Earning a Higher Return on Investment in CD / Fixed Deposits

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I recently left some comments on financial blogs on how I am earning a higher return on investments in CD and fixed deposits.  These comments triggered some questions.

Many were curious just how I am earning 9.5% on certificates of deposits.  Is that possible?  Not in the USA no, not right now at least. In fact, I am not sure if and when we will see a 9% return on a fixed deposit in the USA.  Regardless, you can earn a higher return on investment in CD and fixed deposits if you are willing to consider parking your money in foreign markets.

I understand that investing in a foreign jurisdiction has foreign currency risk implications, but many investors are making the arbitrage work for them very nicely.  I know people that have been doing it successfully for years in various jurisdictions. I have been doing it for the past couple years in multiple countries.

Earning a Higher Return: Investment in CD with Indian Banks

Here is an example of how this can work.  IndusInd Bank Limited, an Indian bank that is protected by the Indian Federal government similar to the FDIC insurance concept in the USA was offering a 9.5% interest rate on any amount of CD or FD for someone willing to invest their money for 400 days.

That is just over a year’s time frame, not long at all in my opinion, considering my CDs are usually in it for the long haul anyway. Further, if a senior citizen invests the funds, the bank gives an additional .5%.  It was when rates were this high when I decided to move a lot more money overseas than in previous transactions.

If you are thinking about the difficulty or hassle involved in executing such transactions, worry not as banks around the world realize that people are constantly looking for the best possible return on their investments and savings, and thus have account representatives specifically trained and dedicated to handle foreign accounts.

I know that many such Indian banks have local USA and European representatives who will assist interested individuals in executing the process. In fact, ICICI, the biggest private sector bank in India has a local branch office in New York! Further, many banks like ICICI host periodic educational webinars geared just for foreigners.  I have been participating in their webinars on investing in Indian real estate, stock and bond markets for the last year and they have been very informative.

I can also appreciate that this is a big leap for someone who has no familiarity with the specific jurisdiction offering a favorable interest rate.  It does help to have some familiarity, or know people that live in those jurisdictions to morally and educationally be there as a resource you can go to for any questions.

Factors to Consider When Investing Overseas

Things I consider in a foreign jurisdiction before investing include the state of the local economy, political stability, future economic outlook, whether or not the jurisdiction is pro US and considered a military ally and more than anything else the overall stability of the jurisdiction in the past decade or so.

If interest rates were the only thing that mattered to me, I would take my money and park it in a Brazilian bank.  Interest rates in Brazil can reach 57635% at times depending on which direction the wind is blowing in.  But interest rates are not the only factor to consider when investing your money across the ocean(s) far away from you.

Investing overseas has been pretty smooth for us so far.  Monies can be transferred via ACH seamlessly, and with bigger banks such as ICICI I even have an ATM card which I can use to withdraw money anytime from any ATM machine in the world.  I have a checking account with them that pays much, much more than what a top tier account would in the US. Most big banks also have offshore online banking capabilities readily accessible to you.

It also helps to have this card as my money is accessible to me globally as I travel.  Citibank is the biggest player in this market, and I am currently looking into how their processes are set up and what kind of interest rates they are offering.

From a compliance perspective, one has to consider local reporting requirements of assets held in foreign accounts as well as income generated by those assets. For example, in the United States, tax payers are required to report foreign financial activity in a FBAR form that is submitted to the tax authorities.

Foreign Currency Risk

India has definitely been the jurisdiction of choice for us. Very stable, fast progressing, the largest democracy today, trends in the strengthening of the rupee against the dollar, customer service and overall current and futuristic economic outlook.

I understand that I have foreign currency risk involved, but the rupee has only strengthened against the dollar.  Tack that percentage gain on to the 9.5% and you are looking at close to 12% total return on investment.  Even if King Dollar resurrects and the forex trend goes the other way, subtract a few percentage points from 9.5% and you will still end up far ahead of most people while parking your money in a low risk investments.

It also helps me that I spend in rupees when I travel to India or other jurisdictions where the rupee has gained strength against the local currency.  After you have initially converted your currency (USD to Rupee), regardless of the forex trends, spending the local currency locally without having to convert it back doesn’t impact your bottom line.

This is another reason many shy away from investing in foreign markets. Because they don’t spend the money where they earn it, the potential exposure to forex trends is greater.  But for 9.5% in a stable and growing economy?  Some might want to reconsider?

I specifically used India in this example, however the premise of this discussion is much broader.  One can take advantage of this arbitrage in any suitable market for them.

Have you considered “parking” your funds in foreign bank accounts in relatively low risk “investments”? Why? Why not?  Considering interest rates in the West are lower, will a return of more than 8 times what you are getting make it worth looking into foreign markets?

Any other thoughts on earning a higher return on this type of an investment in CD / Fixed Deposits? Any other advantages and disadvantages I failed to consider in this discussion?

Read more on high return investment in CD and FDs with IndusInd Bank here.

8 Responses to “Earning a Higher Return on Investment in CD / Fixed Deposits”

1. retirebyforty says:

   June 28, 2011 at 11:21 am

   9.5% return on CD sounds like a great deal! I’ll have to look into it. I wouldn’t feel comfortable putting a lot of money there though. I don’t know anything about India and their FDIC. I’ll have to research more, but thanks for the idea. Sure beats the 0.5-2% we can get here in the US.

   Reply
   • Sunil says:

     June 28, 2011 at 5:47 pm

     you are welcome. it is a great deal, plus the appreciation in forex which of course is not guaranteed but in this case highly likely (in my opinion inevitable). definitely look into it – there aren’t very many democracies as politically stable and economically sound right now.

     Reply
2. Be'en says:

   June 28, 2011 at 2:58 pm

   Hi Sunil

   I have some money invested in SBI at a rate of only 2.7%!! I must do some research because I am sure there are better rates available elsewhere. I am in Canada and we do have ICICI bank here but they don’t seem to be very active in helping NRIs invest in India. Curious to know how I can invest in real estate for retirement in India. What did you learn from the webinars? Any reliable agents that would help you with this?

   Thanks

   Reply
   • Sunil says:

     June 28, 2011 at 5:49 pm

     Be’en – I do not like ICICI’s FD/CD rates at all. They are a solid bank however. I have found ICICI here in the USA at least to be very helpful in helping folks invest in Indian real estate. I recommend signing up for their Webinars and getting in touch with the presenters to discuss the process further.

     Reply
3. Juan @ Blue Sauger says:

   June 29, 2011 at 7:23 am

   Hey the carry trade can be a great thing but I would be careful with it. Look at the NZD, AUD, GBP, after the financial crisis in 2008. As risk is repriced and the global risk apatite changes these carry trade currencies can experience massive fluctuations that would total remove any gains made in the previous year. Not that taking advantage of interest rate differentials isn’t a good idea or an opportunity for profit but still risks abound beneath the surface [as with everything 😉 ].

   Reply
   • Sunil says:

     June 29, 2011 at 2:15 pm

     Welcome Juan – and yes, isn’t that the ultimate question we have to ask ourselves when investing?

     Reply
     • Juan @ Blue Sauger says:

       June 29, 2011 at 4:00 pm

       Yes, I would say valuing risk is one of the fundamental parts of investing but at the same time I would say straight emphasis on volatility, cds spreads, and an attempt at understanding black swan events [though if it truly is a black swan event can we really understand it before hand?] isn’t the heart of investing. I would argue that the heart of investing is a continual search for the right questions to be asking.

       I mean answers are transient and change with the input variables. The equations many times stay constant throughout a person’s career in a certain field [ie is it six sigma certified, what is the irr, what is [a given stock’s] short ratio] but simply answer the questions or answering the questions the best isn’t always the best path. Look the subprime housing market. With people in the housing industries being told to only look at price fluctuations in local markets and to ignore macro debt levels they answered “all of the right questions” according to their field and yet they [most of them] were hurt very badly with their field with the collapse of subrime + the great recession. The housing investors that didn’t get taken down with the subprime market didn’t just focus on answering those same questions [that had a proven level of importance], but they focused on finding the best questions to ask [which thus lead them to metrics like the US’s savings rate + the increase of % change GDP/ % change in private debt + how are condo conversions being priced].

       So I would argue that the level of risk isn’t so much the ultimate question. The importance of the question being asked, I would say that is the ultimate question.

       [Forgive me for discussing investing theory but it kinda just flows out of one’s self at times 😉 ]

       Reply
       • Juan @ Blue Sauger says:

         June 29, 2011 at 4:19 pm

         Though yes, I believe in the traditional free market theory the pricing of risk/volitility is the central optimizing principal [other than that all actors are asocial and utility optimizing] and one can look at the black-scholes options pricing formula for a real world example of this. Yet, efficient market theory isn’t correct 100% percent of the time and as such I think that we should be willing to consider the idea that investors could have different [or should have different] emphasis than utility optimization through placing probabilities on risk/volatility .

         Reply