Category – business
Reading time – 6 minutes
Babies don’t need to study economics. They don’t need to know about debt. They don’t need to calculate interest rates and returns on investment.
But their fathers need to know all this. They need to earn money and then grow it slowly to fight inflation and uncertainty.
Babies and children in turn need this knowledge for their daddy or mamma; who are in-charge of money, which babies will own one day.
Don’t you think they want a wiser dad or mom, so that they can get lot more more money, than a passive parent may provide.
So this blog is to understand basics about debt or loan.
Debt is a loan which is to be repaid in fixed time and is given on particular rate of interest ( extra money other than principal amount ).
It is a way to raise money for businesses.
It can be classified into various types like business loan, personal loan, housing loan, car loan etc.
It can be secured or unsecured. secured loans have attached asset like property, machinary or FD; equivalent to the amount of loan, which can be forfeited in case of inability to return the loan.
What are bonds?
Bonds are one type of debt instruments. They are used by businesses to raise money.
Bond is a standard piece of aggrement, that fixes term of the loan like interest rate and tenure.
Company has to pay interest irrespective of the revenues. Hence, for investors bonds are relatively safer option to invest their money. As fixed returns are guaranteed beforehand. But, as risk is reduced in these compared to shares, returns on investment in bonds is also lower.
Government also takes loan from people for building infrastructure and other works.
Bonds are issued by government. This type of loan is called sovereign debt. Govt gives assured retuns on these investments.
Various debt instruments.
1. Bonds which we have discussed above.
2. Debentures – It is a debt instrument that is not secured by collaterals and generally has tenure longer than 10 years. Hence it is given to creditworthy organizations.
3. Corporate deposits –
It is company version of fixed deposit. It is for fixed duration and has fixed interest rate. It is provided by banks and non banking financial institutions.
4. Fixed deposit ( FD) – It is favourite thing of Indian masses. It preserves money with very low returns.
5. Public provident fund ( PPF) –
It provides for reasonable returns and tax and saving benefits. It has limit of 1.5 lakhs. Lately it’s returns have also been curtailed.
6. National savings certificate ( NSC) –
These are issued by government of India as small savings instruments. It is provided by India post.
7. Debt mutual funds –
These are mutual funds that invest primarily in bonds. Hence they have lower returns as compared to shares but are safer.
Main aim of all these is capital protection.
Capital gains is secondary.
As you age, it is better to invest more in bonds and debt instruments.
As you near your retirement or big expanse, you can take out money from equity and park it into a debt instrument for capital protection.
Inspiration – many personal finance books.
Few things about home loan.
It is given by bank or non banking financial company.
Down payment is initial payment for the home. It is generally 20% of the home value.
Before construction you have to give pre EMI. In first year 99% loan is disbursed.
After registration of the property remaining 10% is disbursed and registration documents lie with bank as collateral.
After, registration EMI starts.
Tenure is time period in which loan is to be repaid.
EMi is decided based on rate of interest and tenure.
There are other charges like processing fee, notarization, conversion charges etc.
Overdraft facility –
It is a way to reduce tenure and EMI of your loan.
Bank creates a savings account linked to your home loan account. It is called overdraft account.
Any additional amount of money in this account; over and above your EMI is taken as pre payment towards the loan. This reduces loan principal and hence reduces EMI.
Added advantage is that you can withdraw money from this account anytime.
For example; if you took 25 lakh loan with overdraft account. And you added 5 lakhs to this account. Interest rate of your loan will be calculated on 25-5 = 20 lakhs in place of 25 lakhs. Hence you get reduced EMI.
Why is it so.
Because interest rate of such loan is higher by 0.25-5% as compared to routine loan.
But inspite of this it is a useful way to save money.
You will be happy that you know it.
Inspiration – Mistakes in personal finance, that I have made.