Investment


Given the current talk about sub prime mess in the US and its fallout, I got to think about home owner ship itself. From the perspective of a prospective home owner, not as an economist or lender or an investor into CDOs.

Let us say that I find a house to buy for 30,00,000 in Chennai (yeah, me dreams quite a lot ;-), so sue me).  Say I am able invest 10,00,000 out of my own pocket and  take a loan of 23,00,000 to pay the rest and to cover other transaction costs.  Let us assume that a lender agrees to loan me the amount at 10% fixed interest rate for a 10 year term.

At the end of 10 year term, I would have paid the lender 36,47,360 (Nifty Mortgage Amortization Schedule Calculator).

Assuming that I had put the 10,00,000 down payment instead into a 10 year term deposit earing 8% interest per annum, cumulated annually, it would have ballooned into 21,58,925, a good 116% appreciation.

So, my take is, the total invested at the end of the 10 year term is 58,06,285.  My down payment money and the interest it would have earned, the loan amount plus the interest I paid.   If I would not have dipped into the down payment and interest purse.  A Big If.  If I sell the house for 23% on top of this, I would get a 116% appreciation on the total investment of 33,00,000. But then why should I do this? For all I know, all things else being equal, I could have just earned the same on a term deposit.

I haven’t taken into consideration other costs and parameters over 10 years – taxes paid, maintenance, inflation, opportunity cost, whatever-else-that-could-put-my-naive-calculations-in-jeopardy.

So, just to ensure that I get a good return, say 70% (thrice 23%) I would have to sell the house at 98,70,685.   This is about 200% appreciation on the original 33,00,000.  Is 200% ROI over 10 years worthy of taking such a risk? If I factor in other expenses and parameters the actual ROI would be even less.

What sez you?

Landed at The Big Picture via Paul Krugman’s blog.  Here is a list of investment principles, regardless of market conditions.  Please spread the word. 

A word of caution though.  This is only applicable to those that have something to invest with. 

Rest, please be assured that someone will soon come up with a list of accruing principles, regardless of whatever conditions.  Once I come across the same, I will dutifully report it here 🙂

Go ahead and follow the link to The Paradox of Gold by Kurt Brouwer. I used to think of gold as a good investment vehicle. Whatever happens, I was under the belief that gold will always come to the rescue. Apparently it is not so.

For example, gold is currently at $707 oz., which is almost triple its value from 2001, yet gold still has not reached its historical peak of $875, which was set in January 1980. Admittedly, that peak was a very short-term one and gold quickly settled back down to $700 or so later in 1980.

So, gold has not even kept up with inflation over almost 3 decades, though I would have made a 300% return if I invested in gold 2001 😦 I do not know if all the prices mentioned are in today’s dollar terms or respective year’s dollar terms. If it were the latter case, it would be even worse, wouldn’t it?

Real estate is not all that it is cranked up to be. Going by the trend shown, there have been 2 extra ordinary run ups in the real estate market. This is for the US. Is there anything similar to this for India? Any pointers?

Neither is gold.

Ofcourse, there is no denying that quite a lot of folks who have profited from both. But is that due to their innate intelligence or is it pure, sheer dumb luck? Whats a poor schmuck to do?

Update: FYI, on the equities front, BSE Sensex outperformed Indian IT majors in the first half of FY 2007-08. A dire portent? Ofcourse, I mean an opportunity for value investors to scoop up as much stake at the trough for eventual shoring up tick.

BTW, is there any way to specify start and end dates in the URL itself for this Yahoo! Finance charts?