Be wary of high yields abroad
Question: I have some money that I would like to place in a certificate of deposit to improve my return. Most of the U.S. banks I’ve looked at are offering 1.00% or less. However, some international banks — most notably, Indian banks — are offering around 9.00%. Is there a reason not to invest my money in an overseas institution when the payback looks so much better? Mark, Portland,OR
Answer: I’m not a big fan of putting CD-type money — your so-called safe money — into overseas debts. I’m skeptical that the higher interest rates are worth the risk.
One big risk is an uncertain return on investment after taking changes in currency values into account. Once the overseas money is converted back into dollars, you could earn even less than you would in a U.S. certificate of deposit — and vice versa. The return is uncertain.
For example, high interest rates in India largely reflect high inflation. The rupee is also trading around a 32-month low against the dollar. The uncertain extent of the fallout of the Mediterranean sovereign debt crisis is behind a worldwide flight of safety for money into the U.S. The demand for dollars is providing support to the greenback’s international value.
Another risk — the most important to my mind — is losing the safety net of FDIC insurance. Yes, you’re getting basically zero return on your money in an FDIC-insured institution (and its credit union equivalent). But the principal is safe. That isn’t the case in many other countries.
However, you could look into a financial institution like Everbank. It offers CDs in a number of foreign currencies. You do get FDIC insurance with Everbank. Remember, the insurance coverage protects you against bank failure — not against market and currency fluctuations.
There are a number of other options, ranging from mutual funds that invest in overseas short-term, money-market-type investments to exchange-traded funds that concentrate on short-term emerging market debts. However, these are riskier investments than a CD.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.