All posts by Aditya

Remittances, SGD INR

SGD INR: Rollercoaster First few months of 2021

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Just yesterday, one of my friends mentioned going to universal studios and experiencing the rollercoasters and that reminded me of movements in SGD INR in the past few months. I said, you can experience a roller coaster just by trying to time remittances from from Singapore to India

Having started the year at 55.25 the pair saw lows of 53.80 by March and sharply reversed back to 55.75 in first week of April. That is a move of approximately 3% down and back up within 3 months which is unusual in the currency markets.

I had expected the pair to drop to 57 SGD INR 55 achieved, Target 57 last year but with RBI intervening in the forex markets and India’s better than expected figures of containing covid resulted in short term strength.

The rupee moved sharply lower after the RBI MPC meeting though there was nothing in the meeting that would warrant such a move. So what has caused such volatility in SGD INR?

Covid Connection?

With Covid cases rising sharply over the last month the fear of economic recovery being derailed is high. One could attribute this move to Covid – however, if you look at exchange rate in September 2020, when India experienced the peak of first wave, the exchange rate was between 53.5 – 54. So I don’t think its covid anymore at play here.

Correlation to Indian Bond yields?

Similarly the Indian G-sec Bond yields have fluctuated between 5.8 to 6.20% in the past three months and seem unlikely to have caused this move. Moreover, with a large borrowing agenda in 2021, RBI would do everything in its power to keep the yields stable / low thereby containing the cost of funding for the government. So I don’t think the expectation of increasing yields would have caused this move.

Falling Oil Prices?

Brent Crude traded close to 70$ in early march and has fallen back towards the 60$ mark in April. India imports almost 80% of its oil which is traded in USD. Having a strong rupee when oil prices are high and letting them fall a little as oil goes lower can help the cost of oil in rupees stable. I believe that this could be a small factor in RBI allowing the rupee to correctly sharply lower and I would watch the oil prices over the next few months to get a sense of where INR may be headed. However, I don’t think this was the real reason.

RBI reducing intervention in the forex markets?

This I believe is the real reason behind the rupees move lower. There was a very low risk carry trade in the market whereby an institution with access to dollar market would borrow in dollars and invest in rupee bonds thereby having an arbitrage of anywhere between 1-3%. The belief was that RBI would intervene and keep currency anchored around the 73 mark against the USD. RBI may have decided to purge such trades by either mopping up dollars temporarily or not intervening in the forex markets.

I am not saying that RBI is manipulating the currency but tri agenda of subtly boosting exports, lower oil prices cushioning the cost of outflow and objective of flushing out traders with one way bets might have resulted in the sharp moves recently.

What to expect over next 3 months?

I think that 55 is now the new base rate with fluctuations of Rs 1.5 on both sides of the mean.

With MAS scheduled to release monetary policy data sometime in April, SGD INR could touch 57 in a knee jerk reaction or fall back to 54 in a quick move. There are analyst reports that suggest that with economy still not open to tourists SGD may continue to remain weak against the US Dollar. However, with housing prices inching up I don’t think MAS would want a weak dollar which would make Singapore properties cheaper for foreigners.

In a nutshell, I expect the roller coaster ride to continue and would take any move above 56.25 to transfer and invest in India. There is still value in some sectors of the equity markets and then there are low risk investments like Bharat Bond which I analysed in the previous post – Bharat Bond Better than NRE FD

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Investment, Tax saving

BHARAT BOND ETF – a better option Than NRE FD?

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NRE FD has been my preferred low risk, tax free investment option since the time RBI allowed banks to offer interest rates of their choice. However, with the established banks offering only 5% or lesser rates on NRE FD’s, I have been looking for other options that can give higher returns but with same low risk.

A few banks like IndusInd still offer 6.5% rate on NRE FD but with bank deposits being insured only upto 500,000 rupees the risk of loosing money in case of a default goes up (do remember what happened to Yes Bank and other co-operative banks). A bank will only offer interest rate higher than the market rate under 2 scenarios – either they are a new player and want to build a customer base or they are unable to raise funds easily as markets believe their business to be risky.

Bharat Bond ETF is one such instrument that has been on my radar and I wanted to analyse how it stacks against the NRE FD.

What is Bharat Bond ETF?

Its a Fixed Maturity ETF that invests in AAA rated bonds of Public Sector Companies (PSU). These bonds are not the same a Government Bonds (G-Sec’s) but pretty close in terms of risk profile given that govt has majority stake in most PSU’s.

As this is an ETF, an investor can sell the investment anytime on the National Stock Exchange (NSE), thus being extremely liquid. Yes, there would be short term or long term capital gains depending upon the date of sale but calculations suggest that its a good investment even with taxes if held to maturity.

How does it compare to NRE FD?

BHARAT Bond ETF wins hands down even after providing for tax when compared to NRE FD’s from large banks.

For calculations, I have assumed that the investor holds the etf to maturity and inflation averages 3%.

The break even interest differential between the two investments is appx 0.8% with the above assumptions of maturity and inflation. What that means is, in theory, if Bharat Bond ETF yields 6.8% then an NRE FD of 6% will provide roughly the same total return.

Why is Bharat Bond ETF better than NRE FD?

One has to consider multiple factors when considering an investment and not just the yield. The most important factor would be liquidity, default risk and tax impact if you return to India. Bharat Bond ETF provides better risk protection on amounts greater than 500,000 when compared to NRE FD and more liquidity as it is traded on exchange.

Bharat Bond ETF is a better investment than NRE FD irrespective of the interest rate if you have plans to return to India over next 8 years (the tax free benefit of an NRE account ceases within 2 years of returning to India) as the interest from deposits will no longer be tax free. The sooner your plans to return to India the greater the gains from ETF would be when compared to NRE FD.

Inflation protection is the other benefit that the ETF provides – If the inflation increases and averages to say 5%, the indexation benefit will reduce the tax liability as shown in table below

Similarly, if the capital gains are removed or the tax rate is reduced in the future the gains from the ETF will be higher.

So no matter how I look at it, Bharat Bond ETF maturing in 2031 is a better investment as compared to NRE FD for long term wealth accumulation. Instead of opening a fixed deposit buying this ETF makes a lot more sense for all investors whether non resident or resident.

Investment, Tax saving

SRS – Should Foreigners Contribute?

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In the last post Annuity via SRS increases the monthly payouts I had analysed how SRS (Supplementary Retirement Scheme) benefits Singapore Citizens and PR’s (Permanent Residents). In this post we will determine at what level the scheme becomes beneficial for foreigners, i.e. those working in Singapore on Employment Pass or have setup businesses.

Before jumping into data driven analysis let me list out the small difference in the scheme for the two groups.

  • A foreigner can withdraw the whole amount in SRS account, without paying the 5% penalty, after 10 years of making the first contribution
  • Only 50% of the withdrawn amount is taxed when withdrawn after 10 years
  • The tax is determined by adding the taxable amount to the income of the year to determine tax liability
  • If you are not a tax resident in the year of withdrawal, then a flat rate of 22% or tax resident rate whichever is higher is used to determine the tax liability (SRS income gets added under Other Income for tax purposes)

What this means is that if you started contributing on say 1 Jan 2010, then you can withdraw the accumulated amount in SRS on or after 2 Jan 2020 without paying the 5% penalty (this option is only available to foreigners so if you are planning to become a PR then do consider this option, specially if you need that lumpsum amount for a better investment opportunity or buying a house).

Next to remember is marginal rate of tax – say your income in the year of withdrawal is SGD 120,000 and you are in 11.5% tax bracket, then the SRS withdrawal will get added to 120,000 and attract tax rate of higher slabs.

If you are planning to return to your country of origin for good, then leaving Singapore in the second half of the year gives you slightly favorable tax treatment as you remain tax resident for the year and don’t get taxed at a flat non resident rate. If your destination is India, then a return between 1 Oct to 31 Dec is the sweet spot and gives you maximum tax benefits in both countries.

Is SRS really beneficial for foreigners?

To determine this, running calculations for various income levels, tax brackets and varying rates of return was the best bet. It took a while to not just run the algorithm but also verify for accuracy so that the readers get a nice matrix to use as for reference.

This time around I took a contribution period of 10 years and full contribution amount of 35,700 to SRS with the pre-requisite that the person also invests the tax saved on account of SRS in similar return generating portfolio outside of SRS. What this means is that if you contributed 35,700 and are in 11.5% tax bracket, you invest the tax saving of $4105 in similar portfolio as SRS and not spend it.

Data shows that if you are earning less than 120,000 per year the benefit of contributing to SRS are negligible though SRS does become beneficial as your earnings increase and tax rate increases. The key for me though is that SRS contributions don’t leave you worse off in any scenario.

You can decide to contribute to SRS or not based on your personal circumstances and the benefits matrix tabulated above. However, if your employer provides for CPF equivalent contribution only via SRS and to get that benefit you have to contribute to SRS then contributing to SRS is a no brainer. Foregoing that income just because you don’t want to contribute to SRS is an outright loss.

I would strongly recommend that everyone opens an SRS account the year they come to Singapore and make a small contribution to lock in your 10 year period and also the maturity age. Even if they don’t contribute in subsequent years there is nothing really to loose.

When should I withdraw from SRS?

If your SRS account is less than 10 years old then waiting for the remaining years can be beneficial. On withdrawal before completing 10 years, the whole amount gets added to your income and you also pay 5% penalty. So avoid doing this as much as possible.

If you decide to wait for SRS to mature (either 10 years target or full maturity at the age of 62) and are no longer Singapore tax resident then do think about how your country of residence treats dividends and capital gains that accumulate in SRS account during this period.

As an example, for Indian tax residents, all foreign income must be declared while filing taxes and taxes paid on, this means that any dividends or interest that you receive on your SRS account while waiting to withdraw must be detailed in your Indian tax returns. Any gains made due to sale of investments (e.g. Unit trusts, stocks) will be liable for capital gain taxes of that year. Failure to disclose may result in the entire amount being taxed when remitted back to India.

There are provisions to claim double taxation relief which may or may not apply based on each person’s circumstamces, if in doubt, get a qualified tax professional to prepare your tax return.

As with citizens and PR’s, contributing to SRS once in 15% bracket or higher is definitely worth it. Feel free to post in comments if you think there are situations where SRS does not make sense, we can analyse and debate the scenarios.

Investment, Tax saving

Annuity via SRS increases the monthly payouts equivalent to your tax bracket

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Let me forewarn, this post is heavy on numbers but I have tried to simplify the results as much as possible so you don’t have to do the heavy crunching. However, if you love the language of numbers (like I do) then happy to discuss variations in comments.

I had always wondered, is SRS actually beneficial in the long run and how do the returns stack up when compared to investing the amount directly and not contributing to SRS thereby foregoing the tax benefits.

SRS withdrawals attract tax on 50% of the withdrawals after the maturity date which means that the accumulated capital gains and dividends in your account do get taxed. On the flip side, the capital gains and dividends outside of SRS account or through money invested in CPF are tax free. So the big question I had in my mind was – do I end up worse off if I put money in SRS by virtue of having to pay tax on half of my gains on withdrawal.

Anlysing various scenarios and coming to a conclusion was my best bet.

Methodology

For calculations, I took a contribution period of 25 years – from the age of 37 to 62, assumption being that by then the salary / earnings of an individual have grown enough to be able to put aside some extra money towards savings. Not many people would have enough surplus to contribute towards the SRS in the initial years of employment.

It is assumed that the person contributes 15,300 per year for the calculation period and is also able to invest the tax saved on account of SRS in similar return generating portfolio outside of SRS to maximise returns. What this means is that if you contributed 15,300 and are in 11.5% tax bracket, you invest the tax saving of $1759 in similar portfolio as SRS and not spend it all.

Last assumption was that on reaching withdrawal age, you have no other taxable income and the tax rates remain at the same levels in future (this is a big assumption but for comparison I did not have any other choice)

Results

The results were a relief, to say the least. Even though I would end up paying tax on half of my gains the numbers indicated overall gains by contributing to SRS. The most interesting observation was that at around 4% yearly return, contribution in SRS would generate an additional payout close to your tax bracket.

So if you are in 11.5% tax bracket and invested the money through your SRS account, then that contribution yields additional 10.88 % as compared to having invested the same amount independently. The difference comes due to the tax savings.

The percentage gains reduce as your return on investments increases (see table below) but for you to be worse off by investing through SRS you would need a portfolio that can compound at a rate of  22% or more which is a rare feat to achieve.

Looking at the table its evident that the higher the tax bracket one is in, higher are the gains by contributing to SRS. I would personally not contribute full amount to SRS if you are in a tax bracket lower than 11.5%. The gains are marginal and having money locked in for long makes it un-attractive (atleast to me) though do open an SRS account as soon as possible even if you are going to contribute 100$ once to lock in the maturity age.

Risks

SRS accounts have their drawbacks and quirks. The money is locked till you are 62 and any withdrawals before that attract penalty and the whole amount gets added to your income in the year of withdrawal.

The returns will also go down if the tax rates by the time one retires move up and if financial standing of Singapore changes.

The calculations get trickier if done for a foreigner who wants to withdraw the money when leaving the country and I will try and tackle that in a subsequent post

Investment

Russia … Yet another case of Mutual Fund outperforming ETF

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Looking to maximise returns, I wondered if it would be better to switch my investment in Russia from mutual fund to ETF and just like Lion Global Vietnam (read here), the HSBC Russia Fund has outperformed the ETF by a decent margin over the past 5 years.

Russia has two major indexed the Rouble Denominated MOEX (previously MICEX) and the RTS which is dollar denominated. The returns on these 2 indexes have been very close but I decided to bring both in for reference. Interestingly, these indexes have given returns performed near S&P 500 over the past 5 years (US is not the only market that gives good returns). Infact, the RTS was outperforming the S&P index by a large margin before the pandemic (data from Bloomberg below)

I shortlisted 3 USD denominated ETF’s for this comparison – iShares MSCi Russia (ERUS), Vaneck Vectors Russia ETF (RSX) and Vaneck Vectors Small Cap ETF (RSXJ). These are all USD denominated and have performed better than the other ETF’s.

Comparing these to the HSBC Global Russia Fund showed that the fund outperformed the closest etf by roughly 18% over 5 years – Russia Small Cap ETF (RSXJ).

Interestingly only the Russia Small Cap ETF had massively outperformed the index during the 2017/2018 period when the Russian ruble had appreciated against the US dollar.

However, the question is why Russia?

Russia Valuation’s are attractive

Russia is the 11th largest economy currently, some would rank it 6th on the purchasing power parity scale and the Index trades at an approximate PE of 14.5 which leaves room for at-least 20% on the upside. Major components of the index are state oil companies and Yandex which is a technology play. With the world slowly learning to live with the Covid virus and opening up the demand for oil would go up. So technology and oil, the 2 fuel’s of economy, are what you get exposure to by investing in the Russian markets. Not to forget, it provides for some geographical diversification as well. There is also a chance of Ruble strengthening against the USD on general dollar weakness trend which most analysts are predicting (I don’t think dollar will weaken in a big way)

However, investing in Russia comes with risks. Political risks are number one concern – the Russian markets can fall sharply if there is an escalation in US – Russia tensions; a new wave of Covid or growing protests against President Putin can also cause a fall. The Russian market, specially RTS, did fall spectacularly in March, giving up close to 80% of the past 4 years gains when oil prices fell and pandemic had started to take hold.

On the upside, the President Putin could open up the Russian markets just that tiny bit to give western countries access to market and prevent them from imposing trade sanctions.

So I am going to diversify with the HSBC fund to invest in Russia though allocating some amount to the Russia small cap etf can bolster overall returns.

For readers, do your own due diligence while making any investments to be financially safe and don’t forget to mask up, no matter where you read this from. Let’s all do our part in keeping our loved one’s safe and be responsible towards society in general.

Investment

NRE Fixed Deposit rates (November 2020)

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With RBI reducing benchmark rates the NRE FD rates have been on a decline though some banks still offer high returns.

NRE Interest is tax free but only guaranteed protected upto a maximum of 5 lac rupees just like any other bank deposits, anything over that is like a unsecured loan to the bank.

So while making a deposit try and spread the risk across different banks if possible. Yes, that means having to manage more than one bank account and if you like the convenience go for a respected and strong bank like SBI though it means lesser return.

BankRateTerm
Indus Ind7%1 to 3 years
IDFC First6%500 days
Standard Chartered5.60%12 months to 21 Months
HDFC5.50%greater than 5 Years
DBS5.50%greater than 4 years
ICICI Bank5.50%greater than 5 Years
SBI5.40%greater than 5 Years
Kotak Mahindra4.90%1 year 1 month to 4 years

When shortlisting a bank, I would not touch a co-operative bank no matter how high a rate they offer, then I would exclude small time private players, then exclude big private players who have grown too fast (remember Yes Bank), then look at Balance sheet and management and even exclude foreign banks like Deutsche and HSBC whose parent entities are struggling. If any foreign bank fails RBI is not going to save it. Lastly look if LIC has a stake in the bank, if yes, then that is a very good indicator of government support and interest (higher chance of bailout if something goes awry).

Click on the Bank Name in the table above and it will take you to the website of the Bank and if you find any other rates that are worth sharing leave a comment and I will add them to the table.

Investment

Low Cost etf’s don’t always mean superior returns!!

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Anyone who is remotely financially savvy, if asked the questions, “ETF or mutual fund?” would without hesitation vote in favor of ETF. There are strong reasons for leaning towards an ETF’s – they are marketed as low cost instruments that can improve your returns over time. Even 1% saving every year compounded over a 5 year period could add up to 7-10% extra returns.

However, one should not forget the ultimate goal of total returns and in case of Vietnam, which has been my preferred market since my first visit to the country, the lion global mutual fund beats the ETF’s by a wide margin.

How does the Lion Global Vietnam Fund Stack up against the ETF’s?

The fund has beaten VNM, which is US listed ETF and XT Vietnam ETF listed on SGX by 76% and 39% respectively over past 5 years.

The chart from Bloomberg above summarizes the performance nicely. If I were to add in the currency rate variance the performance margin will improve even further. Singapore dollar has strengthened around 5% over USD in past 5 years and factoring for that the Singapore dollar denominated Lion Global fund would have beaten VNM by 81% and DB managed XT Vietnam etf by 44%.

The fund has even outperformed the Vietnam index over the past 5 years barring 2018 which was the Vietnam market peak and the fund lagged behind slightly. As of today it has beaten the index by 6%.

What is my strategy for 2021?

I believe in the Vietnam story in the long run. Its a country of grit and has young population. It is one of the few countries to have managed COVID waves effectively. I would rank it number one in managing the pandemic given its lack of resources as compared to a South Korea or a Taiwan.

The Vietnam market has delivered 15% YOY return in the last 5 years and I will continue to invest in Vietnam through this fund. Yes, the fund has a annual expense ratio of 1.78% and management charge of 1.5% but I am happy to pay that amount till the point in time my total returns are superior. Moreover this fund is SRS eligible which makes it perfect to be included in the retirement portfolio. For those of you not in Singapore SRS stands for Supplementary Retirement Scheme, equivalent of ISA in UK, 401K in US and ELSS in India

I think that the Vietnam market should go up by another 15% in 2021 and I would continue to invest through this fund.

So remember, don’t just buy an ETF because it has low cost, focus on superior returns for long term wealth accumulation.

Investment

Tax free returns better than NRE FD

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Yes, every now and then I do research and analyse avenues that can generate total returns that Trump (no pun intended 😊) the good old NRE FD.

Back in 2016 I had suggested Tax free bonds as a good investment bet (Tax free bonds better than NRE FD’s). The tax free bonds are already up 50% and have also given 7.65% tax free interest year on year which would push up the overall yield to roughly 20% per annum and total return around 85%.

Around a year or more back I talked about India focused SGD denominated debt funds that are available in Singapore in the comments section but never got a chance to do a detailed write up hence now there is detailed analysis.

The fund that I like comes from HSBC – HGIF India Fixed Income AM 30 fund. This has generated better returns than NRE FD over the past year and I believe will continue to out perform over the next year.

HSBC India Fixed Income AM30 fund

Taking the investment date of 22 Nov 2019 when the NAV of the fund was 8.559, the fund has generated 0.42 in dividend till date and fallen slightly to 8.43, bringing the total return to 2.96%.

Comparatively the same amount invested in an NRE FD at 7.5% would have yielded 3.23% if one took the exchange rate of 52.84 (interbank rate). You and I would have got a exchange rate of 52.55 and that would result in a total return of 2.66%. If I factor in the cost of transferring funds back to Singapore the returns will be even lower – 2.1%.

If you did a monthly SIP with this fund the 1 year currency movement adjusted return would have been upwards of 6%.

Downside Risks

With an average yield and good portfolio mix mostly in Govt Sec the downside will only happen if

1. Rupee weakens due to covid or border tensions

2. RBI increases deposit rates due to Inflation

Exchange rate movements impact the fixed deposit returns as well which I had detailed in – Why timing is so important, so from that perspective there is no real difference between this fund and an NRE FD.

Comparing on account of safety there is not much difference either, NRE FD is insured for a max of 500,000 rupees ~ 9000 SGD and this fund invests in mostly in Indian government or PSU bonds (data below from the fund website) therefore I would think that this fund is relatively safer for larger amounts of investments

Why do I like this fund for money that I want to keep in Singapore?

The fund has additional gains when INR appreciates and investment income in Singapore are tax free. Biggest benefit is liquidity – there is no lock in period like a Fixed deposit and i can sell the units anytime if I need the money. This fund is SRS eligible as well.

It will be worth analysing how this fund stacks against the Bharat Bond ETF, something for a subsequent post. In case you have come across investments that generate relatively safe and superior returns then do mention in comments for everyone’s benefit.

Forex, Remittances, SGD INR

SGD INR 55 Achieved, Target 57

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SGD INR finally crossed 55 after appreciating 5% from the exchange rate in Nov 2019 – 52.60. Theoretically speaking you would have gained slightly more by transferring to India but after accounting for the transaction costs it might not have been much.

It stayed below the 55 mark as I had written more than 2 years back SGD INR flirts with 52 could it hit 55. That time i did not think it will cross 55 but now I am updating my SGD INR target to 57, yes you read it right, Fifty Seven!!

By when?

I expect this to be achieved by the end of the year and then the rate should slowly decline back to 54.5 leading upto the Indian Budget in Feb 2021

The rationale being that USD INR will touch 76.5 and USD SGD will move to 1.34 mark in the short run.

Why will INR weaken?

Inflation and rising COVID cases will make it hard for INR to appreciate, the fund flows on account of mega deals that Reliance Industries has been doing should come to an end and at some point the Foreign Institutional investors will book profits and withdraw their gains from the stock markets. RBI will smoothen then currency movements but given the inflation has very little room to tweak the interest rates.

Why would SGD strengthen?

Singapore is one of the last few countries that offer a positive interest rates on government securities and is politically stable unlike US or parts of Europe. This gives SGD bonds safe haven status and money comes in. The same thing happened in 2009-2012 when SGD rose to as high as 1.22 against the USD.

Does this only benefit SGD INR?

Next 6 weeks should provide opportunity across currencies – EUR INR could see 90, GBP INR 99 and USD INR – 76.5. So those looking to transfer can watch out for these levels.

Instead of waiting for absolute levels, I would plan for any transfers based on what is your end goal. If you are getting a high interest rate in NRE FD’s or other investments now then even current rate of 55.4 is a good rate. Each of us have different goals, tax status and risk tolerances. Therefore plan based on your needs and not get stuck at specific levels.

There are other options if you do not want to transfer the money to India and yet want to gain with the short term increase in rates, watch out for the next post.

Finance, Forex, Investment, SGD INR

Why Timing is So Important

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While it maybe difficult to time any market timing does play an important role and could be the difference between ordinary and stellar returns.

Timing of transferring money to India and investing in NRE Deposits or any other investment vehicle could also mean the difference between a 3% compounded return vs returns of 7% or more.

To illustrate this, I took the money transfers I have done over the past few years and tabulated a return table. I factored in cost of transferring funds i.e. nett money received in India and also the cost of repatriating the money back on maturity and using today’s exchange rate

As you would see the return ranges from anywhere between 3% to 8%, even for transfers which were done not too far apart.

The best returns were achieved when the SGD INR rate was well beyond what fundamentals commanded – like in 2018 the fair value of SGD INR was around 52 and a transfer made at 53.3 generated a superior return

If the exchange rate moved favorably or stayed flat the returns went up. Return matrix using exchange rate of 54

Based on long term interest rate parity, i believe 54.5 -55 is fair value for SGD INR towards the end of 2020. So if the pair crosses 55 and banks are still offering 6% or more NRE FD’s then it would be a good investment to consider.

I would be keen to hear what your experience with generating stable returns in India has been