Is Chocolate Finance’s New US$ Account Worth It?

With high-interest-rate environments making USD deposits increasingly attractive, Singapore-based fintech Chocolate Finance has launched a new USD interest rate product that promises up to 4.6% per annum. The offer has caught the attention of savers and investors alike, especially those looking for alternatives to fixed deposits, money market funds, and US Treasury bonds.

However, as with any financial product offering high returns, questions arise.

• How does Chocolate Finance generate these returns?
• Is it a safe investment?
• Are these returns sustainable?
• What risks should investors be aware of?
• How does the USD/SGD exchange rate impact earnings?

In this article, let’s deep-dive into Chocolate Finance’s new USD product, explain how it works, what it invests in, so that you can decide for yourself whether it’s a good fit for your investment strategy.

What Is Chocolate Finance’s New USD Product?

At its core, Chocolate Finance’s USD product is a high-yield cash management account, where customers deposit USD and earn daily interest. Unlike fixed deposits that require locking up funds, this product offers liquidity and no minimum deposit requirements.

Key Features of Chocolate Finance’s USD Product

• No lock-in period – Withdraw funds anytime without penalties.
• Daily compounding interest – Interest accrues and is credited daily.
• Tiered interest rates – Up to 4.6% per annum.
• MAS-regulated – Operates under a financial license.

Interest Rate Breakdown

Is Chocolate Finance Legitimate and Regulated?

Chocolate Finance is a licensed financial institution under the Monetary Authority of Singapore (MAS). However, it is important to highlight that:

• Foreign currency deposits are NOT covered by the Singapore Deposit Insurance Corporation (SDIC). Unlike SGD bank deposits, investments in Chocolate Finance are not protected if the company ceases operations.
• This is NOT a bank deposit. This product is an investment, not a savings account. Investors face risks such as bond yield fluctuations and foreign exchange risk.

Unlike traditional fixed deposits, Chocolate Finance’s product carries market risks. Returns are dependent on bond market performance, which can fluctuate.

How Does Chocolate Finance Generate These Returns?

Chocolate Finance invests customer deposits into short-term, investment-grade bond funds and retains the surplus yield collected after distributing the promised interest returns. These funds aim to provide a stable yield while keeping duration short to manage interest rate risks.

These are the four main bond funds that the product will be invested in:

• Dimensional Short Term Investment Grade USD Fund (DSF)
• Fullerton Short Term interest rate USD Fund (FST)
• LionGlobal Short Duration Bond USD Fund (LGF)
• abrdn SICAV I Short Dated Enhanced Income USD Fund (ASF)

These bond funds are not unique to Chocolate Finance and you can create your own portfolio of bond funds using them in other investment platforms as well if you wanted to.

What we want to take note here is that that these bond funds are investing in short term bonds across the globe that mature in less than 5 years. Short term bond prices are less volatile to interest rate fluctuations, compared to long term bonds. As these bond funds are actively managed, the management fees (as well as other underlying costs) are much higher than the passive ETFs that many are used to seeing.

Are the Returns Guaranteed?

The returns are NOT guaranteed. However, Chocolate Finance has a ‘Top-Up Programme’ where they have committed to topping up returns if bond yields fall below the target return (up to US$50,000 deposits) during the promotional Qualifying Period (from now until 31 March 2025, or until the assets under management for the Chocolate Managed Account reach S$1 billion—whichever comes first).

However, this does not guarantee long-term sustainability. If bond yields decline significantly, Chocolate Finance may:

1. Reduce its advertised interest rates (like what they have done with the SGD product).
2. Stop the top-up programme.
3. Increase its risk exposure to maintain returns.

Investors should not assume that rates will remain fixed forever.

How Do Currency Movements Affect Returns?

Since the product is denominated in USD, investors who convert back to SGD are exposed to foreign exchange fluctuations. This currency risk is fully bore by the investors and not by Chocolate Finance so I have created a table below that hypothesised what happens if the USD were to appreciate or depreciate against SGD.

The following table separates capital and interest components to illustrate how USD/SGD exchange rate movements impact final returns, assuming an investment of US$10,000 at USD/SGD rate of $1.3495.

The TLDR here is that:

• If USD strengthens, investors gain in SGD terms.
• If USD weakens, SGD returns fall, which could wipe out part of the interest earned and if worse, impact your invested capital as well.

This is especially important for Singaporeans who are most likely to eventually convert their USD holdings back to SGD.

Would I Invest in Chocolate Finance’s USD Product?

Chocolate Finance’s USD product is an interesting alternative to traditional fixed deposits and money market funds, offering higher returns with daily compounding and no lock-in period. The fact that it is MAS-regulated and managed by an experienced team adds credibility. However, despite its attractive returns, the investment does come with risks that cannot be ignored.

One key concern for me, is the lack of capital protection. Like foreign currency deposits in banks, this product offered by Chocolate Finance is not covered by the SDIC insurance, which means that if the company were to face financial difficulties, investors could lose their funds. Additionally, the returns are not guaranteed and depend on the performance of short-term bond funds. If bond yields fall, Chocolate Finance may be forced to lower the advertised rates or take on additional risk to maintain returns. Investors should also consider foreign exchange fluctuations, as the USD/SGD rate will impact the final returns when converting funds back to SGD.

Is This a Good Investment?

Chocolate Finance’s USD interest rate product is not a fixed deposit, but a cash-like investment option that offers higher returns with some risks. Investors must weigh the pros and cons of bond market exposure and currency fluctuations.

Would you consider investing in this? Let me know in the comments! 🚀

PS: Since I will be joining iFAST Global Markets as an investment advisor, you can always schedule a call with me if you would like to discuss your investment strategies in more detail.