How to handle excess money in NRE account?

Veeramani
Jun 11, 2019
How to handle lumpsum 10 lakh above money as NRE account holder. Currently I have kept in NRE savings. Is this wise approach ??
1 Answer
Jun 14, 2019

To start with, when you are looking at holding money in any account or fund, there always has to be a reason or goal attached to it. The reason can be as simple as emergency funds to just sending out the surplus funds back to India: 

  • Emergency Funds
  • Funds parked for a short term in savings account for an upcoming real estate, vehicle or other purchase
  • Funds for Parents in India
  • Funds parked for kid’s education or marriage
  • Funds parked as Retirement Corpus or
  • Surplus Funds sent to India

Now once this is defined, we should also look at the savings account interest rate the bank is providing. Post this, we can then evaluate whether keeping the same in a savings account is a wise approach. So let us try to evaluate it point by point.

Assumption: Savings account Interest rate of 4% p.a. being offered by the bank.


  1. Emergency Funds
    1. Options: Savings account or Liquid / Overnight Mutual Funds
    1. Evaluation:

                                                              i.      Savings account (SA): Has the flexibility to withdraw or transfer anytime that you want, with a fixed return. However, the return is pretty low (only 4% p.a.) and compounding is mostly done quarterly. Also, interest is taxed as per tax slab post INR 10K savings interest every financial year (Sec 80TTA).

                                                            ii.      Liquid / Overnight Mutual Funds: Historically have provided a higher return (around 6 – 8% p.a.); also they invest in safe debt instruments. However, the returns are not guaranteed and also on redemption, the amount is credited back to account the next working day.

    1. What would I do? I would split this INR 10L  across the two options (INR 5L in savings and INR 5L in liquid or overnight funds), which would give you the flexibility of higher returns on one part and immediate availability of funds on the other part, thereby optimizing the portfolio returns.

 

  1. Funds parked for a short term in savings account for an upcoming real estate or other purchase
    1. Options: Savings account, Fixed Deposits or Debt Funds for short term (Liquid, Ultra Short Term or Low Duration Funds)
    1. Evaluation:

                                                              i.      Savings account (SA): Pros and cons explained above.

                                                            ii.      Fixed Deposits (FDs): Higher returns than savings account. However, lower flexibility for immediate withdrawal and penal charges (or lower interest rate) on premature withdrawal, and taxation on returns as per the tax slab. Also, suggest you to avoid cooperative banks or society FDs and look at investing in known brands only.

                                                          iii.      Debt Mutual Funds for a short term: Liquid or Liquid+ (Ultra short term or Low Duration mutual funds) invest in safe debt instruments of different tenures. Liquid+ funds are suitable only if the funds are to be held for more than 3 months. However, the returns are not guaranteed and also on redemption, the amount is credited back to account the next working day.

    1. What would I do?

                                                              i.      If I have to do the payment within the same month, I would hold all in liquid funds.  

                                                            ii.      If I know I would need to the money post 3 months or 6 months (or such a defined tenure), I would compare the FD rates for this tenure with liquid+ returns and take the decision accordingly. Highly probably, would go ahead with a good ultra short duration or low duration fund.

                                                          iii.      If I am not sure how long would the deal take to materialize, I would partly keep the amount in savings (for immediate down-payment) and the rest in liquid funds.

 

  1. Funds for Parents in India
    1. Options: Savings account, Fixed Deposits, Debt Mutual Funds or NCDs
    1. Evaluation:

                                                              i.      Savings account (SA): Pros and cons explained above.

                                                            ii.      Fixed Deposits (FDs): Details explained above, so not repeating.

                                                          iii.      Debt Mutual Funds: There are various debt options available, across different tenures and risks. The returns can also vary accordingly. One can look at liquid / liquid+, credit risk funds etc. Depending on the risk appetite.

                                                          iv.      Non Convertible Debentures (NCDs): NCDs are issued by corporates to raise money. One can look at purchasing NCDs from a trusted brand, and looking at current scenario, you may be able to earn around 10% p.a. interest (annual coupon) for a horizon of 3 to 5 years.

    1. What would I do?

                                                              i.      If the amount is only kept with an aim to provide funds to parents as and when needed, hold it partly in savings account (say INR 5L) and rest in a FD or debt mutual funds, depending on the return expectation and risk appetite.  

                                                            ii.      If the aim is to provide a pension kind of income to the parents or annual fixed amount, I would prefer putting the funds in a couple of good NCDs providing monthly or annual payouts. This would work as a pension source for the parents.

 

  1. Funds parked for kids’ education or marriage or for own Retirement
    1. Options: Savings account, Fixed Deposits, PPF, Mutual Funds or Stocks (shares)
    1. Evaluation:

                                                              i.      Savings account (SA): Pros and cons explained above.

                                                            ii.      Fixed Deposits (FDs): Details explained above, so not repeating.

                                                          iii.      Public Provident Funds (PPF): If you are a really conservative investor, you can look at investing in PPF. It has a lock-in of 15 years to start with but assures a guaranteed return (defined by the government every year, currently around 8% p.a.).

                                                          iv.      Mutual Funds: Assuming you are a young person, all these goals are a long way away, somewhere between 10-30 years. Equity mutual funds give the advantage of higher returns at the cost of higher risk, however with such a long term horizon, the risk is also diminished. You can refer to my answer on Types of mutual funds to understand the risk-reward ratio from each category of mutual funds.  

                                                             v.      Stocks: If you have the knowledge and expertise of investing in Stocks, only invest basis that. This asset class is extremely risky, so invest accordingly. Also on the positive side, with high risk comes the option of high rewards.  

    1. What would I do?

                                                              i.      I would avoid putting any funds in FDs, PPFs or stocks. At my age, I would prefer going for 70% equity mutual funds, 15% hybrid mutual funds and 15% in savings accounts. This would help me take the risk along with some cushion in case of a fall.

                                                            ii.      If I were to invest in stocks to take a bit of risk, I would go with equity SIPs in some of the best blue-chip stocks.

 

  1. Surplus Funds parked in India
    1. Options: Savings account, Fixed Deposits, Mutual Funds or Stocks (shares)
    1. Evaluation:

                                                              i.      Savings account (SA): Pros and cons explained above.

                                                            ii.      Fixed Deposits (FDs): Details explained above, so not repeating.

                                                          iii.      Mutual Funds: Assuming you are a young person, all these goals are a long way away, somewhere between 10-30 years. Equity mutual funds give the advantage of higher returns at the cost of higher risk, however with such a long term horizon, the risk is also diminished. You can refer to my answer on Types of mutual funds to understand the risk-reward ratio from each category of mutual funds.  

                                                          iv.      Stocks: If you have the knowledge and expertise of investing in Stocks, only invest basis that. This asset class is extremely risky, so invest accordingly. Also on the positive side, with high risk comes the option of high rewards.  

    1. What would I do?

                                                              i.      Since these are my surplus funds and I can afford to take risks in them, I would avoid any safe options like Savings or FDs.

                                                            ii.      I would prefer investing 50% corpus (INR 5 Lakhs in this case) into equity mutual funds (high risk like sectoral, mid and small caps).

                                                          iii.      I would divide the remaining 50% in some good midcap stocks (25%) and some blue-chip stocks (25%).

                                                          iv.      This will ensure if I have a successful portfolio, the stocks can be the multi-baggers and mutual funds can be the support. However, since this is a highly risky folio, it can also lead to erosion of wealth.

 

Note: Another important factor to consider in the evaluation of Taxation on various Equity and Debt instruments (including Mutual Funds) applicable to Indians, domestic companies and NRIs.

Read here: What are Mutual funds and what are the various types of Mutual Funds? 

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