In today’s volatile market, managing risks in your investment portfolio is an invaluable skill for all investors, perhaps even more so than learning to pick stocks or analyse candlestick patterns.
One of the fundamental ways you can do this is to have a portfolio of assets that are allocated in accordance with your investing goals and risk tolerance. This means balancing out equities with other asset classes like bonds, commodities, and cash.
Here are four investments that are risk-free for all practical purposes, which Singapore investors should not neglect as part of their risk management strategy.
# 1 CPF Top-Ups
CPF allows you to earn attractive risk-free returns. In addition to monthly contributions by your employer and yourself, you can also consider voluntarily making CPF top-ups into your Special Account (SA), which will earn a minimum of 4.0% per annum.
The first $60,000 of your CPF monies, with up to $20,000 in your CPF Ordinary Account (OA), will earn an additional 1.0% in interest returns. This means that if you have not maxed out the $60,000 bonus interest threshold, your top-ups would be earning 5.0% per annum – risk free!
As an additional perk, you can also receive up to $7,000 in tax reliefs when you make cash top-ups into your CPF SA, and an additional $7,000 in tax reliefs when you make cash-ups into a loved one’s CPF SA.
However, before you do this, you need to know that unlike the above investments, which can be sold or redeemed early (notwithstanding that you’ll likely lose some value when you do this), this is irreversible.
The catch is that the monies are highly illiquid, since CPF top-ups are irreversible. Your monies will be locked up (and earning good interest for you) until your CPF retirement age and can make withdrawals.
# 2 Singapore Savings Bonds
Launched in October 2015, the Singapore Savings Bonds (SSB) offers Singaporeans a way to enjoy superior interest compared to a regular savings account, without losing much liquidity or taking on additional risk. With a minimum subscription of $500, it is also widely accessible to most Singaporeans.
What is interesting to note is that while there is no penalty for early redemption of the bonds, in case you need your money earlier, the bonds pay a step-up interest each year, up to the 10th year, which incentivises you to hold on to it until maturity. This means that the bonds pay a lower return in the beginning years, but continues to pay a higher rate each year, until the 10th year.
New tranches of SSB are issued monthly, and you can refer to the SSB website to see the interest rates for the upcoming issue.
Singapore Savings Bonds Interest Rates for October 2018 (Source: SSB Website)
As you can see, the latest issue of SSB has a 1-year interest rate of 1.74% per annum, and it returns 2.42% per annum when held over 10-years.
Read Also: How To Buy The Singapore Savings Bonds
# 3 Endowment Plans
In contrast with the stock market, which has no guarantees of any sort, endowment plans do come with some form of guaranteed returns as long as you pay all the committed premiums and hold on to the policy till maturity.
Exposure to the upside of stock markets is provided in the form of bonus, non-guaranteed returns that depend on the performance of your insurer’s participating fund. This investment component of endowment plans is the key difference between an endowment plan and saving money in a bank account.
Some endowment plans may have an insurance component as well, which gives you a certain sum assured tagged to the policy. This provides you with a payout in the event of death or permanent disability.
# 4 Fixed Deposits
Although fixed deposits are not commonly thought of as an investment, they offer us a way to earn guaranteed returns on our money that are higher than a savings account, while still being virtually risk-free. Deposits with all full banks and finance companies in Singapore are covered under the Deposit Insurance Scheme, insuring up to $50,000 of your deposits in each account.
If you’re thinking of making a fixed deposit this month, you can take advantage of this promotion by CIMB Bank in celebration of their 9-year anniversary. CIMB Bank is offering 0.09% per annum of bonus interest on top of the existing online promotional rates for CIMB Fast Fixed Deposits accounts opened online from 1 to 30 September 2018.
|Tenure||Rates (per annum)|
|3-months||1.40% + 0.09% = 1.49%|
|6-months||1.55% + 0.09% = 1.64%|
|12-months||1.75 + 0.09% = 1.84%|
Using Risk-Free Investments As A Foundation
Once you’ve built a foundation of stable assets that guarantee your principal and returns, you would be in a better position to make higher risk, higher return investments like stocks, properties, peer-to-peer lending, or even cryptocurrencies.
Many of these riskier investments are volatile and require you to be able to stomach and ride out wild price swings to earn good returns over the long term. But at least you can do so while being comforted at the stable and predictable returns that the risk-free portions of your portfolio provide.