This article was first published on 11 May 2020 and updated with the latest bond issue details.
The Singapore Savings Bonds (SSBs) are a special type of Singapore Government Securities (SGS), which also includes SGS bonds and treasury bills (T-bills). Unlike the SGS bonds and T-bills, SSBs provides investors the flexibility to withdraw their investments at any point and without any penalties.
Due to its superior benefits (or potentially lower “risks”), SSBs provide an interest rates that are typically lower than regular 10-year SGS bonds. Moreover, there is a special step-up interest rate feature on the SSB, paying us a higher interest return the longer we hold on to the SSB. The maximum tenure of the SSB is 10 years.
During a market downturn, such as the one brought upon by the COVID-19 pandemic, holding bond investments can be handy as the principal and interest payments are guaranteed. In this article, we look at some pros and cons of investing in the SSB this year.
Pro # 1 One Of The Safest Investments
While bonds may be perceived to be safer investments than stocks, properties or alternative investments, especially during a market crash, they are not completely immune to risks.
The current COVID-19 pandemic has affected almost every company’s operations in one way or another. Even if the company hasn’t been financially impacted, it does not mean that it will continue to remain immune to the imminent recession we face this year, which could be the worst since the Great Depression in 1930s.
This makes bonds issued by any company riskier, regardless of their current financial standing. While this may apply to the SSB, it is backed by the Singapore government, which holds the strongest “triple-A” rating from international credit rating agencies.
If we are looking for a liquid investment or want the bulk of your emergency funds to continue earning an interest return, the SSB offers superior rates than our bank accounts and without any volatility.
Pro # 2 Greater Cash Flow Concerns
As we grapple with an economy in recession and remain uncertain of its full impacts on our finances and job prospects, ploughing funds into the stock market can be daunting.
This is especially so if we run into unpredictable financial difficulties and have to cash out our investments in a few months. If we do so, we may not be able to ride out the short-term volatility and may suffer losing a significant chunk of our investments.
By investing in the SSB, we do not risk the principal and even if we cash out early, we are assured to receive the interest returns on a pro-rated basis.
Once you are more confident or have built other financial buffers, you can always redeem your SSB and invest the funds elsewhere.
Pro # 3 Make Your Money Work Harder By Investing Via The Supplementary Retirement Scheme (SRS)
During a market crash, we want to be able to stretch our dollars as far as we can. By investing in the SSB through our Supplementary Retirement Scheme, we are able to earn dollar-for-dollar tax relief on up to $15,300 each year, on top of enjoying other benefits provided by the SSB investment.
The impacts of COVID-19 may last for longer than we think, and being able to reduce our income tax, while continuing to put away money for our retirement in our SRS accounts can be helpful.
Cons Of Investing In SSB: It Pays A Low Interest Return
In return for enjoying such a safe investment option, we receive a return that some may deem low. The current SSB issue for August 2020 is paying an interest return of just 0.24% in the first and second year, and even if we held the SSB to the full 10-year period, we would have earned 0.88% per year on average.
The Latest SSB (August 2020):
If we have an investment horizon of 10 years or more, think that the global economy will recover over the longer term and have the stomach for higher risks in the short-term, investing in stocks and other investments can potentially provide significantly higher returns.
The evidence behind this is that, given enough time, the markets always recover from recessions and crashes. In the chart below, we can see that the S&P 500, comprising close to 500 of the largest and most liquid companies in the US has been on an upward trend over close to 100 years.
Source: Yahoo! Finance
Consider Your Risk Appetite And Ability To Take On Risk Before Investing
The SSB has many other pros and cons that may not be specific to the current COVID-19 situation, and you can read these SSB-related articles on DollarsAndSense.
However, when choosing to invest your money in the current market environment, you have to understand the risks associated with your decisions as well as your possible requirement to dip into your investments in case you become impacted by the recession headed our way.
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