LoanRaja Blog- Personal Finance Guide

Apply for car loan today! If you are looking for a fresh car for your portico, you can’t get luckier. Falling petrol prices, lower interest rates and struggling auto companies will make your life easy even in this recession.

Around fifteen years ago, I first started noticing that the number of cars was growing, while the number of two wheelers was reducing. This was a trend (at least in Bangalore), that continued till about a few months back. Somehow, it seemed as if the number of two wheelers was increasing and the number of cars was coming down.

This, let me hasten to add, is a purely personal observation, and in no way backed by in depth research or painstaking market surveys.

Again based purely on conjecture and conversation with friends and relatives, this could well have been a response to the increased fuel prices and the decreased job security as more people parked their cars in their garages and began to blow the dust off their scooters and motorbikes again.
Now, hard facts tell me that car sales have indeed dropped this year. And so have car prices.
So, is this a good time to buy a car?

This year, there have been so many twists in the auto industry that the answer to that is going to be a long winded one.

On the face of it, yes, it does seem like a good idea. Car companies have been announcing price cuts, interest rates are lower and fuel prices have dropped.

But scratch a little deeper and it is interesting to see why we have this situation at all.
The simplest one first. Fuel prices have been cut a little, a small nod in acknowledgement of the crash in global crude prices. The Government is obviously giving some breathing space for oil companies to recover losses before it (hopefully) announces more cuts.

The price cuts have been driven by a combination of reasons. In October and November 2008, car sales showed a sharp fall, as both individuals and companies put off buying decisions following high interest rates and lack of credit from financing companies, and the general economic condition. Saddled with huge inventories, car manufacturers have announced discounts to get rid of their stock.
Moreover, it is the end of the year, when car manufacturers in India usually drop prices. This is to avoid being stuck with the previous year’s stock, going by the date of manufacture.

Interest rates too are lower, thanks to the various monetary measures taken by the Government. Car makers have also promised to pass on the 4 percent reduction in Cenvat announced by the Government for all manufacturing industries.

So the cars are ready and the buyers are ready, but according to reports, it is the car finance companies, which are acting spoil sports.

As in the housing industry, only demand can drive production and only easily available low cost financing can drive demand. And only higher demand can help the industry out of its rut.
Because, right now, the auto industry has been shutting down factories, bringing down number of shifts and cutting back on production. This situation of excess capacity is likely to last all of next year too.

However, prices will begin to rise if there is no off-take. This, despite the fact that input costs, specially cost of steel, have come down. Companies may not be able to sustain lower prices if the demand continues to be depressed, as they will have to bear the costs of idle capacity.
But new model launches are still on the anvil. Both Maruti and M&M are expected to make some announcements soon. With Tata’s Nano gearing to hit the roads in 2009, you will have a lot more to choose from in future. However, if you are on the look-out for a new car, this is a perfect time. For the first time, you don’t have to worry much on the fuel front with global crude prices sliding downwards on a regular basis.

If you look at the returns of ELSS funds, it may not be heartening. But that shouldn’t stop you from investing in ELSS this tax planning season

December may be the month to relax at the work place with a string of holidays but many may not be allowed to if they have not completed the tax planning exercise. With the year almost coming to an end and with slightly over a quarter to go for the financial year, it’s time to focus on tax planning.

A number of products offer tax relief as they are covered under section 80 C but this time investors can have a higher allocation towards equity markets as equity markets have come off their highs in the last three quarters. That provides a good opportunity for fresh investors if they are looking at building corpus over the next 3-5 years. With tax planning instruments like ELSS (equity linked savings scheme) and ULIPs (unit-linked insurance plan) allowing exposure to equity, investors can look at these two options.

In the case of ELSS, options are plenty as almost every mutual fund company has the product under its portfolio. However, going by the past performance and investment strategy, SBI Magnum Tax Saver, HDFC Tax Saver and Franklin Templeton Tax saver can be your preferred choices as these funds have been consistent with their performance. While returns from some of these funds may not look pretty at present (if you were to compare 1 and 2 year returns), the fact is that equity markets at present is going through one of the challenging times. In addition, weakness in the market is a good opportunity for fresh buying and hence, allocate a portion of your tax saving fund into this product.

Besides ELSS, unit-linked plans can be another option for tax saving as it allows exposure to equity. The advantage with ULIP is that equity is not the only option and the investor has the option of switching from one fund to another. However, at current market level, equity can be a better option for long term investors. In the case of ULIPs, plan features are similar among various insurance companies, but costs such as allocation charges, administrative charges and policy charges are the ones to look out for. Here again, these charges can make a huge difference for those looking at insurance as a short to medium term investment option with the payment term being less than 10 years. In the long run, however, there is not cause for concern, as most companies have similar cost structure after five years.

Even when tax planning is a necessity for many, not many have the advantage of liquidity. For many fresh and young investors, tax deduction tends to bring a better relief than tax saving investments as they need not worry about the investment! Such investors can go in for monthly payment mode through SIPs for ELSS and ECS in the case of insurance. However, such luxury may not be available for last minute tax savers with the year coming to an end in the next four months. So, look for lump sum for the current year and from next financial year, make it a point to sign up for SIPs.

Another option for monthly saving is SIP in a general fund or a debt fund and the amount can be transferred to an ELSS fund at the time of providing investment details to the employer. While debt funds give the comfort of accumulation without risk, equity funds provide the element of opportunity of earning higher returns but with the baggage of risk. Go for an option that suits your risk taking abilities.

Home loans have been the flavor of the week with best rates for home loans— the finale being delivered on Monday, the 15th of December; when public sector banks announced reduced rates for home loans. Is that good news? Or are there any catches to it? One quick look at the balance sheet for home loans, as it appears now.

On the plus side:

• Housing loans are down with immediate effect to 8.5 % for loans up to Rs.5 lakh and 9.25 % for loans up to Rs.20 lakh.

The package effect does not include the above Rs.20 lakh category, but given the CRR and repo rate cuts, bankers believe that prime lending rates for not only home loans but all loans will drop anyway.

• The home loan package is only for public sector banks. But the private and foreign banks – which offer loans in the 13- 17 % range — may follow suit, partly driven by the market and partly to get a share of the sub 20 lakh loan segment, which is known to be a segment of high recovery. There are already reports of private banks taking a re-look at their interest structures.

• Borrowers will have to pay less margin money on home loans (that is the amount they need to pay upfront) which has been brought down to 10-15 % from 20-25 %.

• EMIs are not likely to change for five years, going by the announcement made by the PSBs. After that period, borrowers may be given the option of going in for fixed or floating loans.

• No processing and pre-payment charges and free life insurance cover for borrowers

On the plus side, the cut in rates by PSBs may force the private and foreign banks to follow suit. Today, the private banks are in the 17% range. However, the PSB’s generally cater to the sub 20 lakh loans.

 Competition from the package will see housing finance companies review their interest rates.

On the minus side

• Home loans flavor is only for existing borrowers. After all, the intent behind the scheme is to stimulate the economy, particularly the cement and steel industry rather than benefit for individuals. Still if interest rates fall, it is only a matter of time. (Overall, a plus)

• Banks may take a hit on home loans margins, but it is not expected to be for long. They will make up from gains in treasury, say bankers.

• Can’t see anything else?

The stock market too has reacted with caution but positively. Stocks in the banking and finance, cement and construction, engineering and capital goods industry have all gone up.

If the sub Rs 20 lakh segment picks up, it is a positive trend. This segment is known for the high rate of recovery, so will it attract builders who were so far focused on the higher end of the market and the commercial sector?

The other thing to watch out for is that a lot of builders have lost money; homes going vacant, being sold at discounts and a continuing cash flow problem in the industry, this is the time when builders may cut corners, put quality at risk.

The sub 20 lakh homes would be impossible to find in metros, and very difficult in larger cities. Will this package see more homes moving to suburbs, or to smaller towns and villages? Any views?