Sensex today posted a 421-point rally helped by gains in blue-chips like ICICI Bank, Reliance Industries and Infosys

Mumbai: The New Year celebrations came a bit late on Dalal Street, as a strong rally in the stock market today added more than Rs 1.5 lakh crore to investor wealth. The upsurge was noticed across all segments and sectors and all the indices closed in the positive territory with gains ranging from 1-5 per cent.

Personal Finance debt, i.e. taking a loan, can be a great tool to build your wealth.

Loans can offer you many benefits, for example home and car loans help you achieve the financial goal of buying a home or a car (by making payments over a period of time) without having to wait and save enough to make an outright purchase.

However loans are often misconstrued as an instrument for the non-wealthy, when this is indeed not the case. Wealthy investors often use loans to help themselves get even wealthier. Where loans are concerned, you might find that you are one of two broad types of individuals. Each type has a unique viewpoint when it comes to taking a loan.

First, there are the emotional extremes - those individuals who either dislike loans so much that they will not borrow even a rupee, or those who like loans so much that they have over-leveraged themselves and might be now struggling under their EMI burden.

Second, there are the 'I'll Take It, But I Won't Like It' individuals. These are the ones that take a middle approach when dealing with their liability. Once they have taken the loan because they need it - the logical step, they then do their best to repay / prepay it as quickly as possible because of the mental or emotional discomfort caused by being 'in debt'. Most of us find ourselves in this second category.

The simple truth of the matter however, is a very factual truth.

A loan is simply the borrowing of funds, to be used for a particular purpose. Loans will simply give you the opportunity to incur the expenditure (for example, buy the house or the car) that you wish to incur, when you wish to incur it, and repay the amount a little at a time every month, over a specified tenure.

In this article, we will cover 2 aspects to personal finance debt.

• Different Kinds of Loans Available, and How to Ensure You Don't Over-Borrow
• Why it is sometimes Not better to prepay your loan
  

Different Kinds of Loans Available and How to Ensure You Don't Over-Borrow

Unsecured Loans
An unsecured loan refers to any kind of loan that is not attached by a lien on any of your specific assets. This means that in case you default on the loan due to bankruptcy or any other reason, the unsecured debt lender does not have the right to claim any specific asset.
An example of this is credit card debt or perhaps a personal loan from a friend or relative.

Secured Loans
A secured loan is one where you, the borrower, pledge some asset of yours as collateral to the loan. This means that in case of bankruptcy or any other reason for defaulting on the loan, the lender of your secured debt has the right to take possession of the asset (known as repossession) , and sell it to recover some of his loss.
An example of this is your car loan and home loan.

There are many options of loans and different lenders (from banks to housing finance companies to your relatives), which can help you take a loan when you need one. You need to ensure however that you don't over-borrow and put a strain on your finances. There is a simple way to check whether you are over-leveraged or not.

It is the Debt to Income Ratio.

                                                 Total monthly outgoings on liabilities (EMIs)
Debt to Income Ratio =               Total monthly income from fixed sources

As discussed, this ratio is simply the sum of your monthly outgoings (EMIs) on your liabilities, divided by your total fixed monthly income. It ideally should not be more than 0.35 (or 35%), else you may be putting a strain on your income to service your debt.

Before taking a loan, assess your monthly income and expense, see how much additional outflow you can afford to have on an EMI, and accordingly decide how much loan you can comfortably handle.

Remember, if you take a higher loan, you have to pay a higher EMI. The broad thumb rule is, your EMI will be as many thousands per month, as every 1 lakh loan you take.
So, if you take a loan of Rs. 20 lakhs, your EMI will be (approximately) Rs. 20,000 per month.

Why It Is Sometimes NOT Better To Prepay Your Loan 

At PersonalFN we have come across many clients, who once they have taken a loan, prefer to prepay it as soon as possible because the idea of being 'in debt' is not comfortable for them.

This is a personal matter and while there is no question that these clients are genuinely feeling uncomfortable about the loan - it does not necessarily make financial sense to prepay as early as possible.

The reason is simply the opportunity cost of your money.

This means, if you have a loan which is charging you interest at 10% p.a., and you suddenly come into some surplus funds which you can either use to prepay all or part of your loan, or to invest, the first thing you need to do is check the opportunity cost of these surplus funds.

Would it make more sense to prepay the 10% interest loan, and thereby save yourself from paying the 10% interest? Or would it make more sense to invest the funds into an investment instrument that would earn you more than 10% - based on your risk appetite and time horizon?

For example, Mr. Shah (our favourite fictional character) has taken a home loan on which he is paying 10.50% interest currently. He has recently inherited Rs. 10 lakhs and wants to use it to partly prepay his loan. As there is no prepayment penalty any longer, he wants to prepay the loan up to Rs. 10 lakhs - the entire extent of the inheritance.

However, instead of prepaying the loan, if he invests the Rs. 10 lakh into a strong performing diversified equity mutual fund, then in the long term (3-5 years plus) he will likely earn a return of 15% per annum on this investment. So instead of saving 10.50%, he is earning 15%.

This is what we mean by opportunity cost. If he chooses to prepay the loan and save 10.50% interest, he is losing out on the potential earning of 15% return.

Remember, if there is an investment instrument which would give you a long term rate of return that is higher than the rate of interest you are paying on your loan, it would be financially more prudent to invest the funds and earn the higher rate of return, than to prepay the loan (in full or in part) and save yourself the lower rate of interest.

In addition, certain loans have tax benefits. For example, a home loan on a self occupied property helps you get a tax benefit of up to Rs. 1 lakh on principal repayment u/S 80C and interest repaid is deductible up to Rs. 1.50 lakhs. On a let out property, the interest deductible is not limited, you can claim full interest paid as a deduction from your annual taxable income.

So, remember - a loan can be a great tool to help build your wealth. Just remember to only take the amount of loan you are able to service without adding financial stress, and have a contingency fund set aside as well.

The BSE benchmark Sensex tumbled by over 334 points in opening trade on Friday, extending Wednesday's losses on concerns over slowing industrial growth and a weakening trend in the rest of Asia amid renewed worries about the euro zone debt crisis.

The 30-share Sensex, which lost nearly 389 points in Wednesday's trade, plunged by 334.27 points, or 2.02 per cent, to 16,153.97 in opening trade on Friday.

In a similar fashion, the wide-based National Stock Exchange Nifty index declined by 91.20 points, or 1.84 per cent, to 4,852.45.

All the sectoral indices were trading in the negative zone with losses of up to 2.14 per cent, led by financial and metal stocks.

Brokers said the market sentiment was badly dampened by reports that industrial output contracted during October, in addition to a weakening trend on other Asian bourses following overnight losses in the US on fading hopes for a speedy resolution to the euro zone's debt crisis.

In the Asia region, Hong Kong's Hang Seng index was down by 1.90 per cent and Japan's Nikkei index lost 1.70 per cent in morning trade on Friday. The US Dow Jones Industrial Average ended 1.63 per cent lower in Wednesday's trade. PTI SUN

Growth in the September quarter had slipped to 6.9 per cent, the weakest pace in more than 2 years, and many private-sector economists have slashed their growth forecasts to about 7.5 percent for the full year.

India's industrial output likely shrank 0.5 percent in October from the same month a year ago, its first decline in over two years, hurt by a slowdown in export growth, a Reuters poll showed. The data is due on Monday.

By 11:30 a.m. (0600 GMT), the 30-share BSE index was down 1.4 per cent at 16,257.4, with all but two of its components in the red. The benchmark had fallen as much as 2 percent at one stage.

"Indian stocks are like a cycle stand," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors. "If one falls, others follow suit."



Energy major Reliance Industries , which has the heaviest weight in the main index, fell more than 2 percent after Nomura downgraded the stock to 'neutral' from 'buy', citing worsening exploration and production possibilities and declining refining margins.

Private sector lenders ICICI Bank and HDFC Bank fell more than 1.5 percent as slackening growth and a vulnerable rupee, which had hit a record low last month, drove investors away from stocks.

Brokerage Macquarie said it would continue to be bearish on the Indian banking sector because of deteriorating asset quality and a possible tightening of margins due to an increase in savings rate.

The Reserve Bank of India is widely expected to pause at its meeting next Friday after raising rates 13 times since early 2010 to fight stubborn inflation.

The rupee, which is the worst performing Asian currency this year, fell as much as 1 percent in early trade.

Shares in export-focused software services company Infosys shed nearly 1 percent, while smaller rival Wipro was down 0.6 percent.

The 50-share NSE index fell 1.37 percent to 4,876.2. In the broader market, there were 2.7 losers for each gainer on a total volume of 223.6 million shares.

The MSCI's broadest index of Asia Pacific shares outside Japan was trading down 2.5 percent on growing doubts that European leaders can forge a credible borrowing scheme to tackle the euro zone's debt crisis at a summit in Brussels.

NEW DELHI (Reuters) - India's annual food inflation eased to its lowest in nearly three-and-a-half years in late November, driven by a sharp fall in prices of vegetables and protein-rich food, bolstering the case for a pause in rates when the RBI reviews policy next week.

Food inflation sharply eased to 6.60 percent in the year to November 26, government data on Thursday showed, from an annual 8.00 percent in the previous week.

New crop arrivals in the market have broadly pushed down vegetable prices, with potatoes leading the fall with a more than 4 percent drop in the latest week. Prices of protein-rich items like eggs, meat and fish also fell by more than 1 percent.

The annual fuel inflation remained unchanged at 15.53 percent in the latest week, data showed.

"There are seasonal advantages in place which explains the declining trend in food inflation. This was expected, but the only issue is this could partly be offset by the impact of the weak rupee on core inflation," said Shubhda Rao, chief economist with Yes Bank.

"I still expect November (headline) inflation to come in at 9.04 percent," Rao said.

The government will release October's industrial output data and November's headline inflation data next week.

"I would still bet on a pause in the December review," Rao said, adding, if October's industrial output growth slumps, and if other macroeconomic indicators continue to disappoint, the Reserve Bank of India could cut rates as early as in January.

Others echo her views.

The headline inflation has stayed stubbornly above 9 percent for the 11th month in October, despite 13 rate increases by the RBI since March 2010.

"If food inflation is collapsing, it will feed into other inflation very soon. So my view is that we are in a position to cut rates today," said Surojit Bhalla, chairman of Oxus Investments, a Delhi-based consultancy firm, earlier.

"In my opinion, the past two rate hikes were unnecessary and applied because of the RBI's ludicrous obsession with the spot level of inflation. Worse still, they have barely started to feed through," said Patrick Perret-Green, head of forex and local markets strategy for Asia at Citigroup said in a note.

India's benchmark 10-year bond yield briefly fell as much as 3 basis points to 8.50 percent, following the weekly price data release.

In its October review, the central bank had said if inflationary pressures started to abate by December, more rate increases may not be needed.

The RBI had said that taming food inflation also needs supply-side responses and had indicated that the government needed to do more to smoothen supply-side responses.

India suspended on Wednesday plans to open its $450 billion supermarket sector to foreign firms such as Wal-Mart Stores Inc (NYSE:WMT - NewsWMT.N), backtracking from one of the government's boldest reforms in years in the face of a huge political backlash.

Various government officials had said that allowing foreign direct investment in multi-brand retail could have eased supply-side bottlenecks and tamped down on food inflation which is typically outside the purview of monetary policy.

The European debt crisis seems never ending with both Germany and France lowering expectations for a deal to save the Euro at the upcoming European Union summit. The European Central Bank (ECB) has agreed to act as a lender of last resort only on the condition that governments show credible fiscal consolidation. A similar situation might be arising in India.

India's fiscal situation is getting out of hand. The country's fiscal deficit reached almost 71% of its full-year target in the first half of the year. This cast doubts over the government's ability to meet budget goals as federal finances feel the pressure of squeezed revenues and slowing growth. The government is set to fall short of its fiscal deficit target of 4.6% of GDP for 2011-12 by at least 1% and this will take the deficit to 5.6%, higher than the 5.1% deficit seen in 2010-11. The Reserve Bank of India (RBI) has been consistently warning the government about the worsening fiscal situation. But the government has so far ignored the RBI's warning and has failed to implement any kind of reforms with respect to food, fuel, fertiliser and power subsidies. It has also made no progress in improving the tax to GDP ratio. The government subsidy bill in the current fiscal is likely to go up by a massive Rs 1 trillion from Rs 400 bn on account of higher outlays towards fertiliser, food and oil.

But what is more worrying is the worsening fiscal situation of states. The states' fiscal position is also getting into a mess with expected losses of Rs 1 trillion of SEBs (State Electricity Boards) having to be borne by state governments. State level fiscal deficit will exceed 2.2% of GDP projected for 2011-12 if the SEB losses are taken into consideration. As a result India's total debt to GDP ratio is expected to increase from 65% to more than 70% in FY12.

So unless urgent reforms are undertaken by the government, the fiscal situation is not likely to improve any time soon. In fact with economic growth slowing down, revenues to the government might also take a hit, thus adding to the fiscal woes. It is time for the government to end policy paralyses and take some hard decisions. Any slippage on the fiscal gap target has the potential of worsening India's inflationary woes and choking private investment.

NEW DELHI (Reuters) - India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target.

Asia's third-largest economy is now expected to grow by 7.25 to 7.5 percent in the fiscal year ending next March, the government said in a mid-year review, down sharply from an estimate of 9 percent issued in February.

The slowing economy has put government finances under further stress, fueling a recent sell-off in the rupee. While tax receipts so far have lagged the budgeted estimates, expenditures are climbing at a faster clip.

"There can be no denial that meeting the target (of fiscal deficit) will not be easy this year," the finance ministry said in its review, without giving a revised forecast.

Separately, the trade deficit for the fiscal year ending March 2012 is expected to sharply widen to $155-$160 billion from $104.4 billion a year ago, posing further downside risks to the weak Indian currency.

Slowing demand for Indian merchandise in overseas market is also making the government uncertain about achieving its annual export target of $300 billion.

"There is clear evidence of a deceleration in exports growth," said Rahul Khullar, trade secretary, after releasing the provisional trade data for November.

"There is a serious balance of trade problem."

Net tax revenues have grown at just 7.3 percent year on year in the first seven months of 2011/12, while expenditure has jumped by about an annual 10 percent.

Adding to the gloomy outlook, the government said raising a budgeted 400 billion rupees via stake sales in state-run companies in choppy market conditions would be hard to achieve.

"There can be no denial that meeting the target (of fiscal deficit) will not be easy this year," the finance ministry said in its review, without giving a revised forecast.

With less than four months of 2011/12 still remaining, economists say the full-year fiscal gap may be almost one percentage point higher than the budgeted target of 4.6 percent of GDP.

The fiscal deficit has already reached nearly 74 percent of the full-year target.

Any slippage on the fiscal front is expected to force the cash-strapped government to borrow more from the market. It has already unveiled 528 billion rupees of extra borrowing for the remainder of this year.

The government blamed its rising subsidy bill for higher expenditures but said it is determined to keep any slippage in the fiscal deficit target to a minimum level.

Early this week, the government forecast its subsidy bill for the full year to rise by 1 trillion rupees.

HEADWINDS

India may face its worst financial crisis in decades if it fails to stem the slide in the rupee, leaving the Reserve Bank of India (Toronto:RBI.TO - NewsRBInull) with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors.

Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

Europe's festering debt crisis and worries about the U.S. economy have seen global investors pull funds from emerging markets in recent months, adding to pressure on their currencies.

The rupee is facing the brunt of this capital flight. The partially convertible currency is down nearly 17 percent against the U.S. dollar this year and is the worst performer in Asia.

The government has attributed the depreciation in rupee in part to global reallocation of funds toward safe-haven assets and has reiterated its policy of forex intervention to control volatility rather than alter the trend.

The weak rupee is confounding India's inflation management by pushing up the cost imported items. Headline inflation has been steadfast above 9 percent for the past 11 months despite 13 rate hikes by the central bank since March 2010.

The government said softening global commodity prices on slowing demand should cool inflation beginning December and slow it further to 7 percent by March.

The rupee declined most in more than a week on Friday, on worries that the European leaders will struggle to resolve the debt crisis denting demand for riskier assets, while dollar demand from oil importers and a slide in local equities also weighed.

At 02:25 p.m., the partially convertible rupee was at 52.21/22 per dollar, sharply weaker from its 51.75/76 close on Thursday, after dipping to 52.35 in early trades -- a level not seen since November 30. Most traders expect the rupee in the 52.10-52.40 range in the day.

Traders said dollar buying by oil companies and negative domestic shares hit by growth concerns pulled down the unit. Risk-off sentiment globally as hopes dimmed that a European Union summit would make substantial progress toward containing the euro zone debt crisis also weighed.

The euro dipped on Friday and languished near a one-week low as hopes dimmed that a European Union summit would make substantial progress toward containing the euro zone debt crisis.

The Reserve Bank of India Governor Duvvuri Subbarao on Thursday had said rupee was always on the RBI's radar and the central bank will intervene only to manage volatility.

However, on Wednesday, Subir Gokarn, a deputy governor at the RBI, had said the bank does not want the current fall in the rupee to spiral out of control.

MUMBAI (Reuters) - Gold buying in India, the world's biggest consumer of bullion, continued its weak trend, after the rupee tumbled 1 percent, pushing premiums lower, dealers said on Friday.

* "We are virtually jobless from October 8, retail buying is missing... Indian rupee interest rates are high and people prefer to park money in fixed deposits," said Daman Prakash Rathod, director with Chennai-based MNC Bullion.

* Gold on the Multi Commodity Exchange was trading at 29,077 rupees per 10 grams helped by a weaker rupee and global markets. The yellow metal has gained more than 5 percent since November.

* Premiums charged on London prices also fell to $1 per ounce as buying weakened, from last week's $3 an ounce. Scrap flow continues unabated.

* The rupee, which fell 1 percent on Friday, plays an important role in determining the landed cost of the dollar-quoted yellow metal.

* Weddings season demand will end by last week of December, and halt briefly for three weeks, before re-starting at the end of the month.

* Near-month silver on the MCX was 56,356 rupees per kg, up 0.21 percent on day.

Indians seem to have taken a fancy to scams the same way that Somalians have to piracy. Almost every other breaking news on TV channels talks about some money making racket or the other. The latest scam to be unearthed may however be bigger than all the previous scams put together. And its ramifications may be even more lethal.

Under the double-tax treaty signed with the Swiss government, the Swiss will now have to provide details to the Indian government on transactions involving Indians. It's thus no big surprise that black money is quickly exiting the Swiss Alps. But then where are these illegal piles of cash going? Well, it may be coming right back to India and sitting peacefully in our own backyard. And the amount involved could be as hefty as US$ 40-45 bn. But, this is just the figure for one year, 2010-11. The actual amount of black money entering the country could be a lot more.

Do you ever look at the latest export numbers, FII data, etc. and believe that these numbers are works of fiction or a figment of someone's imagination? Well, the latest black money scam may be just that. According to three analysts from Kotak Securites, who have been studying various data points, the numbers just don't add up. Here are a couple of examples:

Official export data shows a 79% year-on-year (YoY) growth in engineering exports in 2010-11. However, exports by engineering companies in the BSE 500 index show just a 11% growth. In dollars terms, the difference is even starker. There appears to be a US$ 28 bn shortfall in exports. Now, the probability that this amount has come in through over-invoicing or fictitious exports is higher than that it came from tiny engineering companies which are not part of the BSE 500 index.

Copper exports have also quadrupled from Rs 85 bn to Rs 367 bn. But, how is this possible in India, a country which does not as a practice export this mineral. China apparently bought the whole lot. So is the dragon nation also part of this public hoodwinking?

Also, in 2010-11 foreign investor flows added up to US$ 22 bn, according to official data. The Kotak analysts did a cross-check with international sources like exchange-traded funds and EPFR Global. Their analysis shows that not more than US$ 4.5 bn came in to India. So, where did the other US$ 17.5 come from?

Well, India really needs to clean up its act. Else even the legitimate flows of capital into the country may dry up. Greater disclosures, a strong clampdown on corruption and a complete shakedown of government frauds need to take place. Anna Hazare's movement and his 12-day fast should not go in vain. And neither should India's reputation as an investment destination.

By Equitymaster – India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian stock markets.

BANGLAORE: Hyundai Eon, the new small car launched by the Korean auto major on Thursday, has set the small-car segment in India on fire. With its attractive price, ranging between Rs 2.69 lakh and Rs 3.71 lakh (ex-showroom Delhi), the car seems to be pitted against other brands in this segment, namely Maruti's Alto and A-Star, Honda Brio, Chevrolet Spark and Tata Indica.

Sensing the competition, Maruti Suzuki recently introduced limited editions of its highest-selling brand Alto, under the new name Alto Xplore. It loaded the car with new features such as an advanced double-din stereo with USB and Bluetooth, new body graphics, outside rear view mirrors (ORVMs) and sporty roof spoiler.

Alto is priced between Rs 2.32 lakh and Rs 3.17 lakh (ex-showroom Delhi) and is the best selling car, averaging about 20,000 units a month.

The Alto, with 3.47 lakh cars sold last fiscal year, accounted for around 16% of all cars sold in India and is the top selling car model on the planet, having edged Volkswagen's Gol & Golf and Fiat's Punto. Hyundai aims to sell 1.5 lakh units of the Eon in a year, an ambitious target in a tepid car market and also given that the Alto took almost four years after launch to reach this level of unit sales.

Eon has been launched in six variants - D-Lite, D-Lite (O), Era, Magna, Magna (O) and Sportz. The top-end variant comes with features such as music system, driver airbag, central locking, air conditioning, power windows and power steering.

Hyundai has invested Rs 900 crore on the development and production facilities of the latest entrant in the small car segment.

Hyundai's most ambitious launch to date comes at a time Maruti has temporarily stopped Alto's production because of a longstanding labour issues, now running into its third month, and which has left the country's biggest carmaker dependent on a slender inventory to drive sales during the bumper festive period.