Eye on the Economy

Singapore Savings Bonds: Low-risk product for beginners

The Singapore Savings Bond will be another safe, low-cost option for mom-and-pop investors.

An investment that guarantees the amount you put in, pays you interest and allows you to withdraw your money any time without any penalty; this is about as risk-free as it gets.

And you need only $500 to get started.

This is the promise of the Singapore Savings Bonds (SSB), to be launched later this year.

The anticipation that greeted the announcement was palpable. A large group of Singaporeans who are planning for retirement have liquidity and are searching for investments that are able to deliver attractive returns.

But some of that initial excitement has died down despite the clear advantages of this capital-guaranteed product that pays a reasonable interest on only a modest outlay.

One reason could be that the cap on the amount that people can buy has yet to be announced and may not be very high.

A second factor is that the interest will be decent but unexciting as it is based on the coupon rates for 10-year Singapore government bonds. Assuming a $10,000 investment and a 2.4 per cent interest rate, this gives an average interest of $240 a year or $20 a month.

Step-up rates will apply to encourage investors to hold the bonds for 10 years. The initial rate will be lower than 2.4 per cent but the interest paid in the 10th year will be higher than 2.4 per cent. This translates, for example, to an initial interest rate of 0.9 per cent in the first year and 3.3 per cent in the 10th year.

On that basis, the interest earned in the first year will be $90. Since it is paid out in six-monthly intervals, the first two payments will work out to $45 each in the first year.

That is small beer. The question is whether Singaporeans have the patience to sit out the 10 years to enjoy the full benefits.

Still, at an average of 2.4 per cent a year, the SSB is undoubtedly more attractive than its closest comparison - fixed deposits - for which promotional rates are around 1.5 per cent.

But how popular the bond will end up being will also depend, to a large extent, on the cap.

If the cap is set fairly low, say at $10,000 per person, it will not be meaningful enough to attract those who are managing or building up a retirement portfolio of a few hundred thousand dollars.

A $10,000 investment in the SSB means an investor still has to fret about how to manage the rest of his nest egg.

The investor may end up parking $50,000 or $100,000 in a fixed deposit, even though the rate is lower, simply because it is less work to worry about managing it.

Of course, the downside to a fixed deposit is that withdrawing it early means forgoing the interest, whereas the SSB will still pay some interest.

If the cap is fixed at the $5,000 to $10,000 level, its appeal will lie with a segment of the population who have not been saving or investing. As a safe and easy-to-understand investment option, the SSB is suitable for this group.

OCBC Bank's vice-president of wealth management in Singapore, Mr Vasu Menon, said the product will appeal "to individuals with a limited pool of funds to invest... It will also appeal to conservative investors looking for a very safe way to grow their money".

Aberdeen Asset Management Asia's director of business development, Mr Nicholas Hadow, felt that the SSB could also appeal to "those approaching retirement, requiring certainty of income and a need to protect their capital".

For PwC's Asia Pacific & Singapore asset management leader Justin Ong, the SSB will offer "an additional option to create a more balanced investment portfolio for retirement".

However, less conservative investors may turn their noses up at the SSB for its low return, given the range of options in the market.

Real estate investment trusts (Reits) have taken off in a big way because they offer a regular payout every quarter.

Malaysian bank RHB, in a report out yesterday, projects the yield of various Reits this year.

Suntec Reit, for example, should offer around 4.5 per cent while CDL Hospitality Trusts, which includes hotels such as Copthorne King's Hotel, will deliver around 6.3 per cent - all more attractive yields than the SSB's.

Reits are tradeable, but if prices fall, investors who sell will be unable to fully recoup their capital.

Unit trusts, too, will still have their followers. Lion Global Investors' head of fixed income, Mr Phoon Chiong Tuck, pointed out that unit trusts work by pooling together funds.

In that way, investors, for the same amount, can invest in a diversified range of bonds rather than just in one bond. Unit trusts also offer investors the chance to benefit from foreign currency movements.

The drawback is the sales charge of around 3 per cent when buying into a unit trust fund. However, unit trust proponents say that if the fund is held for 10 years, the charge of 3 per cent spread out over the decade should not be a deterrent.

Investors are also looking forward to the retail bonds that Temasek Holdings will likely introduce. This will materialise in the not-too-distant future as a bonds framework - which could cover the Temasek bonds - is currently being ironed out.

In the broader scheme of things, the launch of SSB improves the lot of the mom-and-pop investors in terms of giving them more choices that are simple, safe and low-cost.

The investing landscape is improving, with the recent changes introduced by the Monetary Authority of Singapore's Financial Advisory Industry Review, which aims to sell commission-free basic insurance products. The Central Provident Fund Board is also lowering the costs of investing in unit trusts and investment-linked insurance products under the CPF Investment Scheme.

All these moves, including the introduction of the SSB, level the playing field for retail investors.

But with many investment choices out there and many investors searching for ever-better returns, there is no short-cut from doing one's homework to ensure a comfortable and financially stress-free retirement.