Tuesday, April 10, 2007

Magical Interest Rates

How many times have you seen this number on a billboard at a traffic signal? How many times have you ignored it, just to look at a more interesting advertisement? Today, we are back to this boring number. Fixed Deposits and Compound Interests

Here’s an old story about compound interest

In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $24. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $24 and received 9.5% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.
Source: Savingadvice.com

Time and Interest Rate – The two most important aspects of compounded interest.

  1. Rs. 100 at 9% interest compounded quarterly would be Rs. 156.05 in 5 years and Rs. 243.52 in 10 years. With simple interest the same amount at 9% would be Rs. 190. If that doesn’t sound too big, let’s calculate this for an amount of Rs. 200,000

Compound interest – 9% for 10 years – Rs. 487,037.79
Simple Interest – 9% for 10 years – Rs. 380,000

  1. Rs. 100 at 7% interest compounded quarterly would be Rs. 200.16 in 10 years. Hence at 7% interest an amount takes 10 years to double. On the other hand, Rs. 100 at 9% interest compounded quarterly would be Rs. 243.52 in 10 years. At this rate an amount takes just 8 years to double!!

Now that we have the basics of compounding, the following will aid you to make a decision on Fixed Deposits

  1. Are you the first time investor in the process of creating an emergency fund or are you putting away a part of your money in risk-free investments before plunging into riskier investments? What is a better time than this and which is a better tool that this?
  2. A Fixed Deposit or a Term Deposit is an investment tool that allows you to set aside some money in the form of a deposit in a bank or a financial institution or a company and fetches you compounded interest (monthly/quarterly/annually) for the period specified.
  3. Currently, the highest interest rates are being offered over a period of 3-5 years (3 years 3 months being most common). In the case of the investor withdrawing the deposit before the completion of the term, most banks impose a fine known as the pre-closure penalty. This could vary from a small penalty of 0.5-1.5% on the interest earned or a lower interest rate would apply for the short term. In some cases the bank does not allow premature closure of the deposit.
  4. Most banks specify a minimum deposit amount that could range from Rs. 100 up to Rs. 25,000. The most common minimum deposit amount is Rs. 10,000.
  5. The links to the Fixed Deposit information of four significant banks are as follows
    1. State Bank of India
    2. State bank of Mysore
    3. HDFC Bank
    4. ICICI Bank

Also worth considering is the attractive Fixed Deposit scheme from Canara Bank

  1. In the case of all the above schemes interest is compounded quarterly. Hence the effective annual rate of interest is higher than the one specified.
  2. For interest payable above a sum of Rs. 10,000 for an assessment year on all fixed deposits in a bank, tax at the rate of 10% is deducted at source. In the event of the investor not liable to tax a 15H form should be submitted.
  3. The interest rate on Fixed Deposits was as low as 8% during the period December 06. This recent hike in interest rates over the past few months has been due to a number of reasons – good credit growth, tight supply of money, to control liquidity, etc. In addition, as it is commonly known, Feb-Mar is the end of the financial year and is a period wherein banks are hurrying to meet their annual fund targets. For the smalltime investor this means that these attractive interest rates may soon be withdrawn. While most public sector banks have extended their previous 31st March deadline by another month, private sectors are still non-committal about the cut-off date.

Update: April 11th, 2007

Post Archana’s comment I did realize that some clarification was required on the declaration to be filed for no deduction of tax.

For individual residents in India aged 65 and above, a declaration is required in Form 15H to the bank if the tax on his/her estimated income for the financial year is nil.

For citizens below 65, a declaration in Form 15G can be furnished by a depositor if the tax on his estimated total income for the financial year is nil and the aggregate amount of interest credited or paid (or likely to be credited or paid) during the financial year is not more than the maximum amount, which is not chargeable to tax (Rs 1 lakh for male taxpayers and Rs 1.35 lakh for a women). It is important to note that both the above conditions are required to be fulfilled.
Source: The Hindu, Nov 2006

Wednesday, April 4, 2007

About ‘Personal Finance and You’

Are you struggling with your paycheck? Does it never seem to be enough? Are you living from one paycheck to another? Do you have nightmares about not having saved a single rupee in spite of earning money for a couple of years now? Do your parents do your tax saving year after year? Does your money accumulate idly in a current / savings account? If your answer is yes to more than one of the above questions then you seriously need to sit up and rethink about your financial strategy.

Some weeks ago, I expressed interest in my journal to start a blog on Personal Finance. Here I am, with the first post. This blog is currently going through an experimental phase with no structure or specific focus on any single aspect of personal finance. I plan to delve into anything and everything that affects the financials of a salaried individual – long-term saving, short-term saving, saving on taxes, investing and spending wisely.

Here you will find information on savings tools, bargain buys, balanced investing, financial trends and a number of links to other useful personal finance articles and features across the internet. Though most of the posts on this site will focus on personal finance in India, targeting the twenty-something salaried class, it is important to note that the general aspects of personal finance are applicable anywhere in the world and will make perfect sense to just about anyone at whatever age.

Welcome to this website. Join me on this journey towards the discovery of financial independence and how to make money really work for you. Very importantly, please note that all views expressed here are based on my own reading, experiences and research. The same goes for comments and opinions left by readers. I do not work for any personal finance related organization nor is my aim to market any finance related product. My advice to all you readers would be to do your own research before you make a decision.

This is my first venture into something as serious and significant as Personal Finance. With time and with continued learning and discussions I am hoping that this will evolve to cater to the needs of the readers and provide reliable and useful information on all aspects of personal Finance