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India - CD - investments?

If we(Indian citizens) invest in India's CDs, we get 9+ interest. Is it not a good option to put all your money there and do not worry about stock market fluctuation?

Jun 04, 2013 by SSK from Dublin, CA in  |  Flag
5 Answers  |  7 Followers
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12 votes
Dushyant Pandit Level 17

You have focused on the high yield number. It is attractive. But you might be well off considering the costs and the risks as well. Here are some issues to consider:

1) Are you an Indian Citizen? A NRI? An OCI? (It may impact the product you actually get).

2) Are you investing in a CD or a CD surrogate? Many CD’s that are being marketed are really Promissory Notes (P-Notes). Ask your banker to give you a written answer. (P-Notes may be riskier).

3) The Exchange rate risk is a big factor in your returns. Despite Indian stock market highs, for example, Indian investments in dollar terms have not been as lucrative.

4) What are your expectations about Inflation in India? High rates might signal high inflation which in turn may impact your overall return in terms of US dollars, over the term of the CD.

5) Where will you consume the money? Many Indians invest in India CD’s with the idea of spending the money in India. This makes the CD’s more viable – exchange rate uncertainty is reduced.

6) Finally, how much money are you talking about? Calculate the potential interest and then determine if it’s worth the administration difficulties and costs of investing in India and then reporting these incomes in your US taxes etc.

7) Ask your banker to put all terms, including the repatriation in writing; I have learned that there is a lot of enthusiasm during the sale process which is unmatched with subsequent delivery capability.

8) If you do decide to go ahead, remember to start small and wade in cautiously.

Good Luck

Comment   |  Flag   |  Jun 05, 2013 from Summit, NJ

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4 votes

Rod has made some great points. You also need to realize that you have currency risk along with interest rate risk and inflation to consider. If you are a dollar based investor you will need to spend dollars and not rupees.

Comment   |  Flag   |  Jun 04, 2013 from Leawood, KS

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3 votes

This is a tough question without knowing more details, but, I'll give it a shot.

First, it all depends. Are you Indian citizens residing in the United States, or in India? In which country(s) do you file your tax return(s)? What's your annual taxable income, both inside and outside India?

It's my understanding that current Indian CD rates are running in the 7-8% range currently. The rate of inflation in India was most recently 4.89%. The individual tax rate is progressive from 3 -30%.

Thus, if one were in the 20% bracket (there), an 8% CD after tax would net you 6.4%. Now, subract the rate of inflation, and your net (spendable) winds up being around 1.5%.

Again, a sketchy example at best, but without more detail, it's impossible to give a clear and concise answer on this one.

3 Comments   |  Flag   |  Jun 04, 2013 from Springfield, MO
SSK

Thank you Ron. You are correct. Current interest rate is 9%. Earn the interest in India and convert the interest money back to US$ and bring it to USA without worrying India's inflation. That is still 7+ % returns. Let me know your thoughts on this.

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Flag |  Jun 04, 2013 near Dublin, CA
Rod Miller, CFP®, CLU, ChFC

Again, without knowing more, it's really hard to comment any more than I have. I'd still need to know your tax situation, etc to give advice on your situation. As Alan says below, NEVER put all your eggs in one basket. And, as Andrew pointed out, there is a currency risk in addition to everything else mentioned thus far. Caveat Emptor.

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Flag |  Jun 04, 2013 near Springfield, MO
SSK

Thank you Rod

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Flag |  Jun 04, 2013 near Dublin, CA

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3 votes

How secure are India's CD's? Even if they are secure, Putting all your eggs in one basket NEVER is wise.

1 Comment   |  Flag   |  Jun 04, 2013 from Calabasas Highlands, CA
Rod Miller, CFP®, CLU, ChFC

Agreed.

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Flag |  Jun 04, 2013 near Springfield, MO

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1 vote

Dushyant covered all the salient points. My biggest concern would be investing all of your money in one place. I don’t think the high yield is all that attractive considering exchange rates. Though it may or may not be more attractive than a CD in the US, that 9% also has more risk.

Comment   |  Flag   |  Jun 07, 2013 from Delray Beach, FL

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