LoanRaja Blog- Personal Finance Guide

Interest rates more volatile? Rate cuts have become a regular affair but the consumer and banker is not enthused about borrowing or lending. Both need a bigger push from the government
In recent times, interest rates have turned more volatile than equity markets. Not surprising considering the fact that there is talk of a rate cut on a weekly basis. It is the expectation of these cuts which is keeping the Indian market swing in a wide range. If you look at some of the other global markets, the volatility in interest rates is not exciting for traders. Now, will we have a rate and if it comes through, will it get us out of the current slowdown which is all around us?

In fact, many have been complaining that life hasn’t changed in a big way after the recent rate cut which has pushed banks to cut down interest rate by 0.75%. The crib is that home loan rates are still in double digit and well above the comfort zone for many. As a result, borrowers are not exactly rushing to banks for buying property or cars.

If government is thinking of another cut in interest rate or stimulus package, it is due to the non responsive behaviour of the consumers. However, for the consumer, the problem is not merely on the rate front. In the case of property, developers are unwilling to press the price revision button having created land banks during real estate boom. As a result, you still find the property prices on the higher side as the developer is not ready to offer a discount of more than 15-25% in interest rate. In the case of cars, the story is entirely different.

So who need not worry about interest rates? Car manufacturers have been faced with the challenge of rising inventory and have begun to lower prices but the consumer is not ready to bring in a new car in a hurry. The reasons for lack of enthusiasm are plenty but top among them is the uncertain future. If the salaried is not sure if he will have the same pay cheque for the next one year, the uncertainty is of a different kind for the self-employed who account for a good chunk of car buying population at this time of the year. For these entrepreneurs, receivables are mounting and cash is turning out to be a rare commodity. With the economic recovery threatening to take more time to return to normalcy, the entrepreneurs are not in a hurry to invest on new wheels.

It is in this background one has to view the economic packages being unleashed by the government. In an election year, the government is keen on reviving the sentiment which has taken a huge beating. The uncertainty, liquidity crunch and the lack of enthusiasm among consumers to loosen their purse strings is not having the desired impact and hence, the Union government has been pushed to get more aggressive with its goodies. That’s why now you hear about income tax sops on home loans, higher investment limit for Section 80c and there is even talk of the government pushing builders to offer steeper discounts. Banks have already been told to get back to lending rather than focus on government securities. In the past few months, banks have resorted to increased scale of treasury operations. Not surprising considering that government securities have become the most profitable option for improving bottom line. The focus on treasury has been an easy option for banks in an era of falling interest rates. As you are aware, the yield from government securities goes up in inverse proportion to the prevailing interest rates and the sharp fall in the last few months has helped the yield to be in the range of over 15%. Unless there is pressure on them to get back to lending, banks may continue to rely on treasury profits for their good health. Only government has the wherewithal to push them.

As time flies, a thought crosses my mind; how is an investor affected by financial crisis and who can he seek for investment tips? Now for instance would you expect a kiranewala to talk about financial crisis? Last week, I walked into a store to pick up a gift and handed over a Rs 500 note to the shopkeeper. The man didn’t have enough change to return to me. While that is nothing new in a city like Bangalore, what puzzled me was his reply. He cribbed that due to the slowdown in the US and financial crisis, consumers everywhere were going slow on their purchases and business was low during the last few weeks. Going further, we will talk on some investment tips to face this financial crisis.

If a shopkeeper who is not even an investor dealing with small value items is complaining of slow-down and financial crisis it is a clear indicator of the state of the economy. So how does one understand the outcome of financial crisis and how the investor is affected? The stock markets were the early birds to forewarn us by slipping into reverse gear since February and it has been tough for investors to find avenues for products which give good returns. On the other hand, the growing uncertainty at the work place for the salaried class, lack of business growth for the self-employed has forced everyone to change the investment strategies. At this hour, not only one needs to focus on liquidity but investors should also remember the fact that wealth creation is a continuous process and not something done only during boom times. Here, are some tips which can help you tide over the current financial crisis but also help you make a good opportunity of the environment.

Be Liquid during Financial Crisis:

The Investment tip here for investors in the current environment as every investment product has failed to offer stability during this financial crisis. At the same time, different markets have also been offering good investment opportunities for long term investments and hence one needs to have the liquidity to take advantage of the situation. For instance, equity market has failed to sustain intermittent relief and on the other hand, has been presenting buying options in blue chip stocks at regular intervals. Similarly, property too has been going through the phase of corrective mood and investors with long term focus can look for their choice.  However, for being liquid, one need not hold on to cash and instead, the money can be parked in fixed deposits or liquid funds.

Invest in a Systematic way: As pointed out earlier, equity markets have been volatile in the last few quarters and hence, look attractive for long term investors. However, investors need not rush to pick up at one go and instead, the investment process can be over a period of time. There are two ways of going about the staggered investment strategy. The well-known investment tip is to sign up for an SIP in an equity fund and keep buying units in a mutual fund on a monthly basis. The other option is to invest at one go but still take advantage of staggered accumulation through STP. In this option, an investor invests a lump sum in debt funds and transfers a fixed sum into an equity fund on a daily, weekly or monthly basis. The concept is similar to SIP but the biggest difference is that investor can still enjoy the benefits of SIP with one-time investment. Another added advantage is that mutual funds allow STPs even on a daily basis which can make a huge difference over long term. For instance, an investor can park Rs 2-3 lakhs in a liquid fund at the beginning of year and transfer Rs 1,000 to an equity scheme on a daily basis. For STP, the choice of equity funds can be more than one fund too.

The accumulation strategy need not be restricted to mutual funds alone. Even with respect to stocks, buy them in small lots. However, buying has to be planned carefully and you also need plenty of patience to get the acceptable price for your stock.

Someone once observed that real estate prices can never fall. There is only so much land in the world to sell real estate, and being a scarce commodity in that sense, demand and therefore prices of land, can only go up.

Yes, there will be some ups and downs, but the land market will never crash. And in the long term, investment in real estate – land and property — can only be profitable.

However, like someone also said, in the long term, we are all dead anyway, and it is the short and medium term that affects us the most.

And in the short term, buying ability, construction prices and interest rates determine property prices to a large extent.

Right now, the Indian property market or Real Estate per se is seeing some interesting swings. For a while, it seemed as if prices would continue on an upward spiral, and a house/ flat for Rs 1crore became matter of fact.

And then, the RBI struck. Loans to housing became stringent, interest rates went up and home buyers found life tough.

Now, it is the turn of the developers to struggle. On the one hand our land prices are still high, and on the other the falling prices of homes, with home loans once again getting priority; which would mean there is still much scope as far as Real estate is concerned.

But buyers are still cautious and are refusing to bite. Buyers are skeptical to invest may it be in real estate or in any other investments. Banks too, have yet to start looking at home loans again, despite directions to do so from the Government of India. In an attempt to get the segment back on track, developer associations such as CREDAI and the National Real Estate Developers, Council (Naredco) have both urged members to cut prices on properties. Developers, who are strapped for cash, are dangling various freebies, incentives, and easy payment options.

So the obvious focus for real estate seems to be the middle and low-income group housing schemes. The high-end homes are already in oversupply. Even commercial property is lying vacant. The only serious house buyers are these looking for a roof over their heads, rather than those looking at real estate as an investment option.

One other area that is expected to gain popularity during a slowdown is the affordable or low cost housing segment – which includes homes between Rs 3-20 lakh. This is attractive to the buyers – because of the lower prices and attractive to developers, because their initial investment can be a little lower, a boon in times of a funds crunch like now.

Once demand picks up, the construction industry thereby real estate itself is expected to revive.

The next few months will see a correction in rentals – a trend that has already set in. Rents have gone down anywhere between 10-50 percent, depending on the location. In the meantime, there is a lot of vacancy – in high-end luxury apartments, as well as office space. Companies too are putting off real estate decisions, waiting for conditions to improve before making any new investments.

One point of view is that the slowdown has only been a means to bring about a correction in real estate, bringing it down to more realistic levels. Developers will continue to find it difficult to raise funds and prices are expected to fall by at least 10-15 percent over the next 6-9 months.

Investment in real estate remains a good proposition, as long as it is direct investment. Real estate equity funds have taken a beating. A lot of private equity finds from investment banks that they are not in good shape either, in the wake of the global financial crisis.