ROR calculations and other safe investments

[novice_investor]

Wanted to invest about 5k (no stocks / mutual funds) and was thinking of a bank cd as one option. Have the following questions and would appreciate your guidance for the same.

1. What are other safe investment options apart from cd’s

2. International banks are offering a better return on govt. backed cd’s. The plan mainly involves investing in form of Indian Rs. and earn about 5 – 8% depending on term. How do I calculate ROR not knowing currency rate fluctuations and wanted to find out if there are formula’s which I can use to calculate the same.

Thanks in advance and regards
Jay

[jIM_Ohio]

If you want FDIC insurance, stick with local CDs at US banks
International CDs would be a scam, IMO. If you are looking for an 8% return without much risk, you will get scammed sooner or later.

Treasury bonds, I-Bonds, and TIPs would be investments I would look at if CDs at FDIC banks were not good enough.

[novice_investor]

Thanks Jim but as mentioned these CD's are government backed (Reserve Bank of India - similar to our Federal reserve).

Also can you guide me on calculating the ROR

Regards
J

[jIM_Ohio]

Thanks Jim but as mentioned these CD's are government backed (Reserve Bank of India - similar to our Federal reserve).

Also can you guide me on calculating the ROR

Regards
J

The india government is not the same as the US government, not even close.

You would need to know the beginning currency rate and end currency transfer rate to calculate.

If 5000 US dollars is 1000 indian money , then that $1000 compounds at X% (rate of CD), then at end that X+compounding is transferred back to US dollars at the exchange rate at the end of the term.

Unless the CD terms specify something different. I would not consider foreign CDs to be as safe as US CDs- not even close. If you are chasing "guaranteed rates of return" you will be burned a few times- some of these are scams and some are legit, but unless it was a swiss banc (stable currency) or a Euro bank (decent currency) I would not even consider it.

[jpg7n16]

Indian money = Indian Rupees


By investing in Rupees, you would be entering the foreign currency game, and in order to eliminate that risk would have to go into FX hedging (Foreign exchange hedge - Wikipedia, the free encyclopedia)


There's a reason they offer higher returns than US gov bonds do. They have more risk, so have to give a better deal to get people to invest.

It could work out for you, or it could backfire. The return in rupees would be easy to calculate, but the end return in dollars is going to wildly vary. So you could easily make 8% in rupees, but lose 5% due to FX loss. Or you could make 8% in rupees, and gain another 5% due to FX gain. (or gain 8% lose 25%, gain 8% +25%, etc.)


The only way to make that calculation with some level of certainty would require an FX future rate equal to your time horizon. If you are going to invest for 1 year, you would be able to hedge your investment with a 1 yr currency future. Which I'm not sure is offered for Rupees.