Liquidate financial assets if its return is lower than rate charged on loan

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I had once approached a State Bank of India (SBI) branch to open a Public Provident Fund (PPF) account, but didn’t open it. However, I gave them my Permanent Account Number (PAN) to them. Later, when I approached another bank to open my PPF account, they said I already have a PPF account in SBI using my PAN as reference. When I contacted the SBI branch, they told me to contact their main office, and so on. There is no transaction or balance in the account nor do I have any other dealing with the said SBI branch. What should I do?

—S. S. Sharma

A PPF account cannot be opened by submitting only your PAN. You need to fill an account opening form and have to submit your residence proof and photograph/s to activate the account.

If SBI has opened the account inadvertently, ask them for the PPF account number and passbook or statement. If they are saying there is no PPF account, do check out from their systems, if possible, to understand why the other bank is saying there is an existing PPF account in SBI in your name.

If you are not able to make any progress, then you need to contact their local head offices. You can either visit the offices or reach out to them through phone or email.

I am planning to buy a car this month. The bank is offering me an interest of 9.25% with 100% full finance on the ex-showroom price. I have some fixed deposit (FD) and mutual fund investments but don’t want to liquidate them. Is taking a car loan a better idea or should I liquidate my investments?

—Mayank Lathar

You need to be aware of a few basic principles to determine whether it is recommended to go for a loan or not. Firstly, if you go for a loan, it should preferably be for an appreciating asset class and not for a depreciating one. In the latter case, the cost of the asset including the interest cost increases substantially due to servicing of loan, while the value of the asset diminishes. At the same time, it is important to determine the net cost of borrowing. In your case, the rate of interest is 9.25%.

However, if you are self-employed, the interest cost becomes an expense in your profit and loss statement, reducing your taxes as per your marginal rate of tax and bringing down your real cost of borrowing. The net cost then is to be compared with the expected yield on your financial assets against net of taxes. For example, if your bank FD gives 7.25% rate of interest and you come under the 30% tax bracket, the net return on FD post taxes becomes 5.075%. This needs to be compared with the net borrowing cost. Likewise, for mutual funds—if they are equity mutual funds, the average return over a three-year period can be compared with the cost of borrowing (however, there is no assurance for the returns of equity asset class and, hence, an average of three years or even of longer duration can be considered). So if you find the bank FD rate to be lower than the cost of borrowing net of tax adjustments, it may be prudent for you to liquidate the deposits and opt for a lower amount of loan or even go for no loan. It is also good to know your short-term liquidity needs at the time of deciding.

[“source=livemint”]