What is Singapore Savings Bonds (SSB) and its benefits?
Looking for a long-term investment opportunity that carries little risk and provides guaranteed returns? The Singapore government has the solution. First announced in May 2015, the Monetary Authority of Singapore (MAS) will launch a new form of government bond known as The Singapore Savings Bonds (SSB) that would allow Singaporeans young and old to have an avenue for long-term investment to kick-start or diversify their investment portfolios.
Features of Singapore Savings Bonds (SSB)
The main features of the SSB includes the chance to invest in a government backed savings bond who had maintained their triple A credit rating consistently even though the recession years. Moreover, every potential retail investor has the ability to obtain their investment amount in full with no capital losses, providing a safe, principal-guaranteed investment instrument.
Another defining feature of the SSB would be the “step-up” accrued interest over a 10-year period. This encourages potential retail investors to seek a long-term alternative to the fixed deposits offered by banks that are usually hampered by its low interest rates and inflexible structure.
The illustrative figure provided demonstrates that an initial investment of SGD1000 would result in an average of 0.9% investment return, amounting to SGD9. The subsequent year would see an increase in the average investment return to 1.2%, amounting to SGD15 in total. If held through to full maturity of 10 years, the total average investment returns would usually be between 2% to 3%.
Even though the numerical values and percentages are only for illustrative purposes, the total average interest for the full 10 years would match that of a 10-year Singapore Government Securities (SGS) investment returns that has generally been between 2% to 3%.
Furthermore, the investments in SSB have a flexible redemption structure where retail investors need not decide on the investment period and would be able to get back their funds with no minimum period required.
How Would This Benefit the Layman?
Most people would be excited by the proposition of investing in any form of investment instruments and have guaranteed returns. For the older generation, the SSB exists as a safe, flexible way to have enough money for retirement without having to be subjected to low interest rates offered by banks for both ordinary savings account holder or fixed deposits. Even during emergencies, investors would have quick access to their cash when they need it.
For the younger generation, the SSB provides an opportunity to diversify the risks that exists in their portfolio by allocating a portion to the Savings Bond. In any chance where the investor decides to change their investment strategy, one could always cash back on the investment at no penalty to invest it elsewhere. The SSB would also provide a good stepping stone into the world of investment with a low initial investment amount of just SGD 500 and stands as a balance for riskier portfolios with higher-yielding asset instruments such as stocks.
How Would This Compare With What Commercial Banks Offer?
Commercial banks in Singapore currently offer short to medium term saving bonds in the form of fixed deposits that would yield a conservative interest and have features that would pale in comparison to the SSB. First and foremost, most commercial banks would only have returns based on the amount that is being allocated for the fixed deposits as well as the total tenor period of up to 36 months. However, the returns on investments are usually between 0.05% to around 1.95%.
The highest at 1.95% at the time of this article is offered by CIMB Bank for a period of 24 months that requires an initial deposit of SGD 100,000 and above. Terms and conditions do state that defaulting on the tenure period would result in the investor losing part of their interest returns or their principal investment amount. Such practice is a commonplace amongst banks and it usually attracts the upper class demographics that have spare cash and wouldn’t have the sudden need to withdraw at any time during the tenure period.
Structured deposits are another alternative that commercial banks offer but carry higher risks than fixed deposits. Similarly to fixed deposits, there is the problem of liquidity of assets where investments have to be held for a period of time and the early withdrawal would affect the returns or the principal amount. Moreover, there are higher risks involved due to the nature of underlying financial instruments such as equities, interest rates and market indices or a combination of those that would provide variable returns.
As such, the SSB does offer a safer and better alternative to the different avenues of investment that the banks have to offer with its stated features and benefits over the long run. Also, the fact that the SSB would only be issuing a maximum of SGD 4 billion of bonds this year with only SGD 50,000 per issue and a maximum of SGD 100,000, the SSB would exists as a complementary investment option due to the cap and the limited amount of interest returns at the end of 10 years. Therefore, if you do have much more money to invest, you could always consider the other options provided by the banks or alternatively turn to SGS for the older scheme.
How Would You Be Able to Apply?
For the potential investors who wish to apply and redeem coupons for the Savings Bond, you would be required to satisfy a few requirements.
- Have a bank account with any one of the participating banks (DBS/POSB, OCBC and UOB) and an ATM card.
- You would need to have an individual Central Depository Securities (CDP) account with the Direct Crediting Service (DCS) activated.
- Application and redemption of bonds would be done through either the ATM or Internet Banking (Applicable only for DBS/POSB account holder.
- Also note that there would be a SGD 2 application and redemption request that is non-refundable.
Now that you are informed about the features and benefits of SSB and the stark advantages of applying for the bonds managed by the Singapore Government through Monetary Authority of Singapore, the commercial banks operating in Singapore would experience a reduction in people applying for fixed or structured deposits. In our next article, we will discuss about the reserve system that all banks adopt, how the SSB is actually competing with the existing banks for capital, how the overall situation would affect the loans offered by them to the people; especially home loans which are slatted to experience the greatest increase in interest rates.
Source: The Straits Times
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