When interest rates fall, it is beneficial for borrowers to have a shorter reset period as rate cuts will be passed on to your IME quickly.
Q. I have a loan account in one of the government banks and my interest is based on MCLR with a one year lock-in period. The interest on my loan was reset in April and the 8.5% rate will be maintained for a year. I think I might miss out on reduced interest rates because of this one year reset. I am not in a position to conclude if it is a good idea to change the length of the MCLR to 6 or 3 months, or to continue with the prevailing year. Any indication about this will help me greatly to conclude and finalize the MCLR frequency.
A. With the rate cut from the Monetary Policy Committee, interest rates on loans have fallen quite sharply over the past two years. So, yes, having a one-year reset on your MCLR loan caused a delay in passing those rate cuts through to you. However, whether a shorter reset will benefit you depends on the direction of interest rates from here.
When interest rates fall, it is beneficial for borrowers to have a shorter reset period as rate cuts will be passed on to your IME quickly. But if the rates are going to go up, then a longer reset will be to your advantage, as the rate increases will only show up slowly in your NDE.
Today, after declining steadily over the past five years, we believe that the decline in interest rates in India may have bottomed out. The RBI’s repo rate, the economy’s benchmark rate, is already at its lowest level in more than two decades.
While it had hit a low of 4.75% in the previous cycle during the global financial crisis, it is now already at 4%. With high inflation rates and an economy resuming growth after a COVID-induced recession, the MPC is also on hiatus after the last repo rate cut in May 2020. So it appears that rates are on hold. Market interest will remain sideways or move over the next few months to one year.
If the economy normalizes quickly, market interest rates could also rise sooner, from the unusually low levels induced by COVID. Given this possibility, now is not a good time to switch to shorter resets on your variable rate home loan.
A longer reset will be more useful as it will delay the impact of rate increases on your EMI output. However, if your mortgage rate is currently 8.5%, you seem to be paying higher rates compared to the rates available to the best borrowers in the market, which are below 7%. Check if switching to a repo linked home loan at the same bank (this loan is directly linked to the RBI repo rate) will work cheaper.
You can also consider whether transferring your loan balance to another bank or housing finance company can lower your EMI by offering you a more competitive rate.
Even after such a change, you risk a rate hike. Therefore, go for longer resets after a change.
Q. I just started working a year ago. I wanted to start saving for my future. I really have no idea where to invest. I learned that the RBI was issuing gold sovereign bonds and bought 16 grams worth 74,832. Was it a good move? The price of gold rose during containment. Was it a good time to buy these bonds?
A. Although Gold Sovereign Bonds (SGBs) are a good vehicle by which you can add gold to your portfolio, investing all your savings in a single asset is not a prudent action because poor performance or a lack of money. liquidity in this asset can materially affect your financial position. position. In the future, it would be better for you to save and invest your earnings according to a well-thought-out financial plan.
While it’s great that you are thinking about saving so early in your career, investing requires a little planning first. Your first step in embarking on your investment journey should be to create an emergency fund amounting to approximately six months of basic expenses.
This sum should be placed in term deposits with major banks so that you can draw down at any time when you need it.
Also purchase a medical insurance plan, if your employer does not offer one. Before deciding where to invest the rest of your money, it would be advisable to set financial goals towards which you want to save or invest.
List, with the help of your family if necessary, the main life goals you have in mind in the short term (three years from now), medium term (3-7 years) and long term (seven years). and more). Setting your goals this way will then help you decide how much to save and how you can allocate your savings among assets like gold, term deposits, debt, and stocks.
Usually, for goals within three years, bank term deposits are your best bet. For 3 to 7 years, you can consider postal programs such as NSC, Debt Mutual Funds, Corporate FDs, and Gold. For goals that are in seven years or more, you may consider splitting between equity funds (index or multicap funds), debt funds, public provident funds and SGBs – as they have a maturity of 8 years.
Despite the recent surge in prices, gold is not an asset that can generate double-digit returns for your portfolio over the long term.
It is an asset that plays the role of insurance by protecting the value of your portfolio against drastic fluctuations in other assets. Gold tends to perform well when other assets such as stocks or debt fall short.
We suggest that you invest 5-10% of your overall savings in gold on a systematic basis, either through SGBs or gold exchange traded funds.