Category: Personal Finance

All you need to know about credit card EMI

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Are you planning to use the credit card EMI option to purchase big-ticket items this festival season?

Here, we lay down some points that you need to know before availing yourself of the equated monthly instalment option on your credit card.

 

Note the rate

Pay attention to the interest rate you are charged.

Different interest rates are applicable to different tenure options that span three to 24 months.

Generally, credit card companies charge interest at the rate of 12-15 per cent per annum.

It’s a good idea to compare the interest rates on credit card EMIs with the rates charged on consumer durable loans offered by various banks and financial institutions.

Also, check if any processing fees are applicable.

Make an informed choice taking into account total effective cost.

Sometimes, banks offer no-cost EMI on certain products, which means you need to pay just the price of the product or the service with zero interest component in your instalments.

It’s another thing that no-cost EMI could be a marketing hook.

That’s because, often, the discount you would have been eligible for — had upfront payment been made on the purchase — will not be allowed in case of credit card EMI payment option.

The discount foregone may nullify the interest benefit.

No ‘MAD’ option

Buying with a credit card using an EMI option is different from making a purchase using a credit card and then opting to pay the minimum amount due on the bill.

In the latter, credit card companies allow you to defer your liability by paying only a portion of your monthly outstanding due — this is called minimum amount due (MAD), which is 5-10 per cent of the total outstanding due.

Despite the higher interest charges in this option, paying MAD provides a breather at times of cash crunch and helps in avoiding the late fee and penalty that is usually charged on non-payment of dues within the cut-off date.

However, the MAD option is not applicable to the EMI charge on your credit card dues.

Say, the due on your credit card for September is ₹30,000, including EMI charge of ₹20,000.

In this case, the MAD would be ₹20,500 (EMI of ₹20,000 plus 5 per cent MAD on the balance ₹10,000).

If the credit card dues do not include EMI charges, the MAD would be ₹1,500 (₹30,000 x 5 per cent MAD).

Pay by due date

If you miss the deadline to pay credit card dues that include EMI charges, you will be heading for trouble.

In addition to the late fee charges, interest at exorbitant rates of up to 40-50 per cent per annum will be charged on the total due amount.

Worse, the interest charge wouldn’t be from the due date of the credit card payment but from the date of each transaction; this could jack up the interest charges significantly.

Simply put, if there is a default of an EMI payment, one would lose the interest grace period of 15-45 days that credit companies offer customers.

For example, say, on October 20, 2020, the EMI is charged to your credit card, which is due for payment on November 10.

If you miss the deadline and make the payment on November 15, you are not only charged the late fee amount but also interest charges from the date of transaction, that is October 20, till the date of payment.

In this case, you would lose the interest grace period of 21 days — October 20 to November 10 — offered by the credit card company.

Limit blocked

When you opt for credit card EMI, the amount equal to the outstanding EMI amount will be blocked in your credit card limit and only the balance can be utilised for your future credit card usage.

Prepay with fee

If you want to prepay the EMI amount before the due date, you will be levied foreclosure charges. For example, ICICI Bank charges a foreclosure fee of 3 per cent.

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Readers’ Feedback – The Hindu BusinessLine

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On last week’s Big Story, ‘Trump or Biden: Who’ll bring cheer to the stock markets?’:

Excellent analysis

Yadu Mooss

Great analysis. I believe Biden may find a middle ground.

Anoop Singh

***

I have saved the article ‘Despite ‘work from home’, the stock of Embassy REIT is a good buy’ published on October 23, in order to refer to it later.

Thoroughly enjoyed reading this. Very insightful and in-depth analysis. Thank you for sharing, Bavadharini KS. I never miss Radhika Merwin’s articles and I have added Bavadharini KS’ to that list.

Rohan Thakur

***

This relates to the interview titled ‘ESG-compliant companies command premium valuation,’ of Bharti Sawant of Mirae Asset Mutual Fund published on November 2 in the print edition.

As of now, it seems ESG would much evolve in times to come, and probably may not be even restricted to ESG funds. So glad to see this.

Anup Maheshwari

***

This is with reference to the video ‘Know your salary ’ published on the BusinessLine website on November 2.

This article was much in need for us. Thanks.

Bhushan Parab

This is wonderful, Anand! Very helpful topic and nicely done.

Meera Siva

Good one.

Durgesh Kumar

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How to tender shares in a buyback

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Despite the havoc wrecked by the Covid-19 pandemic, 2020 has seen over 40 companies announcing share buybacks.

Including the recently announced share repurchase plans of IT majors TCS and Wipro, buybacks amounting to over ₹32,000 crore have been announced in 2020.

Companies that have excess idle cash may consider distributing it to shareholders in the form of dividends or by repurchasing a certain amount of the outstanding shares through buyback offers.

The shares that are bought back are then extinguished by the company. Reducing the number of shares outstanding helps improve the earnings per share for continuing shareholders and perks up the return on equity.

 

Since the buyback price is usually set at a premium to the prevailing market price, a buyback announcement sends out a positive signal for the stock. Ideally, it denotes undervaluation of the stock and the management’s confidence in the company’s prospects.

Your decision to participate in a buyback can be based on variables such as the buyback price and the prospects for the company. If you have decided to accept a buyback offer, here’s what you should know.

Procedure

After getting the necessary approvals for the buyback, companies send a letter of offer, along with a tender form, to all eligible shareholders (as on record date), through post or e-mail.

The opening date of the buyback offer is mandated to be within five days of dispatch of offer letter to shareholders.

For those having a demat account with an online broker, the procedure is simple. Most online brokers such as Zerodha and HDFC securities have separate tabs for share buybacks (Corporate Action in Zerodha and Buy Back in HDFC securities). After logging in to your account, you can select the particular tab and enter details of the buyback trade.

For those of you applying using the physical tender form, the sharebroker will, in turn, place the bids for shares on the designated exchange(s), on your behalf. While the shareholder is just required to specify the number of shares he/she wishes to tender in the case of a tender offer, the agreeable offer price must also be mentioned in case the buyback is being done through open offer.

This is because in the case of a tender offer, the offer price is fixed, while in the case of an open offer type of buyback, the company specifies a maximum price and buys back shares from the market during a defined time period.

Consequently, a uniform price might not be paid to all shareholders in the case of a buyback through open offer.

Shares held physically

Shareholders who continue to hold the shares in physical form must get their shares dematerialised before the close of the buyback period, in order to tender shares in the open offer buyback.

In the case of a tender offer buyback, eligible shareholders who hold physical shares and intend to participate in the buyback should submit certain documents such as PAN and address proof to their sharebroker, along with the tender form, original share certificates and valid share transfer forms.

Upon verifying these documents, the sharebroker will place the bids for buyback and give the shareholder a Transaction Registration Slip (TRS). Shareholders are then required to submit the original shares certificates and other documents mentioned above, along with the TRS generated to the registrar of the buyback, within two days from the offer closing date.

Acceptance and rejection

No matter how attractive the offer price may seem, it is the acceptance ratio that matters to shareholders tendering their shares in a buyback.

Acceptance ratio is the ratio of shares accepted to the total number of shares tendered by investors.

For instance, consider the buyback offer of Just Dial (August 4, 2020), where the company announced a buyback of up to 31.42 lakh shares (representing about 4.84 per cent of the then outstanding shares of the company). However, based on the company’s post buyback announcement dated August 31, we infer that eligible shareholders bid for over 385 lakh shares. Hence, the acceptance ratio was at about only 8 per cent.

SEBI has mandated that at least 15 per cent of the number of shares must be reserved for retail investors who hold shares worth up to ₹2 lakh (market value), as on record date. This could improve the acceptance ratio. In the Just Dial buyback, the company received bids for over 17 lakh shares from small shareholders, for whom 4.71 lakh shares had been reserved.

Consequently, the acceptance ratio for small shareholders was much higher at 27 per cent.

Also, the acceptance could be better when not may shareholders tender or many only partly tender their shares.

Upon finalisation of the basis of acceptance, the company will transfer funds to the respective shareholder’s bank account through their sharebroker. If the buyback offer is rejected, the shares shall be credited back to the demat account of the shareholder, or the physical shares be sent back to the shareholder. Shareholders should note that the funds received shall be net of any cost, applicable taxes and charges (including brokerage) that may be levied by their sharebroker.

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Will Saral Jeevan Bima be a good term insurance option for you?

Personal Finance

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In a bid to make the process of purchasing health insurance simpler, the insurance regulator IRDAI introduced a standard health insurance product — Arogya Sanjeevani.

Following this, the regulator also recently provided guidelines for standardisation in the life insurance space, through a standard term life product — Saral Jeevan Bima. All insurers are to launch the product by January 1, 2021. The launch of Saral Jeevan Bima ensures purchase of a term plan is made simple and easy.

About the policy

Saral Jeevan Bima policy is a standard term life cover as per IRDAI requirements.

It is a pure-vanilla term cover which pays the sum assured (SA) in lump-sum to the nominee in case of death of the policyholder during the policy term.

This policy is offered only to individuals aged between 18 and 65 years for a minimum policy term of five years (maximum of 40 years). The plan offers a minimum SA of ₹50,000 and a maximum of ₹25 lakh, in multiples of ₹50,000. However, insurers have the option of offering a higher SA (over ₹25 lakh), too.

We recently covered the details of the product extensively in another article, ‘All you need to know about Saral Jeevan Bima’. Here, we highlight whether or not should you opt for this policy.

Take note

There are three important points to note before you go for Saral Jeevan Bima.

One, it is the most basic term plan which provides level term cover — the premium payment and the life cover you choose remain constant for the policy term.

On the other hand, most policies in the market offer different options for SA.

For instance, LIC’s Tech Term plan gives you the option to choose between a level SA and an increasing SA.

Two, this standard plan offers lump-sum pay-outs to the nominee only upon the death of the policyholder.

But most plans in the market offer staggered pay-out options with an increase in pay-out at a certain percentage every year.

Some policies offer return of premium paid if the policyholder survives maturity.

And lastly, most term plans in the market offer accidental death benefit, partial and permanent disability benefit, and terminal and critical illness riders, in addition to death benefit. Some policies have riders built into them. For instance, SBI Life’s eShield comes with terminal illness cover built into the policy, and offers accidental death and accidental total and permanent disability as riders.

In the case of a standard term plan, only two riders can be offered — accidental death benefit and permanent disability benefit. Even then, it is at the discretion of the insurers.

The ₹25-lakh cover may not be sufficient for everyone. When it comes to term plans, experts generally recommend having a term policy with a death benefit at least 10-20 times your gross yearly income.

You should also consider your personal financial position (your liabilities) to decide your SA, as it will help if your dependants can comfortably settle your outstanding liabilities, if any, in your absence.

While insurers have the option of offering higher SAs on this standard policy, we need to wait and watch as to how many will do so.

Otherwise, with Saral Jeevan Bima, since terms and conditions and pay-outs are the same across insurers, you can select the insurer based on the premium, services offered as well as their claim settlement track record.

To give you an idea, the premium for existing term plans for ₹25 lakh (30-year-old male for 70-year policy term) works out to ₹3,500-8,500 across insurers.

It would work to the benefit of the policyholders if this policy is available through digital platforms as online plans tend to be cheaper.

Currently, the minimum SA of many insurers are higher than that of Saral Jeevan Bima — ₹50 lakh for LIC’s online term plan Tech-Term, and ₹35 lakh for SBI Life’s eShield (if purshased online). If Saral Jeevan Bima is available online, it can come in handy for those looking for a cover for ₹5-25 lakh.

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Readers’ Feedback – The Hindu BusinessLine

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This relates to the technical call on PI Industries published on October 22. The daily afternoon Nifty calls on the BusinessLine website are sometimes posted late after the price levels have already been breached. Is it possible for you to post the same Nifty call noon updates on your Twitter handle? Thanks.

Shekhar

Our response: Thank you for bringing the delay to our notice. We will rectify this soon.

We will also tweet it from our official handle.

This is on the article ‘Despite ‘work from home’, the stock of Embassy REIT is a good buy’ published on October 23. I do agree on the business part though — the markets and regulations need to mature.

V Nagappan

This is with reference to the article ‘How a senior citizen can generate more income amid low interest rates’ published on October 24 in the print edition.

Making a plan for growing the income of senior citizens is welcome, but it is not a good idea to forego the purchase price in the annuity product for additional return. At most, this may be suitable for senior citizens over 70 and who do not have any dependents.

Generally, senior citizens who have a spouse and children prefer to pass on the purchase price as part of their legacy and also to take care of their family’s daily expenses after their departure.

In my opinion, the scheme can be modified to make it attractive and acceptable to people who are willing to park a certain amount of money for higher returns and are willing to sacrifice a certain percentage of the purchase price, but are reluctant to forego the entire amount. Instead of returning the total purchase price, 20 per cent of it may be deducted and the balance may be refunded to the nominee.

AS Venkata Rao

This is with reference to the Statistalk ‘How prepared are Indians for their retirement?’ published on October 28. Well-compiled data on a very relevant topic. For salaried individuals, EPF is the foundation for building a retirement corpus and is the best addition for compounding of returns. Had it been optional, investors would have ignored it. Also, it’s an irony that people withdraw from their EPF corpus to pay off their home loans!

Kaliappan K

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How a family can plan its finances holistically

Personal Finance

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The necessity of having a good plan to manage family money cannot be overstated. Having a holistic plan is necessary but not sufficient condition to preserve and grow wealth and achieve family goals. At best, it should act as a guard rail and guiding post for the next turn and not the entire journey.

Also read: How a senior citizen can generate more income amid low interest rates

A holistic plan is one which is prepared for most possible outcomes (internal and external) and considers both behavioural and analytical aspects of decision making.

Nassim Taleb puts it brilliantly: “If you want to figure out how a thing works, first figure out how it breaks.” If we study the reason for wealth destruction in families, mostly it is internal rather than external. Greed, hubris, imprudence create more harm to family wealth than war, inflation or recession.

Need for clarity

Primium non nocere – First, do no harm. The first step towards a holistic financial plan is having clarity on what is really needed for the family. Both the family and planner have to work hard to get their thinking clean and make it simple. A few goals such as children’s education and marriage, and retirement are common to every one’s life and should be part of the plan.

Also read: Things to keep in mind while exchanging your old gold jewellery

Other goals such as vacation, second home, starting a new business, early retirement etc are very personal and need to be really thought through. In essence, beyond some technicality, financial planning converges with life planning and becomes a sub-set of it. Amazon founder Jeff Bezos said: “Focus on what will not change in 10 years rather than thinking what will change.” This is a great piece of advice for anyone who is taking the first step to create a plan.

Risk and volatility

Another important aspect of holistic planning is the concept of uncertainty, risk and volatility. It applies greatly to financial planning. Investing in markets is dealing with a complex system where everything affects everything else and the systems are in perpetual motion. Also, global markets are linked with each other due to financial integration. All this make investing challenging.

Hence it is important for the family to know the following things. Volatility is an expression of risk and not risk by itself. Risk is something you can put a price on. Odds are known and one can budget for it. Uncertainty is hard to measure and cannot be budgeted or accounted for.

The important thing to note is that risk can be budgeted but uncertainty can only be embraced or hedged. To start with, a family should assess how much risk capacity the plan allows for and how much risk tolerance it has.

Also read: Your Taxes

For instance, if one of the goals is to buy a car in the next six months, the risk capacity permitted by the plan is the least. Also if the family is really uncomfortable seeing 5 per cent erosion of capital on a temporary basis, the risk tolerance is very less. There are a lot of tools available to help families/planners with psychometric testing to determine risk profile.

Investment framework

Once the financial objectives are defined and risk assessment is done for the family, the next step is to create an investment framework. In essence, an investment framework should help realign long-term capital to long-term assets, after budgeting for short-term liquidity requirements and contingencies. This is an important decision making node for the family/financial planner where they have to decide on asset class participation, allocation and its location.

Also read: How work from home can impact your tax outgo

Asset class Participation: Often it is asked as to why one should have diversification across asset classes. Quoting Warren Buffet, “Diversification is a price we pay for our ignorance.” Uncertainty cannot be budgeted for; it can only be hedged or embraced. Hence diversification across various asset classes helps a family to hedge future uncertainty and prepare the portfolio for various economic outcomes.

The important pillars of asset class participation are real estate, equity, gold and debt (not in any order). There are other asset classes such as private equity, art and passion investments. These asset classes should be evaluated if one has expertise of subject matter and time on hand. Also, most of these other investments have liquidity constraints and hence one should think very prudently before making them a core part of the investment allocation. An important objective of any plan is not to be asset rich and cash poor.

Asset Allocation: Deciding on the percentage of capital to be allocated to an asset class is a function of risk assessment done for the family. Analytically it is a very simple exercise but is the most difficult concept to execute in practice. Studies suggest if one does attribution analysis for investment gain from a diversified portfolio, 91 per cent of the gain can be attributed to asset allocation. Right execution of asset allocation is one of the cornerstones of any financial plan and its success.

One of the observations is that if any asset class does not give par return for 3 to 5 years, ownership in the portfolio goes down significantly or becomes zero. The recent example is having gold in a portfolio as a protection asset. Since gold didn’t perform well from 2011 to 2017, it had a negligible presence in most of the portfolios. A practical hack to this problem is to stay away from narrative and stories. The human mind is more susceptible to stories than facts. Most of the narratives and stories are post facto and after price performance.

Asset Location: Deciding on ownership of assets and how it is located is also very important. We believe one should be open minded and do the full spectrum of analysis on available opportunities. In each asset class there are multiple choices available to align investments with financial objectives. If the portfolio is in need of regular income, maybe bonds are a better option but if liquidity is required debt mutual funds will serve the purpose.

If one wants to build long-term annuity, options such as REIT and InvIT should be explored. Direct equity ownership can be explored if one is building a long-term intergenerational portfolio and has active involvement. The point to ponder is what choice will help you opt for simplicity over sophistication and still achieve your objective.

Maintenance matters

It is a fact that disproportionate energy goes in building something rather than maintaining it. Maintenance is underrated and building is overrated; hence, the key to success is maintenance. After the creation of a financial plan and investment framework, regular diligence (at least quarterly) with your advisor and rebalancing prudently is perpetual work-in-progress. It is very difficult to re-balance the portfolio in panic and mania. About 90 per cent of investors failed to re-balance portfolios in favour of equities in March 2020; reason: Fear.

Today it is equally difficult to re-balance to reduce allocation to Nasdaq if it has become overweight; reason: Greed. These are a few examples of how behavioural aspects impact portfolio outcome more strongly than external events. In times of crisis or euphoria only framework works; willpower gives up.

As in other aspects of life, the key to success lies in execution. There are some time-tested principles and learnings which can help execute plans better:

  • Have a long time preference – The only sustainable and real big edge that families have against big institutions is long-term investment horizon.
  • Distinguish between desirable and attainable. Most investment success also depends on initial conditions and hence this distinction will help family set realistic goals.
  • Do not underestimate liquidity. Having assets which provide liquidity during tough periods is a game changer.
  • Wu Wei is a philosophy of passive achievement. Often, in investing, a bias for inaction — rather than constant churning — helps.
  • Often decision making will happen between ignorance and knowledge, hence thinking probabilistically will be of immense value.

Holistic financial planning in essence is about finding your own equilibrium. This will protect the family from internal and external headwinds and help creating wealth in good times.

Lastly, festina lente — make haste slowly

The author is CEO and MD of TrustPlutus Wealth Managers (India)

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Readers’ Feedback – The Hindu BusinessLine

Personal Finance

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I read the article ‘Will employees gain if gratuity rules are tweaked?’ that appeared on BusinessLine sometime back. If you serve more than six months in the last year of employment, it is considered as a full year of service. So, if a person completes four years and 181 days in the fifth year, will the person be eligible to claim gratuity? Is 180 days considered six months?

John

Our response: In general, if you stay on with your employer continuously for five years or more, you are eligible to get gratuity.

But there are exceptions and legal rulings that relax the five-year continuous service rule to be eligible for gratuity. One, the rule is waived if an employee dies or is disabled.

Next, the Madras High Court in the Mettur Beardsell case had ruled that if an employee completes four years and 240 days in service, he will be eligible for gratuity.

So, to your query, if a person completes only four years and 181 days in the fifth year, he would not be eligible for gratuity.

But once a person becomes eligible for gratuity as per the above rules, the number of years of completed service to determine the gratuity amount as per the Payment of Gratuity Act takes into account the service of more than six months in the last year of employment. So, if you serve more than six months in the last year of employment, it is considered as a full year of service to determine the gratuity amount. For instance, service of 20 years and seven months will be considered as 21 years.

This is in the context of the article titled ‘Why the stock of Muthoot Finance is a good buy’ that appeared on BusinessLine on October 19.

It could be a perfect buy in this situation — very less risky counter. It can be averaged at various levels for the long term. Good point, Ms Keerthi.

Bala Krishna

‘All you need to know about IPO allotment’ that appeared on BusinessLine on October 20 was well-articulated. I stopped applying to IPOs long back, after several bitter experiences of non-allotment.

TS Thiruvenghadam

Regarding the ‘buy’ call on Muthoot Finance, gold loans picking up does correlate to rising gold price, but the after-effects are disastrous if the gold price falls.

Shailesh Desai MD

Our response: Muthoot’s average loan-to-value is at 54 per cent. Additionally, the loans are of shorter tenures, which should provide sufficient cushion during a falling-gold-price scenario.

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Things to keep in mind while exchanging your old gold jewellery

Personal Finance

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When purchasing gold, we often exchange our seldom-used ornaments to reduce, at least to an extent, the total spend. If you have plans to exchange your old gold for new this festival season, here are some factors you should consider before you take the plunge.

No right time

If you think you will get a better deal if you exchange your old gold (in the form of jewellery or bar) when the gold prices are high, you are mistaken. This is because the gold you are exchanging and the new gold will buy are valued at the same price, which is the prevailing market price.

Whether the gold price is at ₹4,000 per gram or ₹5,000 per gram, you can always exchange your old gold ornament for the same quantity of new gold ornament at no additional cost (except making charges and taxes).

Having said that, we usually tend to buy more gold (in weight) than what we exchange. Thus, you will be better off buying gold (with or without exchange) when gold prices are lower.

Purity check

While exchanging gold, the timing of exchange doesn’t matter much. What matter is the weight and purity of the gold you are trading off.

Jewellers use a jewellery weighing machine and an assaying machine to determine the weight and purity of the gold you offer, after removing any stones and other embellishments.

If you would want to cross-verify if these metrics are assessed correctly by the jeweller, you can do so, if you have the invoice of the gold you are exchanging .

Of course, if your old gold is hallmarked, the details of the purity of the gold would be mentioned on the item itself. Hallmarking of gold is done only for three levels of purity — 22 karat gold (22K916), 18 karat gold (18K750) and for 14 karat gold (14K585).

A pure gold bar would be of generally 24 karat purity.

N Anantha Padmanaban, Managing Director of Chenna-based NAC Jewellers, says there is no need for customers to test the purity if the gold is hallmarked and brought from a reputed gold showroom.

Say, the gold you want to exchange is not hallmarked, you can request the jeweller to display the purity test results.

GR ‘Anand’ Ananthapadmanabhan, Managing Director of GRT Jewellers, another Chennai-based player, says the gold given for exchange with his firm will be melted and tested using an XRF machine right in front of the customers, if they request for it.

Following the acceptance of terms of the weight and purity of the gold exchanged, take a moment to notice the gold rate used to value your old gold.

If the gold being exchanged is of 18 karat, but the gold being bought is of 22 karat, the applicable gold rate to value the old gold should be the gold rate for 22 karat x (18/22).

For example, if the rate charged for the 22 karat gold you are buying is ₹5,000 per gram and you are exchanging 18 karat gold, your old gold should be valued at a minimum of ₹4,090 (5,000 x 18/22).

But if you are exchanging gold of 22 karat purity, it should be valued at the same ₹5,000 per gram.

Wastage on total value

Note that while the value of exchanged gold will be deducted from the cost of your new ornament, the making and waste charges (otherwise called ‘value addition (VA)’) and taxes (SGST and CGST — each of 1.5 per cent) shall be calculated as a percentage on the original vale of the new ornament and not on the deducted value.

For instance, say the value of the gold in the old ornament exchanged and the new ornament is ₹1 lakh and ₹2 lakh respectively. Your total cash outflow would be ₹1 lakh (₹ 2 lakh – ₹ 1 lakh) plus VA of ₹20,000 (say, VA is 10 per cent-then 2 lakh x 10 per cent) plus taxes of ₹6,600 (GST of 3 per cent on new ornament value plus VA). That would be equal to ₹1,26,600.

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