Buying a house V/s Renting a house - The difference can cost you Rs 100 Crores!

Recently I had represented Gulakh to an event where a widely popular and reputed fund manager claimed that he stays on rent and has invested all his money in the markets. And mind you, he is married! :P
It was quite a brave call to make especially when one has earned enough to not only afford an house but also earn substantial income from a job as well as from the markets.

Buying a house has always carried sentimental value. Many dream about getting that right job which can enable them to take an EMI and book a house. Even if it is located in the outskirts. As a Mumbaikar, most of us would know somebody or the other who travels atleast four hours a day.

I have always espoused the idea of renting a house rather than buying one.

Let us try to compare both the scenarios:

Scenario A

Consider Mr H who wants to buy a house worth a crore.
For this amount, he is able to afford a 2 BHK in Borivali.
He is earning Rs 90,000 per month and his wife is earning Rs 50,000 per month.
He avails of a loan worth Rs 83,00,000 and together they can comfortably pay an EMI of Rs 75,000 to buy a flat priced at a crore.
I used this to calculate.

Suppose they have to start paying EMI from Dec 2016, I have considered the following assumptions which seem fair:

a) As mentioned earlier, 54% of their incomes is spent on home loan EMI
b) They are able to invest 20% of their income in mutual funds viz is around Rs 28,000. Every year this amount increases by 10%.
c) Their salaries increase year on year by 15% (considering promotions/job changes)

d) The rest is for all their other expenses

Now how will their investment corpus through SIPs look like in December 2026?

Year	SIP/month
2017	28000
2018	30800
2019	33880
2020	37268
2021	40995
2022	45094
2023	49604
2024	54564
2025	60020
2026	66023

Assuming a CAGR of 15% and average SIP/month as Rs 44,624 one may expect this corpus to grow to around Rs 1.24 crores by Dec 2026.

If we are being very favourable, the value of the property could grow by 15% CAGR, which means in Dec 2026 it would be worth Rs 4.045 Crore.
By Dec 2026, close to 75 lakhs still remains to be paid off.

So their networth could be: Rs 4.05 crore + Rs 1.24 crore - Rs 0.75 Crore =  Rs 4.53 crore.
Which would be worth around Rs 2.73 crores as of today considering an inflation rate of  little less than 8%.

QUITE IMPRESSIVE RIGHT?

Scenario B

Mr H and his wife rent a 2 BHK in Chembur (Tilak Nagar).
They pay a rent of close to Rs 35,000.
Since they are paying rent instead of EMI, they not only invest the difference between the EMI and rent (75000 - 35000 = 40,000), but they also invest 20% of their combined salaries.
Now let us assume their increase in salary also takes care of the increase in rent (about 5% year on year. And after a point it will remain stagnant)

Now how will their investment corpus through SIPs look like in December 2026?

Year	SIP/month	SIP/month	Total
2017	28000	40000	68000
2018	30800	40000	70800
2019	33880	40000	73880
2020	37268	40000	77268
2021	40995	40000	80995
2022	45094	40000	85094
2023	49604	40000	89604
2024	54564	40000	94564
2025	60020	40000	100020
2026	66023	40000	106023

The average SIP is Rs 84625.

Now since they were young and didn't buy a house, they decided to be aggressive and invest in a mid cap mutual fund like Birla Sun Life Mid Cap Fund. Since its launch in Oct 2002, it has offered a CAGR of 24.58%.

Now let us assume even a CAGR of 18% to be most conservative.

Over a period of 10 years at a CAGR of 18%, this works out to be Rs 2.84 crores

Over 10 years, Networth in the case of Scenario A = Rs 4.53 Crores

Over 10 years, Networth in the case of Scenario B =.Rs 2.84 Crores

Now let us look at what will happen over a 20 year period in the case of Scenario A.

Year	SIP/month
2017	28000
2018	30800
2019	33880
2020	37268
2021	40995
2022	45094
2023	49604
2024	54564
2025	60020
2026	66023
2027	72625
2028	79887
2029	87876
2030	96664
2031	106330
2032	116963
2033	128659
2034	141525
2035	155678
2036	171245

In 2036 Dec, another Rs 55 lakhs would be outstanding to be paid
At a very optimistic growth of 15%, the flat would be worth Rs 16 crores.
Average SIP would be worth Rs 80,184
Mutual Fund corpus would be worth Rs 12.1 Crores.

The networth is an impressive 16+12.1 = 28.1 - 0.55 = Rs 27.56 Crores.

Now let us look at what will happen over a 20 year period in the case of Scenario B.

Year	SIP/month	SIP/month	Total
2017	28000	40000	68000
2018	30800	40000	70800
2019	33880	40000	73880
2020	37268	40000	77268
2021	40995	40000	80995
2022	45094	40000	85094
2023	49604	40000	89604
2024	54564	40000	94564
2025	60020	40000	100020
2026	66023	40000	106023
2027	72625	40000	112625
2028	79887	40000	119887
2029	87876	40000	127876
2030	96664	40000	136664
2031	106330	40000	146330
2032	116963	40000	156963
2033	128659	40000	168659
2034	141525	40000	181525
2035	155678	40000	195678
2036	171245	40000	211245

Average SIP would be worth Rs 1,24,814
CAGR would be 18% over 20 years (Quite possible as Birla Sun Life Mid Cap Fund has delivered close to Rs 24% during a 20 year old period)
The corpus would be worth Rs 29 Crores.

Over 20 years, Networth in the case of Scenario A = Rs 27.56 Crores

Over 20 years, Networth in the case of Scenario B =.Rs 29 Crores

Now let us look at what will happen over a 30 year period in the case of Scenario A.

Year	SIP/month
2017	28000
2018	30800
2019	33880
2020	37268
2021	40995
2022	45094
2023	49604
2024	54564
2025	60020
2026	66023
2027	72625
2028	79887
2029	87876
2030	96664
2031	106330
2032	116963
2033	128659
2034	141525
2035	155678
2036	171245
2037	188370
2038	207207
2039	227928
2040	250720
2041	275793
2042	303372
2043	333709
2044	367080
2045	403788
2046	444167

In 2046 Dec, the home loan would have been paid for.
At a very optimistic growth of 15%, the flat would be worth Rs 64 crores.
Average SIP would be worth Rs 1,53,527
Mutual Fund corpus would be worth Rs 107 Crores.
Total networth = Rs 64 Cr + Rs 107 Cr = Rs 171 Cr.

Now let us look at what will happen over a 30 year period in the case of Scenario B.

Year	SIP/month	SIP/month	Total
2017	28000	40000	68000
2018	30800	40000	70800
2019	33880	40000	73880
2020	37268	40000	77268
2021	40995	40000	80995
2022	45094	40000	85094
2023	49604	40000	89604
2024	54564	40000	94564
2025	60020	40000	100020
2026	66023	40000	106023
2027	72625	40000	112625
2028	79887	40000	119887
2029	87876	40000	127876
2030	96664	40000	136664
2031	106330	40000	146330
2032	116963	40000	156963
2033	128659	40000	168659
2034	141525	40000	181525
2035	155678	40000	195678
2036	171245	40000	211245
2037	188370	40000	228370
2038	207207	40000	247207
2039	227928	40000	267928
2040	250720	40000	290720
2041	275793	40000	315793
2042	303372	40000	343372
2043	333709	40000	373709
2044	367080	40000	407080
2045	403788	40000	443788
2046	444167	40000	484167

Average SIP would be worth Rs 1,93,528
CAGR would be 18% over 30 years.
The corpus would be worth Rs 277 Crores.

Over 30 years, Networth in the case of Scenario A = Rs 171 Crores

Over 30 years, Networth in the case of Scenario B =.Rs 277 Crores

A GRAND DIFFERENCE OF MORE THAN RS 100 CRORES

So what would you like to do? Rent or buy?

17 Financial resolutions for 2017

Merry Christmas!

The New Year is just around the corner and it is time for new resolutions!

Here are 17 financial resolutions to get started with:

1) I will get health insurance policies for my self and for my dependents 

According to this article written way back in 2014, room rates for well known hospitals are more than the tariffs charged by luxury hotels. Quartz goes on to write that India's GDP between per capita based on purchasing power parity grew by 121% from 2004 to 2014 whereas average medical expenditure in urban areas grew by 176%. It is just too costly to fall sick!

2) I will get term life insurance policy for myself

Listened to the older members of your family and bought a money back plan? You are in big trouble! The returns offered by money back plans are next to nothing. And they hardly offer a decent cover for your dependents in case of your unfortunate demise. Not convinced? 

Let us take the case of LIC's new money back plan - 20 years. You can access their calculator here to create your own illustration.

Let us look at their sample illustration given below:

If you survive for 20 years and pay Rs 7752 every year as premium, then the following would happen:

a) You would have paid 15x7752 (as you need to pay premium only for 15 years) = Rs 116280

b) Throughout those twenty years, if you passed away your family would get anywhere between Rs 1,25,700 and Rs 1,83,500

c) If you survived, you would receive anywhere between Rs 114000 and Rs 1,58,500

WHICH MEANS (EXCUSE THE CAPS LOCK AS I NEED TO MAKE A STRONG POINT HERE): AT THE END OF 20 YEARS:

• BY PAYING RS 7752 YOU ARE GOING TO EARN ANYWHERE BETWEEN 114000 AND 158500 WHICH WOULD BE WORTH AROUND RS 28500 AS OF TODAY AND RS 39625 AS OF TODAY. CONGRATULATIONS FOR SUCCESSFULLY DESTROYING YOUR WEALTH!
• YOUR INSURANCE COVERAGE WOULD BE OVER AND IF YOU NEED TO BUY INSURANCE IT WOULD BE PROHIBITIVELY EXPENSIVE

Rather if you buy a term plan from Edelweiss Tokio according to the options given here, (assuming I earn Rs 8 lakhs per annum + dont chew tobacco or smoke):

a) I pay Rs 6683 annually for which I get a coverage of close to Rs 80 lakhs

b) The coverage is for 30 years

b) Now you may argue that I won't get my money back. But if I invest that difference of Rs 7752 - Rs 6683 = Rs 1069 for 20 years in a mutual fund that would offer me returns worth 12% per annum, I would earn Rs 10,68,089. WAIT! HOW MUCH DID YOU WRITE? 

YES THAT IS RIGHT - MORE THAN RS 10 LAKHS!! Check out for yourself.

So in the first scenario when you bought a money back policy from LIC, after 20 years, the best you would be left with:

a) Rs 158500

b) No life insurance coverage

In the second scenario when you bought a term insurance policy from Edelwiss Tokio, after 20 years, the worst you would be left with:

a) Rs 10,68,069

b) Policy coverage of Rs 80 lakhs for another ten years.

And in any case, LIC does invest your money in the markets.

3) I will begin investing in mutual funds. In case I have been investing, I will bump up my SIPs

This is an absolute no brainer. Read this beautiful case study about how long term investing through SIPs has made serious wealth.

4) I will only buy shares of good businesses and hold them for as long as possible

This article talks about veteran investors who have bought and held on to shares for several years. Mr Janak Mathuradas's family have been share holders in Tata Group's companies for more than 100 years. Although there are a few investors who hold shares of more than 100 companies in their portfolio, I would recommend that you take the advice of your finance investor or your CA who can guide you with a list of 10-15 good companies in which to invest for atleast a decade.

5) I won't rely on tips to invest. I would rather research and analyze before investing

These cartoons explain it -

6) I will save first and then spend

Don't decide how much you are planning to save by figuring out how much you need to spend.

Just reverse it!

Set up your bank account to automatically credit atleast 20% of your salary into recurring deposits and mutual funds. Offer your bank a mandate to do this during the first week of the month. It will ensure that you are able to follow fiscal discipline for the remaining days of the month.

7) I will track my expenses

Download Walnut in your phone. And thank me later.

8) I will avoid borrowing as much as possible

Yeah I get it about YOLO (You live only once)

But if you start supporting YOLO by LOCO (Live on credit Oh!), you would find yourself under a MODI (Mountain of debt infinitely). Now isn't this going to anger some bhakts!

9) I will pay my entire credit card outstanding bill amount and won't get into the trap of paying only the minimum bill amount

Read this to understand in detail. You will find yourself falling into a debt trap which would be harder than getting out of quicksand.

10) I won't take personal loans to buy gadgets or go on holidays

Refer to point 8!

11) I will not underestimate the power of small savings. 

I will consciously aim towards saving atleast Rs 10 per day from my daily expenses. One way to go about this would be to walk some distance before catching a taxi or auto. You can read how by even saving Rs 500 per month one can make close to Rs 2.6 lakhs in ten years!

12) I will reduce the number of times I eat out

Size of your tummy reduces and the size of your wallet increases.

13) I will plan my retirement

Presently we are proud of our demographic dividend. We are among the youngest nation in the world. But doesn't that also mean at some point of time we will be having several senior citizens to take care off. Wouldn't it be great if most of them have taken care of their finances so that they aren't a burden on society. If you are 30, set aside 10 percent of your income to be invested in mutual funds and keep increasing that percentage every year. If you are 40, set aside 30%. If you are 50, set aside 40% and invest most of it in debt funds. If you are 60, don't give up. Save and Invest. You will thank me when you are 80. Here are some inspirational seniors.

14) I will pay off my short term debts as soon as possible

Personal loans and credit card loans have back breaking rates of interest. Not paying them off will not only keep you in a vicious debt cycle but also impact your CIBIL score. And this might hurt you whenever you are off to avail of that home or vehicle loan.

15) I shall buy a piggy bank

You may laugh this off. But when demonetization occured I knew I had close to Rs 3000 in coins which could help me when one can't go cashless :P 

It also helps to discipline a child in the house as a piggy bank is usually the first exposure to the concept of saving for her.

16) I shall read the following blogs:

• Subramoney
• Jaagoinvestor
• Safalniveshak
• Valueresearch
• Stable Investor

These blogs have helped me in my journey of understand about personal finance and long term wealth creation. The authors of these blogs maintain integrity and sanity even when other participants in the market are getting carried away with bullish or bearish trends.

17) I will teach my children basics of financial planning

This would be one of the best lessons to bequeath to your little one. Educate yourself if you don't feel confident and instill financial discipline and knowledge about investing in your child. This article has covered some very relevant points.

Here is hoping that you have a financially successful new year!

Edelweiss GPS – Giving direction to your investment strategy

Wolfgang Amadeus Mozart is supposed to have remarked – ‘True genius lies in simplicity’.

Since I started investing a little more than half a decade ago, I have used different websites to invest, track and manage my portfolio. Navigating through these portals used to be a difficult experience. Especially since I didn’t know how to begin or what should be my purpose to invest. Should I be starting off with stocks or settle down with mutual funds?  As a wet behind the ears investor it used to be difficult for me to understand several terms.

However Edelweiss has to adhered to Mozart’s philosophy and have introduced Guided Portfolios (GPS) whose user interface makes investing unbelievably easy.

So what is Edelweiss GPS?

Edelweiss GPS is an algorithm based intelligent system which designs mutual fund portfolios for investors and guides them towards their financial goals through systematic investments. Confused? Don’t be! Keep reading.

What was the need for such a product?

Simply, to make things simple! Investing has historically been a high involvement process. Either you need to make sense of several research reports with numbers thrown about generously or be dependent on tips with doubtful fundamentals. What if something could address both these problems? That is what this platform does. It offers an informed recommendation after posing straightforward questions about your background and goals.

How does it work?

It works by making the process of investing easy. Click on Edelweiss.in. You will encounter pointed questions such as: I have some money and want to invest it OR I have a financial target and want to achieve it

If you fill up the blanks and choose the risk profile which suits you amongst low, medium and high.

Once you click on show me my portfolio, you would encounter the recommendations made by the product as well as how this portfolio has perfomed in the past:

The platform also offers the rationale for recommending this portfolio, performs a scenario analysis by comparing it with performance offered by regular fixed deposit and also predicts how the portfolio might shape up into after certain number of years.

The Indian markets are poised to achieve a multi year bull run and you might be worried about missing out. If that is the case, then sign up quickly with Edelweiss GPS and you would be fascinated by how it makes the entire experience of investing a breeze.