Singapore Savings Bonds (SSB) have been issued since October 2015. If you haven’t already heard about it, the SSB represent an exciting and highly viable option for retail investors. But what exactly is the SSB? How does it perform compared to similar asset classes? And perhaps most interestingly, how much should you invest to ensure that you’ll never lose money?
What is the SSB?
The SSB is a fixed income instrument with a principal and interest that is backed by the full faith and credit of the Singapore Government. Other than being virtually risk-free (Singapore’s credit rating is AAA), the SSB has a low minimum investment of $500 (up to a maximum investment of $50,000 in a single issue and a cap of $100,000 across all issues). While SGS have a 10 year term, investors can redeem their principal and accrued interest in any month before the bond matures, and their accounts will be credited at the start of the next month, resulting in little liquidity risk for the investor. Interest rates (see table below) are higher than those offered for typical deposit accounts, and interest is paid semi-annually.
Interest Rates for SSB Issued in January 2016 (SBJan16)
|Year from issue date||1||2||3||4||5||6||7||8||9||10|
|Average Return per Year (%)*||1.21||1.26||1.48||1.76||1.99||2.15||2.27||2.37||2.47||2.58|
*At the end of each year, on a compound basis
Compared to other fixed-income instruments, SGS provides a highly liquid and risk-free investment for your portfolio.
These are securities with a fixed coupon interest and various maturities issued by corporations. Corporate bonds usually have a high minimum investment ($250,000) and are only open for purchase by accredited investors. These are investors who have a $2m net asset value, or whose income exceeded $300,000 in the preceding 12 months. Corporate bonds usually have higher yields (3.33%; A-rated) than government bonds but carry a higher risk of default.
Fixed deposits offer slightly higher interest rates (0.05% to 0.55%) than normal savings accounts. However, it does have minimum lock-in periods which means that you could lose all interest earned if you withdraw your funds within this period.
Mutual Funds and Unit Trusts
These offer interest rates of about 3%. However, these investments are riskier than the SSB and interest earned can be diluted by annual management fees.
Compared to the SSB, fixed deposits and T-bills have longer lock-in periods and offer lower interest rates. Over a 10-year period, the SSB can potentially outperform mutual funds or unit trusts if you consider that the SSB has no annual management fees to dilute the interest earned, and no price risk for early redemption.
While corporate bonds offer higher yields than the SSB, the higher risk associated with the product, as well as the high barrier to entry can be prohibitive for the average retail investor.
In essence, the SSB has many advantages compared to similar products due to its virtually risk-free nature and comparable interest rates.
Should I invest in the SSB?
As with any form of investment, the answer depends on your risk appetite and the returns you’re expecting.
If you have a high appetite for risk, there are other investments that offer higher returns such as corporate bonds. However, the SSB also has a place in higher risk portfolios as a means of risk diversification.
If you’re considering relatively low-risk investments such as fixed deposits, then the SSB should be a strong consideration as it offers higher returns while also offering a flexible commitment. This means that it makes sense to put a portion of your personal savings into the SSB as it offers higher interest rates than a fixed deposit or normal savings account. Moreover, you can still withdraw your funds in the event of an emergency.
How do I buy the SSB?
Now that you’re interested in buying, just how do you go about doing so?
The first step is to open a savings account with any one of 3 local banks: DBS/POSB, UOB or OCBC. Next, you’ll need to open a Central Depository (CDP) Securities account and activate a Direct Crediting Service which you can do through the SGX CDP website. Applications for the SSB can then be done through ATMs or internet banking.
As mentioned earlier, the minimum investment amount is $500, with increasing multiples of $500 up to a maximum of $50,000 per issue. In the event that the issue is over-subscribed, a cut-off investment amount will be imposed. This means that any amount invested over the cut-off amount will be returned to your bank account.
When applying for the SSB, a non-refundable transaction fee of $2 will be charged. Another $2 transaction fee will be charged if you choose to redeem your investment.
What’s the minimum I should invest?
Now that you’ve read all about the SSB, how it compares to other similar assets, as well as how to buy the SSB, how much should you invest? One approach to this is that you should be looking to invest an amount that ensures that you’ll never lose money.
Even though the principal amount of the SSB is guaranteed, remember that you have to pay $2 when you apply, and $2 when you redeem your principal. Hence, the minimum sum you should invest would be one that generates enough interest in one month to cover this loss.
Based on the Jan 2016 SSB 1st year interest rate of 1.21% you can use the following formula where X is the minimum sum you should invest:
X = 4 * 12 / 0.0121
X = $3,966.94 (or $4,000)
Basically, if you invest $4,000 now and redeem your principal after one month, the interest you earn in that month ($4,000 * 0.0121 / 12 = $4.03) is enough to cover your transaction fees.
This means you’ll never lose money, and the only risk you’ll face is the time taken for the principal to be transferred to your account.
But if you choose to hold the SSB to its 10-year maturity, you’ll be earning $1,053 in total interest on your $4,000 investment.
Interest Earned for SSB Issued in January 2016 (SBJan16)
|Year from issue date||1||2||3||4||5||6||7||8||9||10||Total Interest Earned|
|Interest Earned ($)||48.4||52.4||76.8||105.2||120||120||122.8||126.4||133.6||147.6||1,053|
Essentially, the SSB is a great retail investment option if you have any spare cash in your savings account. It is relatively risk-free, has no minimum lock-in period and offers a higher interest rate than a savings account or fixed deposit.