Category Archives: Investment

Now NRE Deposit yield 9.25%, and yes its Tax Free!!

NRE or NRO – that was a constant questions NRI’s always had when investing in deposits in India.

NRO accounts got paid almost same interest rates as the term deposit rates for resident Indians whereas NRE rates were much lesser – almost a half of NRO interest rates (Banks could not offer more than 275 basis points above the global benchmark London Inter-Bank Offered Rate (LIBOR) on NRE term deposits). So if NRO account was fetching 9% then NRE account would get 4%. The catch of course was 2 critical components:

  • Interest on NRE deposits is tax-free whereas NRO attracts 30% tax
  • Both Principal and Interest in NRE account can be repatriated without any restriction but for an NRO account only interest could be repatriated

With the RBI move to deregulate the interest rates on NRE and NRO accounts on 17th Dec 2011 the stage was set for reform. After 10 days Banks came out and increased the rates on NRE deposits.

The comparison between a NRE and NRO deposit now is extremely compelling in the favor of NRE account.

So here is my recommended strategy

  1. Use a bank that has a favorable online remittance service to India. The 3 which I prefer are money2india.com by ICICI bank, Axis Remit by Axis Bank, QuickRemit by HDFC (you could use Kotak bank as well but I have not used their service). All the above banks usually take a 0.5%~1.0% cut from the inter bank exchange rate.
  2. Check the cost of conversion when converting back to Forex (Citibank and other foreign banks have usually charge up to 2% so avoid them)
  3. Open the NRE Bank account, if you don’t have one, preferably with the bank whose service you want to use to transfer money – get in touch with a relationship manager and negotiate a good exchange rate incase the bank has overseas branch

The only 2 downsides that I can foresee are:

  • Rupee continues the downward slide and the interest rate gains are wiped out by currency depreciation (the probability is low)
  • Finance Ministry introduces tax on the NRE account and bring it on par with the NRO account in the upcoming budget – if this happens then the yields would go down but the benefit of being able to repatriate money out of India would still remain
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10% Stamp duty = 10% move in SGD

The 10% additional stamp duty on all house purchases by foreigners in Singapore took everyone by surprise and thwarted the plans of buying a house for many a people. This was the second drastic attempt of the authorities to moderate the Singapore housing market after the sales tax charge of upto 16% on selling a house within 4 years brought about earlier in February 2011.

One would question why such an extreme measure was needed which made owning a house 10% expensive for foreigners.
A policy to gradually strengthen SGD has helped control the inflation since the start of the year. The exchange moved from 1.28 in Feb 2011 to 1.20 by Aug 2011 – a gain of 6%. This tamed the inflation  but did not have the desired effect to cool down the property prices.

On the flip side a strong SGD has impacted the exports of goods and services by making them more expensive. It would be worth mentioning that the Singapore Monetary authority uses Exchange rate as one of the means to implement its monetary policies.

Lets put some numbers around how exchange rate impacts the cost of housing and exports. Say someone wanted to buy a house worth 128,000 SGD in Feb 2011 (I know there is nothing available at this price) and there were others wanting to buy services worth the same amount. The cost in terms of USD would be 100,000 for either case.

Come Aug 2011 the same house was now costing 106,000 USD and the property markets were showing signs of slowing down. But the services that earn revenue for the economy and also generate employment had gotten expensive as well.

In the backdrop of slowing global economy organisations would look to move to cheaper destination to source the same goods and service. So to stay competitive something had to give way and in this case it was SGD. With the currency moving back to 1.28~1.30 range the situation turns back to Feb 2011 with the potential of housing market starting the upward journey again.

Housing is a cost of living for the residents of Singapore and rising rentals and property prices has contributed to employees looking for higher salaries to cover costs. Higher salaries again result in net higher cost for the employers.

So the next logical step was to introduce a deterrence for the foreign money chasing the Singapore property and here we have a property tax.

Possible Scenarios

The scenario could now play in 2 possible ways – Let the SGD move around the 1.30 mark or let it depreciate a little more to 1.35 range (same as 2008-2009 levels)

SGD stays around 1.30

With this new tax the same house now costs 110,000 SGD for a foreigner but the cost of services and exports stay put at 100,000.

SGD moves to 1.35 mark

If the SGD moved to 1.35 the same house would cost 104,000 USD. This would bring net cost of a house for a foreigner back to the Aug 2011 levels achieving the same impact as SGD trading at 1.20 against the USD but the exports and services would be only 95,000 USD making Singapore very competitive against other Asian countries plus the 10% revenue that the government earns from the tax could go towards benefitting the residents or tax subsidies to the companies.

So all in all the range I see SGD moving in next few months would be 1.27 to 1.34 against the USD depending on how the global events turn i.e. a 3% move either side of 1.3 mark against the USD

Investment of a different kind – Buy Collectible Coins when you want to invest in Bullion

Every other day you would hear about investment advisors recommending to take an exposure in Gold or Silver using an ETF or buying phisycal metal. A lot of investors prefer buying gold or silver bars instead of putting money in an ETF as the ETF’s have management fee and usually trail the bullion price on any given day.

For those who prefer holding phisycal gold or silver buying the Collectible Bullion coins would be a good idea. Most leading mints issue .999 purity silver coins every year and varying variety of Gold coins from 22kt purity Krugerrands to 24Kt Chinese pandas.

These bullion coins are minted in limited quantities each year and cater to both the collectors and investors market. The coins are usually at a premium to the silver price for the minting charges, transportation and insurance costs.

One would ask that why should they pay a premium for a coin and not buy simple bullion bars?

Yes one could buy the bars but even the bars come at a premium to the spot silver price i.e. include the cost of mintage (shaping silver to a bar), the process of making a bar is simpler which results in a smaller charge.

The differential between the price of a Bar and a coin of similar weight is around 5% but coins come with a potential of collection value as they are minted in limited quantities for each year, with the year mark and are usually sold out even before the year ends – The 1 oz. Australian Lunar coins bearing the dragon for 2012 have already been sold out!!

Additionally the coins are equivalent to a piece of art and carry aesthetic value.

The mintage of the popular Silver bullion coins is listed below

Silver Kiwi Fern – avg 10,000 each year – 1oz. Fine Silver

 

 

 

Chinese Panda – 600,000

 

 

 

Australian Kookaburra – 300,000 2011, maximum 500,000

 

 

 

Mexican Libertad – 1,650,000

 

 

 

Canadian Maple – 3,526,052 in 2009

 

 

 

 

American Eagle – 34,662,500 in 2010

 

 

 

So think about buying these coins as investments in silver or gold – a bar minted in say year 2000 would have a small premium over silver price of the day but a coin that was minted in 2000 would always command a bigger premium than the bar.

Relative Value arbitrage – Gold, Silver and Platinum

Bullion space has been really volatile in the past few days. Gold has given better returns than silver and Platinum in the upmove during the past 5 years.
Gold lost around 10% from the highs of last year but silver and Platinum have both come down 30% and 50% approximately from their highs of 2008.

Historically Gold, Silver and Platinum have maintained a value ration amongst them and this seems to be out of sync at the moment.

Doing some number crunching on the historical data here is a trade strategy that exploits the relative mispricing and is geared to give near positive returns when tracing the past data.

The bullion trio is priced at:
Gold – US$ 948/oz,

Silver – US$13.45/oz and

Platinum – US$1182/oz at the time of writting.

I am recommending creating a strategy where one is 60% short on Gold and 20% long on both silver and platinum by value.

The strategy should yield an absolute return of around 25% when the bullion trio traces back to the historical ratio’s and the mispricing in relative value is resolved. Gold: Silver – 60 and Platinum: Gold – 1.75

We shall trace the strategies pay out on a weekly basis. So as of date we start with
Short Gold – worth 600US$
Long Silver and Platinum – worth 200US$ each

The ratio now as we create the trade is 70.48 for Gold Silver and 1.24 for Platinum Gold

Watch out in a week to see how the strategy is doing.

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Week 1 – 29th July 2009:

Gold – US$931: Silver – US$13.51: Platinum – US$1166

Gain – 10.75$ on Gold, Loss of 2.7$ on Platinum and 0.44$ on Silver

percentage gain – 0.76%

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Week 2 – 5th August 2009

 Gold – US$965: Silver – US$14.64: Platinum – US$ 1267

Gain – $16.25 on Silver and $14.38 on Platinum; Loss – 10.75 on Gold

Percentage gain – 1.98%

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Week 3 – 13th August 2009

Gold – $949.50; Silver – $14.56; Platinum – $1254

Gain – $15.06 on Silver; $12.18 on Platinum; Loss – 0.94 on Gold

Percentage Gain – 2.63%

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Week 5 – 25th Aug 2009

Gold : 944.50; Silver: 14.10; Platinum: 1237

Gain on Gold – $2.215; gain on Silver $8.27; gain on Platinum – $9.30

Percentage Gain – 1.98%

Changing strategy to 50% short gold and 25% long each Silver and Platinum. Both strategies will be tracked.

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Week 6 – 3rd September 2009

Gold – 977; Silver – 15.37; Platinum – 1229

Gain on Silver – 27.03; platinum – 7.65; Loss on Gold – 15.18

Gain on Strategy – 1.98%

(With ratio’s of Short Gold 50% and Long Silver and Platinum 25% each the strategy would yield 3.11%)

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Week 7 – 8th September 2009

Gold – 1000.70; Silver 16.54 and Platinum – 1285

Loss on Gold – 33.35; gain on Silver – 44.31 and Platinum – 17.42

Gain on strategy – 2.83%

(With ratio’s of Short Gold 50% and Long Silver and Platinum 25% each the strategy would yield 4.94%)

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Week 8 – 15th Sep 2009

Gold – $1007.40; Silver – $17.04; Platinum – $1328

Loss on Gold – $31.33; Gain on Silver – $64.62; Platinum – $30.87

gain on Strategy – 6.42%

(strategy of 60% short gold and 20% each long silver and platinum would yield 3.88%)

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After 9 months – 23 April 2010

Gold – $1140; Silver – $17.96; Platinum – $1731

Loss on Gold – $101.26; Gain on Silver – $81.61; Platinum – $116.11

gain on Strategy – 9.65%