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Bond Investments (Aside From The SSB) For The Average Singaporean To Consider

Aside from the Singapore Savings Bonds, here are some form of bond investments that you can consider.


The Monetary Authority of Singapore (MAS) announced earlier this month that they have received and accepted $413.2 million of applications from 19,505 individuals for the first tranche of Singapore Savings Bond (SSB).

All applicants will be receiving the full amount in which they subscribed for. (capped at $50,000 per issuance). On average, each applicant would have received about $21,000 worth of SSB bonds.

There is so much talk in town about just how fantastic our government initiated SSB is compared to fixed deposits and endowment funds. The Sunday Times even devoted close to two pages to talk about the SSB last week.

Before you take the plunge and invest your money into the SSB, it is worth understanding first what are some similar bonds out there in the market that are comparable to the SSB.

Read Also: Why You Should Invest In Singapore Savings Bonds Over Endowment Plans

Buying The Singapore Government Securities

Not many people know that we can actually purchase Singapore Government Securities (SGS) via local brokerages such as DBS. This means that we can actually lend money directly to our government.

Simplistically, the SSB mimics its interest returns and maturity structure of the SGS. The only difference is the “Step-Up” interest structure of the SSB where the longer you hold, the more returns you will receive. The SGS (assuming a 10-year bond) will pay you a fixed 2.78% interest on an annual basis.

Pros and Cons of SSB Vs SGS

SSB SGS
Min. Invest Required $500 $1,000
Liquidity High Low
Net Present Value Lower Higher
Investment Limit $100,000 No limit
Risk Risk-Free Risk-Free

 

Pro:

The SGS pays its interest twice a year. This means that for every thousand dollars we have in a 10-year SGS bond, we will earn about $13.90 (2.78% x $1,000 / 2) once every 6 months, for 10 years.

In comparison, the SSB has a step up function where we will only be paid more towards the tail end of the 10 years. For example, in year 1, SSB holders will earn $5.90 (1.18% x 1000 / 2) every 6 months, and slightly more the next year, and so forth.

This means that while both the SSB and the SGS will pay out the same absolute amount of interest at the end of the 10-year period, the repayment schedules for both of them differ. The SSB will pay out less during the earlier years and make up for it by paying more towards the later years. The SGS payment will remain fixed for the duration of the 10 years.

A year one finance student will immediately recognise that money earned today is more valuable than money earned tomorrow. Because of this, the SGS provides a slightly better deal than the SSB.

Furthermore, you can buy as much SGS as the government issues, while the SSB has a limit of $100,000 per person.

Con:

If we intend to buy the SGS and hold it till maturity, we will face no risk of not getting back our initial principle sum invested. However, if we intend to buy and sell the SGS on the secondary market, there are some events that would cause our bond to lose some value. For example, if interest rates increase, bond prices would normally go down.

SSB on the other hand guarantees full repayment of the initial value that you invested in with accrued interest, regardless of market movement.

SGS conclusion

If we are looking for liquidity, the SSB will definitely be the investment vehicle of choice. However, if we would like to enjoy a fixed interest rate of 2.78% per annum and intend to hold the SGS till its 10-year maturity, then the SGS would be preferred.

ABF Singapore Bond Fund

There is a bond fund that consists of highly rated bonds which has the best ratings globally. Although this index is a bond fund, there is no maturity date unlike the SSB or SGS. That is because whenever a bond matures, the portfolio manager will use the proceeds to make another purchase into a similar bond. In other words, the bond fund simply rolls the principle over and over again.

Some of the bonds in this fund consist of SGS, SP PowerAssets Ltd, Temasek Financial I Ltd, Land Transport Authority, PSA Corporation Ltd and Housing Development Board. As a Singaporean, we would know of these common names and probably trust in their ability to repay back the money that they have borrowed.

Pros and cons of ABF SG Bond Fund

SSB ABF
Min. Invest Required $500 $115 + Transection Cost
Liquidity High High
Net Present Value Lower Higher
Investment Limit $100,000 No limit
Risk Risk-Free Low

 

Pros and cons of SSB VS ABF SG Bond Fund

Pros:

The minimum investment amount can be as low as $115 (lot of 100 x $1.15 – intraday as of 27 Oct 2015), though one still has to bear in mind the transection cost incurred. Investing in such high quality bonds would allow Singaporeans to earn higher interest to help them generate a better return to combat inflation.

Cons:

Since there is no maturity, we will always face the risk that we might make losses if the market acts against the bonds that the ABF is holding. No maturity means that the only way to get back the investment would be to sell off our stakes. In the process of doing that, we may potentially realize the losses too especially if the market isn’t good. Thus this bond investment does carry with it some market risk.

SSB vs. SGS vs. ABF SG Bond Fund

As long as we have intentions for our invested money to be liquid and guaranteed, always choose the SSB.

The SGS and ABF SG Bond Fund could be alternative worth considering if we do not mind some exposure to market risk, or if we would like to invest beyond the $100,000 limit set on the SSB.

Read Also: How To Buy The Singapore Savings Bonds

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