All About Reverse Mortgage

While planning for the Retirement one should keep in mind that what are the options available to an investor at the age of Retirement for the regular inflows or annuity. That might be Reverse Mortgage, Insurance Plans, SWP, etc.

Let’s check what is Reverse Mortgage, options available, their advantages & disadvantages in this post.

What is a reverse mortgage?

In a home loan scheme, you take a loan from the bank, buy a house with that loan and pay back the loan along with interest to the bank.

In case of a reverse mortgage scheme, the homeowner receives money in installments equivalent to the value of the loan.

The bank will have the right to sell the property after the borrower passes away to recover the loan If the sale proceeds are in excess of the sum due to the bank, the excess is returned to the legal heirs. The borrower also has the option to repay the loan earlier as well.

A reverse mortgage allows a person to get a regular cash flow to take care of financial needs. The money can be received in a lump sum and/or regular payouts.

What are the options available for a person applying for a reverse mortgage?

There are two options available —Reverse Mortgage Loan(RML) and Reverse Mortgage Loan-enabled Annuity (RMLeA).

In the case of RML, you will either get a lump sum amount or amount in installments, depending on the frequency selected.

In the case of RMLeA, the loan amount is given to an insurance company. The insurance company works with the corpus such that it gives you an annuity for the rest of your life. This is like a pension.

Ask Yourself – Is 1 Crore Enough for Retirement?

Who can choose to go for a reverse mortgage?

Senior citizens who own a house can opt to go for a reverse mortgage. The house should have been bought by the borrower. It should not be inherited property. Senior citizens may not have a regular flow of income and reverse mortgage helps them to take care of living expenses.

How can I avail of a reverse mortgage?

The following conditions are required to be satisfied for a person to avail of a reverse mortgage –

  • The person should be a senior citizen (age>60 years).
  • The person should own a residential house.
  • If the person is taking the loan jointly with the spouse, the spouse should be above 55 years old.
  • The house can be owned individually by the person wanting the reverse mortgage or jointly with the spouse.
  • You can apply for it through a bank or a financial institution. Fill in the application form and submit a copy of PAN card and registered will, details of the property and a list of legal heirs along with the form to the bank. The bank will assess the property and decide on the loan to be given. It usually gives loan up to 40%-60% of the value of the property. The bank will charge some fees related to the processing of the loan.
  • SBI, LIC, PNB, Indian Bank, Andhra Bank, Dewan Housing Finance Limited are some of the organizations that offer a reverse mortgage.

What are the tax implications of a reverse mortgage?

There are no tax implications in case of a reverse mortgage. The amount received as a lump sum or as annuities are not liable to tax payments. If the property is sold before the reverse mortgage comes to an end, the relevant tax for capital gains is applicable.

What are the advantages and disadvantages of a reverse mortgage?

Reverse Mortgage looks like an attractive option. It is a good source of income for retirees. It uses the existing property to generate income.

The bank can recover the loan only after the death of the borrower or when the property is sold. There is no fixed tenure for repayment of a loan.

Reverse Mortgages are not popular in India. Many people have a sentimental attachment to their property and do not want to sell it off for a regular income stream. They want to pass it on to their heirs.

The loan value given by banks for reverse mortgages is low. The owner has to ensure the upkeep of the property and pay all taxes and other dues related to the property. If this is not done, there can be foreclosure of loan or to prove that he/she can make their homeowner’s insurance, tax, and upkeep payments. If failed in keeping the taxes current and paying the insurance premium on time will result in foreclosure of the loan.

The product is not easy to understand nor well publicized. People are unaware of its features and stay away from it.

Should I go for a reverse mortgage?

A Reverse Mortgage is a great option for people who want to live in their house and at the same time earn an income but are not interested in giving the house to their heirs. It is good for people who have valuable property and not enough investments or savings to generate regular income for them.

But the documentation is a tedious process. There is not enough knowledge and information about a reverse mortgage in India. If as a retiree, you have a source of income but it falls a little short of what is needed, you can go for portfolio review or go for more tax-efficient investment products. The processing fees should be looked at and checked if it is not burning a hole in your pocket. If you have a big house, you might want to sell the property when the property market is good and you can invest the money in different investment products to get the most optimum returns. It may not be necessary that the bank fetches a good price for your property after your death. You can move into a smaller house where maintenance related efforts and costs may be lower and will work to your advantage.

Consider these factors before you make the final decision on a reverse mortgage.

After retirement, one may not have a regular income channel. But expenses will continue to be there. Some expenses might increase and some might decrease.  It is important to have an appropriate strategy to get a regular income during retirement.  It is important to manage money smartly so that one does not have financial woes in the retirement years. If one invests an appropriate amount as per the financial plan in MFs when he/she has a regular income, Reverse mortgage can be set up during the retirement years for regular income.

If you have any questions regarding Reverse Mortgage – feel free to ask in the comment section.

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Hemant Beniwal September 10, 2019 0 Comments

Ask Investment Questions

Investment is the backbone of financial planning. So if financial planning is battle training, investment is the Kargil. This is an ultimate practical experience and while doing this question or query is bound to surface. Hence this is the page where I have collected the common investment questions that arise in every once mind. You are likely to get solution to your query here or else ask me through the comments section.


Investment Questions:

  • Should I take loan & invest in Stocks?
  • Are Company Fixed Deposits Safe?
  • What are ETF & which Indian ETF I should Invest in?
  • How much I save for my goals?
  • How to get good returns through futures & options?
  • What about investments made in IPO.
  • What will happen if we are caught in spiral like Japan?
  • What should I expect from my Bank Fixed Deposits?

Leveraged Investment

Question: My Friend who’s a stock broker, advising me to purchase some stocks as stock markets is at very attractive levels? As I don’t have enough money so he’s told me to get a personal Loan. I can pay EMIs easily, but is it advisable?

This is not a friendly advice. Either your friend wants to earn brokerage out of your risk or he’s also not that equipped with knowledge to advise you on financial matters. Stock market is one of the most risky asset classes at least for short term where you can earn or lose the fortune. But even if you want to stay invested for long term and you are comfortable in paying the EMIs then also I would not advise you to enter this investment by taking Loan. No one can guarantee you returns in stock market. Personal Loan is among the costliest Loan available as bank doesn’t ask for any security or collateral along with it. It’s Interest rate varies from 16%-20%p.a. As there’s no guarantee in Stock market so it’s very risky to take loan and invest. Moreover there’s a condition attached with personal Loan that this money should not be used for Stock market Transactions. I advise you to start a SIP in Equity Diversified Mutual Funds with the amount you are comfortable paying as Loan EMIs. This will help you in building up the corpus and also satisfies your desire to enter into stock market.

Company Fixed Deposits

Question: I want to invest in company fixed deposits which are safe and good to invest with fairly good return. May I request your good self to suggest the name of safe company for investment? Period of investment is 3 year.

There’s no company which I can call as safe. Fixed deposits are unsecured loans that companies procure from general Public. If a company defaults and goes bankrupt, fixed deposit investors will be paid second last i.e before Equity Investors. But still you can check those companies which have good rating by credit rating agencies. Rating does not make company deposits safe but at least it helps in gaining confidence on the soundness of repayment capacity. There are some Government companies also which issues FDs. You can consider those also.

ETF or Exchange Traded Fund

Question: Can you please provide me an update on ETF…. What is ETF? How much return do we get? For someone at my age of 25 it is right time for me to invest in ETF? Which ETF should I invest for long term?

ETF or Exchange traded funds are passive funds which follows some particular index be it Sensex or CNX 500. These funds are similar to index funds with only difference that these are listed on exchange – so you can also do transaction any time in the day rather than waiting for end of the day. Returns in ETF are directly linked with index performance so if Sensex will give 12% return in year – you can also get the same amount. My suggestion as India is still a growing economy – there is a scope for fund managers to beat index. So you should make your portfolio through 3-4 diversified equity funds.

How much one should save?

Question: How much percentage of my total Income should one invest and in which financial instrument considering children education and retirement planning?

Actually percentage of income going in goals depends on once age & type of asset class you are choosing. If someone is around 30 years & invest in equities – approx 15% income will be sufficient to achieve these basic goals but he is investing through debt may be 25% of income is needed. But if someone is close to 40 the he needs 25% through equity & 35%-40% in case if debt. But as I said other factors like Job security, other goals also determine the quantum of investment.

Future & Options

Question: Please tell me about how to invest in Futures & Options. How I can earn good returns from it.

Future and options are most common “Derivatives”. Derivatives are financial instruments that derive their value from an ‘underlying’. The underlying can be a stock issued by a company, a currency, or a commodity like gold etc. The derivative instrument can be traded independently of the underlying asset. As per most famous investor “Derivatives are instruments of financial mass destruction”. Why he said this – because derivatives are leveraged instrument & very risky for any investor. Institutional players use these Instruments for hedging their positions but retail investors use them for speculation. Assume that you have capital of Rs 50000 – that you used to buy a future of x company by paying 25% margin. Now if particular stock(underlying security) will rise by 10% in a month you will gain Rs 20000 on your portfolio or 40%. Now think if it goes down by 10% – as retail investor don’t have understanding or control over their investment; they soon lose their capital.

IPO or Initial Public Offer

Question: I have 300 shares of Jsw energy, which is received at the time of IPO offer. I want to know about the future of this share from the point of view of as an investor, I am not a trader. Please give the expert opinion.

Investor often thinks IPO is a good way to make QUICK money and gets attracted towards it. It is true that few of the companies who came up with an IPO have done well but it is not easy to pick the right ones. Do you remember Reliance Power IPO in Jan 2008 & same happened with other power & infrastructure IPOs. Investor thinks that IPOs are good Investment Vehicle but in reality they are against investor’s interest as they arrive in market when promoters are sure that they will fetch good premium. Do you know BSE IPO index which was launched in August 2009 is down by 9% & in the same period Sensex has given more than 25% return? One should stay away from IPOs or be very choosy.

India Vs Japan

Question: What will happen if we are caught in spiral like Japan i.e. correction of 80% & still bleeding though Japan’s companies are not bleeding then why the Nikkei is not giving the returns? I hope u must be getting what i wanted to ask. Please do clarify why we will go on making new highs on index although with ups n downs

There are 2 reasons for what happened in Japan- first when their market topped it’s valuation was almost 5 times of average. Their PE was approximately 100 at that time. Second Japan is now a developed country & in last 2 decades their GDP growth is 2-3% max. Hope it answers your concern. India is still growing economy and the best is still to come. Next 10-15 year will be Golden years for India – you will like to sit out & watch the game or would you like to participate.

Bank Fixed Deposits

Question: What are the historical real returns on Bank Fixed Deposits in India? When will they turn positive?

Real rate of return is when we remove adjust normal/nominal rate of return (like 7.5% on FD or 8% on some post office scheme) is adjusted for inflation. Normally bank interest rates gives close to 1% of real rate of return but if consider taxation actually we are making losses. Last 2-3 years were pathetic for a debt investor as real rates are negative – even RBI is concerned regarding this. India is a growing economy & inflation will always be higher due to demand coming from public – one must hold equities & real estate to take benefit out of it.

In Case you have questions related to investments ask in comment section.

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Hemant Beniwal August 8, 2019 0 Comments

15 Types of Risk that affect your Investments

When someone asks me “tell me some risk-free investment which can generate good returns” or “low risk high return mutual funds” – I get confused. Why? Because according to me there are n number of risks in investing & I am not sure which risk he is talking about. Warren Buffett Said “Risk comes from not knowing what you are doing”  so today let’s risk ourselves to understand different types of risks that are associated with equity & debt investments.

What is Risk ?

What comes to your mind when someone says RISK or this investment is risky? Risk for most of the people has only one meaning loosing the principal amount. In scientific language “Risk may be taken as downside risk, the difference between the actual return and the expected return (when the actual return is less), or the uncertainty of that return.”

Image Credit Onemint

2 most basic types of risk

Investment is related to saving but saving does not mean investment. Investment is about deferring your present consumption for future goals with expectation of security of amount & getting returns. So there are 2 basic risks in it:

Investment Risk – it is about possibility of losing money. Today you invest Rs 5 lakh in equity & get Rs 4 after 3 years. Investment risk can be measured by Standard Deviation.

Inflation Risk – it is losing purchasing power of money. In 2011 you invest Rs 5 Lakh in debt & get Rs 10 Lakh in 2020. But your Rs 10 Lakh is not able to buy you the item which was available for Rs 4 Lakh in 2011.

Check below picture which tells you that with time (in equity) Investment risk is reduced & at some point of time it turns to zero. But on other hand Inflation risk increases with the time & there is no end to it. Or we can say in short term risk is volatility of assets & in long term it is loss of purchasing power.

Systematic Risk Vs Unsystematic Risk

There is one more way to classify financial risk – is risk will impact whole economy or particular company or a sector.

Systematic Risk – it is also known as market risk or economic risk or non diversifiable risk & it impacts full economy or share market. Let’s say if interest rate will increase whole economy will slow down & there is no way to hide from this impact. As such there is no way to reduce systematic risk other than investing your money in some other country. Beta can be helpful in understanding this.

Unsystematic Risk – it affects a small part of economy or sometime even single company. Bad management or low demand in some particular sector will impact a single company or a single sector – such risks can be reduced by diversifying once investments. So this is also called Diversifiable Risk.

Different types of Risk in Investments

We have divided it into 2 parts – risk in debt & other risks. It is a big investment mistake if someone feels that there is no risk in debt investments – people who have ignored this in past have paid huge price.

Risk in Debt Investments

Credit Risk – it is also called default risk. As the first pic of this article shows that people only look at returns & not risk in it. Let me ask if SBI bank is paying some 9% interest & some NBFC NCD is paying 12.5% – which one you choose. If you think 12.5% NCD will be the right choice – you are ignoring the credit risk. Credit risk is when company doesn’t have capacity to pay principal or interest amount. In past there is a long list of companies which defaulted like CRB Capital, Escorts, Morpen Labs etc. Even Bank FDs have credit risk – there is guarantee only upto Rs 1 lakh. Credit risk is close to zero in Government Bonds.

This is most common & most important risk in debt – to understand it better read “Why debt will always give negative returns

Interest Rate Risk – change in interest rate will impact price of bonds (or NCDs). There is negative relation between price of bond & interest rates – if interest rate will increase price of bond will go down & vice versa. This risk can be reduced if you hold bonds till maturity. Interest rate risk also affects Bank Fixed Deposit investor – he was having Rs 5 Lakh & he invests at a prevailing rate of 9%. What will happen if interest rate increase to 10% – he will be losing 1% interest.

Reinvestment Risk – Let’s assume that you made investment in a bond with 9% yearly interest. Interest rate reduced to 7% in 1 year so next year when you received interest & went back to invest it was invested at lower rate.

Liquidity Risk – if you have some bonds that you would like to sell for immediate requirement but there is no buyer or fewer buyers than sellers – you may have to sell your bonds at discount.

Country risk – it is also called sovereign risk. As you read in Credit risk “Credit risk is close to zero in Government Bonds” but close to zero doesn’t mean zero. What about present condition of PIGS – Portugal, Ireland, Greece & Spain. Even in India there have been instances where fixed deposits issued by govt. backed companies deferred maturity payments by issuing additional bonds.

Inflation Risk – as mentioned in starting of the article. Inflation is your biggest enemy.

Other Investment Risks

Exchange Rate Risk – If you invest in debt or equity of some other country you will face exchange rate risk. If some of your US investments earn 10% in one year in dollar terms but the same year dollar loose 2% in comparison to rupee – your actual return will be 8%. NRIs are heavily impacted by this risk & they should make financial decision after considering it.

Timing Risk – I don’t think I need to explain it but only one suggestion – don’t take this risk.

Volatility Risk – equity prices keep fluctuating on day to day basis. This can be measured by standard deviation.

Political Risk or government risk or regulator risk – What will happen if you have invested in a particular sector & government comes out with an adverse policy. This risk can be clearly seen in sugar or oil & gas sector.

Valuation Risk – You may find a great company with great future prospects but if present valuation is too high you will not make money. Infosys was good company in 2000 & great company in 2005 but its price of 2005 peak was less than 2000.

Business Risk & Technology Risk – couple of years back pagers & typewriters were important part of once life but these products are no more there. Same happened with Audio tapes & floppies – what would have happened to these companies.

Execution risk – the time between when you see your price and when the trade actually goes to the market.

Concentration Risk – when you invest in single company (I know a person who invested all his long term savings in Satyam), single fund or single asset management company you are actually taking a huge risk.

Information Risk – This is again a very important risk to understand. You take your financial decisions based on some information – this information is provided either by manufacturer of financial products or agents/distributors/advisors or media. What will happen if this critical information is wrong or not complete? If you think this only happens at the time of buying insurance – you are absolutely wrong. This can happen in any financial product including mutual fund (you see advertisement of 100% return in a year – these are point to point returns & completely misguiding), taking loan (interest rate shown 9% but actually it is 16% – it is game of Flat rate & Reducing rate) or even simple products like tax free infrastructure bonds.

Someone rightly said “If you torture numbers enough, they will confess to almost anything”– read extract from Economic Times about IDFC Infrastructure Bond advertisement:



*(yes this star) – Do you know what this star is called? Asterisk or Aster-RISK – Aster means Star & Risk means anything or everything that is written in this article. If you find this star somewhere try to find hidden things in footnotes.

There are few other risk which impacts you directly or indirectly – institutional risk, operational risk, event risk, company risk, geopolitical risk, sociopolitical risk, counter-party risk, reputation risk, commodity risk, management risk, principal risk, opportunity risk, prepayment risk, call risk, legal risk and I am sure I have missed lot others….

Oh so many risks & you thought only equities are risky. Now from the next time when you say Risk Free Investment – first clarify which risk you are referring to.

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Hemant Beniwal August 8, 2019 0 Comments