We have previously published an article in November about our preference for Singapore Savings Bond over Fixed Deposit. The reason being that for most people, fixed deposit is a tool where they placed a portion of their unused cash at to fetch higher interest rates.
However, we at ITP feels that if those are cash that you would not be using, cash that you are prepared to set aside for a fixed period of time (eg. 10 months, 1 year or 2 years), you should be looking at the Singapore Savings Bond instead of Fixed Deposit.
According to moneysmart, the fixed deposit rates in Singapore range between 1.5% to 1.9%. What is Fixed Deposit?
Basically, it is an account with a financial institution, more often than not a bank. You have to placed a sum of money in this account for a fixed period of time. For this time period, you will receive interest rates that is higher than a normal savings account. After which, you will be able to get your money back together with the higher interest. However, you can choose to withdraw your monies prematurely, but you will lose the interest accumulated.
The reason for the low interest is that you are guaranteed to get your initial capital back. Therefore, your risk is very low. Especially in Singapore where the banks are very stable and the risk of default is very low.
However, that being said, the returns are so low, they do not beat inflation.
The Singapore Savings Bond provide better advantages as compared to Fixed Deposits which is why we at ITP prefers Saving Bonds over Fixed Deposit.
In January’s issue of the Singapore Savings Bond, the interest rates provided are better than the December issue.
Singapore Savings Bonds can be subscribed by investors via the 3 local banks at multiples of $500 with a maximum investment of $100,000. Interest are paid every 6 months
Here is my list of pros and cons of the Singapore Saving Bonds as compared to fixed deposits as to why we at ITP prefers Saving Bonds over Fixed Deposit.
Singapore Saving Bond Interest Rate Pros
- The bond is backed by an AAA rated Singapore government. The probability that this AAA rated government default on the bond is very low. Definitely even lower than banks.
- Interest rates are generally higher than fixed deposits.
- Investors can decide the time period that they want to hold the bond for.
- Investors can hold onto the bond for short period of time. Unlike fixed deposits, bondholders can terminate prematurely and still receive interest. Albeit, a pro-rated amount.
Singapore Saving Bond Interest Rate Cons
- Redemption takes places once a month. Therefore, if you need cash the next day, you will find that it is faster to cash out fixed deposits.
- This bond cannot be traded on any secondary exchange, which deprives bond traders from making any profit from bond price movements.
- On average, the 10 year return for Singapore Savings Bonds does not beat inflation, therefore, investing for the long term using Singapore Savings Bonds does not sound enticing.
We can see that essentially, Singapore Savings Bonds works like fixed deposit. Person A brings out excess cash and commits it to an entity (the Singapore Government) for a period of time and receives interest.
The difference is that the Singapore Savings Bonds has a backing larger than any banks and interest is guaranteed.
Unlike other government bonds who provides really low interest (except Temasek bonds which is already over-subscribed, so no chance of buying it anymore), Singapore Savings Bonds can be a good substitute for fixed deposits.
With the introduction of the Singapore Savings Bonds, if I have excess cash that I would like to put aside for a year, monies that I do not want to risk in the equity markets, Singapore Savings Bonds is where I go to. It provides me with higher interest, stability, safety and liquidity.
However, for the long term, the returns are too mediocre. For the long term, equities makes much more sense than bonds. Some bondholders will disagree, locking themselves into high yield bonds and junk bonds that provide them with “steady” returns over the years. However, that is another topic for another day; bond investment is not safer than stocks. Bonds are equally safe as compared to stocks and both bonds and stocks are only as safe as the issuer.
To beat inflation, one must invest, however, handing over to professionals can be very risky as ignorance is risk. One must be educated in money so that they do not suffer unnecessary losses.
Investment in Singapore for Beginners
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