Should I invest in a foreign CD?
December 12, 2013
Q: I read about CDs in India yielding 9 percent interest rates. Is it possible for an American to invest in such an account?
A: There are several reasons why you should be wary of this kind of investment.
Through the end of the third quarter of 2013, India had a year-over-year inflation rate of 9.84 percent. So, if the best CD rates in India are around 9 percent, they are in much the same boat as the best CD rates in the U.S. -- struggling to keep up with inflation.
Now, if you are investing in India but living in the U.S., why should you care about the Indian inflation rate? Because high inflation is often a sign of a weak currency, and your deposit would be denominated in the local currency. Sure enough, over that same one-year period when India experienced a 9.84 percent inflation rate, its currency declined by about 15 percent against the U.S. dollar. So, had you made this investment a year ago, you would have earned 9 percent in interest and lost roughly 15 percent to the exchange rate.
Beyond understanding the economics underlying any investment opportunity, there are three basic questions you should ask before depositing money in a foreign institution:
- Is it a scam? Actually, whether it's at home or in a foreign country, you should always be alert to the possibility of a scam when dealing with unfamiliar people or institutions. Don't do anything unless you can independently verify the legitimacy of the institution offering the product, and the authority of your specific contacts at that organization.
- How safe is the bank? Remember, your money would be a long way from FDIC insurance. You'd have to do some research into the quality of the bank making the offer, and find out what protections are offered to depositors in India.
- What about taxes? Often, foreign accounts have local taxes withheld, but you would also still be liable for U.S. taxes on your earnings. The U.S. has tax treaties with several countries that allow investors to avoid double taxation, but even if this is in place, reclaiming taxes that were withheld from your account can involve complicated paperwork and long delays.
One of the real hazards of a low-interest-rate environment like the one the United States is experiencing is that people start looking beyond the tried-and-true options in a search for higher yields. When the best CD rates in the U.S. struggle to reach 2 percent, it is natural that a 9 percent CD rate would sound attractive. Unfortunately, reaching for higher yields can radically change your risk exposure, pushing it well beyond what you would normally expect from investing in a CD.
Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the home page.