Anticipation is growing for the October launch of Government-backed Singapore Savings Bonds. But few realise that retail investors keen on bonds have had other options before this. We look at two of them: bond funds and retail corporate bonds traded on the Singapore Exchange (SGX).
Many investors are worried that equities have risen too high and are looking for somewhere safe to temporarily park their cash - and earn a decent return at the same time. They can meet both of these needs by investing in bonds.
Until recently, however, many have felt that only wealthier and more sophisticated investors use such instruments.
Singapore Savings Bonds (SSBs), requiring just $500 to get started, are set to change that.
But two other bond instruments have long been available to retail investors and may be worth considering even after the launch of SSBs: bond funds and corporate bonds.
Bond funds are funds that invest in bonds. Investors buy a certain number of units, which rise or fall in value, depending on the fund's showing. They are charged a management fee. Some funds pay investors periodic returns.
Local investors normally invest in funds through banks and online unit trust platforms. There are 217 fixed income funds on offer at Fundsupermart.com.
Only seven corporate bond options are available to retail investors at present. They are sold on the SGX and most are transacted in lot sizes of 1,000 for about $1,000.
A key reason so few corporate bonds are available to investors is that companies have to issue prospectuses, which are costly to produce, for their bonds to be traded on the SGX.
Also, most companies issuing corporate bonds are able to meet their funding needs without selling bonds on the SGX. They sell these bonds to accredited investors, mainly wealthy people, and institutional investors, usually in amounts of about $250,000.
Some readers have asked what the Government has been doing to make corporate bonds more accessible to the public.
Last September, the Monetary Authority of Singapore and SGX announced measures they were considering adopting to make corporate bonds more accessible to retail investors. One proposal was to allow firms which met certain criteria, including credit standards, to issue bonds to retail investors on the SGX without issuing prospectuses.
Another was to allow certain companies whose bonds had been issued and listed on the exchange for six months to issue new bonds of the same terms on the SGX.
For subsequent bond issues, prospectuses would not be required. However, the amount of bonds that can be issued would be reduced from the first issue.
It was also proposed that investors who had obtained the bonds of these eligible companies off the exchange be allowed to sell them on the SGX six months after the bonds were first issued.
The increased accessibility of bonds is good news for many investors. The regional head of Treasures Private Client and Treasures at DBS Bank, Mr Royce Teo, said having bonds in one's investment portfolio in addition to other asset classes reduces volatility of returns when the market falls.
"If markets take a turn, bonds can cushion the overall impact on the portfolio," he said.
Let us compare some characteristics of SSBs, bond funds and corporate bonds.
Bond funds and corporate bonds generally offer higher yields than SSBs for investments of the same tenor, noted Mr Terence Lin, regional research manager for bonds and portfolio management at iFast Financial, an online investment product distribution platform.
This is because of the higher credit quality of the Singapore Government compared with institutions that issue corporate bonds, he said.
For instance, a CapitaMall Trust bond maturing in 51/2 years' time is yielding 2.817 per cent.
The return is higher than those offered by Singapore Government Securities (SGS) of similar maturity. An SGS with about six years left yields 2.18 per cent a year. The yield of SGSs with shorter maturity periods is less than this.
As SSB yields are the same as average SGS yields in the month before issuance, this implies SSBs will likely yield less than the interest rates offered by bond funds and corporate bonds of the same tenor.
Retail corporate bonds currently traded on the exchange can also be considered relatively safe even though their credit quality may not be as high as the Government's, Mr Lin said. The companies that issued these bonds are generally blue-chip companies with sizeable assets, such as Singapore Airlines, or stable businesses, he said.
The returns of bond funds invested in bonds of high credit quality and short tenors are likely to be stable, he noted.
He said bond funds that invest in high credit quality and shorter-term bond instruments are relatively safer investments for now. This is because when the US Federal Reserve hikes interest rates, the returns of funds invested in longer-term bonds would be more negatively affected than funds invested in shorter-term ones, he explained.
You can diversify risk across a larger range of bonds through investing in bond funds. However, SSBs and corporate bonds provide greater specificity on how much your payout will be.
Bond funds invest in a large basket of bonds, noted Mr Bernard Chan, financial services director at Jaguar Organisation, which represents AXA Life Insurance Singapore. As a result, you reduce the risk of being badly affected if a single bond defaults, he said.
Corporate bonds are the most liquid of the three security types as they can be sold at current prices at any point of the day, Mr Lin said.
Bond fund investments are less liquid as the units normally trade at only one price for each day, he said. This price is retrospectively determined and is based on the bond fund's net asset value determined at a pre-designated point of time during the day.
So if you hear during the day that a bond fund's performance has turned south, you may give an immediate sell order, but these units will be sold at the single price for the day, Mr Lin pointed out.
TRANSACTION COSTS AND OTHER FEATURES
Only investments in bond funds incur management fees. They range from 0.3 to 0.5 per cent of the investment amount for bond funds investing in short tenor and high credit quality bonds, said Mr Lin.
Buying and redeeming bond fund units may come with a charge. The charge for buying such units can be as high as 5 per cent of one's investment in some cases. However, some platforms, such as Fundsupermart.com, do not impose such charges.