Guaranteed returns sound attractive, especially when markets feel uncertain. After all, many investors like the idea of earning passive income without worrying too much about volatility.
But when interest rates fall, “safe” investments can become less rewarding than they first appear.
This does not mean guaranteed-return products suddenly become bad investments. Products such as Singapore Savings Bonds (SSBs), fixed deposits and cash management accounts still serve an important purpose, particularly for investors prioritising capital preservation or liquidity.
The issue is that lower interest rates change the trade-offs. Returns fall, but fees that are associated with these products usually do not. Inflation also becomes harder to ignore when interest rates are low.
It is also important to remember that not all guarantees carry the same level of certainty. A guarantee is only as reliable as the institution backing it. Investing through the Singapore Government via instruments such as SSBs carries a very different level of risk compared to lending money to an individual, even one you trust.
When Returns Fall, Fees Matter More
Even low-cost products like SSBs become less attractive when interest rates decline because fixed costs start taking up a larger share of returns. For example, every SSB application comes with a $2 transaction fee. On its own, this sounds negligible. But for investors applying regularly, the costs add up over time.
Suppose an investor puts $5,000 into SSBs every month over two years, eventually investing $120,000. Assuming a simple interest rate of 2% per annum, the investor would earn about $4,800 in interest while paying $24 in transaction fees. If rates fall to 1% per annum, total interest earned drops to about $2,400 while fees remain unchanged at $24. In other words, the fees now take up a bigger share of the returns earned.
The same issue becomes more noticeable with products that charge ongoing management fees, such as cash management accounts offered through robo-advisory platforms.
For example, a 0.15% annual fee on a $100,000 portfolio works out to $150 a year. If the portfolio yields 1.5%, the investor earns $1,500 and pays about 10% of returns in fees. But if yields fall to 0.8%, returns drop to $800 while the fee stays the same. In that scenario, more than 18% of returns go towards fees.
Guaranteed Returns Do Not Protect Against Inflation
Another issue investors sometimes overlook is inflation. Even if returns are guaranteed, purchasing power is not. For example, earning 1% per annum may feel safe, but if inflation is running at 2% or 3%, the investor is effectively losing purchasing power over time.
There is also the issue of opportunity cost. Investors who keep too much money in low-yield guaranteed products during periods of low interest rates may miss out on stronger long-term returns elsewhere.
Of course, higher-return assets come with greater risk and volatility. Not every investor should aggressively chase returns. But staying overly conservative for too long may preserve capital while making it harder to grow wealth meaningfully over time.
Safety, At A Cost
Guaranteed-return products still play an important role in many portfolios, especially for investors prioritising stability, liquidity or short-term financial goals. But in low-interest-rate environments, investors need to look beyond headline returns. When yields fall, fees and inflation take up a larger share of returns, while the opportunity cost of staying overly conservative becomes more significant.
Ultimately, the question is not whether guaranteed-return products are “good” or “bad”, but whether the returns remain worthwhile after accounting for fees, inflation, and available alternatives.
Editor’s Note: Actual returns for the SSB would be lower as investments are made progressively and SSBs use a step-up interest structure. Cash management accounts are investment products and do not provide guaranteed returns.
Read Also: Why Guaranteed Returns On Your Investments Aren’t Always Guaranteed
Photo Credit: iStock/Sashkinw
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