Home Equity Line of Credit

I really don't know much about this, but this is a topic of much wider interest, so I am writing about this.

A Home Equity Line of Credit (often called HELOC, pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house.

A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses the line of credit to borrow sums that total no more than the amount, similar to a credit card. At closing you are assigned a specified credit limit that you can borrow up to. During a "draw period" (typically 5 to 25 years), HELOC funds can be borrowed "on demand" and you pay back only what you use plus interest. Depending on how much you use the HELOC, you will have a minimum monthly payment requirement (often "interest only"); beyond the minimum, it is up to you how much to pay and when to pay. At the end of the draw period, you will have to pay back the full principal amount borrowed either in a lump-sum balloon payment or according to a loan amortization schedule.

Another important difference from a conventional loan: the interest rate on a HELOC is variable based on an index such as prime rate. This means that the interest rate can - and almost certainly will - change over time.

HELOC loans have become very popular in the United States in 2000s, in part because interest paid is typically (depending on specific circumstances) deductible under federal and many state income tax laws. This effectively reduces the cost of borrowing funds. Another reason for the popularity of HELOCs is the flexibility not found in most other loans - both in terms of borrowing "on demand" and repaying on a schedule determined by the borrower. Furthermore, HELOC loans' popularity growth may also stem from their having a better image than a "second mortgage," a term which can more directly imply an undesirable level of debt.

It must always be kept in mind that the underlying collateral of a home equity line of credit (HELOC) is the home. This means that failure to repay the loan or meet loan requirements may result in foreclosure.

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Mutual Funds Simplified

Equity markets may have rebounded smartly after the dramatic fall in May. But fixed-income instruments seem to be stealing the show these days.
After wrecking havoc in stock markets around the world, the tight liquidity scenario is finally playing to small investors' advantage. After several years, investors are finding that fixed deposit rates are climbing to respectable levels.
While 90-day bank deposits are offering around 5 per cent returns, one-year deposits are yielding 7-8 per cent. As far as mutual funds are concerned, though the future of income funds, which invest in medium-and long-term debt papers, seems to be uncertain, short-term debt funds are giving returns in excess of 6.5 per cent.
On a post-tax basis, debt schemes - fixed-maturity plans in particular - seem to be the best option for investors looking for steady returns.

Funds beat banks: Even as banks are luring investors with higher fixed-deposit rates, mutual funds seem to be steeling a march over them with FMPs. The total assets under management under these schemes have nearly doubled this year.
At the end of July, these schemes had a combined corpus of Rs 28,571 crore (Rs 285.71 billion). According to industry sources, in August alone, 14 FMPs have so far been launched with varying maturity and the total collection is expected to be at least around Rs 4,000 crore (Rs 40 billion).
The AMCs that have launched FMPs this month include Reliance, ABN AMRO, Principal, HSBC, UTI, HDFC, LIC, Prudential ICICI, JM Financial, DBS Chola and SBI.
Essentially targeted at corporate and high net worth investors, FMPs combine the tax efficiency of mutual funds with the safety of fixed deposits.
The current rates on FMPs are as attractive as bank deposit rates and, thanks to the lower taxes on mutual funds, the post-tax returns on FMPs are better.
Currently, 90-day FMPs are offering around 6.85-7.10 per cent, while one-year FMPs are generating around 8.10 per cent pre-tax returns. HDFC Mutual's 26-month FMP yields 8.45 per cent for corporate investors and 8.10 per cent for retail investors.
These schemes usually come with a quarterly or annual term, and the shorter-term schemes are a huge hit with corporate investors, who usually seek to lower the tax incidence.
Mutual funds charge as low as 5-10 basis points as expenses, which is abysmally low. Even for retail investors in the top income tax bracket, these schemes make sense.

The tax edge: As dividends of mutual funds attract only a dividend distribution tax of 22.44 per cent for corporate and 14.03 per cent for individual investors vis-�-vis interest on deposits and corporate bonds, charged at the marginal income tax rate, mutual funds give better post-tax returns.
"High net worth individuals have a lot of appetite for these schemes as they generate significantly higher post-tax returns," says Sameer Kamdar, national head - mutual funds, Mata Securities.
Furthermore, income from mutual fund units - held for more than a year - is deemed to be 'capital gains' and, hence, qualifies for indexation benefit. This reduces the tax incidence even more.
Thus, while a 8.1 per cent, one-year FMP would yield a post-tax return of 7.2 per cent for an individual investor in the top income tax bracket (if he opts for the growth plan), a bank fixed-deposit offering a similar rate would yield only 5.37 per cent net of tax.
Even if you opt for the dividend plan, which is less tax-efficient compared to the growth plan, for more than one-year time horizon, you would come up with a post-tax return of 6.96 per cent.
The post-tax returns indicated above are based an indexation rate of 4.5 per cent. For the uninitiated, indexation is a method wherein returns are deflated to the extent of inflation.
The tax is calculated only on the inflation index-adjusted returns. The idea is that tax on long-term capital gains must be charged only on the real returns earned by an investor. The inflation index is published by the income-tax department every year.
Similarly, 90-day FMPs, which offer 7 per cent, would yield a post-tax return of 6.01 per cent. Currently, JM Mutual and LIC are offering rates upwards of 7 per cent.

The risk factor: Though FMPs are projecting fairly high yields, these are only indicative returns. They produce predictable returns over the desired timeframe since the maturity of the portfolio matches the tenure of fund schemes.
Unlike other schemes that suffer from volatility and, hence, risk of erosion in asset value, an FMP - structured as closed-end funds - carries no interest rate risk. Whether yields rise or fall, the asset value of these schemes is protected as deposits/ bonds are held to maturity.
Still, they do not guarantee returns as bank deposits - where the interest is assured - do. Though FMPs have delivered the returns they have indicated so far, there could be a risk of asset-liability mismatch, and the investor may not finally get exactly the indicated yield.
Says Dhirendra Kumar, chief executive officer of Value Research, a Delhi-based mutual fund tracking firm, "Since there is no guarantee on the returns that funds give, there is a risk that investors may or may not eventually get the returns indicated even in case of FMPs, which are otherwise quite predictable."
Besides, if you lock in funds in an FMP you don't have the option of liquidating it prematurely. But in case of bank deposits, you can withdraw your money without any penalty. However, the interest rate you earn on the deposit would be based on the period the money is invested for.
For instance, if you break a one-year deposit after three months, you would be entitled to the interest rate applicable for the three-month deposit - and not the one-year rate.
In fact, since bank deposits can be withdrawn without any penalty, it is an ideal time for investors to close their old deposit accounts yielding lower returns and renew them at the prevailing rates.

Other debt funds: With uncertainty on interest rates receding, debt markets have rallied over the past one month. The 10-year benchmark yield has declined from 8.5 per cent in mid-July to 7.91 per cent now, and this has propped up the returns on debt fund schemes.
Most categories of debt funds have delivered returns in excess of 6 per cent. Particularly, medium-term gilt and debt funds have generated over 10 per cent returns. Should you then begin to relook at income funds?

May be, not yet.

Fund managers warn that this kind of returns may not be sustainable. On the contrary, the debt market rally looks overdone and the market may be in for some correction.
And if that happens, income funds may be back to square one. Moreover, the risk-return factor, today, is strongly in favour of short-term funds.
"The return differential between medium-term and short-term debt funds is quite narrow, and the choice must be obvious given that short-term funds offer far greater stability and slightly lower returns," says Kumar.
Over the past one-month, short-term funds have seen a surge in returns too. This category has given an average return of 7.2 per cent, which again compares favourably with bank deposits on a tax-adjusted basis.

Source & Help: www.rediff.com

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How to secure your child's future

Though insurance is ideally seen only as a "protection tool", many investment-oriented products from insurance firms have caught the fancy of investors.
Child insurance plan is one among them. These are promoted as ways that help parents fund their children's needs such as education and marriage. Usually under such plans, the parent is the insured person and the child is the beneficiary.

The two broad categories of Child Plans are:
Traditional plans such as endowment plans or money back plans: The proceeds from these may either be in lump sum (as in endowment) or as installments over a number of years (as in money back plans).
Here, the proceeds will have two parts: (a) The basic sum assured which is payable to the beneficiary either on policy maturity or on the death of the insured. (b) The bonus component, which depends on the amount declared by the insurance company each year, is accumulated over the years and is paid out at in the final year.
The premiums received under these plans are invested in debt instruments such as government bonds. Such policies are easy to understand. However, as they lack equity component, they do not really serve the purpose of creating wealth in the long term.
Unit linked plans: These policies became popular recently. The premiums received herein are invested in equity and/or debt markets, depending on the policyholder's preference. Here, there is usually no guaranteed bonus on the part of the insurance company and the entire investment risk is borne by the policy holder.

Benefits of ULIPs Vs traditional policies
There are two major benefits for ULIPs:
Charges and portfolio disclosures are transparent in the case of ULIPs.
A policyholder has greater flexibility in choosing the investment options compared with traditional policies. Switching between options is also possible.

ULIPs Vs diversified mutual funds
So how do these policies fare compare with mutual funds? After all, investing in these policies means that you are believing that they are an adequate substitute to mutual funds. This is what I found:
These policies are far more opaque compared with MFs. The Web sites of two of the leading insurance companies (HDFC and ICICI Prudential) contain data up to September 30, 2006, only and not beyond, as they only undertake quarterly declarations. Compared with this, most MFs declare performance data on a daily basis and their portfolios at least once a month.
The charge structure in insurance policies is complicated (as I have outlined above) compared with those of MFs where the maximum charges levied rarely exceed around 4.50-5 per cent. While some defenders of child plans may state that the charges reduce with time, it also means that the policyholder is compelled to stay with a poorly performing fund merely because he has already paid the lion's share of expenses at the outset of the policy.

Returns
On the returns front, a comparison is difficult as ULIPs have been functioning for only around the past three years, unlike most of the well managed diversified equity funds which have been around for much longer.
However, certain stipulations on the part of the Insurance Regulatory and Development Authority (such as the seven-year dividend payout rule) constrain the investment universe for insurance companies. Hence they may not be able to exploit many investment opportunities, unlike mutual funds who can do so.
If one takes a couple of examples, HDFC Standard Life Growth Fund (ULIP) has given a return of 1100 basis points per annum over its benchmark (BSE-100) since January 2005 (as per their Web site) while Pru ICICI Maximiser has outperformed the benchmark by around 500 basis points since inception.
Compared with this, HDFC Growth Mutual Fund's returns stood at around 700 bps over the BSE Sensex while ICICI Growth Plan has given returns of around 1200 bps over the NSE Nifty Index. It will be interesting to see how the insurance companies perform during difficult times.
Traditional policies need not be considered as competition, as most, if not all, have given single-digit returns over time.

The final word
There is no conclusive evidence to show that Child Plans are superior for wealth creation. Till such evidence is obtained, I believe that it is preferable to unbundle the insurance and investment activities.
Hence I will end by once again suggesting that a combination of a term policy plus a systematic investment plan in a good diversified equity fund will serve our purpose in a superior way.

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Money Multiplier

ICICI Bank (India) provides a wonderful facility called Money mutiplier facility. A Money Multiplier Account allows you to set a minimum balance (subject to a minimum of Rs 10,000) to be maintained in your Savings Account. You can put in a request for the transfer of the excess of the minimum Savings Bank Account balance to Fixed Deposits in units of Rs 5,000 and for a period of one year or more, as specified by you. So you enjoy a higher effective rate of
interest on your deposit.

When you need the money, you can withdraw it by issuing a cheque or through an ATM. The deposit gets broken in multiples of Rs. 5,000 automatically. Thus, you don't lose out on liquidity either!

The Money Multiplier feature gives you the liquidity of a Savings Account coupled with high earnings of a Fixed Deposit. This is achieved by creating a Fixed Deposit linked to your Savings Account providing you the following unique facilities.

Maximum returns - Your money is never idle. Creation of a linked FD ensures higher rate of interest on your Savings Bank Deposits. You can issue instructions through any channel such as the ICICI Bank Branch, ICICI Bank Phone
Banking and ICICI Bank's Internet Banking for creation of Fixed Deposit(s) from the surplus funds in your Savings Bank Account (subject to a minimum of Rs. 10,000). The Fixed Deposits will be created in multiples of Rs. 5,000 for a tenure of one year or more as instructed by you.

Maximum Liquidity - You can withdraw the funds from your savings account through any channel such as the ICICI Bank ATM, ICICI Bank Internet Banking or by issuing a cheque. etc. All linked Fixed Deposits will be enabled for
automatic Reverse Sweep in multiples of Rs. 5000 on a Last-In-First-Out (LIFO) basis when the balance in the Savings Account falls below Rs.10, 000. The amount reverse swept will earn interest rates at the applicable rate for the period that the deposit was held with the Bank. The remaining amount will continue to earn higher interest at the
original rate applicable to the fixed deposit.

Auto Renewal - Under this facility, when your deposits fall due, the bank will automatically renew the principal and accrued interest for the same tenure as the original deposit.

Tags: Money Multiplier Maximum returns ICICI Bank Account

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How Stock Market works

It was autumn, and the Red Indians on the remote reservation asked their new Chief if the winter was going to be cold or mild. Since he was a Red Indian Chief in a modern society, he had never been taught the old secrets, and when he looked at the sky, he couldn't tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.
But also being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked "Is the coming winter going to be cold?"
"It looks like this winter is going to be quite cold indeed" the meteorologist at the weather service responded.
So the Chief went back to his people and told them to collect even more wood in order to be prepared. A week later, he called the National weather Service again. "Is it going to be a very cold winter?"
"Yes," the man at National Weather Service again replied, "It's definitely going to be a very cold winter."
The Chief again went back to his people and ordered them to collect every scrap of wood they could find.
Two weeks later, he called the National Weather Service again. "Are you absolutely sure that the winter is going to be very cold?"
"Absolutely," the man replied. "It's going to be one of the coldest winters ever."
"How can you be so sure?" the Chief asked.
The weatherman replied, "The Red Indians are collecting wood like crazy."
I think Stock Market also works in the same way.

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Investing Tips for Indian Market

The stock market 'meltdown' witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks.

Considering the Indian stock market behaviour over the previous fortnight, it would not be entirely inappropriate to state that the 600+ points (9%) correction witnessed in 10 trading sessions was almost as bad (if not worse) as the single-day near 800-points (16%) crash (!) seen on May 17, 2004. This is because, in either scenario, it is primarily the retail/small investor community, which gets affected the worst as they are generally among the late entrants to a bullrun (i.e. near the peak) and amongst the last to exit in a correction. However, some amount of stock market prudence and a disciplined approach could go a long-way in protecting one's capital. Listed below are a few points.

Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-popping returns, it must be noted that these stocks have the potential to wipe out almost the entire invested capital. Another way greed affects investor behaviour is when they buy/hold stocks above the price justified by its fundamentals. Similarly, in a vice-versa scenario (bear market), investors must control their fear when stock markets turn unfavourable and stock prices collapse. Panic selling would serve no purpose and if the company has strong fundamentals, the stock is more than likely to bounce back.

It is apt to note here what Warren Buffet, the legendary investor, had to say when he was asked about his abstinence from the software sector during the tech boom, "It means we miss a lot of very big winners but it also means we have very few big losers.... We're perfectly willing to trade away a big payoff for a certain payoff".

Avoid trading/timing the market: This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers' end at the end of the day. In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again. In Benjamin Graham's (pioneer of value investing and the person who influenced Warren Buffet) words, "Basically, price fluctuations have only one significant meaning for the 'true' investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market".

Avoid actions based on rumours/sentiments: Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investors' portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch. However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffet, "Be fearful when others are greedy and be greedy when others are fearful".

Avoid emotional attachment/averaging: It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price. However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company's performance may improve for the better and the stock would provide an opportunity to exit at higher levels. Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffet's words, "Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks".

Avoid over-leveraging: This behaviour is typical in times of a bullrun when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards). However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements. In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.

Keep Margin of Safety: In Benjamin Graham's words, "For ordinary stocks, the margin of safety lies in an expected 'earning power' considerably above the interest rates on debt instruments". However, having a stock with a high margin of safety is no guarantee that the investor would not face losses in the future. Businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term. But if a portfolio of stocks is selected with adequate margin of safety, the chances of losses over the long term are minimised. He further points out, "while losing some money is an inevitable part of investing, to be an 'intelligent investor,' you must take responsibility for ensuring that you never lose most or all of your money."

Follow research: The upswing in the stock markets attracts many retail investors into investing into equities. However, picking fundamentally strong stocks is not an easy task. In fact, it is even more difficult to identify a stock in a bullish market, when much of the positives are already factored into the stock price, making them an expensive buy. It is very important to understand here that owning a stock is in effect, owning a part of the company. Hence, a detailed and thorough research of the financial and business prospects of the company is a must. Given the fact that on most occasions, research is influenced by vested interests, the need of the hour is unbiased research. Information is power and investors need to understand that unless impartially represented (in the form of research) it could be misleading and detrimental in the long run.

Invest for the long-term: Short-term stock price movements are affected by various factors including rumours, sentiments, market perception, liquidity, etc, however, in the long-term, stock price tends to align themselves with its fundamentals. Here it must be noted what Benjamin Graham once said, "...in the short term, the market is a 'voting' machine (whereon countless individuals register choices that are product partly of reason and partly of emotion), however in the long-term, the market is a 'weighing' machine (on which the value of each issue (business) is recorded by an exact and impersonal mechanism)."Of course, it must be noted that the above list is not exhaustive and there may be many more points that an investor needs to understand and follow in order to be a successful investor. Further, the above points are not just a read but needs to be practiced on a consistent basis. While making wealth in the stock markets was never an effortless exercise, it becomes all the more difficult when stock markets/stock prices are at newer highs.

In the last, I hope all these information will be helpful to reader. Please leave you comments or feedback on this article.

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How to Start Raising Money for Growth

Q: We've got a product that sells well, but we need capital. How do I start?

- Larry N., San Francisco

A: Not having much information about what you need and where you are in the process, I'll begin by saying that it's important to understand there are different forms of capital with different costs associated with them.

I'll assume your company has a track record and operational history and that you've exhausted all commercial banking and debt issuances to support your growth. Banks focus on asset-backed loans, which can be personal or business assets. If available, this is cheap money compared to the equity investors will want.

But, having experienced over-leverage in a company, let me suggest that debt should be used for operating cash, not growth cash.

If you are indeed focused on growth capital, let me start by suggesting that it is all about exposure. Investors need to understand what you have done and where you are going. The majority of capital falls into two categories: angels, usually wealthy community-based individuals taking "flyers" on local businesses; and venture capitalists, who invest for a living.

Angels need to hear your story and see a summary of your plan and will usually make an investment on that basis. They know that the story will change, and they typically have faith in the management team they meet through the investment process.

The venture capitalist sees many deals, and the screening process is unmerciful. You need to create a summary and start working on an "elevator pitch"-a 30- to 60-second summary of the who, what and why of your business.

Having a good written summary and elevator pitch gets the process together. It helps to sharpen your understanding and align your thoughts. The rationale for a summary is that angels rarely read your whole plan, because a plan itself never gets the deal done.

You'll find angels at various community-based angel fairs. These events are often held by chambers, business networking groups and various professional organizations. At the upper end of these, you'll also find VCs. You'll probably need an introduction, so whip out your Rolodex and start calling friends who can help you out. Once you're introduced, get the summary in their direction and follow up with a call.

Once you find interested parties, you will need to get in front of them with a credible story. So practice, practice, practice. If you can't communicate your story quickly and concisely, don't waste your time and theirs. Practice with a video camera, practice with friends, and keep practicing.

In the end, you'll find that for the person who takes an interest in your company, it came down to the credibility of yourself and your presentations. That, and your company's exposure to the financial audience.

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