Category Archives: Investment

Tax Free Bonds: Better than NRE FD’s

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Yes, you read it right! Tax free bonds are better than NRE Fixed deposits.

After all these years of recommending NRE FD’s as the safest bet for investing in India, I am changing my recommendation to Tax free bonds (in no particular order) by IREDA, NHAI, NABARD, REC and HUDCO.

Lets compare the bonds to the NRE deposit

1. NRE Fixed usually give the highest rate for a lock in of 2 or 3 years and are averaging between 7.8% to 8.2%, which means that the reinvestment on maturity would be at the prevailing interests rates.
2. NRE deposits have a penalty in case of pre mature withdrawal
3. Interest on NRE deposits is tax free

A Tax free bond on the other hand is giving a 7.64% for a period of 15 years (NABARD which opens tomorrow – 9th Mar 2016) in retail category (less than 10 lacs) or half a percent lesser for amounts exceeding 10 lacs.

You must be wondering why am I recommending the bonds when they give lesser interest and are tax free like the NRE FD? The Central Bank interest rates across the world are going down and India has already had a few rate cuts which makes these Bonds attractive. As the interest rates will be reduced the value of these bonds will increase (capital appreciation) . These bonds are more liquid than a FD as they are traded on the stock exchanges which means that one can sell the bond without incurring pre mature withdrawal penalty in case of FD. Further for a slightly lesser interest rate these bonds let you lock in a higher interest rate for next 15 years.

If this has not convinced you then let me tell you the most important reason why I am recommending these bonds – interest on NRE FD’s becomes taxable if a NRI returns to India. Depending on the individual residency criteria in section  6 of the Income Tax of India on return a NRI becomes a Tax Resident in 6 months to 2 years, upon which the NRE accounts are converted to a Resident Rupee Account, which means that any interest that accrues on your NRE account after you become tax resident becomes taxable.

These bonds on the other hand assure tax free income for next 15 years from the date of allotment.

Now the fine print – not all bonds are open to NRI’s for investment, however if you have a resident bank / brokerage account you could use that to apply for these bonds and / or purchase them from open market and benefit from capital gains and long term tax free interest income.

You would be “Out of Money” 80% of days if you transferred money to India in 2015

The last few days of Chinese New year holidays allowed me to spend some time on SGD INR analysis. I always had a feeling that transferring money to Indian specially with a view to play on the interest rate differential would not have been beneficial in the last year and I had to test my feeling against some actual numbers.

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I took the average investable Tax Free NRE FD rate as 8% and cost of transferring money as 1%. The interest that someone could earn in Singapore was taken as average of 2% (DBS Multiplier, OCBC 360, UOB One or some money market funds) which brought the effective interest rate differential as 6% (8% – 2%).

There might be a few of you who could have got slightly better NRE FD rates and also managed a better transfer rate, however in my observation banks or transfer services usually charge anywhere between 0.8% to 1.5% as remittance fee. This fee could be charged as a out right fee or built into the exchange rate that they offer you. Similarly I took the cost of transferring money back from India as 1% as well though people tell me it can be close to 2%. I have personally never transferred money from India so just went in with the 1% charge.

The result of number crunching vindicated my gut feel  – there were only  39 days in 2015 (around 11%) which provided a better return if someone transferred money to India, invested in NRE FD and transferred it back to Singapore as compared to keeping money in Singapore and starting to transfer to India once SGD INR crossed 47.50.

Interestingly of those 39 days 12 were in Jan 2015 and remaining between 24th April to 22 May and few in mid June.

The number of days went up to 62 (around 20%) if the person decided to leave money in India instead of bringing it back but the period of transfer remained in first half of the year.

Anyone who panicked and transferred money since July would be “out of money” based on today’s DBS remittance rate of 48.50 (Market rate around 48.90).

Of-course the rates can and will change in the coming days and a few more days of 2015 might become “In the money” but I would rather transfer around 48 than at 46 – it translates to gains of around 5%.

SGD INR 2015

 

 

RBI Cuts Benchmark Rates – Now What?

The much talked about interest rate cut finally happened today. RBI Governor keeping true to his character surprised the markets with an earlier than expected cut taking India on a path different from Russia and Brazil where central banks have increased the benchmark rates in the past few weeks.

I must say it’s a brilliant move by the Governor to put the ball back into Finance Ministers court and push for structural fiscal reforms in the upcoming budget. The general sentiment has been that the higher rates are keeping India from growing which overshadows the fundamental issues of red tape, poor infrastructure and wastage in public expenditure.

The sustained fall in oil prices (thank Russia for occupying Crimea) has given India the much-needed window to push through reforms without being worried about stroking uncontrolled inflation.

The question is that will this rate cut and structural reforms be enough to achieve the targeted growth? No, absolutely not. The other key factor, which should not be ignored, is the exchange rate of the rupee against other currencies. To recap the last year – Rupee has oscillated between 58 and 63.5 against the US dollar (I use USD as a benchmark because the other rates are nothing but a cross rate). The fall in rupee has been less pronounced as compared to its Asian peers like the Malaysian Ringgit, Indonesian Rupiah, Singapore Dollar, Korean Won etc. On the global front, the Yen, Euro and Pound have also dropped sharply against the USD resulting in net gains by the Rupee against these currencies as well.

While the gains in Rupee boost the feel good factor about the India story – is a sustained gain in Rupee the right thing for the Indian economy? My take is that RBI would not let Rupee gain beyond the 62 mark to keep the exports competitive. There was evidence of this when RBI was seen buying dollars in the last week when Rupee gained sharply. With a generally weaker Rupiah, Ringgit, Peso and Riel the Indian exports would face tough competition in areas like garments, IT services, food grains and other manufacturing. Also with Euro and Pound weakening the demand from European countries would decline if the goods are not priced competitively.

With crude oil staying below 50, I think RBI would target the Rupee around 65 against the USD (at-least that’s would I would do, if I were the RBI governor). That would be a roughly 5% decline from the current levels and will bring it at par with other countries with export competitiveness. A sharp gain in the currency would negate any benefit that the lower oil prices would have and I don’t think the RBI or the finance minister would want that.

We should not forget that infrastructure reforms do not happen overnight and take years to fully have the desired impact.

What would that do to SGD INR – 45 mark would remain as the strong support for the pair with upside of Rs.50, but of-course remitting money to India and investing in NRE deposits would always remain a good option.

Postal Stamps: A long forgotten treasure

It had been years since I had looked at my stamp collection and while on vacation this year I wanted to spend some time ensuring that the stamps were still there and in good condition.

Collecting stamps was a childhood hobby and maybe something that was passed down the family (at-least in my case) – my Grandfather, Father, Uncle had all all indulged in stamps at some point or the other in their lives. As a kid I always wanted to have all stamps from all countries and felt the collection I had was not big enough – in retrospect I could nor be more wrong.

So on the second day of my holidays I pulled out the case with all my stamps.I must say it was pretty heavy (much heavier than what I had imagined) – There were many albums filled with stamps, first day covers, miniature sheets, postcards and various other postal items. There were stamps from Russia, China, America, Britain, Hungary and of-course India. Browsing through the collection I felt like a little kid who has been left in a candy store – everything was so pretty and brought back memories of childhood.

Having some time on hand I decided to catalogue the collection for future reference and started with the slow process of noting everything on a spreadsheet. The real challenge was to keep myself focused and not get carried away admiring the stamps. After many hours I had finally listed all the indian stamp sheets that I had and this was just a small portion of the overall collection.There were quite a few stamps of which I had more than one sheet and out of curiosity I thought of why not selling off the extra stuff to buy more stamps (once a collector, always a collector).

So here I was checking the listed prices of my extra stamps on auction sites – and what I saw was nothing short of complete amazement!!

Most stamps had shot through the roof and were selling at 50-100 times the face value.

It was hard to believe what I was seeing and initially I just brushed it aside as people ask crazy prices, but having seen the valuations I had to dig around a little more – after all, this could be a lot of money and what I found left me wide eyed. The prices I was seeing were transacted prices.

The stamp sheet from my collection that had appreciated the most were from 2003 – Aero India and Temple Architecture of India

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The temple architecture sheetlet set had 5 sheets which I had bought for Rs.80 each (~1.25USD) and they now commanded a price of Rs.10,000 each (~165USD) a massive 132 times appreciation in 10 years – yielding me a 55% annualised return.

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Similarly the Aero India sheet set o 4 sheets with a face value of Rs.600 (~USD10) was valued at Rs.40,000 (~670) an annualized return of 40%

Just as with China the valuation of Indian collectibles increased with the general growth in the country. I also found an old stamp from China which was valued at $50 in the international market and was again baffled to see that one could get upto USD 3000 for the same stamp in Mint condition (unfortunately mine was cancelled and used)

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Having looked at the valuation of some parts of my collection I am all re-convinced about stamps as an alternate investment. As with any investment there are risks and for stamps the 2 biggest risks are lack of liquidity and risk of destruction – after all they are delicate pretty thing on paper.

Next I had a look at some coins and they took me on another roller coaster ride of awe and disbelief, but that is for another post..,

Low Risk Funds holding good in a falling bond market

 

Time flies and it’s over 10 months since we talked about the Low risk funds in Singapore – Good returns with Low Risk Funds. A lot has happened in the market since then with the talks of Fed tapering QE being the biggest news causing sell off in the Emerging Markets and Bonds.

However the funds that I talked about earlier in the year have been holding well with the exception of the Lion Global Singapore Fixed Income A fund.

Fund Returns

The fund has slipped in red for the 10 month period. The NAV has dropped by 1.49% but has paid off equivalent amount in interest/ dividends and is net flat.

The United SGD fund has been doing very well and is up 3.25% year to date, Fullerton and Nikko follow closely behind. In the coming year this strategy might still work as Singapore Dollar remains stable. I will be looking to re-balance my portfolio soon and will share some new ideas shortly.

Falling Gold and its YTD Performance in Different Currencies

Gold and Silver have been on a steady decline this year and having lost 17% and 25% respectively in USD terms got me curious to find out if there was any country where the value of these metals increased in the local currency terms.

After some research and marrying the Exchange Rates to the price of Gold and Silver at various points in time I got the below table ready…45 Currencies to look at :).

Gold Silver performance

I did not really find any country where the value had increased but Japan came very close to parity. Gold has lost only 2% value when measured in JPY. Given the massive weakness in JPY over the past few months the gold value has been able to off set the losses when measured in yen terms.

The second closest country was South Afria which has experienced similar currency weakness but not as large as the yen.

On the other extreme are countries like Mexico, China, Thailand and Malaysia where strengthning local currency and growth prospects of economy have aggrevated the losses for those holding gold or silver. Gold is down 22% in Mexican peso terms and 19% when measured in Yuan.

The stark contrast between Japan and Mexico does highlight how Gold and Silver could act as store of wealth when countries go through or are expected to go through inflationary periods or there is a general run on the currency.

Now you would be wondering what is my view on the metals?

Well i treat them as any other investment avenue and continue to have my exposure to these through collectible coins 🙂

Over 5% annualised return with Low Risk Funds in 3 months

Close to 3 months since I first talked about the Low Risk funds that are liquid and generate good returns in my post – Good returns and Low Risks with Funds that Invest in Singapore Bonds and its great to see that 2 funds have generated over 5% annualised returns in 90 days.

United SGD Fund and Fullerton Short Term Int Rt have gained 1.44% and 1.18% in this period clocking annualised gains of over 6% and 5% annually.

Fund Performance 3 months

My personal favourite Nikko AM has lagged behind at 2.64% annualised but still much better returns than a bank deposit, Though I must say that mid way I did re-allocate some money to United SGD and Fullerton Funds when the SGD crossed the 1.25 mark against the USD.

I have noticed that these funds generate better returns when SGD is strengthening. Looking at the returns in past 3 months I am going to re-balance my portfolio and move some money from US Equities to these funds before the “Sell in May, Go away” phenomenon hits the wall street. Till then enjoy the gains 🙂

 

Is Bullion really a store of wealth and hedge against inflation?

I hear it all the times that Gold and Silver are a hedge against inflation but they do not always maintain purchasing power…a very simple example would be comparing mcdonalds Burgers in various years with price of silver:

1955 Hamburger 15 cents, Silver 1 USD per ounce

1967 Hamburger 18 cents, Silver 3 USD per oune

1979 Hamburgers 43 cents, Silver 30-40USD per ounce

1995 Big Mac hamburger $1.99, Silver 4.4~6 USD per ounce

2002 Double cheeseburgers $1.00, Silver 4.25~5.1 USD per ounce

2013 Mcdouble cheeseburgers 99 US cents, Silver 29.95~33.5 USD per ounce

Interesting to note that while price of Burger rose from 43 cents to 1.99$ an increase of 5 times, the silver value fell from 35(average) to 4.75 USD.

If one could buy 81 Hamburgers using an ounce of Silver in 1979 the same one ounce of silver fetched only 5 burgers in 2002.

There was no period of negative inflation between 1979 to 2002 to warrant a reduction in Silver price based on the theory that bullion is hedge for inflation.

I have used Mc for the comparison as BigMC index is a commonly used index for estimating cost of living across various countries. There could be asset classes that could throw a different result and compounded with Exchange rates the results would differ for different countries.

Would be great if you could contribute similar data in comments and lets see if the hypothesis holds good?

Good returns and Low Risks with Funds that Invest in Singapore Bonds

With the low-interest rates in most of the developed economies in the world the bank deposits tend to yield low returns. Singapore is no different and one could get as low as .25% interest on Savings Bank accounts. Fixed deposits do slightly better and could yield up to 1.68% p.a.

This clearly is less than the inflation that the country experiences, below are a few funds that invest in short dated Singapore government bonds and have yields good enough to cover inflation.

As these funds invest in Singapore Bonds they carry relatively low risk. of course they are not as safe as a Bank deposit but the yields are favorable given the risk-reward ratio.

Fund Info

Lion Global Singapore Fixed Income fund has the lowest risk and yielded a positive return even in 2008 (during the financial turmoil). On the other hand United SGD fund gives occasional stellar returns like that in 2009 and 2012 yet still remaining largely in positive territory.

Nikko AM fund has managed to beat inflation in most years and is the one I prefer.