Wednesday, August 19, 2009

SHOULD YOU TAKE LOAN FROM YOUR EMPLOYER/COMPANY?

Companies , these days, increasingly position the loan benefits that they offer to their employees , as a major financial benefit to the employee. But, taking a loan from the employer is something I strongly recommend people to avoid . Here’s why I believe you should not opt for a loan from your employer:
1. Any loan from your employer ties you to your job. You can’t come out until the loan amount has been cleared in full. You might argue that you can always ask your new employer to bear the loan. But where does that take you? From one chain to the next? Plus, I’m not sure if any employer today would be willing to bear existing loans.
It’s psychologically debilitating to see your take home salary cut by the EMI (Equated Monthly Installment) amount on the loan even before it’s credited into your salary account.

2.There’s a hidden cost. Though you do not actually pay any direct interest on the loan amount, the notional interest surfaces as a perquisite in your income tax calculations and adds directly to your taxable income. I didn’t know this fact until I saw my income tax calculations; it was already too late.

3. People take loans that they dont really "need" . I have seen people taking loans from the employers just to take the benefit of saving on the interest differential that is there between the employer's rate and the prevailing market rate. This leads to people taking on credit liability when they do not really need the money. Most of the time credit is not used in the best possible manner leading to drain on savings and finacial stress.
With some fanatic fiscal steps, those already in the trap can manage to come out of this situation sooner than they think.

Friday, August 7, 2009

EXIT ENTRY LOAD, ENTER EXIT LOAD

SEBI is an institution which aims to act as watchdog to protect the interest of common investors in the equity markets. With this aim in mind, SEBI sometime back mandated that all AMCs do away with collecting entry fee to investors who wishes to invest in mutual funds. This is a revolutionary decision since it makes the mutual funds the best investment structure by a long distance. Now the investors will not be charged any entry fee and the entire money invested will be accounted for in the number of units. This will push up the effective returns that the investor will get.

But, all is not well with this step. There are certain concerns as of now which needs to be addressed.

1. No entry fee means lesser people willing to sell- The abolition of the entry fee has led to a dramatic fall in the number of distributors who are willing to distribute or sell MFs. Many banks who earlier used to aggressively sell MFs to their clientele have completely stopped or have gone slow on it since selling them does not make them money anymore. This is likely to impact the retail investor in the end since it will be difficult for him to locate point of sale of MFs now . The lower the distribution , lower would be the accessibility of this product which already has abysmal penetration of less than 3 % of the population in India.

2. Increase in Exit loads - While SEBI has mandated that entry loads be done away with, it has allowed AMCS to charge exit load of 1% . Now, most of the equity based funds have hiked their exit loads from 0% - 0.5% to 1%.

3. Increase in the holding period of MFs for no exit load - Earlier the average holding period for equity based MFs where no exit load was charged was about 6 months. Now the same has been increased to 2 years in most of the funds. This means that if an investor wishes to avoid paying exit load, then he may have to stay invested for a longer period of time.

4. The investor may be forced to pay more than 2.25% - With the abolition of fixed entry fee, the SEBI has allowed that an agent or advisor can charge his/her commission separately from the investor. This has opened up a small window where an agent might try and extract more commission out of an investor. This will then defeat the whole purpose of the abolition of the entry fee.


There are few glitches which need to be ironed out before things can be really streamlined for the AMC, the distributor/agents and the common investor.