What are NRE and NRO accounts for NRIs / PIOs

Non-Resident Indian is often faced with the situation of maintaining a Rupee account in India. This post clarifies what are the options available for NRIs, specifically whether they should choose NRE or NRO accounts.

Why do we need a separate account for NRIs / PIOs
Primarily, there are two reasons for opening such an account: 

1. NRI wants to repatriate overseas earned money back to India
2. NRI wants to save and invest India based earnings in India.

What are the account options for NRIs?
NRI has the following two options of accounts available for opening in India:

1. A Non Resident External Rupee (NRE) account
2. A Non Resident Ordinary Rupee (NRO) account. An NRO account can also be opened by a Person of Indian Origin (PIO) and an Overseas citizen of India (OCI).

Similarities between NRE and NRO accounts

1. Both accounts can be opened as Savings account as well as current accounts
2. They are Indian Rupee accounts. 
3. The average monthly balance to be maintained for both NRE and NRO accounts is dependent on the bank.
4. NRO or NRE account may be in the form of savings, current, recurring or fixed deposit accounts.

NRO Savings accounts can also be maintained with the Post Offices in India. However, individuals/ entities of Bangladesh and Pakistan require prior approval of the Reserve Bank.

Differences between NRE and NRO accounts

1. Repatriation: NRE account is freely repatriable (Principle and interest earned) while the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to USD 1 million net of applicable taxes in a financial year after giving undertaking along with a certificate from a chartered accountant.
2. Tax Treatment: NRE account is Tax free (no Income tax, wealth tax and gift tax) in India. On the other hand the interest earned in NRO account and credit balances are subject to respective income tax bracket and are also subject to applicable wealth and gift tax.
3. Deposit of Rupee funds generated in India: If an NRI/PIO/OCI is earning income originating in India (such as salary, rent, dividends etc.) he/she is only allowed to deposit it in NRO account. Deposit of such earnings is not permitted in NRE account.
4. Joint Holding: NRE account can be jointly held with another NRI but not with resident Indian. On the other hand NRO account can be held with NRI as well as resident Indian (close relative) as defined under Section 6 of the Companies Act 1956.

When to choose NRE accounts

1. When you want to park your overseas earnings remitted to India converted to Indian Rupees.
2. When you want to maintain savings in Rupee but keep them liquid.
3. When you want to make a joint account with another NRI (possible only in a NRE account)
4. When you want your Rupee savings to be freely repatriable.

When to choose NRO accounts

1. When you want to park India based earnings in Rupees in India.
2. When you want an account where you can deposit any income earned in India such as rent, dividends etc.
3. When you want to open account with another resident Indian (close relative)

Interest Rates in Savings, Term Deposits for NRE and NRO accounts is very similar to what we get in the resident savings account in India.

Cheers

Manoj Arora

Lead a Financially Free Life !!

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Understanding Repo Rate and MSF Rates

Understanding these two rates (Repo rates and MSF rates) lets you make an informed decision on when to enter or exit specific stocks and / or mutual funds. Even if not that, it helps you understand the general market movement whenever RBI (Reserve Bank of India) decides to alter these rates.

We have already studied about Repo Rate in one of our earlier posts - What is Repo, Reverse Repo and CRR. But since MSF Rate is a new concept and is related to Repo Rates, it was important to refresh our memories.

Repo Rate (Reverse Purchase Option), in nutshell, is the rate at which the banks borrow money from RBI (and they must sell their govt bonds to do that). Any increase in Repo rate by RBI means that banks need to shell out more interest to borrow more money. This in effect leads to liquidity crunch and slows down the economy. This is often a measure used to reign in inflation as well.

Many economy lovers and enterprise houses, including the general market sentiments feel that an increase in Repo rate is anti-economy. But there is another vital factor that must be understood before we derive any conclusions about the impact of increase or decrease in repo rates. This factor is called as MSF (Marginal Standing Facility) Rate.

Understanding MSF

At present, banks can borrow a limited sum of around Rs. 40,000 Crores from RBI at the running Repo Rate. Any amount above this level has to be borrowed at the running MSF rate. Since the banking systems borrowing requirements are much higher than this cap of Rs. 40,000 Crores, the MSF becomes the effective borrowing rate for a large portion of the banks. MSF rate is usually 1-2% higher than the Repo rate.

Impact of MSF Rate change

So, if the MSF rate has come down, while the Repo rate has gone up, it is very likely in a growing and stable economy like India that it is pro-economy rather than anti-economy. It is only in under developed economies where the banks borrow at Repo rates that there is a direct impact of repo rate hike on the economy and growth.

So, while the market may have reacted with emotions and reacted negatively on repo rate hike, understanding of the wider picture may just give you a golden opportunity to invest more funds in the stock market at the right time.

Cheers

Manoj Arora

Lead a Financially Free Life !!

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What is Partition Deed

While a Gift Deed is an instrument to gift a movable or immovable property, a partition deed for a property is executed to divide the property among different people - usually among the family members. As with a gift deed, this is a natural phenomenon as generations change hands. It is better to equip ourselves with the knowledge needed for partition deed.

Gift Deed and Relinquishment Deed - Movable or Immovable Property

When it comes to transferring property from one owner to another, a sale deed may not always be the right instrument, especially if you want to pass the asset on to your relatives. This is also a natural phenomenon as the property changes hand from one generation to the next. In such cases, instruments like a gift deed or relinquishment deed can come to your rescue. However, blindly choosing either can lead to problems. It is better to understand these instruments and then take informed decisions.

What are Gilt Funds

Gilts or Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset management companies with exclusive investments in government securities. Gilts are securities issued by the central government and are said to carry sovereign or minimal risk. Lets understand more about them.

Financial Wisdom for Youngsters

When it comes to teaching money management habits to our children, we either procrastinate the entire subject, or we feel it is not the right time to talk about money to our children. Unintentionally, we lose the most significant element that makes most people wealthy across the globe i.e. Time leverage.....read on..

80% of America's millionaires and 70% of all global millionaires are first-generation millionaires, ie they created wealth in their own life span and did not inherit anything or got it via lottery. When we analyse the data across all these millionaires, we realize that the biggest factors that they leverage to build wealth is the concept of "time leverage"

And what better age to teach children about time leverage than when they are in school. They have the time on their side. Rs. 500 per month saved from their pocket money, can make them millionaires in 30 years - that's the power of time leverage. But if that is so simple, then why is not almost everyone a millionaire. This goes back to the same old beliefs that we have seen for generations, and follow them with our sub conscious mind.

So, i thought of taking this initiative to our upcoming generation as one of the give backs to my society. Started with my own kid's school. 

In one such seminar conducted on 30th Aug at Queen's Valley School, Sector-8, Dwaraka, on the topic of "Financial Wisdom for Youngsters", we discussed and interacted on the importance of learning good money management habits from a young age (starting from their pocket money) and how these habits can continue to benefit them for the rest of their lives.

It opened up the student's minds and was extremely well received, by the students, teachers and the principal herself. The below acknowledgement letter from the school principal is self explanatory.

School curriculum miss out this fundamental life skill of how to manage money well. Do not be shy. You are getting your child educated in the best of the schools, asking them to compete in this world, giving them industry knowledge - all with just one aim - so that they are able to earn well and take care of his / her family. Along with this, if we teach them to handle money well from a young age, that can change their fortunes by the time they got to the age of doing a job. 

They will work for the love of their craft rather than for the need to earn money.

Go on, engage yourself with them on basic money management habits, some of which are listed below:

Save, no matter how small – Guide your teen to save money out of his/her pocket money or money received through gifts. The idea is to inculcate the habit of saving in them from a tender age. Whether it's a little or a lot,  open a low-fee savings account with a bank so that you can personally monitor their savings. Nowadays, banks are offering savings account for your children with features like net banking and ATM facility. They also have security features to prevent overspending and misuse of the account, so go ahead and get one for your child.

Make them spend within a Budget – Based on the average cost of clothing, entertainment and gifting, provide a specified amount per month to your teen. Ask them to manage the entire month on the limited budget they have, which will make them more responsible towards money.

The power of compounding - Your teen might have learnt the compounding theory in books but it's time to make them learn in reality. Use an online calculator to show your teen how compounding works so that they just don’t save but grow their money.

A strict ‘no’ to credit card – Make your teen understand the dark side of credit cards as it is no free money. They often lead you into a spending spree, and into debt. Credit cards are good if used wisely though, but they might turn out to be destructive weapons in your teen’s hands.

Let them achieve their own goals -  It’s a good idea to let your teens pursue and achieve their goals on their own like buying a gadget or enrolling into some kind of training. Instead of paying on their behalf, ask them to save and pay for their goals, if not fully then partially. This will bring them a lot closer to systematically work upon their goals in the future as well.

Let them experience poor budgeting- Allow your teen to suffer the consequences if they have made poor financial decisions. Instead of giving them excess money, ask them to cut on their own expenditures for the remaining days like no eat-outs with friends and movies just because they have spent their money in shopping.  It’s much better for them to learn this now than when they will have to deal with bigger responsibilities in future.

A financial plan will work at its best if the entire family is in sync with it and therefore making your teen understand the same is an important aspect. The above steps require time, effort, and patience from the parent, but they provide experiences that make the realities of personal finance far more manageable to your teenager.

If you need any help, do feel free to write back to me, and i would be more than happy to help.

Cheers

Manoj Arora

Lead a Financially Free Life !!

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What are Blue Chip Companies and how are they selected

I used to hear the term "Blue Chip companies" since i was a child, but it is only during the journey of financial freedom that i had enough craving to dig deeper into why these are termed as blue chip companies, what these companies are, and how are they selected.

How did the word "Blue Chip" originate?

As befits the sometimes high-risk nature of stock picking, "blue chip" term derives from the game of poker. The simplest sets of poker betting discs include white, red, and blue chips, with tradition dictating that the blues are highest in value. If a white chip is worth $1, a red is usually worth $5, and a blue $25.

What are Blue Chip companies?

According to the New York Stock Exchange, a blue chip is stock in a corporation with a national reputation for quality, reliability, and the ability to operate profitably in good times and bad. They usually pay good dividends also, since dividends bring stability to returns in bad times. In India, Blue Chip companies are the companies which constitute the BSE Sensex(30 companies) and NSE Index (50 companies)

Guidelines to select Blue Chips in India

SENSEX consists of 30 top scrips from different sectors. BSE has some strict guidelines to select scrip into SENSEX.  Scrip Selection Criteria for Sensex are

• Listed history – Listing history of at least 3 months at BSE, preferably more than one year
• Trading frequency – Should trade each and every trading day
• Final rank - The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weight age to the rank on the basis of three-month average full market capitalization and 25% weight age to the liquidity rank based on three-month average daily turnover & three-month average impact cost.
• Market Capitalization - The weight age of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index. These are typically Large Cap stocks.
• Industry/Sector Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE. The company should also be a leader in its own industry segment.
• Track Record: In the opinion of the BSE Index Committee, the company should have an acceptable track record.

A similar parameter is held for NIFTY, which is an index of 50 shortlisted companies. 

Which are the Top 30 Blue Chip Companies in India
As on August 2013, these were the Top 30 Blue Chip companies that formed the Sensex. Depending on various factors as listed above, there are companies that can move into the list, and some which can move out of the list.
 

No.	Company	Industry
1	Bajaj Auto Ltd	Automobile Two & Three Wheelers
2	Bharat Heavy Electricals Ltd.	Electric Equipment
3	Bharti Airtel Ltd.	Telecommunication - Service Provider
4	Cipla Ltd.	Pharmaceuticals & Drugs
5	Coal India Ltd.	Mining & Minerals
6	Dr Reddys Laboratories Ltd.	Pharmaceuticals & Drugs
7	GAIL (India) Ltd.	Gas Transmission/Marketing
8	HDFC Bank Ltd.	Bank - Private
9	Hero MotoCorp Ltd.	Automobile Two & Three Wheelers
10	Hindalco Industries Ltd.	Aluminium & Aluminium Products
11	Hindustan Unilever Ltd.	Household & Personal Products
12	Housing Development Finance Corporation Ltd.	Finance - Housing
13	ICICI Bank Ltd.	Bank - Private
14	Infosys Ltd.	IT - Software
15	ITC Ltd.	Cigarettes/Tobacco
16	Jindal Steel & Power Ltd.	Steel/Sponge Iron/Pig Iron
17	Larsen & Toubro Ltd.	Engineering - Construction
18	Mahindra & Mahindra Ltd.	Automobiles-Tractors
19	Maruti Suzuki India Ltd.	Automobiles - Passenger Cars
20	NTPC Ltd.	Power Generation/Distribution
21	Oil & Natural Gas Corpn. Ltd.	Oil Exploration
22	Reliance Industries Ltd.	Refineries
23	Sesa Goa Ltd.	Mining & Minerals
24	State Bank Of India	Bank - Public
25	Sun Pharmaceutical Inds. Ltd.	Pharmaceuticals & Drugs
26	Tata Consultancy Services Ltd.	IT - Software
27	Tata Motors Ltd.	Automobiles-Trucks/Lcv
28	Tata Power Company Ltd.	Power Generation/Distribution
29	Tata Steel Ltd.	Steel/Sponge Iron/Pig Iron
30	Wipro Ltd.	IT - Software

So, if you are looking for companies that are stable, give you decent capital appreciation, pay good dividends, and you are ready to invest for long term, these are the first set of companies that you should look out for.

Cheers

Manoj Arora

Lead a Financially Free Life !!

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When will you start living your life?

The book is now gaining momentum and is now giving the first symptoms that it can very well be a best seller this year. But irrespective of how much the book sells, here is the part i like the most about the growing word of mouth. 


This book and the increasing word of mouth gives me an opportunity to reach out and help so many more people attain financial freedom in their lives, and then enable them to do something which they always wanted to do.....to spend time with their families, to learn guitar, to join politics to cleanse our system, to plant trees, to travel the world and explore its enormous beauty, to help under privileged children, to not only see their children grow but also contribute in their growth....and on and on...essentially .. to follow what they love to do..... because MONEY is now out of the equation, and that's FREEDOM.

This is the freedom of thought, freedom to act, freedom to live the life of our dreams.

I wanted to share a comment that one of the book fans - Mr. Kanwalpreet - left on Flipkart today morning. I do not know this guy. But he has now sent me an email also to start getting coached on his journey towards financial freedom. 

"I am an avid reader of the Business and Financial Planning books from the past one year as I had started with my job just a year back. I always knew that one should take command of his finances as early as possible so as to really enjoy one's life and stop living up to his monthly paychecks. To really fulfill one's real essence of life one should be stress free to anymore worry about the Money and to achieve that one must know how the Money works for you.

I have read Rich Dad Poor Dad, Cash flow Quadrant by Robert Kiyosaki, The Snowball : Warren Buffet and many other books to get a deep insight in the Financial world. But after reading all these I was still on with my research on the Investment tools that were available in the India Markets so as to really implement the concepts taught by these great leaders. And on my way to research I found this book.

This book summarizes most of the Business and investment tools that are available in the Indian markets and how one can make a the best use of them in a best possible way. I loved the way the author has narrated himself in the book and it truly feels as if someone is just sitting next to you and teaching you.

I feel this is the book for anyone who is aiming a little higher in life than just the bread, butter, family and the materialistic things. Its about living your life the way you aspire it to be and stop getting stuck in something which your heart does not follow.

And the best part is that the author has promised to be in touch with you in case you have any difficulties in understanding something...
I would say this is a must read for anyone who is looking for a true freedom and aspiring for something more from life and giving back to humanity in a way you think is the best way you can."

(For more comments from other readers on Flipkart, click here)
(For more comments from others readers on the Freedom Portal, click here)

What else can i say. He has summed it up so well when he says:

I feel this is the book for anyone who is aiming a little higher in life than just the bread, butter, family and the materialistic things. Its about living your life the way you aspire it to be and stop getting stuck in something which your heart does not follow.

This is the crux of the book. 

Some of the people may continue to believe that this book is about money. Yes, it does talk about money, investments, savings, wealth principles, financial planning but that is not the soul of the book. The soul of the book is about living your life. As i keep telling my followers, Financial  Freedom is not about accumulating money, it is not the end goal. Financial Freedom is about the freedom to live your life.

So, get, set, go...Do not wait for an ideal time or ideal conditions to exist in your life, before you take charge. If you are serious to lead a value adding life, it must start today.

There are so many others who are reaching out and starting their journey. When will you reach out? When will you start living your life? Give it a try. Do not assume that you know what i am talking about. Do not repent at the end of life that at least you could have tried.

I am there to help..reach out !!

Cheers

Manoj Arora

Lead a Financially Free Life !!

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What are Large, Mid and Small Cap Funds

We keep hearing terms like large-cap, small-cap and wonder what type of stocks we should own and what these terms really mean? How does someone calculate whether a company is a large-cap or mid-cap? With so many people having such questions in mind, i thought of sharing this post with you.


What is Market Capitalization?
If you wish to buy a company and all its shares were offered to you at the current market price, how much would the company cost you? The answer is its Market Capitalization. Yes, you will have to pay the “Market Capitalization” of the company which is the product of a company’s total number of shares outstanding and the market price of the share.

Example
Let’s understand it with the help of an example. Suppose, you decided to purchase ABC Industries, when its shares were trading at Rs.50 and the number of  shares outstanding were 1 Crore. You would have paid,
Rs.50     x    1,00,00,000    =    Rs. 50,00,00,000
i.e., Rs. 50 Cr. is the Market Capitalization of ABC Industries.

What does Market Capitalization reflect?
However, what you should remember is that the market price of a share is the public opinion about the worth of a company’s stock. Thus, Market Capitalization is the public opinion of what the whole company is worth. This opinion is based on the past performance, future prospects and market sentiments of the public about the company. The market capitalization changes with time as a result of factors like company performance, economic factors like inflation, interest rates, etc.

Categorization of Companies
In India, you can find companies with market capitalization ranging from a few lakh to as much as few lakh Crores ! As a result, companies are usually classified as large-cap, mid-cap and small-cap companies.

What are Large-cap, mid-cap and small-cap companies?
We have frequently heard about some companies being Large-cap (e.g. Reliance, Tatas, Infosys etc.), while many others being Mid cap or Small-cap companies.  "Cap" is short for capitalization, and generally used for market capitalisation. Wonder how they are classified? Let’s take a look at how the BSE classifies companies according to their market capitalization.

The 80-15-5 method
BSE uses a method called as the 80-15-5 method. Here’s how this method works:

• Arrange all the companies in descending order of their Market Capitalization.
• The group of companies from the top, which together contribute 80% of the total Market Capitalization are Large-cap Companies,
• The next group of companies contributing 15% (80-95%) of Market capitalization are Mid-cap companies, and
• The remaining companies which contribute 5% of Market Capitalization are Small-cap companies.

Thus, the Large-cap companies, Mid-cap companies and Small-cap companies contribute 80%, 15% and 5% of the total Market Capitalization of the market respectively. This is known as the 80-15-5 method. The number of small-cap companies is the highest followed by mid-cap and large-cap companies. Thus, a small proportion of the total number of companies (large-cap) contribute the major part (80%) of total market capitalization.

Thumb Rule
As a thumb rule, the market capitalization of small-cap companies is up to two thousand crore, mid-cap companies is between two thousand to ten thousand crore and large-cap companies is above ten thousand crores. However, this does not mean that if the market falls or rises considerably, large-cap companies will become mid-cap and mid-cap will become small-cap, or vice versa.

Rather, the above ranges will change with a change in Total Market Capitalization.

What is the significance of Market capitalization?
It is regarded as an indicator of a company’s size. Large-cap companies are more robust. A large-cap company can be compared to a heavy goods carrier, while a mid-cap company to a mini carrier. If there is a speed breaker/bump on the road, the chances of a mini carrier getting knocked down are much more as compared to the heavy goods carrier. At the same time, a mini carrier picks up speed quickly and travels faster as compared to the heavy goods carrier; which requires time to catch up speed but has better stability and momentum. 

Summary
So, when you build your equity portion of the portfolio,  make sure that you have a core foundation of large cap companies, and over and above that, you can buy a limited set of mid or small cap companies to balance your risk-reward ratio.

All the best !!

Cheers

Manoj Arora

Lead a Financially Free Life !!

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Mission of Life

The two most important days in your life are the day you are born, and the day you find out why.... said Mark Twain.

While all of us precisely know about one of these two important days, it is very rare for most of us to have established the second day of our lives.

Why do we exist on this planet? What is the value add of our life? Is it just our own survival, or just the survival of our family? Is that the only meaning of our lives? OR is there some purpose of our lives? Is there a mission that we live for, and are also ready to die for? This purpose is called as the mission of our life.

If you do not have a documented mission of your life, you do not know what you are missing in your life. You are mission the spark, the passion, the enthusiasm, the bliss, the happiness, and everything else that makes your life worth living. Life is not supposed to be a struggle, life is supposed to be lived and added value to. Finding your mission takes time, but make sure you are making an honest attempt to do so. 

My mission in life is "To Elevate My Society" and there are three distinct problems that i am targeting to address:

(1) People in our society who do not have time for themselves, or for those who are in need.

(2) People are fighting with each other, not only on bigger issues, but more on pity issues. We have forgotten to live in harmony.

(3) If we do not take care of our environment right now, it may just be too late.

Below is my plan to be a part of the solution to address these 3 vital problems of our lives. 

Again, it does not matter whether i can solve these problems or not, what matters is whether i am a part of the problem or a part of the solution. I am happy that i belong to the latter category.

Which category do you belong to? If you are watching things happen, you are definitely not a part of the solution. Make a mission of your life. Document it. Work on it. Not only will you lead a happier life, but you will change the way people around you think and act.

You can write to me at help@ratrace2freedom.com if you need any help in establishing a mission of your life. There are techniques to do that. I will be more than happy to help.

All the best !!

Cheers

Manoj Arora

Lead a Financially Free Life !!

My Life's Mission | RR2FF Portal | Facebook | Twitter | Blog | Ask for help