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U.S. fundas that are different in India

The number of Indian financial bloggers are few and far away, and when you search for financial information you might hit more U.S. based bloggers who tell you about their experiences. Unfortunately some concepts just don’t apply here – perhaps for the reason that our financial system is created differently – here’s a few instances where things are different.

Checking and Savings accounts
Ramit Sethi talks about how he negotiated out of bank fees – he has a “checking account” which he overdrew (used more than the funds he had) and the bank charged him an overdraft fee for this. The U.S. has “checking” and “savings” accounts that are different; you write cheques from the former, and only the savings account earns interest.

The Indian banking system allows for both checking and savings accounts to be the same – you write cheques that moves funds from the same account that yields you interest. (Okay it’s just 4% interest). In fact many banks will allow you to link a savings account to a fixed deposit – that yields higher interest than the savings account – and allows you to “sweep in” any amount that you overdraw from this deposit. The remaining part of the deposit continues to earn higher interest.

“Current accounts”, which are usually given to businesses, are the equivalent of zero-interest checking accounts.

IRA accounts, 401(K)
People in the US seem to love numbers. When you ask them the route to someplace it usually contains instructions like “Take 426 east, and at exit 27 turn on 42 North and then it merges with 57 North…” and stuff like that. That’s perhaps better than instructions you get in India (“Take second right and ask the paanwaala where Tumkur road is”) but you’ll still get a little perturbed with numbers.

So bloggers will keep talking about 401(K) accounts. There is no such thing as a 400(K) or even a 401(J) account – the number and letter refer to a section of their tax code. Like we talk about 80C deductions.

401(K) is like our provident fund. This is a retirement account – an IRA, or an Individual Retirement Account – which yields interest. Unlike in India where the money is invested at a fixed rate of interest, the U.S. allows you to determine where your 401(K) money is allocated (Equities, bonds or the like). And unlike in India, 401(K) withdrawals are taxed. Things like Roth IRAs are just different kind of such accounts, like we have PPF and EPF.

Home loans are “mortgages”
What we call a home loan, they call a mortgage. They’ll routinely talk about second mortgages which are essentially top-ups on your home loan.

Do you come across any that sound funny?

  • Harshit says:

    >oh yes, My personal favourite is “FICO Score”!! It’s a number that preety much determines if you as a person can be trusted in financial matters or not. It reflects your credit history.

    Harshit

  • Anonymous says:

    >Hi Deepak,

    I read about FMP on moneycontrol. (http://www.moneycontrol.com/india/news/mf-experts/why-fixed-maturity-plans-arebest-bet/228387)It seems it is a good option to park funds. But I donot know who is offering FMP. Could you please write about FMP providers.

    Regards
    Raj

  • Nilesh says:

    >Deepak,

    Some help needed. My company has now made contribution to superannuation fund optional for all employees. i have few questions here to decide on whether to opt for it or not.

    is there a general rule for interest payment for saf contribution by employers. if yes, how much %pa interest is paid.

    for tax calculation, this SAF contribution from now on will be included in 1lac limit in 80c or it is apart from that.

    also will appreciate if you can throw any other light on the same

  • osgeek says:

    >Is there an equivalent of “payday loan” in India? It is a very short term loan – up to your next paycheck.

  • Deepak Shenoy says:

    >harshit: Yes, man – FICO and the whole “it will affect my credit history” thing is not too well known here.

    Raj: FMP is provided by nearly everyone – I know valueresearchonline.com had done a few reviews recently, you might want to check there.

    nilesh: if this is a registered superannuation fund, your company’s contribution, upto 1 lakh per year is tax (and FBT free). THis is separate from 80C as per my understanding but please confirm with your accountant.

    osgeek: Nope – you get unsecured loans like personal loans and stuff called express loans like in this HDFC bank page. Nowadays many urban loans are given pre-approved and even over the counter – but nothing (yet) relates to paydays. Most companies will lend your paycheck amount as a “salary advance” though.

  • Nigel says:

    >This was a funny post (especially the part about asking directions..).

    I have the reverse problem in that I am trying to figure out Indian finance terminology. I can assure that it seems just as confusing: PPF, EMI, PAN, ULIP etc. etc.

  • Deepak Shenoy says:

    >Nigel: It definitely must sound funny! I think every financial market gets its terminologies established and you need to match them with what you know. PPF->Roth IRA, EMI->monthly payments, PAN->something like SSN but not quite etc.

    Where you get into stocks things get worse. India has “bonus” issues which don’t exist in the US. The margin financing concepts are different. Our futures/option lot sizes are different for each stock, and not every stock has futures.

    It’s all different but deep inside it’s all the same.

  • Raj says:

    >check out cnbc tv 18 after dark. if you can stay awake, watch the suze orman show (dunno the exact timings). its full of things ou wont find here.

  • Amateur Analyst says:

    >I came accross two terms “Prime” and “subprime” with respect to mortgages in US. Prime being loans given to people with sound credit history and are chaged lower interest compared to “subprime” borrowers who are charged higher int. as their credit profile is blemished. Moreover, there is another category in between: “Alt-A”, which is basically mortgage for people who are not salaried emplyees. With this comes other mortgage products like “stated income” (lender agrees to whatever income you disclose), “no/low doc” mortgages which are for people who cannot file required docs for mortgages. Phew…. there are so many new things. More later….