If you’ve only got a minute:
- Low-risk investments typically offer safe and reliable returns.
- Singapore Government Securities, fixed deposits and savings plans are examples of low-risk investment vehicles.
- Diversification across multiple products and asset classes can reduce the level of risk you take.
Rising interest rates, coupled with an inflationary environment are pushing investors to seek higher yields to safeguard the value of their money. Higher inflation not only drives up costs of living, cash sitting idle in low interest bank accounts is effectively losing its value over time too.
Cash alternative investments are typically low risk and offer a slightly higher interest rate compared to a plain vanilla bank savings account. The returns however, are relatively lower than higher risk investment products (such as equities and funds) to grow your money more effectively over the long term. Still, there is a place for cash alternative investments in everyone’s portfolio.
For those who want to move their spare cash into cash alternative investments, there are 2 key factors to consider – 1) liquidity and 2) risk.
You would want to ensure that the liquidity of the investment fits your needs in case you need to gain quick access to your cash for short-term needs. As such investment options offer low risk levels, the returns of these investments are typically from 2% to 3% per annum (pa).
How can consumers then, make their money work harder by taking advantage of the higher yields offered by low-risk investments/cash alternative products presently?
Here are 8 cash alternative products you can consider.
1. Singapore Government Treasury Bills (T-bills)
Singapore is one of a handful of countries that has a Triple-A credit rating, which indicates that debt issued by the government is of a high level of creditworthiness and it comes with a strong capacity to repay investors. The Singapore government issues short-term bonds called T-bills at both 6-month and 1-year durations. These are the shortest tenured Singapore Government Securities (SGS) available.
The 6-month T-bill issued on 15th September 2022 reached a high 3.32% cut-off yield, a significant increase from the previous T-bills issued on 6th September 2022 and 23rd August 2022, with cut off yields at 2.99% and 2.98% respectively. Unlike SSBs and SGS bonds, T-bills are zero-coupon bonds that do not pay out interest.
Instead, T-bills are issued at a discount to their face value – the price of the T-Bill is lower than the principal which the investor receives at maturity. For example, if you invest S$10,000 in a 1-year T-bill, you will receive the “interest” at the start (S$299 discount based on 2.99% p.a.) and eventually have your S$10,000 back at maturity. Put simply, you only need to pay S$9,701 upfront.
The minimum amount to invest in this product is $1,000 with an admin fee of $2. Do note that 1-year T-Bills offer higher yields as compared to 6-month T-Bills. Why? Because there is more risk priced into the security due to the increased duration of the tenure. Lastly, T-Bills are useful for investors who want to invest within a very short term – up to a year – without taking much risk.
While you can sell T-bills on the secondary market, bear in mind that the price may rise or fall before maturity.
2. Singapore Government Bonds
There are also longer-term bonds that fall under Singapore Government Securities (SGS) – ranging from 2 to 50 Years. They pay on a fixed semi-annual coupon - every 6 months - starting from the month of issue. SGS bonds pay out regular interest payments (coupons) on the amount you invest in half-yearly intervals throughout the bond tenure.
For example, if you had bought S$10,000 worth of the 50-year Green SGS bond with a coupon rate of 3% p.a., you would be getting S$300 in the form of two interest payments of S$150 each, every year. These payments will be made every half yearly until the bond matures (in this case 50 years – the longer you hold the bond, the more interest you will receive!).
If you decide to sell it in the secondary market, bear in mind that the bond price may rise or fall before maturity.
3. Singapore Savings Bonds
Singapore Savings Bonds (SSB) are another safe and stable product offered to individuals by the government. The investment period goes up to 10 years. Launched in October 2015, SSBs are targeted at retail investors who want higher interest than bank deposits but are cautious of putting their hard-earned savings at risk.
The bonds pay a step-up interest rate each year, up to the 10th year. In other words, the bonds have a lower yield earlier in its tenure, but progressively pay a higher interest rate or coupon until the bond’s maturity date. This means that the longer you save, the higher the return.
With SSBs, bondholders are guaranteed to receive their full principal back in any month, without any capital loss or penalty. This means that should you need to redeem your bonds before the 10-year maturity period, you won’t be penalised for cashing in early.
If you decide to exit the investment before the 10-year period, you will receive a lower average return per year. The easiest way to calculate your projected returns from investing in an SSB is to use the calculator in the My Savings Bonds portal. You will also be able to check how your returns vary with early redemptions.
The minimum investment for this particular security is $500, and the maximum individual holding is $200,000. There is also a $2 transaction fee to purchase and exit this product.
4. Fixed Deposits (FDs)
A fixed deposit account pays a fixed amount of interest on a lump sum of money over a specified period. FDs earn higher interest than leaving cash in your savings account.
Many banks offer FD schemes at promotional rates. With interest rates increasing, local banks are offering attractive FD rates of around 3% p.a for a 12-month tenor.
Do note that FDs allow for immediate withdrawals but premature withdrawals typically incur a fee and may result in ineligibility for any accrued interest. DBS is currently offering an 8-month fixed deposit rate of 2.6% p.a (minimum S$20,000 capped at $1 million). This is a promotional rate by invite only.
Deposits with full banks and finance companies in Singapore are covered under the Singapore Deposit Insurance Scheme (SDIC). The SDIC insures the deposits you have with banks, finance companies, and insurance policies with insurance companies. Under SDIC, your deposits per bank are insured up to $75,000.
5. Higher interest savings account
With a higher interest savings account, you can potentially enjoy higher interest rates by fulfilling certain criteria. For instance, the DBS Multiplier Account offers up to 4.1% interest pa when the account holder credits his or her salary into the account, meets a minimum credit card spend, has a regular spend on insurance policy or investments, and/or has a home loan with DBS.
The amount of interest you earn also depends on the total transaction amount you have made with the bank. If utilised wisely, you might be able to earn a significant amount of interest per year on your savings alone!
6. Savings Plans
Savings plans may be bundled with or without an insurance component.
Insurance savings plans are offered by insurers and they can be sold via banking channels. They may appear similar to fixed deposits in that you are required to lock up your monies over a fixed period but the principal sum may not be protected if you choose to surrender the policy prematurely. the money will be put into savings and investments funds. A typical savings plan is the Manulife SmartWealth (II) which invests in funds of your choice and has a policy duration of 3, 5 or 10 years. Additionally, insurance savings plans may offer a lumpsum death benefit if something untoward happens to you.
For a bank savings plan (that is non-insurance linked), you may consider the POSB SAYE Account. It has a fixed deposit feature for the first 2 years that can generate a 2% annual interest on your savings.
For savings plans, consumers should consider the lock-up period, early withdrawal penalties, fees involved and whether the principal and returns are guaranteed.
7. Cash management accounts
Cash management accounts are typically offered by brokerages – these accounts invest in cash funds, money market funds (MMF) and short-duration bond funds.
The net yields are between 1.5% and 3.5% and returns are projected and not guaranteed. These accounts provide liquidity and are generally low risk. However, they are not backed by the Singapore government or SDIC.
8. Money market funds
Money market funds invest in stable, highly liquid, short-term instruments including cash equivalent investments, T-bills, and bonds that are close to maturity.
The safety-first characteristic makes money market funds and short duration funds an option for those looking to earn some yields on their surplus funds. However, these are still mutual funds so while they are generally considered safer instruments, your capital is not guaranteed.
Short duration funds do come with slightly more risk than money market fund, and investors can expect a slightly higher potential return than money market funds.
In summary
The above investment options can give you relatively safe and reliable returns. Nonetheless, it is important to do your due diligence before investing in any investment product including in seemingly low-risk instruments as they have implications on whether your principal is protected. Remember to always weigh the consequences before investing in any product.
It is important to understand that diversification is key so do not put all your eggs in one basket or simply invest your savings entirely in cash alternative products. To mitigate inflation and longevity risks, spread your investments across a variety of asset classes to ride out volatility on portfolios and enjoy long-term gains for sustainable financial wellness.
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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