For many years, Singaporeans were deprived of products offering both safety and reasonable returns.
Singapore Savings Bonds is a wake-up call for banks, insurance companies and financial institutions to stop offering mediocre products and up their games. The investment for Singapore Savings Bonds can start from as low as $500, and based on the current rate of Singapore Government Securities, you are expecting to get an average return of 0.9% (1 year) to 2.4% (10 years).
But what if you feel this is not compelling enough to you. What if you want to accept slightly more risk for a better return?
Today I will explain two alternative investments to Singapore Savings Bonds
Alternative #1: Single Premium Endowment Plan with Guaranteed Yield
This kind of product is scarce in Singapore because every product is tied to a “tranche”. “Tranche” is actually a French word meaning “slice” or “portion”. In layman’s term, it means the insurer acquired some investments with a certain return, split it up into smaller pieces, and sell it to investors.
The tranche is normally a good deal and one time opportunity for that period of time.
Examples of such products in the past are
- AIA Wealth Accumulator
- NTUC Capital Plus
- TM Wealth Enhancement
The latest product in town is “Wealth Plus 2” offered by Life Insurance Corporation (Singapore) Pte Ltd (LIC), key features of the product are:
- This is a Single Premium 5-yr endowment plan
- Guaranteed 1.92% compounding return per year
- Minimum investment $50,000, Maximum $1 million
- No medical examination required
How to calculate the return
The key difference between such investment and a government bond is that the bond will pay out the coupon but the endowment’s return is compounding. (click here for a basic understanding of bond investment)
Suppose you buy a $50,000 bond product paying you 1.92% per year. you receive $960 coupon per year and your total return after 5 years are $50,000 + $960 * 5 = $54,800
But 1.92% compounding return means your total return after 5 years is $50,000 * 101.92%^5, which is $55,000. The table below shows the return for different investment amount.
Peace of Mind
Another good point about this product is that, unlike other investment instruments, this policy is protected under the Policy Owners Protection Scheme gives you add on protection in the rare event if the insurer fails.
Limited Time Offer
The tranche has only $15 million and will normally be filled very fast.
Alternative #2: Singapore Bond Fund
An investor can also gain exposure to Singapore bonds by purchasing bond funds.
Investing in bond funds is always more efficient than investing directly in the same bonds comprising the funds.
- You do not need as big a capital outlay as if you were to buy all the bonds in the fund.
- The task of actively managing your bond holdings to control your portfolio’s risks and achieve desired returns is passed on to the fund managers.
- You can liquid your fund anytime if you need the cash.
Yes, fund managers charge you a fee, but retail investors won’t get the same deal as the fund manager. Buying individual corporate bonds sounds a good idea but you will always end up overcharged by your bankers and brokers. The fees you might incur are:
- Commissions
- Spread which is included in the price of the bond quoted to you (and you don’t even know how much it is).
- Administrative fee handling your coupon
- Custody fee
- Bond transfer fee
Fund managers also pay the fees, but they pay much much less due to their scales.
How does a bond fund look like
Take PineBridge Singapore Bond Fund as an example. This is a Fund “seeks to provide stable income with capital preservation by investing primarily in high credit quality SGD fixed income instruments”. The fund was incepted since 2002. The top 10 holdings shown below will give you a better picture of what assets the fund is holding.
Bond Fund managers do outperform the benchmark
The best way to look at a fund’s performance is to look at the rolling return. If you were to hold this fund (green bar) for a rolling one year period, it has been outperforming the Singapore government bond index (orange bar) for all the past 30 periods.
To further explain, take the rightmost bar for example. It means if you were to hold this fund from March 2014 to March 2015, your investment return is more than 6%, if you were to hold a Singapore government bond, your return is only about 2.6%.
The drawback of Bond Funds
Of course, bond funds do have their own disadvantages.
When times are bad, a bond fund manager may suffer a “squeeze” by their own investors. If everybody wants to cash out their investments at the same time, bond fund managers are “forced” to sell their holdings at a lousy price to fulfil their obligations. However, if you hold a bond yourself, you can just sit tight, if you have the will to do so.
When interest rates go up, the market value of the bonds will drop. A bond fund manager must be proactive to adjust the portfolio according to the market environment. After all, isn’t that what the managers are paid for.
Take Action
There is no difference between a pessimist who says, “oh, it’s hopeless, so don’t bother doing anything,” and an optimist who says, “don’t bother doing anything, it’s going to turnout fine anyway.” Either way, nothing happenes – Yvon chouinard, founder of Patagonia
We all know we have to save. If you want to sleep well but do not want your money to be eroded by inflation; If you want to understand how the bond investment can supplement your existing portfolio, you can request a non-obligatory discovery meeting below.