Well, this comes out of nowhere literally, just strolling in “The festival city” mall on the occasion of Eid, we were discussing about the ME assignment and what all to write in it.
After a long walk and some window shopping for a few hours, we felt hungry and decided to grab a meal for us. The place was so crowded as if it was free food being distributed.
Grabbing a place to sit and eat looked like a horrendous task that day. We finally grabbed our meals and tried searching for a place to sit. Though we got hold of a table but were short of two chairs…next to our table were two small kids enjoying their meal. To our surprise one of them offered us a seat saying we can both share it till we find another one…I can sit for half the time and then he can…I was amazed at his gesture of this 7 year old Arab kid. To amaze me further this boy during our small conversation taught us a very good lesson in just a single line. Now what he said was “If everyone was good, we all would have had enough chairs.”
Wow!
Even he wouldn’t have thought of how big a solution that was to every crisis and every situation we humans create for ourselves and for others.
Now let’s try applying the game theory to this simple problem of not having enough chairs to sit.
If there is a family in the food court, suppose consisting of a woman, a man and two children. Now, if this family starts looking for chairs and they find four of them, they would all be seated comfortably and can enjoy their meals. Once they are done, they can make place of another set of people and so on.
Now, this is an ideal state but what happens when people who are in a bigger group start looking for more and more chairs around. They find free chairs grab them and be seated, wherever people find maximum chairs they grab all and get seated. Sometimes even after finishing their meals they remain seated and do not make way for others.
Also, if there is a shortage of chairs, people do not consider grabbing sufficient chairs to seat the females and children first, but think of maximizing the chairs so that everyone can sit. This kind of strategy is called the dominant strategy. Though many people would say that this is the best way to make sure all are seated. This actually is not the most efficient way. Let us now think of a scenario where according to the little boy, everyone is good. In such a scenario, what everyone should do is to grab enough seats first to seat women and children and then if there are sufficient seats around, should go for more chairs. This sort of situation can be termed as Nash equilibrium.
But the hindrance to this sort of behavior comes when one man does not believe that the other will do so. He has a doubt that the other person may go for all the chairs and hence tries to maximize his chairs. This leads to maximum chairs for one but scarcity of chairs for many.
If we apply this to the world outside, we all try and maximize our profits and those who succeed in doing so do that cutting other’s margins or chances of earning a living.
What if we were considerate enough for the needful? What if we all make a cartel so that everyone gets an equal opportunity to have a go at things they desire? Why don’t businesses of today aim at providing things, not at a premium price, but things everyone can afford?
Sunday, October 5, 2008
Wednesday, September 26, 2007
India Shining!
What would have been a better trigger than an Indian victory in the T20 world cup-no not for the sensex and Nifty to hit the 17K and 5K marks-but for me to write this post.
India winning a World Cup or for that matter Sensex crossing the 17K mark were just a matter or time; lets compare it with a tenth grader getting A+ in sports and 85-90 percent in academics too; that's entirely my perspective.
We celebrated 60 years of Independence, or should I call it our sweet 16th birthday as a nation, which is full of youth, exuberance and agility; with a penchant to make a mark on the history of the world; a nation with a dream to change its destiny ; a nation with its wings spread-out and ready to fly.
I feel proud to be a part of this era where whatever we are touching is turning into gold; with my fingers crossed, I wait for the day when this shining India brings with it a name, the fame and glory to stay, and we still have to go a long long way.
India winning a World Cup or for that matter Sensex crossing the 17K mark were just a matter or time; lets compare it with a tenth grader getting A+ in sports and 85-90 percent in academics too; that's entirely my perspective.
We celebrated 60 years of Independence, or should I call it our sweet 16th birthday as a nation, which is full of youth, exuberance and agility; with a penchant to make a mark on the history of the world; a nation with a dream to change its destiny ; a nation with its wings spread-out and ready to fly.
I feel proud to be a part of this era where whatever we are touching is turning into gold; with my fingers crossed, I wait for the day when this shining India brings with it a name, the fame and glory to stay, and we still have to go a long long way.
Friday, September 21, 2007
Why buy a home when you can rent one?
It’s obvious, isn’t it—if you pay rent for years, you’ll have nothing to show for it in the end, but if you used that money to pay home loan instalments instead, you would be creating an asset. This was the question Tarun Banerjee was pondering. But he couldn’t shake off the suspicion that the truth may be more complicated. Tarun, aged 37, is a senior-level financial services professional, married with two kids.
He’s had his eye on a threebedroom flat in South Delhi, costing Rs 60 lakh. He would need to pay Rs 10 lakh up front, and borrow the remaining Rs 50 lakh. The 20-year equated monthly instalment (EMI) for the loan worked out to Rs 51,610 per month. Tarun wasn’t worried about the EMI, though—he could afford it. But he wanted to do a spot of number crunching. So we did a comparison of how Tarun would fare if he bought the flat, and if he rented it.
THE BUYING SCENARIO
Most people consider buying a house because of the tax breaks: the interest component of the EMI, up to Rs 1.5 lakh, is exempt from income tax. The maximum you can save in the highest income tax bracket (33.99%) is Rs 51,000. As for the principal, the tax benefit under Section 80C of the Income Tax Act is lost if, like Tarun, you pay the principal from your Provident Fund and insurance.
Also, since Tarun would take a loan of Rs 50 lakh, he would need life insurance, to protect his family from liability in case anything happened to him. We suggest two term insurance plans of Rs 25 lakh each, for which he would pay an annual premium of Rs 9,000 for each. Why two policies? Because 15 years into the loan period, the amount pending repayment would be Rs 25 lakh. If he bought a policy each of 14 and 20 years’ duration, he would need only one policy from the 15th year.
The net cash flow (tax savings on the Rs 1.5 lakh deduction, minus insurance charges) would be invested in diversified equity mutual funds, and would grow to Rs 26.78 lakh in 20 years, assuming the mutual funds give a tax-free return at a compounded annual growth rate (CAGR) of 12% (a reasonable assumption, as equity has given 16% returns over a 26-year period, and the future looks even better). I assumed a year-on-year growth of about eight per cent in the property value. Tarun was shocked: “Doesn’t it grow by 30-40 % year on year?” I explained my reasoning. If property grew at that rate, this property would be worth Rs 2.23 crore in just five years! Now, if you want to sell, there should be buyers, right? If someone was going to rely on loans to buy property, they may have to borrow Rs 2 crore, and fork out an EMI of Rs 2 lakh. Not many people can afford that. Salaries are growing on an average at the rate of 10-15 % a year, so rising incomes cannot take care of that. The explosive growth of the past three or four years is unlikely to occur again in the future. Some exceptional mutual funds have given returns of 800-1000 % over a five-year period, but that, too, is going to be difficult to replicate (this is why I reckon a 12% CAGR for mutual funds).
Historically, too, property has grown at a sedate, single-digit rate. An 8% return thus seems realistic over a 20-year period. In fact, after deducting 0.5% for society charges, property tax, and so on, net growth would be around 7.5%. The property is likely to be worth Rs 2.55 crore after 20 years. The total corpus then would be Rs 2.82 crore. Tarun was underwhelmed.
THE RENT SCENARIO
What if he were to rent the same flat? The rental norm for prime residential property is 6% per year of the property value, so let’s assume that figure throughout the 20-year period, although it’s more likely to be less than 6%. Anyhow, we reckon Tarun would pay Rs 3.6 lakh as rent in the first year, with 5% annual increases in subsequent years. Since he could afford an EMI of Rs 51,640, he can easily afford this rent. The amount available after rent is invested in a mutual fund.
At 12% CAGR, this would yield Rs 97 lakh in 20 years. Plus, we would put the Rs 10 lakh that Tarun would have paid up front to buy the flat in a mutual fund. This would grow to Rs 96.46 lakh after 20 years. Add to this the tax saving that Tarun would claim on rent. The tax-exempt amount would follow the one-in-three formula: either 50% of the basic rent declared by Tarun’s employer, or 10% of rent above the basic, or the actual house rent allowance . It is reasonable to assume Tarun would claim a deduction of 75% of total rent paid.
The tax saved would also be invested in a mutual fund, and would amount to Rs.1.03 crore in 20 years. So the total cash flow is Rs 2.96 crore. The comparison The final corpus in both cases is not too different, right? Renting would leave Tarun with Rs 14 lakh more than buying his own place. Now, some might argue that comparing a cash flow with real estate is like comparing apples and oranges.
So let’s see what happens if the whole corpus is converted to cash. If he bought the flat, Tarun would pay Rs 10 lakh as long-term capital gains tax. If he rented, he would pay not tax. So renting actually leaves him with Rs 24 lakh more. If we tweaked some numbers , the situation would still not be vastly different. The last I heard from Tarun’s wife, he was still looking at properties—to rent!
-Economic Times
He’s had his eye on a threebedroom flat in South Delhi, costing Rs 60 lakh. He would need to pay Rs 10 lakh up front, and borrow the remaining Rs 50 lakh. The 20-year equated monthly instalment (EMI) for the loan worked out to Rs 51,610 per month. Tarun wasn’t worried about the EMI, though—he could afford it. But he wanted to do a spot of number crunching. So we did a comparison of how Tarun would fare if he bought the flat, and if he rented it.
THE BUYING SCENARIO
Most people consider buying a house because of the tax breaks: the interest component of the EMI, up to Rs 1.5 lakh, is exempt from income tax. The maximum you can save in the highest income tax bracket (33.99%) is Rs 51,000. As for the principal, the tax benefit under Section 80C of the Income Tax Act is lost if, like Tarun, you pay the principal from your Provident Fund and insurance.
Also, since Tarun would take a loan of Rs 50 lakh, he would need life insurance, to protect his family from liability in case anything happened to him. We suggest two term insurance plans of Rs 25 lakh each, for which he would pay an annual premium of Rs 9,000 for each. Why two policies? Because 15 years into the loan period, the amount pending repayment would be Rs 25 lakh. If he bought a policy each of 14 and 20 years’ duration, he would need only one policy from the 15th year.
The net cash flow (tax savings on the Rs 1.5 lakh deduction, minus insurance charges) would be invested in diversified equity mutual funds, and would grow to Rs 26.78 lakh in 20 years, assuming the mutual funds give a tax-free return at a compounded annual growth rate (CAGR) of 12% (a reasonable assumption, as equity has given 16% returns over a 26-year period, and the future looks even better). I assumed a year-on-year growth of about eight per cent in the property value. Tarun was shocked: “Doesn’t it grow by 30-40 % year on year?” I explained my reasoning. If property grew at that rate, this property would be worth Rs 2.23 crore in just five years! Now, if you want to sell, there should be buyers, right? If someone was going to rely on loans to buy property, they may have to borrow Rs 2 crore, and fork out an EMI of Rs 2 lakh. Not many people can afford that. Salaries are growing on an average at the rate of 10-15 % a year, so rising incomes cannot take care of that. The explosive growth of the past three or four years is unlikely to occur again in the future. Some exceptional mutual funds have given returns of 800-1000 % over a five-year period, but that, too, is going to be difficult to replicate (this is why I reckon a 12% CAGR for mutual funds).
Historically, too, property has grown at a sedate, single-digit rate. An 8% return thus seems realistic over a 20-year period. In fact, after deducting 0.5% for society charges, property tax, and so on, net growth would be around 7.5%. The property is likely to be worth Rs 2.55 crore after 20 years. The total corpus then would be Rs 2.82 crore. Tarun was underwhelmed.
THE RENT SCENARIO
What if he were to rent the same flat? The rental norm for prime residential property is 6% per year of the property value, so let’s assume that figure throughout the 20-year period, although it’s more likely to be less than 6%. Anyhow, we reckon Tarun would pay Rs 3.6 lakh as rent in the first year, with 5% annual increases in subsequent years. Since he could afford an EMI of Rs 51,640, he can easily afford this rent. The amount available after rent is invested in a mutual fund.
At 12% CAGR, this would yield Rs 97 lakh in 20 years. Plus, we would put the Rs 10 lakh that Tarun would have paid up front to buy the flat in a mutual fund. This would grow to Rs 96.46 lakh after 20 years. Add to this the tax saving that Tarun would claim on rent. The tax-exempt amount would follow the one-in-three formula: either 50% of the basic rent declared by Tarun’s employer, or 10% of rent above the basic, or the actual house rent allowance . It is reasonable to assume Tarun would claim a deduction of 75% of total rent paid.
The tax saved would also be invested in a mutual fund, and would amount to Rs.1.03 crore in 20 years. So the total cash flow is Rs 2.96 crore. The comparison The final corpus in both cases is not too different, right? Renting would leave Tarun with Rs 14 lakh more than buying his own place. Now, some might argue that comparing a cash flow with real estate is like comparing apples and oranges.
So let’s see what happens if the whole corpus is converted to cash. If he bought the flat, Tarun would pay Rs 10 lakh as long-term capital gains tax. If he rented, he would pay not tax. So renting actually leaves him with Rs 24 lakh more. If we tweaked some numbers , the situation would still not be vastly different. The last I heard from Tarun’s wife, he was still looking at properties—to rent!
-Economic Times
Wednesday, September 19, 2007
Life
It starts with a cry, it ends with a sigh,
between the two, the time passes by;
-trying to find out my full poem.
between the two, the time passes by;
-trying to find out my full poem.
Wednesday, July 25, 2007
Miles To Go Before I Sleep
Stopping by Woods on a Snowy Evening
Whose woods these are I think I know.
His house is in the village, though;
He will not see me stopping here
To watch his woods fill up with snow.
My little horse must think it queer
To stop without a farmhouse near
Between the woods and frozen lake
The darkest evening of the year.
He gives his harness bells a shake
To ask if there's some mistake.
The only other sound's the sweep
Of easy wind and downy flake.
The woods are lovely, dark and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
-by Robert Frost.
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