Light up your Child's future this Diwali Oct 16, 2009

Light up your Child's future this Diwali

Oct 16, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,195.20	351.7	2.09%
Re/US$	46.24	0.1	0.22%
Gold Rs/10g	15,820.00	50.0	0.32%
Crude ($/barrel)	68.81	1.4	2.02%
FD Rates (1-Yr)	4.75%-6.50%

Weekly change as on Oct 15, 2009

Light up your Child's future this Diwali

Impact

All parents want to provide the best they can for their children, by planning for their education, marriage and business activities. However, one must not only plan, but also execute these plans in order to accomplish your goals for your child's future.

It is PFN's constant endeavour to bring you some simple quick read points, which you, as an investor must follow in order to keep the light burning bright, not only this Diwali but every Diwali:

Start TODAY! Not tomorrow - There is a myth that 'one needs large sums of money to invest'. If you start early, your investments get more time to grow. This will also enable you to start with a smaller investment amount.

For Example: Ajay starts saving Rs 10,000 each year at the age of 30, while Sanjeev starts saving Rs 20,000 per year at the age of 40. Both earn 7% p.a. return on their savings. At the age of 50, Ajay will get Rs 409,955, while Sanjeev will get Rs 276,329 – a difference of 32.60%. This is the power of compounding.

Balance your lifestyle expenses - A prudent and responsible parent should resist the temptation to splurge on lifestyle expenses viz. restaurants, leisure, consumer durables, etc, in order to secure a better future for their child tomorrow. Parents should balance the temptations of today with “the better future for their children” tomorrow

Desist from liquidating the portfolio during a cash crunch - When faced with a cash crunch, you may be tempted to draw from the money you have set aside for your child. However, any deviations in your child's portfolio can jeopardize your goals and his future as well. Don't put out the light in his life!

Diversify your investment into various avenues - Do not put all your eggs in one basket! Diversify your investment into assured return schemes and market linked schemes - not putting all your eggs in one basket was never more true than it would be when it concerns your child.

All that glitters is Gold!

Impact

Apart from being a reserve asset, this precious metal has also been, in recent times, viewed as an investment option. Besides beating the inflation index, gold has delivered better returns over a 3 year time frame than the BSE Sensex.

BSE Sensex vs. Gold

(Base: Rs.100)
(Source: Crisil Fund Analyser & Gold.org)

The above graph clearly concludes that during the equity market turbulence in 2006 (May to July), and also during the U.S. Sub-prime mortgage crisis in 2008; investment in gold has been a safe option, delivering stable returns. During the Sub-prime crisis, equity fell more, while gold’s fall was more or less cushioned, and it immediately showed a run-up. So, if you had invested Rs 100 in the BSE Sensex on April 3, 2006, the value of the same would have been Rs 134 on October 3, 2009. Whereas the same Rs 100 invested in Gold would have been worth more, i.e. Rs 171. This is 27.61% more than BSE Sensex.

In the current economic situation, with inflation likely to rise, RBI would be looking at increasing interest rates. In such a scenario, gold would be a good investment option. The U.S. Dollar has also been depreciating; this again would have a positive impact on gold prices. Interestingly, there has also been a rise in aggregate gold holdings by gold ETFs.

Reality check for realty!

Impact

If you are looking to invest in a real estate which is still in the pre or under construction stage, it is imperative to learn about your realty developer’s financial status. Your expectations of getting your dream home in the next couple of years may be shattered if your realty developer is unable to meet his debt obligations.

In the recent times, the money paid upfront by home buyers has been used by the developers to repay past debt, rather than to build houses. The graph below reflects the rough patch which the Indian realty sector had faced post the U.S. Sub-prime crisis in 2008, as indicated by the BSE Realty Index. During 2008, sales were sinking and the debt burden was mounting for the Indian real - estate developers.

Tremors of U.S. Sub-prime Crisis

(Base: 100)
(Period: July 10, 2007 to Oct 9, 2009)

(Source: Crisil Fund Analyser)

Financial Extracts (in Rs Lacs)
	Unitech Ltd.		DLF Ltd.
Particulars	(FY) 31-Mar-09	(FY) 31-Mar-08	(FY) 31-Mar-09	(FY) 31-Mar-08
Net sales	331,563.5	428,011.3	383,904.5	605,846.0
Interest/Finance Charge	55,456.8	28,040.6	80,985.8	44,764.7
Loan Funds	905,584.0	855,237.5	961,496.9	838,640.8

(Source: From the respective companies’ website)

The above table indicates how the sales have dropped on a year-on-year basis for both Unitech Ltd. as well as DLF Ltd by 22.53% and 36.63% respectively. On the other hand the interest cost has mounted for both the companies i.e. Unitech Ltd and DLF Ltd by 97.77% and 80.91% respectively.

In the past six months, a little over Rs 10,300 crores has been raised through Qualified Institutional Placements (QIPs) by these cash - starved real estate companies. The vital point here is, the money raised has not been mobilized to build houses, but rather has been used by the realty developers to service their loans.

Given such a scenario, don’t let the real estate developer make your dream home seem too far from become a reality. In order to preclude this, we advice our readers to be wary and buy only in constructed property and not in under-construction property.

Trimming Deposit Rates

Impact

Interest offered on one year bank deposits are once again shrinking. These rates offered currently are closer to those offered five years ago. The table hereunder depicts the interest rates offered on the bank deposits.

Bank Deposit Rates
Banks	Interest Rates (%) p.a.
State Bank of India	5.75
Bank of India	6.50
HDFC Bank	5.75
ICICI Bank	5.75
PNB Ltd.	6.50
Bank of Baroda	5.50
HSBC India	4.25
Axis Bank	6.00

(Source: Website of respective Banks)
(Term deposits are for amount above Rs 15 lacs but below Rs 1 crore)

In our opinion, in the current bank deposit rate scenario, you must not plough your money immediately in one year bank deposits. With RBI suggesting an interest rate hike in the coming months; we might see an increase in bank deposit rates. For the immediate ask your financial planner for the best option.

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