Singapore Savings Bonds occupy a valuable middle position between financial options that can offer higher returns with higher attendant risk - like shares, currencies and commodities - and the simple expedient of leaving money in a savings or term-deposit account in a bank. The first option would appeal to market-savvy investors who go in not only with knowledge of a particular sector but also with full awareness of the calculated risks they are willing to bear.
What the special type of Singapore Government Securities offers is the assurance of being principal-guaranteed by the State - a source of great comfort to the man in the street, particularly older investors, who cannot afford to see a portion of his life savings go down the drain. It is here that the returns become attractive. The reward for holding a bond until maturity will match the average 10-year Singapore Government Securities yield, which has been between 2 and 3 per cent.
Indeed, combined with this advantage is the flexibility the product offers. A bondholder can get his money back in any month without having to suffer a penalty. However, the paying of interest on a step-up basis will encourage retail investors to hold the bond for 10 years. This would fulfil the objective of a savings scheme.
The bonds provide a good opportunity to enhance the financial literacy of ordinary Singaporeans. In the same way MediShield Life is being unbundled for heartlanders, they should be trained to ask pertinent questions - for example, if interest payments will be compounded.
A complete aversion to risk would undermine the investment climate. At the other end of the scale is the psychological weakness of falling prey to the strong, and often illusory, allure of quick profits. Older Singaporeans nearing retirement would be particularly susceptible to this temptation in a last-ditch attempt to maximise savings to prepare better for their golden years.
They are the people who can least afford to make costly mistakes. They would be served by the presence of financial instruments that counsel prudence, provide the security of government guarantees and yet offer a reasonable rate of interest.
From a broader perspective, there is a need to avoid over-reliance on financial instruments that put pressure on interest rates at a time when economic growth is slowing. But the bond issuance numbers - between $2 billion and $4 billion is expected this year - are hardly a threat, given the overall size of bank deposits. For conservative and novice investors who expect no urgent needs for their funds (investments can be redeemed only monthly), the new bonds offer effectively no risk, affordability and flexibility. That combination is not easily matched.