There are many tools used in investing for diversification, especially when it comes to lowering exposure to risk. In this case a foreign currency fixed deposit (FCFD) is one of the most popular options. An FCFD is a type of fixed deposit that allows consumers convert local currency to foreign currency and then deposit for a certain period of time earning an interest. But how can it be useful and what are the benefits of using it?
What is Foreign Currency Fixed Deposit?
An FCFD is a deposit offered by banks to keep foreign currency for the future in order to earn some interest in the process or hedge against foreign currency movements. Foreign currency is kept for a fixed term. There are a couple of ways how an FCFD can be invested in. First way is opening a local account offering a deposit in foreign currency. Second way is to open an account in a foreign country. FCFD accounts accept popular world currencies, such as US Dollar, Euro, British Pound, Australian Dollar, etc. The total amount earned from a foreign currency fixed deposit depends on 4 elements: the amount of money invested, foreign currency exchange rate, interest rate offered by the bank and the term of deposit. If the duration is long and the amount of FCFD is large then the interest rate is higher. When the FCFD account matures you can sell the amount at the prevailing rate to get your deposit back in your local currency. On the other hand, as a depositor you can keep the funds in the foreign currency current account or update the FCFD for another fixed period.
Pros and cons of Foreign Currency Fixed Deposit
There are many reasons why an FCFD is suitable for investors. Let’s compare pros and cons of this investment tool. Looking ahead, there are more advantages than disadvantages of FCFD and here is why:
- Having an FCFD account allows you to buy currency, keep it for future use and lock the exchange rate. It is a great advantage when playing the casino, for example. As Ireland online casinos support various currencies, you can choose the one you prefer and gamble using your local currency. And if your local currency devalues, the foreign currency you have becomes more valuable because the exchange rate will be higher. In case you need some advice on gambling, here’s more info.
- FCFD is a hedging tool against foreign currency fluctuations. It is a perfect way for those who invest abroad, run a business with overseas transactions and even for supporting family members living in other countries.
- Keeping foreign currency on FCFD accounts increases revenue in two ways: exchange rates and interest.
- Clearly it is safer to keep the money in your FCFD account than in cash.
Apart from all the obvious advantages it is still an investment that involves some level of risk. So the cons are:
- The money deposited in the FCFD account cannot be revoked until the fixed term is up. Early withdrawal might cause penalties, so be sure you won’t need this money for the entire term. Also it might result in the partial loss of a particular sum of money.
- If the exchange rate drops you might lose some value of your currency, but anyway you might not be able to convert it to your local currency and wait until the rates are suitable for you.
To conclude, a foreign currency fixed deposit is a great idea if you are looking for a convenient way to earn on savings with little risk. As the risk of fluctuations of exchange rate is usually low it gives an advantage over investing in shares for instance. This leads to a low-risk nature of FCFD. So it might be a safe and useful way to invest money.