Singapore Savings Bonds: A great investment no one knows about

When it comes to investments, everyone wants the same thing - zero risk, high double-digit returns, and full liquidity - which is like saying I'm looking for a magical unicorn. But what if I were to tell you that there is something that comes close to this ideal, yet only a few people know about it. In fact, this investment is so good that you are limited in the amount of money in which you can invest.

Sound too good to be true? Well, here are the details and you decide for yourself:

Singapore Savings Bond features

Why are they called bonds?

Unlike equities (stocks), in which an investor would own a share of the company (and its potential profits), bonds are where the investor lends money to the company, and the company pays interest to borrow that money for a period of time. When the loan ends (matures), the original amount invested gets returned.

For government bonds, the borrower is the government and because the risk of default is extremely low, these bonds typically receive smaller interest rates than corporate bonds. The money a government borrows is often used to pay for public expenditures, such as infrastructure. But because of its unique liquidity feature, the Singapore Savings Bond behaves more like a fixed deposit and less like a traditional bond.

In a traditional bond, the bond value fluctuates as market interest rates change, and your principal must be invested for a fixed period of time, typically 1 to 30 years. Though unlike a fixed deposit, with the SSB, you can withdraw your money at any time without penalty.

Why don't people know about them?

Bonds are not as "exciting" as stocks since their value does not fluctuate much. For SSBs, their value doesn't change at all. With stocks, you might have the potential for capital appreciation (an increase in value) of the shares, but there is also no guarantee of receiving dividend payments or your original investment, as the value can just as easily decrease.

No sales commission also means no advertising or hard selling. Because these investments don't offer sales commissions, financial institutions are not incentivised to mention their importance or advantages to investors.

As a relatively new investment option, not many people have heard of SSBs. The Savings Bonds programme was only introduced in September 2015, with its first issue in October 2015.

A common misconception for SSBs is that you must invest for 10 years. This is false, as 10 years is the maximum, not the minimum time you can invest. You can withdraw some or all of the money invested with interest, in any given month, without penalty.

Another misconception is regarding the use of the term "bond". Unlike traditional bonds, the SSB is always redeemed at par (face) value regardless of interest rate movements, and the interest rate schedule is locked in upon issuance.

Why I recommend SSBs

They're specially made for Singaporeans. Did you know that an American investor cannot easily invest in SSBs (they are not allowed to open certain trading accounts in Singapore)? You can think of SSBs as special investments meant for Singaporeans to encourage them to save more.

1. They add some diversity to an investment portfolio.

2. Because of their flexibility, they can be redeemed at any time. This means they can be suitable for an emergency fund.

3. They earn higher interest than banks, and having lived through the last seven years of ZIRP (zero interest-rate policy), this is a blessing.

4. With a low minimum deposit requirement of $500, you don't have to be a high net-worth client to buy them. The SSB minimum is much lower than the minimum required for other securities and even certain bank accounts, which means more people can invest in them.

5. Although the initial interest rates on SSBs are lower than the promotional fixed deposit rates offered by banks (e.g., 1.5 per cent, as a Chinese New Year promotional rate), these promotions are typically only available to bank customers that have high balances and require a very large sum to be invested in the fixed deposit.

6. You'll never lose money, which is good for those who don't have the stomach for the sometimes turbulent stock market. They are guaranteed so there is virtually no risk, and no commission to eat away at your earnings.

7. Lastly, they are a great way to teach children about the importance of saving and how compounding will grow savings over time. If your child is lucky enough to get $500 from ang bao money, this is a good opportunity to deposit it into a SSB. You and your child can then watch the money grow with time.

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