[neoonwheels]

Hi Guys,

I want your help in the following business proposal.

Background: My dad has 4L in Mutual Funds since couple of years now (Originally invested around 2.8L). The person who was looking after the investments has started his car rental (Tourist) business since last 2 years. He started with 1 Indica and now has 5 cars (2 Indica, 1 Tavera, 1 Innova and 1 Xylo) in his fleet. He is replacing his old Indica this month. He asked my dad if he is interested, he can come up with a proposal in this line. Yesterday, he came up with one proposal as below:

1. We buy 4L Indica DLS along with permit. The car would be in our name.
2. The recurrence cost of permit renewal etc (2000/-) should be taken care by us.
3. Tires (Every 45-50K) and any accident expenses should be taken care by us (Settling with Insurance company).
4. Every year Insurance is with us

Now he will use the car as one of his fleet and in return he will:
1. Give us 8K per month
2. Driver, diesel and regular service expenses would be taken care by him.
3. In service: Labor, oils and filters, brake pads etc
4. Depending on the market he will increase the 8K amount over the due course.
5. We can terminate this agreement given 1 month notice. No compulsory period in agreement. He can as well terminate it given 1 month notice.

What do you think guys, is it beneficial. As per me, this is not very interesting thing to get into. Even though the Mutual Fund is risky, it certainly can return
good money in 3-4 years horizon (Dividents as well). While 3-4 years down the line, car would be depreciated. The profit is also on the tax saving front but then dad is not a big tax payer either (Retired). Let me know your views.

[n.devdath]

There are few ads like this in the paper and a few scams as well. Please be careful. If you are sure about the authenticity of the person and the Co, then move ahead.

Apart from that, I m very poor in financial matters..

[vasoo]

Personally I dont think this is a good option. Firstly tyres will need to be changed every 25-30k kms or so considering the conditions in which a taxi will be used. That itself will be about 15k of expense every 6-8 months. Insurance may be another 8-10k to start with. Other expenses such as permit renewal added, total annual outgo for you will be in the tune of 35k while income is 96k. Combined with the depreciation of at least 30% (Rs 1.2 lacs) in the first year, thats completely untenable. Not sure if I missed anything here. Another thing to add probably is the opportunity cost of about 30k per year (@8% interest on 4 lacs).

[neoonwheels]

He said he change tires after 45K. Typically his cars are mostly used for airport drops. He said his Indica runs 3.5K every month, so by that typically every year I need to change tires.

1. Tires cost = 12k
2. Insurance = on an avg 9K per year (Would be more in initial years)
First year insurance is already present in 4L car cost
3. Accident repairs: Partly we have to shell money - Misc 9K)
4. That makes it: 96-(12+9+9) = 66K in our hand

I feel this is not a healthy business proposal. Dad is not in 30% tax slab so we are not saving much on income tax as well. On the other hand, this guy will show 8K as his expenditure and can enjoy his tax cut.

This person is reliable as we know each other since 20 years now. But I feel money in MF is a better idea.

[aargee]

Driver's salary - Rs 6000 PM
Diesel - Rs 35 per litre
Mileage = 15 Kmpl
Cost per Km = 35/15 = Rs 2.33

Let's do a math here.

If you need 8K in hand, then 2.33 * X = 8000
X = 3434, which means, every month the car has to run 3434 Kms to fetch you this money. But wait, what about servicing cost for every 5K kms?

Say the servicing cost is about 3K for every 5K kms. So the car has to earn that too, which makes it to run 4725 Kms per month to make 8K + 3K. That leaves one more stuff - Driver.

Say the driver charges about 7K per month. Which means, car has to earn another 7K by running another 3K kms, which makes it to run 7725 Kms per month to make 8K + 3K + 7K.

So on an average the car has to run about 7.7K kms every month which means the car should run for approx 260 Km every day. Looking at practical side...
1. There will be different drivers for a single car; so you can imagine the plight of the car
2. Your break even period (assuming 4L to be constant & not including the insurance, FC, tires in subsequent years) will be 400000/8000 = 50 months which is 4 years + an Indica that has run for 3.69L Kms

PS - I've deliberately left out the profit calculation, adding that would exceed 7.7K per month

[ajmat]

Think about the liquidity and stability factor.

1: Your 4 lakhs is in various mutual funds with different risks, you win some, you lose some but if invested with reputable folks, a high chance of winning

2: Returns on investment might seem low but they at at least tax free

3; You have total control - need to get married, someone needs medical treatment, you can cash in partially and have funds within 4 days

4: Indica has an accident involving injury - car could be impounded, not earning money, may not be able to be sold until case is over, owner might terminate lease. Go figure

[neoonwheels]

Originally Posted by aargee

Driver's salary - Rs 6000 PM
Diesel - Rs 35 per litre
Mileage = 15 Kmpl
Cost per Km = 35/15 = Rs 2.33

Let's do a math here.

If you need 8K in hand, then 2.33 * X = 8000
X = 3434, which means, every month the car has to run 3434 Kms to fetch you this money. But wait, what about servicing cost for every 5K kms?

Say the servicing cost is about 3K for every 5K kms. So the car has to earn that too, which makes it to run 4725 Kms per month to make 8K + 3K. That leaves one more stuff - Driver.

Say the driver charges about 7K per month. Which means, car has to earn another 7K by running another 3K kms, which makes it to run 7725 Kms per month to make 8K + 3K + 7K.

So on an average the car has to run about 7.7K kms every month which means the car should run for approx 260 Km every day. Looking at practical side...
1. There will be different drivers for a single car; so you can imagine the plight of the car
2. Your break even period (assuming 4L to be constant & not including the insurance, FC, tires in subsequent years) will be 400000/8000 = 50 months which is 4 years + an Indica that has run for 3.69L Kms

PS - I've deliberately left out the profit calculation, adding that would exceed 7.7K per month

As I said already, everything (Driver salary, servicing (Consumables etc) and diesel) is taken care by this person. What I have to take care of is insurance, permit (2K yearly) and Tires. The only problem is, 8K is too less to take risk on 4L investment plus hassles in case of accident.

[aargee]

@Neon - I hope you didn't get the point. I've stated my calculations from your Dad's friend's point of view. I'm aware that fuel, driver & servicing expenses are his & that's the reason my calculations are included on the same. 8K is too much IMO.

Check this in addition - http://www.team-bhp.com/forum/indian...am-pg-2-a.html

[condor]

@Neo, any business proposition where you are not in control is not a good idea. A house / premises on rent is a different thing. If ever you have to break the deal, what will you do with a yellow-board car ? Run a taxi service ? Not very likely. You'll need to sell it - and at a steep discount.

Suggest you give a long thought to what Ajmat has said.

[neoonwheels]

You ar eright guys. This seems to be a better investment for dad's friend. He does not need to invest his 4L capital anywhere and still can enjoy tax exemption and keep growing business. In return we are not getting good money and also covering risks for him.

Its better to keep money in Mutual Funds which give you tax free dividents and increase your capital in due course (Depending on market). This business is good only when you manage everything on yourself rather than giving it on contract basis.

@Aargee: Yeh, I thought you misunderstood my points. Again re-reading it from dad's friend's point of view helped me

[anurag_p80]

Cost per Km = 35/15 = Rs 2.33

Let's do a math here.

If you need 8K in hand, then 2.33 * X = 8000

Something wrong with the Math, or is it just me? Cost*Kms= Earning doesn't make any sense. The earnings would be closer to Rs 8-10/ km and not 2.50 as above.

That said, the returns don't seem to be worth the high risks.

[aargee]

Originally Posted by anurag_p80

Something wrong with the Math, or is it just me? Cost*Kms= Earning doesn't make any sense. The earnings would be closer to Rs 8-10/ km and not 2.50 as above.

Anurag, you're right on the part that the cab drivers charges us 8-10 Rs per Km. I just did it based on no profits. Here's the recalculation with profits included

Driver's salary - Rs 7000 PM
Diesel - Rs 35 per litre
Mileage = 15 Kmpl
Cost per Km = 35/15 = Rs 2.33
Actual charged amount = 8 per Km; profit per Km = 5.65 (approx)

If you need 8K in hand, then 8 * X = 8000
X = 1000, which means, every month the car has to run 1000 Kms to fetch you this money excluding the fuel, including fuel it would be 1430 Kms. But wait, what about servicing cost for every 5K kms?

Say the servicing cost is about 3K for every 5K kms. So the car has to earn that too, which makes it to run 1965 Kms per month to make 8K + 3K. That leaves one more stuff - Driver.

Say the driver charges about 7K per month. Which means, car has to earn another 7K by running another 1250 kms, which makes it to run 3220 Kms per month to make 8K + 3K + 7K.

So on an average the car has to run about 3220 kms every month which means the car should run for approx 110 Km every day; and this is excluding his profit (bare minimum commitment to keep you happy & run business)

But wait, there're few more added costs for you
1. Permit & its recurrence cost of renewal
2. Tires (Every 45-50K)
3. Forget the accident expenses for now
4. Every year insurance

So you need to manage the insurance cost, permit renewal & tire changes within the 8K.

Here're some costs for your Dad's friend
1. Give us 8K per month - COVERED ALREADY
2. Driver, diesel and regular service expenses - COVERED ALREADY
3. In service: Labor, oils and filters, brake pads etc - COVERED ALREADY

But from your Dad's friend's point of view...
If the car runs for about 150 Kms a day instead of 110 per day,
His profit is 224 a day which is Rs 6700 & this money is without any investment.

Thanks Anurag for the correction. Hope this is right.

[MX6]

Another way of simple caculations for the profit your dad's friend might earn.
Look at a new car loan emi for a tata indica for 5 years.
Look at what he will pay your dad per month.
difference in those amounts is a direct profit he earns. with all other running / maintenance costs being the same.
What's more, he is not left with a hugely devalued used car after 5 years. Your dad is left with it. While he doesn't end up losing the car's depreciation value, your dad loses it. And your dad's friends made a profit with 0 investment!

If you want more saner returns negotiate a per km rate that he has to pay you on a monthly basis. And ensure that there are no odo-roll backs.
Or on a daily basis put a blanket rate. There are many operators who charge on per rate basis, so doing a survey might help fix. So every day your car is used, your dad's friend can pay you x-amount. Even if it's 1000, it means for a full month's running, he's bound to pay you 30K. You can say that you will bear the petrol charge.

Since these things complicate a lot, it's better your dad doesn't tread in areas where he doesn't know anything. There are other avenues to invest too.

[vivekiny2k]

Originally Posted by aargee

But from your Dad's friend's point of view...
If the car runs for about 150 Kms a day instead of 110 per day,
His profit is 224 a day which is Rs 6700 & this money is without any investment.

Thanks Anurag for the correction. Hope this is right.

8000/6700 is a nice balance if one is providing capital and other is doing all the ground work. Remember, his friend is investing his time and energy.

but again, considering the alternatives and risk taking capabilities of newonwhels's dad, mutual funds may be a safer alternative.

[aargee]

Originally Posted by vivekiny2k

8000/6700 is a nice balance if one is providing capital and other is doing all the ground work. Remember, his friend is investing his time and energy.

but again, considering the alternatives and risk taking capabilities of newonwhels's dad, mutual funds may be a safer alternative.

Its a nice balance, but, its not worth considering the high running Kms per day. The cabbies will spoil the new car, like, garland in monkey's hands.

Ideally the cost per Km should be more & probably the cars should be leased to run with Govt use, something of that sort would be more beneficial.