Investing in foreign currency deposits

Here are my tips for investing in foreign currency deposits. They are based on my personal experience:

1. Get a good rate when you convert from Singapore dollars to the foreign currency. Find out the buy and sell rate for the currency. Take the middle of these rates (which is usually the interbank rate). Find out the spread charged by the bank, which is the rate that you pay, compared to the interbank rate. A good spread is 0.15%. If the spread is more than 0.2%, you should take the trouble to convert the money elsewhere.

2. You can convert the money with an online stockbroker, such as Phillips, and pay a spread of 0.15%. You may have to pay some bank charges, but the amount is quite small. You can compare the total cost, i.e. the spread and the bank charges, to decide which is the best option for you.

3. You can call a few banks to check the interest rate that they pay on the fixed deposit. If you tell your bank about the rate quoted by other banks, they are likely to match it.

4. On withdrawal of the fixed deposit, you can convert the foreign currency into Singapore dollar in the same way, i.e. move the foreign currency to the online stockbroker to get a better conversion rate.

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.

If you convert the money at Philiips, you can transfer it to another bank to earn a better interest rate on the fixed deposit.