FAQ: Investing in foreign currency deposits

1. Why should I invest in foreign currency deposits?

Interest rate is low in Singapore. You can get a higher interest rate by investing in some high yielding currencies, such as Australian or New Zealand dollars. You will face the currency risk, i.e. the foreign currency may drop compared to Singapore dollar. This may reduce the return from the higher interest rate. If it drops further, you may face a capital loss.

The foreign currency may appreciate against the Singapore dollar. You will get a total gain comprising of the appreciation and the hgiher interest rate.

2. What is the cost of investing in foreign currency deposits?

Your cost is in the conversion of Singapore dollars into the foreign currency and converting it back to Singapore dollar on its withdrawal. Most banks charge a spread of 0.5% to 1% for a one-way conversion. The spread is the rate charged by the bank, compared to the interbank rate.

If you transfer the money to an online stockbroker, such as Phillips, you can pay a spread of 0.15% only. Compared to the spread charged by a bank, your savings can be quite substantial. It is worthwhile for you to take this trouble, if you are investing $50,000 or more.

You may have to pay bank charges for making the transfer. Usually, the charges are $100 or less. After allowing for the bank charges, you will find it better to convert the money elsewhere.

3. How can I get a higher interest rate for my bank deposits?

You can ask a few banks to quote the interest rate. A few days before the maturity, you can get a re-quote of the interest rate from a few banks. You can also check the website of these banks. If you tell your existing bank about the higher interest rate that is given by another bank, they are likely to match the rate to keep your business.

If you transfer the foreign currency to be placed on fixed deposit with another bank, you may have to pay bank charge for the transfer. Ask the bank for the charges.

4. Can you show an example?

Here is an example. You wish to convert SGD 100,000 into Australian dollars. The bank quotes the buy and sell rate as 1.3015 and 1.3210. The middle rate, or interbank rate is 1,3112 (i.e. mid-way between the buy and sell rates). The spread charged by the bank is 0.75% (i.e. 1.3201 divided by 1.3112).

If you convert the money at Phillips (through POEMS), you are given a spread of 0.15% above the interbank rate. You will be charged 1.3132. However, as the interbank rate changes each few seconds, you will find this rate changing as well.

If you are converting $50,000, you will be able to save $390 by converting with Phillips. You may have to pay $100 or less in bank charges. You can still make a saving by taking some trouble. If you are converting a larger sum, say $100,000 or more, your saving will be more.

5. Can I invest in a diversified foreign currency fund?

I plan to get a fund manager to set up a diversified foreign currency fund. It will invest in five foreign currencies that pays high interest rate. The fund manager will get the best conversion rate, i.e. low spread, and also source for the best interest rate on short term fixed deposits. The fee charged by the fund manager, say 0.6%, will be more than offset by the saving in the lower spread. Some of the savings will be passed to the investors, perhaps 0.5% to 1% or more.

As the fund is diversified into a few foreign currencies, the impact of a fall in one specific currency may be offset by the gain in other currencies. The average yield of the fund, after adjusting for changes in currency value and charges, should be higher than the interest paid on fixed deposits in Singapore dollars.

This fund is expected to be available before the end of 2008.