Calculating Your Eligibility For A Home Loan

Your friend applied for a housing loan and he got a certain fixed sum as the loan amount. When you applied for the same, the bank sanctioned only 80% of the amount which your friend was able to obtain. Why is there such a difference? Your bank must have informed you that according to your eligibility, you are entitled to avail a maximum loan amount which was sanctioned by the bank. How did the bank calculate your eligibility? What factors affect your eligibility for getting a home loan and the maximum loan amount that you can avail? Learn about the eligibility rules in this article.

Rules may vary from bank to bank, but the basic structure is the same

The criteria based on which a bank or any lender calculates your eligibility for a home loan are the following:

Your income: Your salary if you are employed, your income if you are self-employed, and your PF and pension if you are retired. In case you do not have any income, depending on the terms and conditions of the bank, it may take the income of your guarantor as the basis. The bank takes your take-home salary and fixes a certain magnification, like, for example, 70 percent of your net salary as the loan amount if salary is your lone source of income.

The property: You are taking the loan against a property, which may be a plot where construction of the house is planned or an apartment. In the alternate case, you may purchase an already built home or apartment, which serves as the mortgaged property. If the house is used or old, pre-calculated percentage depreciation will be added to the net worth of the property.

Additional income: If you have any extra sources of income like a business, your partner’s income, income from a property like rent, lease or farming, provident fund deposit etc will be added to your total income, and subsequently this increases your eligibility scale. In case of your partner’s income, adding him or her as a co-applicant will increase the loan amount proportionally. The lender also considers your investments, gold and precious jewelry in hand and other material assets while checking your eligibility.

Existing debt: The bank gives utmost importance to any current debts including all types of loans, accountable debts, and installments while calculating your loan score. If you have any lapsed installments or bad loans, this will affect the loan credit and thereby the amount sanctioned as a home loan.

Basically, any bank checks via all these factors, your repayment capacity and its safety of getting back the loan and interest through either your payments or the mortgage in case of failed repayment.

Plot vs. Flat which makes a better investment

 

There are some who argue that real estate investments have a little variety. But if you delve deep you would understand that it is this simplicity that makes it simpler to take better decisions in real estate investments. You first choose between investing in a commercial property and a residential property. And then there is the process of choosing between a new property and a resale property.

If you have a plan to invest in residential real estate any time soon, there is one big question that most people have – Should you buy a flat or a plot when you think investment?

If you are planning about your first home, for your own use, the situation is a lot different. Buying a plot and building a house gives you the freedom of designing your house from the scratch. But if it is an investment decision that you are making the considerations differ.

Appreciation of cost

This is one main reason why people choose to invest in a plot of land. Even if you already own a flat if you have a plot at hand you would be able to resell it and earn good returns. The key is to pick an area where real estate value has a bright prospective. In general, the value of a flat or a building for that matter appreciates and then saturates. Then there is depreciation in the property value. But with the land, there is always an appreciation value no matter where you choose to buy the land.

Rental income

Unless you buy a piece of agricultural land, a plot yields no income on a regular basis. A flat, on the other hand, would fetch rental income. The rent would depend on the locality where the property is situated as well as the furnishing status of the property.

Ease of resale

Without a doubt, a piece of land can be sold much more quickly than a flat. On a flat, there is very little scope for rework and a majority of the renovation would have to be done after the demolition of the existing property. But with a land, the flexibility of building a property is higher.

The choice of plot vs. flat thus depends on your investment goals:

  • If you are looking for short-term benefits, in the form of rental income then a flat would be a better choice
  • If you are planning for a long-term investment say for your retirement, then buying a piece of land would be better. When you sell if after several years you would be able to get a bulk amount in one stretch.

DCF analysis – the good and bad about choosing it

Talk about the valuation of an investment of any size, DCF analysis is one name that is often recommended. DCF or discounted cash flow analysis is the method in which the company’s value is being perceived on the basis of the actual cash flow that the company is predicted to make in the coming future. When we take any investment be it a small investor investing in a small set of stocks or a large investor or investment firm placing its capital on a new project the intrinsic value of the stock or the project is what matters in the end. DCF analysis helps the investor understand the intrinsic value.


What is DCF analysis?

How would you find if the chosen investment opportunity is really a good one? You should know the actual value of the opportunity, the cash flow it can generate and the growth predicted. Time value of money is something that cannot be underestimated. Even a small amount of cash flow earned in the early days after the investment might matter a lot more than the large cash flow generated in the far future. DCF analysis would take into account not just the cash flow that the investment opportunity yields in the current situation but also the predicted growth. The actual value of the company would not be measured accurately if its current performance alone is taken into account. The same way, to understand and to properly evaluate an investment opportunity the returns that the investor can expect with the time value being taken into consideration should be analyzed. And this is what DCF analysis is all about.

Pros

  • Intrinsic value is the justified measure of an investment opportunity’s value. DCF takes this into account
  • Any volatility in the market, short-term movements might not affect the decisions being taken. Some temporary changes in the market might cause an investment opportunity to generate reduced cash flows. But if there is scope for stabilization and quick rebound then the capital is in a good place.

Cons

  • DCF analysis is known to take a lot of details for making the decision. This makes it a little complicated to use. And this decision might also take time.
  • The analysis made here would be based on some predictions for the future. Such predictions are not always accurate. Smallest changes or even the tiniest detail that is missed out might result in major impacts. So DCF should be done with utmost caution with a reliable source of data.

Are there businesses that are not influenced by the stock market volatility?

 

Is it possible to build a recession proof business? Yes, if you have the right strategies in place. If you are an entrepreneur with a handful of business ideas in your mind then you should know that there are some businesses that are affected even by the slightest changes in the market. And then there are industries that flourish even if there is a market crash. So you first have the option to pick a business from either the resilient sector or the volatile sector. If your business belongs to the most volatile category then you should take measures to secure the business from the impacts of market fluctuations.

Which sectors are low volatile?

Knowing this is important especially if you are an investor. Whether you are planning to invest on a small scale, say in stocks or whether you have a large capital that you would like to invest on a business if you would like stability then there are some sectors that do not budge when there is a market crash. Also these are the types of industries that are safe investment choices for the retirees who do not have room for risks. Consumer goods industries increase the price when there is recession. But the demand almost never goes down. Healthcare services also do not see a drop in demand with recession. These industries thrive because people buy the products and services even if there is a steep price change. Because these are the essentials whose demands almost never goes down. So even if the stock market fluctuates owners of these businesses do not have any risks to worry about. The pricing structure might be modified if the volatility is big enough to affect the economy. But there would be no dull periods.

Be a smart investor

If you are planning to put your hard earned money on the stocks of a firm then you should begin by checking the sector to which it belongs. And look at the policies of the organization that aim at making the business robust even during recession. So even in volatile market the price of stocks of the business would not drop too much. And even if it drops there is a higher chance of the stocks bouncing back to their average levels very quickly. For the investor who likes to play safe the businesses belonging to entertainment, healthcare, food and beverage, death care, tax accounting and others are the safest choices.

The Fluctuating Stock Market Fluctuations

The stock market is a highly volatile market. There are a lot of traders trading on the many different types of stocks and assets. It is a market that is subject to changes every now and then owing to the changes in the market conditions. The prices of the assets keep changing and hence it becomes very important for all the traders to keep an eye on the market to play safe. Now before looking into the various reasons that cause these fluctuations, it is important to know the right understanding of these fluctuations. This would also help in understanding the impact of these fluctuations on businesses and organizations who are also a part of this market.

  • Industrial and business news – this is a factor to be understood to understand the reasons for fluctuations in the stock prices. When two companies belonging to the same market show and sell their products or services at different prices, there are all possibilities for prices of one to go up and the other naturally falls down. For example, let`s take the phone industry. In the initial days, it was only the traditional phones and the phone lines that were the mode of communication. But the invention and introduction of cellular phones gave a great hit to this industry thereby impacting and affecting the business of the traditional phones. This also led to the failure of many telephone companies or they took to shifting their preferences to the cellular industry.
  • Legal environment – this is another important thing to be noted when comes to understanding fluctuations in stock prices. Take the drug industry for example. When the food industry disapproves or disagrees with any new drug from entering into its borders, the drug industry takes a huge hit. So this way the business of the druggists goes down.
  • Before making any investment into a stock or an asset, it is important for an industry to study the market and the market players. This would give a clear idea about the changes in the company`s performance and the same can also be compared with the other company`s performances and successes in the market.

So these are some of the major things that every person should take into account when he wants to learn about the stock market and the reasons for fluctuations. A better understanding of this would help a trader in analyzing the reasons for the fluctuations in the prices.

Choosing the Right Mutual fund!!

We have all heard a lot about mutual funds and its benefits, ease of getting into and the returns associated that appreciates every year when the market seems great. There are umpteen number of funds available for you to choose from, in fact, you need whole of your year to learn about the funds in detail, to consider their working and its return pattern and then start your journey; maybe it will even take more time as there are many new funds raising each day.

So, how do choose the fund that is suitable for you in terms of realizing your financial objective and also fits your budget well, without hurting any other commitments? Well, here are a few parameters that we consider as a common ground to analyze a mutual fund and make the choice.

Ranking in terms of performance:

Yes, performance matters everywhere!! But, here the performance isn’t considered for just a year, its compared from its peer. Every scheme performs either better, best or worst than its peer, and its taken every quarter. This whole detail is available with the AMC. The ranking will be given based on its performance compared to its peer in the same group, like of the fund is a multicap scheme then its considered among other same type funds. If the fund is continuously performing good, sometimes exceptional, then you can head for it. If you find the opposite, then its time to exit from there.

Scheme Size and Asset size:

Though the scheme size and asset size vary to each fund, the majority of them are invested in debt funds, to be on the safer side. This is called Assets Under Management and should be high.

Analysis of Alpha and Beta:

We have heard this terminology in the funds but maybe hasn’t looked too much at it. The alpha component says how better is the fund performance and the percentage of profits returned, while the beta component talks about the percentage of downside, the risk associated; if it goes. Just like the other ratios like Sharpe ratio, risk, and returns ratio should also be analyzed.

Expense ratio:

The name itself says what is the factor, so any fund that has a high expense ratio is sure to be rejected. The expenses are that of management and the fund distribution, which reflects in your fund, so the high expense ratio is a lesser returning fund.

Fund Manager:

This is the important part, as he/she will be the person held responsible for the working of the fund. He decides as to how the distribution happens.

 

 

Different Ways In Which Inflation Affects Businesses

Inflation is one of the biggest risks that an entrepreneur is likely to face. While we consumers have various ways to escape the impact of inflation, business owners are bound to bear the brunt of it all. This is because they cannot stop production all of a sudden. They are required to continue while facing the effects of inflation and have a contingency plan in place to take care of damage control. Listed below are the different ways in which inflation affects businesses.

  1. The purchasing power of customers

This is the first and the most natural response to inflation. With increasing prices of products and services, customers try to buy as less as possible and completely do away with unnecessary purchases. If due to increased management costs, prices do increase, customers will start looking for cheaper options and that will drive down the business even further.

  1. Rising cost of inventory

The prices not only go up for us but also for business owners who need to pay money for their inventory. If the price of replacement inventory rises more than the amount of sold inventory then it can end up in a shortage of inventory.

  1. Changing prices

During inflation, businesses find it hard to have a constant marked price on things. There is a term called ‘menu costs’ that seem to add up when the prices are highly variable. This is highly confusing because nobody seems to know where to draw the line. You cannot project costs, you cannot assume a profit margin and the whole economy is an uncertain mess.

  1. Business loans

A common trend in inflation is the extension of loan portfolios by governments. Businesses, in their quest for expansion, take up loans and hope that the interest rates would be lower. However, in case their new venture or expansion does not work, it becomes difficult for them to pay back the loan amount. Moreover, financial lenders become very strict about giving loans and even if they do, the interest rates are sky-high. Businesses face low liquidity and the ones that are highly dependent on external funding, lose hope of any further expansion.

  1. Wages of employees

Employees of a business suffer the most during inflation. The cost of living increases but the business might not have a great profit margin so it ends up either not giving in to the demands of the employees or cutting back on the already reduced wages. This makes most employees quit work and look for better alternatives.

Here are few things your fund manager would not tell you

 

Fund managers are known to make it easy for you to monitor and manage your funds. There is no doubt about that. And if you stumble upon a reliable fund manager then you can be ensured of the best financial advice as well. But you should always keep a close watch on your portfolio. No matter how reliable a fund manager or fund management company is it would be a bad idea to blindly trust them and leave them to work on autopilot mode. Here are few things your fund manager would not be telling you:

Your fund manager might take some risks that are not really justified

This doesn’t happen all the time. But did you realize that if the fund managers are so good at managing the funds and investment portfolios why is every investor not being able to make huge profits? There are situations where investors even face losses in spite of relying on the best fund managers. Such situations might be because the fund manager took a huge risk. There might be situations where the fund manager is in a hurry to meet some targets or some demands in his job profile. So he might end up taking a risk hoping for larger returns in a short period.

Invest in stocks that the manager might not really know about

Some fund managers, especially those with a lot of experience might start relying a lot on their instincts. The stock market analysis is tedious, whether it is done by the investor himself or his fund manager. Some fund managers, those with a lot of clients to handle might sometimes start taking impulsive decisions. They might choose stocks that they do not know about fully. It is true that they would be able to guess the performance of the stock by looking at a small amount of information and it is relatively easier for them. But it is not a good idea to pick stocks whose story they do not fully know about.

Fixed income funds are not always going to fetch fixed incomes

The name is misleading. Fund managers might lure you into investing in them. But remember that they are not literally fixed income plans. Even these funds are prone to fetch losses sometimes. The risks might be less than the other managed funds but these definitely are not zero risk options as they are perceived to be.