are a small-business owner looking for that edge or the fine-tuning that can make the difference in your business, but don't have the financial muscle to hire big management consultants.

Help is at hand from Action International, the world's largest business coaching company with revenues of over $1 billion and operations in 17 countries. The company is all set to debut in India and is in the final stages of clinching an alliance with the Reliance-controlled NIS Sparta.

"Estimates show one in three new businesses fail in their first year of operation, two out of four by the end of the second year, and three out of four by the fifth. Action's business motto is providing advice to these businesses at a low cost. And small companies -- 4,100 of them across the globe -- have found our expertise immensely useful," says Rahul Kapuria, consultant for Action in India.

The company, which started in Australia in 1993, works in a franchisee model and has more than 550 franchisees in countries all over the world.

So what's the Action model for business success? The core issue, according to Kapuria, is to ensure that a business-owner builds a profitable commercial enterprise that works without them.

The company believes systems should run a business, not the owner, and there are truly only five ways to transform your business into a profit powerhouse. By simply breaking down your sales and marketing efforts into these five areas and understanding how each affects the other, you're halfway there and, most definitely, way ahead of 90 per cent of businesses out there.

Action Business Coaches have at least 344 different ways, (about 50 to 60 for each of the five areas) to help you multiply your profits. The first thing Action does is to access the business by working with the business owners to determine where they are, where they would like to be, and then helping them implement systems and strategies based on what they find that would be the most appropriate for that particular business's needs (increase profitability, systems, employee training, controls and so on).

Action will assess the business in the five key profit generating areas: lead generation, conversion rate, average dollar sale, average number of transactions, and profit margins. Those areas are highlighted in the following equations:

Lead Generation x Conversion Rate = # Customers

#Customers x Average Sale x Avg. # Transactions = Revenues

Revenues x Profit Margins = Profits

So basically, Action is looking at the equation for profitability for any business, in any market, in any industry sector. Throughout all of these sectors of business, the equation for profitability stays the same.

Once it is established where the business is, Action is able to go back and look through its systems and determine which of those would be the most appropriate to implement in increasing the profitability of that particular business type.

Action uses the information gathered on the business to put together a detailed alignment report that will serve as the roadmap to success for the next 12 months of Business Coaching. Once it is established that the business can be profitable, the company moves on to the secondary goal, which takes place during the Coaching process.

That goal is to teach the business owner the difference between working on their business and working in their business. Small business owners can spend 60 hours or more every week just trying to keep their business alive.

Most often, what Action finds, is that they are working on the wrong aspects and end up spinning in a relentless circle until the business finally folds in on top of them.

The company's goal is to help them in working on growing their business instead of concentrating on the technical issues, which are usually counterproductive to growth.

Throughout the process of coaching, Action will spend about an hour each week with the business owner (depending on their needs) helping them stay focused on their goals, testing and measuring results, assisting them with potential obstacles for growth, systems implementation and so on. The company holds its clients accountable for reaching the goals that is set together, and work diligently to help them achieve results.

Kapuria says owners of small- to medium-sized businesses find it hard enough keeping pace with all the changes and innovations going on in today's modern world to find the time to devote to sales, marketing, systems, planning and team management and then to run their business after that.

That is where the Business Coaching comes in. Unlike a lot of other franchisee training programmes, Action's initial 10-day training programme at Las Vegas for the business coaches is only the beginning of his journey into a continual learning curve.

Most volatile mutual funds

Mid-cap stocks have been the darling of the stock market.
And if you have invested in a mid-cap funds, chances are you would have made some great money.
But, being volatile in nature, the Net Asset Value of these funds could drop by huge percentages if the stock market dips.
Here are a few funds that are most volatile.

Funds that can melt away
We fished for diversified equity funds that invest huge amounts in small-cap and mid-cap stocks. The criteria we used was to look for such funds with a market capitalisation of less than Rs 1,000 crore (Rs 10 billion) as per September 2005.
Market capitalisation = number of shares of the company x current stock price.
We computed the weighted market capitalisation of each stock in the portfolio. So, if the fund had 20 stocks of company A, and the price of each stock was Rs 50, then the market capitalisation of that stock in the fund's portfolio would be Rs 1,000.
So we computed the market capitalisation of all the stocks in each mutual fund portfolio to arrive at the market capitalisation of the fund.
Five funds emerged on our screen.
All have been top performers in the past few months. However, if the stock market falls, these funds will show an immediate drop in returns (at least in the short term).
If you have invested in any of these volatile funds, then don't panic as the volatile stock market goes through highs and lows.
If you are a potential investor, get ready for a bumpy ride.

- NAVs and returns are as on October 21, 2005.
- All data refers to the growth schemes. In such schemes, dividends are not distributed from the profits but are ploughed back into the scheme resulting in a higher NAV.
- Portfolio is as on September 30, 2005.

Canemerging Equities
NAV: 11.341-month return: -10.14%3-month return: 7.18%Return since launch: 13.40% (February 2005)Percentage of large-cap stocks: 5.36%Percentage of mid-cap stocks: 41.95%Percentage of small-cap stocks: 49.22%
HSBC Midcap Equity
NAV:12.88291-month return: -7.81%3-month return: 10.40%Return since launch: 28.83 (May 2005)Percentage of large-cap stocks: NilPercentage of mid-cap stocks: 68.19%Percentage of small-cap stocks: 31.81%
Magnum Emerging Businesses
NAV: 21.031-month return: -7.04%3-month return: 9.98%Return since launch: 97.39% (September 2004) Percentage of large-cap stocks: 4.22%Percentage of mid-cap stocks: 57.48%Percentage of small-cap stocks: 36.82%
Pru ICICI Emerging STAR
NAV: 16.731-month return: -10.05%3-month return: 9.70%Return since launch: 63.72% (October 2004)Percentage of large-cap stocks: 1.5%Percentage of mid-cap stocks: 42.97%Percentage of small-cap stocks: 55.53%
Sahara Mid-Cap Fund
NAV: 13.25081-month return: -5.20%3-month return: 11.91%Return since launch: 32.51% (December 2004)Percentage of large-cap stocks: 3.66%Percentage of mid-cap stocks: 58.20%Percentage of small-cap stocks: 34.84%

How to invest in a Mutual Fund

How do I buy the units of a fund?" someone asked me the other day. This query was followed by a mail from a reader who wanted to know if he had to buy mutual fund units from the stock market.
For all of you who are plagued with similar questions, here is the answer.
We have listed five ways in which you can buy your fund units.

1. Get in touch with the Asset Management Company
The first step is to track the AMC -- as fund houses are known -- online.
Once you get onto their Web site, you will get their office addresses, phone numbers and a contact e-mail address. You will even be able to transact online with some of them.
Online addresses of the AMCs
ABN AMRO Mutual Fund
Benchmark Mutual Fund
Birla Sun Life Mutual Fund
BOB Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
Deutsche Mutual Fund
DSP Merrill Lynch Mutual Fund
Escorts Mutual Fund
Fidelity Mutual Fund
Franklin Templeton Mutual Fund
GIC Mutual Fund
HDFC Mutual Fund
HSBC Mutual Fund
ING Vysya Mutual Fund
J M Financial Mutual Fund
Kotak Mahindra Mutual Fund
LIC Mutual Fund
Morgan Stanley Mutual Fund
Principal Mutual Fund
Prudential ICICI Mutual Fund
Reliance Mutual Fund
Sahara Mutual Fund
SBI Mutual Fund
Standard Chartered Mutual Fund
Sundaram Mutual Fund
Tata Mutual Fund
Taurus Mutual Fund
UTI Mutual Fund
Invest online with the mutual fund
Some mutual fund Web sites allow you to invest online. However, you must check if you have an account with the banks they have partnered with.
For example, Prudential ICICI Mutual Fund allows you to buy funds online if you have a banking account with any of the following banks: Centurion Bank, HDFC Bank, ICICI Bank, IDBI Bank and UTI Bank.
You can buy units of SBI Mutual Fund's schemes only if you have an account with the State Bank of India or HDFC Bank.
Get in touch with the fund house
By going online, you will be able to locate the fund house's address and phone number (toll free number in some cases). You can call and request them to send an agent over.
Or, if you want, go over personally. Do make an appointment; you may end up wasting time if the person you want to speak to is not available.
Some, like Prudential ICICI Mutual Fund, have a form you can fill and submit online. Do so and they will send someone over to meet you.

2. Visit your bank
A number of banks are mutual fund agents.
Just walk into your branch and ask if they are selling any funds. See if they have a tie-up with the fund house you want to invest in.

3. Ask around
Ask your colleagues, neighbours, friends and relatives. Someone will know an agent. Just ask them for his contact details or ask that he get in touch with you.

4. Visit the AMFI website
The Web site of the Association of Mutual Funds in India has a list of mutual fund agents across the country.
Under the heading Investors Zone, you will find another one called ARN Search. This refers to the AMFI Registration Number.
Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city.

5. Check the online finance portals
Do you have an online trading account? Then you could check if they also sell mutual funds online.
If you do not have an online trading account and are considering opening one, you could look for a player that offers both.
Some like ICICI Direct sell funds online. But you must have a trading account with them. Others, like India Bulls and Motilal Oswal, do not have this facility online but if you call and leave your contact details, they will send an agent over.
Here are some of the prominent players.
5 paisa
Geojit Securities
HDFC Securities
ICICI Direct
India Bulls
InvestSmart Online
Investmentz.com
Kotak Street
Motilal Oswal
Sharekhan

Then why waiting....start investing on Mutual funds....

FAQs on Mutual Fund SIP

Here are some FAQs on the Mutual Fund SIP

1. Is there a load?

An exit load is a fee you pay the fund when you sell the units, just like the entry load is a fee you pay when you buy the units.

Initially, funds never charged an entry load on SIPs. Now, however, a number of them do.

You will also have the check if there is an exit load. Generally, though, there is none. Also, if there is an entry load, an exit load will not be charged.

An exit load may be charged if you stop the SIP mid-way. Let's say you have a one-year SIP but discontinue after five months, then an exit load will be levied. These conditions will wary between mutual funds.

2. What is the minimum investment?

If you do a one time investment, the minimum amount that you have to invest is Rs 5,000.

If you invest via an SIP, the amount drops. Each fund has their own minimum amount. Some may keep it at least Rs 500 per month, others may keep it as Rs 1,000.

3. How often does one have to invest?

It would depend on the fund.

Some insist the SIP must be done every month. Others give you the option of investing once in three months or once in six months.

They also give fixed dates. So you will get the option of various dates and you will have to choose one. Let's say you are presented with these dates: 1, 10, 20 or 30. You can pick any one date.

If you pick the 10th of the month, then on that day, the amount you have decided to invest in the fund has to be credited to your mutual fund.

4. How must the payment be made?

You can opt for the Electronic Clearance Service from your bank; this means the mutual fund will, as per your instructions, debit a certain amount from your account every month.

Let's say you have a SIP of Rs 1,000 every month and you have chosen to invest in it on the 10th of every month. Under this option, you can instruct your mutual fund to directly debit your bank account of Rs 1,000 on the due date.

If you don't have the required money in your account, then for that month, no units will be allocated to you. But, if this continues periodically, the mutual fund will discontinue the SIP. You need to check with each mutual fund what their parameters are.

Alternately, you can give cheques to your mutual fund. In this case, they may ask for five Post Dated Cheques upfront with your first investment.

Since these cheques are dated ahead of time, they cannot be processed till the date indicated.

5. Must I state for how long I want the SIP?

Yes. You will have to state whether you want it for a year or two years, etc. If, during the course of this period, you realise you cannot continue with the SIP, all you have to do is inform the fund 15 days prior to the payout.

The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want.

6. Do all funds offer SIP?

No. Liquid funds, cash funds and floating rate debt funds do not offer an SIP. These are funds that invest in very short-term fixed-return investments. Floating rate debt funds invest in fixed return investments where the interest rate moves in tandem with interest rates in the economy (just like a floating rate home loan).

All types of equity funds (funds that invest in the shares of companies), debt funds (funds that invest in fixed-return investments) and balanced funds (funds that invest in both) offer a SIP.

7. Tax implications

Let's say you have invested in the SIP option of a diversified equity fund.

If you sell the units after a year of buying, you pay no capital gains tax. If you sell if before a year, you pay capital gains tax of 10%.

Let's say you invest through a SIP for 12 months: January to December 2005. Now, in February 2006, you want to sell some units.

Will you be charged capital gains tax?

The system of first-in, first-out applies here. So, the amount you invest in January 2005 and the units you bought with that money, will be regarded as the units you sell in February 2006.

For tax purposes, the units that you sell first will be considered as the first units bought.

8. How will an SIP help?

When you buy the units of a fund, you may do so when the NAV is really high. For instance, let's say you bought the units of a fund when the bull run was at its peak, leading to a high NAV.

If the market dips after that, the value of your investments falls and you may have to wait for a long while to make a return on your investment. But, if you invest via a SIP, you do not commit the error of buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time.

You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment.

What's a mutual fund SIP?

What type of a mutual fund is a SIP?

I was taken aback by this question before I realised the person posing it thought a SIP was a type of mutual fund.

Unfortunately, many new investors seem to be under this misconception.

A Systematic Investment Plan is not a type of mutual fund. It is a method of investing in a mutual fund.

Here's to coming to terms with it.

How you can invest in a mutual fund

There are two ways in which you can invest in a mutual fund.

1. A one-time outright payment

If you invest directly in the fund, you just hand over the cheque and you get your fund units depending on the value of the units on that particular day.

Let's say you want to invest Rs 10,000. All you have to do is approach the fund and buy units worth Rs 10,000. There will be two factors determining how many units you get.

Entry load

This is the fee you pay on the amount you invest. Let's say the entry load is 2%. Two percent on Rs 10,000* would Rs 200. Now, you have just Rs 9,800 to invest.

NAV

The Net Asset Value is the price of a unit of a fund. Let's say that the NAV on the day you invest is Rs 30.

So you will get 326.67 units (Rs 9800 / 30).

2. Periodic investments

This is referred to as a SIP.

That means that, every month, you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund.

Let's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units.

The next month, the NAV is Rs 25. You will get 40 units.

The following month, the NAV is Rs 18. You will get 55.56 units.

So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

First Milestone

This is my first milestone on creating the first blog on mutual funds. Watch more