04 KALEIDOSCOPE
Open-ended fund
These are mutual funds whose units can be
bought and sold anytime without any so-
called last date. Thus investors can come and
go at any time during the operation of the
fund. This implies that the AUM will keep
changing everyday and so will the NAV. These
are the more common type of mutual funds
today in the country.
Close-ended fund
These are mutual funds whose units can on-
ly be bought during the NFO-New Fund Offer.
After the closing date, no new investor can buy
units. Also the fund has a fixed maturity date
and withdrawals can be only made on maturi-
ty date (excepting certain exceptions). Close
ended funds usually give a better return as
their expenses are usually lesser and the fund
manager does not have to bother about re-
demptions till maturity date, hence having the
freedom to make better investments.
Answers on Page 6
A look at the housing loan industry in today’s perspective
C
onstructing or owning a house
has a niche in the minds of ev-
ery Indian. A house is always
more than just a building; it has
an emotional bonding with us. A
house for one’s self is always a dream
for every one of us, but not all have
the solid cash at hand to make it on
their own.
Traditionally, our grandparents
used to depend on their provident
fund and gratuity amounts received
after retirement – while considering
buying a home, i.e. building a house
seemed a dream only post-retire-
ment. But lately, incomes of families
have been rising and their purchas-
ing power and loan repayability went
up, promoting the sector.
With the emergence of housing fi-
nance as a major business in the
country, an increasingly large num-
ber of people started going in for
home loans. Satellite towns around
the metros shaped the demand for
housing finance that catered to the
common man’s dream.
But the smooth road got eroded by
the recent global economic hurri-
cane. In the past few months, due to
slowdown in the economy, depleted
market confidence and plummeting
ERGO Monday, December 1, 2008
To buy or
not to buy
stock markets, huge question marks
were thrown up in air. Most home
buyers, investors or end users post-
poned their purchasing decision in
anticipation of a price correction,
thus bringing stagnancy in quantum
of sales across most major markets.
Despite falling housing sales,
builders are continuing to hold their
price line without effecting the much
anticipated downward correction.
The situation has developed into a
tug of war between builders and
home buyers. The banks, who are the
credit lenders, urge builders to re-
duce housing price.
The builders cannot reduce hous-
ing prices because of rising input
costs and high land price. In general
the construction cost has increased
due to the shortage and high cost of
construction materials like cement
and steel. In case of residential prop-
erties, there are two prices to be tak-
en into account, the price of the land
and the price of the flat, where land
prices remain unyielding due to the
land availability factor while the in-
creased cost of construction will add
to the hike in housing price. Of
course, location of the property has a
major bearing on the prices.
This high cost of housing is the
major deterring factor when we con-
sider the idea of a house. While the
banks say the builders should reduce
housing price, builders put the onus
on the banks saying it is the interest
rate on home loans that is reducing
housing sales. But interest rates are
determined by other factors affecting
the greater economy and banks’ abil-
ity to bring down interest rate on
home loans is not a function of de-
mand-supply of housing stock.
The extensive rate cut by the RBI is
widely expected to bring in more li-
quidity into the system by reducing
the cost of borrowing for retail con-
sumers. Property prices in India
need to decline further before de-
mand picks up around 10 per cent
drop in property prices is equivalent
to 1.5 per cent interest rate cut in
terms of affordability.
The final take: Although the loan is
cheap, the product needs some more
time to cool down its prices. After all,
a Tamil adage says “Poruththaar
Boomi Aazhvaar” meaning ‘men of
patience will rule the world’. ■
Ambiga Rajeshwari
Research Associate, email
ambiga@finerva.com