Reverse mortgage: Unlock the value of property

The number of Indians with a net worth of Rs 1 crore has grown exponentially in the past decade. But you won’t find these crorepatis zipping around in flashy cars or splurging at shopping malls. That’s because for many of these crorepatis, the biggest chunk of their wealth is lying locked as the property in which they live. They may have an eight-figure net worth but their monthly income is in four figures. Madan Gopal Mathur, 67, is among the asset-rich but cash strapped property owners.

But three years ago, this retired PSU manager found the key to unlock the value of his property when he reverse mortaged his 1,000 sq ft apartment in Delhi. Reverse mortgage is just the opposite of a home loan. In a loan, a person buys property with money given by the bank and repays it with EMIs.

In reverse mortgage, the bank starts giving the owner a monthly payment as a loan against his house. The owner can borrow up to 75% of the value of the property. After his death, his heirs have to repay the reverse mortgage loan taken by him against the property. “It acts as a forced saving for the owner’s children,” says Mathur. What’s more, the house is revalued every five years and the borrowing limit is accordingly revised.

In 2007, his house was valued at Rs 60 lakh and he was allowed to borrow up to Rs 40 lakh against it over the next 15 years. The EMI was fixed at Rs 9,600. The move helped Mathur more than double his monthly income from Rs 9,000 to Rs 18,600. “The government’s decision to introduce reverse mortgage is a godsend for retirees like me," he says.

Till then, Mathur was facing difficulties trying to make ends meet. After taking voluntary retirement in 2001, he found that his nest egg of Rs 22 lakh was not as big as it appeared. A good chunk went into repaying loans and he was left with Rs 12 lakh which he invested in a few insurance plans for annuity income.

“It was difficult to manage the household with the Rs 9,000 I got as annuity,” he says. Mathur tried different options to supplement his income. Since he had a financial background (he had retired as general manager, finance, of Bhel), he started selling life insurance. But he could not keep up with the pace required for the job. He also had to travel long distances to explain the policies to prospective clients. Most of the times, the visits didn’t translate into sales and he made barely Rs 3,000-4,000 a month.

“I was spending more on fuel than what I was earning in commissions,” he says. He could not take help from his children who had immigrated to the US.

STRATEGY	BENEFITS
To reverse mortage his 1,000 sq ft apartment worth Rs 60 lakh	Receives monthly income of Rs 9,600 for his flat. This supplements the Rs 9,000 he gets as annuity from his investments

The first glimmer of hope came in 2007, when the government announced the reverse mortgage scheme. “It was a novel concept and not immediately understood by the public,” says Mathur. Some people even saw a stigma in the scheme. Imagine, funding your living expenses by pawning the house you live in. Yet, Mathur saw in it the panacea for his problems.

When the Punjab National Bank launched the scheme in 2007, he was among the first applicants. Though most of his problems are behind him, Mathur has broader concerns on his mind. “The life expectancy in India is rising but few people are financially prepared to deal with this,” he says. “Reverse mortgage can help them tide over the problem in their sunset years,” he says.

Why you should know the alpha value of your mutual fund

An interesting article from ET wealth dated 3rd Jan 2011

While evaluating the performance of a fund, analysts look at several factors such as the asset size, expense ratio, past returns and company or sector allocation patterns among others. Out of these, the past performance of a fund is widely quoted in fact sheets, research reports and advertisements that solicit mutual fund investments. Though the past performance of a fund is important, it completely ignores the risks taken by the fund.

Mutual funds face two types of risks while investing in stocks: i) Company specific and ii) market specific. A fund aims to eliminate company-specific risks by diversifying their holdings. However, market risk (also known as systematic risk) cannot be eradicated. A well-diversified mutual fund then is prone to market risks only. The returns that a fund generates must be in accordance with the risks it is exposed to. Such risk-adjusted returns are called expected returns.

For making risk-return analysis, analysts use a statistical tool known as alpha (also known as Jensen’s alpha after American economist Michael Jensen who developed it). This measures a fund’s returns relative to its expected returns. A fund that consistently generates higher return relative to its expected return is an outperformer. Alpha is also used by analysts to evaluate the performance of the fund manager. A positive value of alpha means that the fund manager’s stock picking and market timing skills.

For a retail investor the alpha value is important because it measures the excess returns a fund has generated in relation to the returns generated by its benchmark. Alpha values are readily available on websites like valuereseachonline.com and myplexus.com.

Do such positive alpha funds really perform better than the negative alpha funds? We decided to test this by studying the performance of equity-diversified funds. The funds were filtered by looking at funds that are more than five years old and only growth-option funds were selected. After applying these filters we zeroed-in on 116 funds. Out of these, 69 were positive alpha, 24 were negative and 23 have alpha value of zero. We ignored funds with zero alpha values.

We then analysed the performance of positive and negative alpha funds over a period of one year, three years and five years. In these three time periods 56% of the positive alpha funds consistently outperformed their benchmarks. On the other hand, 58% of the negative alpha funds consistently underperformed their benchmarks. This shows that the funds that generate excess returns have the ability to outperform in the medium term and the long term.

However, alpha should be used cautiously while evaluating funds that are not fully diversified. This is because alpha only considers market risk and ignores company-specific risks. Therefore, it gives a distorted picture of the risk-adjusted returns in case of less-diversified funds because such funds are also prone to the company-specific risks.