Singapore Savings Bonds have been introduced on the 30th March 2015. DollarsAndSense are very excited with the prospects of more alternative investment products for the common man. Let us understand how is Singapore Savings Bonds different from other fixed income instruments!
Property, stocks and bonds are the typical investment classes that are available for investors seeking a higher return than the inflation rate to grow their wealth. Among these, bonds are the lesser known evil. With the recent announcement from Senior Minister of State (Finance & Transport), Ms Josephine Teo, on the introduction of Singapore Savings Bond, local investors started getting excited about bonds in Singapore again.
This article hopes to shed some basic information on the choices of bonds that are available for retail investors and to discuss the merits of the savings bonds. Before we do a comparison, let’s deal with the definitions.
Fixed Deposit: Fixed deposit is a financial instrument that offers a higher rate of interest than a regular savings account, for a minimum lock-in period. In our example, we have taken the SGD Fixed deposit rates from DBS. Though, we note that you may be able to gain a higher interest rate of 1.XX % from other banks with promotional offers.
Mutual Funds/ Unit trusts: A unit trust is a pool of money managed collectively by professional fund managers according to the unit trust’s objectives. Currently, a search in Fundsupermart of bond unit trusts, based in Singapore, lists around 9 units trust, with an average interest of 3.06% over a 10 year period.
There are other factors to consider, for example, the risk factor of the unit trust, annual expense ratio and annual management fees.
T-Bills: T-bills or Treasury bills are short term debt securities issued by the Monetary Authority of Singapore (MAS) for the Singapore government in maturities of 3 months to 1 year. Treasury bills are zero coupon products, hence, they are sold at a price less than their par value as the interest is included in the price discount.
In our example, we have taken the one year rate. For simplicity, we have rounded the figure to 1%.
SGS Bonds: SGS bonds stands for Singapore Government Securities bonds, is a longer term debt issued by MAS for the Singapore government in maturities of 2, 5, 7, 10, 15 & 20 years. A SGS bond pays a fixed coupon, typically every 6 months till the life of the security. Upon maturity, the par value of the bond will be repaid.
They are tradable on the SGX, with around 15 of them to choose from.
Corporate Bonds: Corporate bonds are debt issued by a corporation. Usually, they pay fixed coupon rate every 6 months, till the life of the security. Upon maturity, the corporation is obliged to repay the par value to the bond holder. The point to note is whether the bond is an Over The Counter (OTC) product, meaning, you have to go through specialised agents to buy and sell these corporate bonds.
The minimum investment for a single corporate bond is high at about $250,000, it is only open to accredited investors. What does it mean to be an accredited investor, you ask? According to section 4A of the Securities and Futures Act (CAP 289), it means, an individual whose net assets exceed in value of $2 million or whose income in the preceding 12 months, is not less than $300,000. In short, the accredited status implies that the investor can withstand a higher level of monetary risk than the non-accredited investor.
The corporate bonds have varying tenors of 1 year to 10 years. The yield of the bond is highly correlated to the credit risk of the corporation. Hence, the higher the yield, the higher the credit risk of the issuer.
Singapore Savings bond: Recently introduced government bond that guarantees the principal sum. It has no penalty fees for early withdrawal but has a tenor of 10 years with step-up interest rates. At the time of writing, MAS has not released the details of the interest rate for the savings bonds. However, if we were to speculate, it will be in the region of 0.8- 1 % in the first year to around 3-4 % in year 10.
|FIXED DEPOSIT||MUTUAL FUNDS||T-BILLS||SGS BONDS||CORPORATE BONDS||SINGAPORE SAVINGS BOND|
|Min lock- up period||12 months||Nil||12 months||10 years||3 years||Monthly|
|Min Capital investment||1, 000 – 50,000||1, 000||1,000||1,000||250,000||500|
|Interest Rate||0.10 – 0.25%||3.07%||1.00%||2.25%||7% +/-||0.8 – 4%|
|Product Risk||Save- insured by the Singapore deposit insurance cooperation for up to $50K||Performance of the fund management||Backed by the full faith and credit of the Singapore government||Backed by the full faith and credit of the Singapore government||Default risk by the issuer||Backed by the full faith and credit of the Singapore government|
Conclusions from the table above:
- The savings bond should be compared to instruments like the fixed deposit or the T-bills. They have an element of guaranteed principal with low risk. The savings bond is a superior instrument compared to the FDs & T-bills as it gives a higher savings rate with a shorter lock in period.
- Given the savings bond has a tenor of 10 years to reap the full benefits of the step-up interest, we shall compare it with similar products that has a better annualised return over a 10 year period. They are the bond mutual funds and the SGS bonds. In the current low interest environment the SGS 10 year bonds, yield a lowly 2.25%, but should yield closer to around 3+% when the interest rate goes higher. Next, we look at the mutual funds. Though they average close to around 3%, the yearly expense ratio and management fees might lower this return. Also, not to forget the price risks that both the mutual funds and SGS bonds have for early redemption. Given these reasons, we believe the Savings bonds trumps as the choice of investment. The savings bond has no expense fees to dilute the savings returns and carries no price risk for the early redemption, should the need arise.
- Finally, let’s compare it with a corporate bond. The returns from a corporate bond are the highest among all the bond classes. However, with a higher rate of return, comes a higher risk to bear as well. A retiree can invest in corporate bonds and live on the coupon payments, however, the same might be tougher to achieve with the returns from the savings bonds, unless one has a larger capital, and even in that case, the savings bonds has a maximum cap rate. However, we do wish to say that the savings bond is by no way, a similar product to a corporate bond.
All in all, we are very excited by the introduction of this new bond to retail investors in Singapore. Though, at the time of writing this article, both the interest rates and the maximum capital investment have yet to be announced, we can take comfort that this is a superior product compared to the similar products that are available to the retail investors. Given the risk free nature of the product, investors have to taper their expectations of a higher savings rate.
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