Did you know that you can actually lend money to the Singapore Government, and get paid in return, like how a bank or loan shark would?
One way to do it if you have spare cash is through the purchase of bonds from the Singapore Government, where they would raise funds to finance social or infrastructure projects.
The Singapore Savings Bonds (SSB) is one of the best investment products for Singaporeans looking for something that is safe and income-producing asset that is 100% backed by the Singapore government. It is rated ‘AAA’ by credit agencies like S&P and Moody’s, assessing the risk of credit default to be extremely low. Of course, nothing in the world comes with absolutely zero risk, but this is one of the safest investment available to retail investors like you and me.
This post seeks to introduce the SSBs as an investment asset class for novice investors to explore. They are not widely known despite their attractiveness, because many people don’t know what’s out there in the financial space.
What are SSBs?
The SSBs are a safe instrument to obtain regular income known as coupons, similar to interest that a bank pays you. Coupons are paid or distributed to your bank account every six months, and you can withdraw your initial investment at any time without any financial penalty. The longer you save, the higher the interest rate and returns. You can invest for up to ten years, up to maximum individual investment of S$100,000.
What is the interest rate?
The Singapore government usually issues new SSBs every month, with each lasting for 10 years. The interest rates are fixed and locked at launch and there will be no changes for that particular SSB throughout the entire lifecycle of the bond.
Interest rates are determined at launch depending based on the average Singapore Government Securities (SGS) yields the month before applications for that issue open, and they are stepped up, i.e. increase with time. Similar to fixed deposits, they give you a guaranteed return with a known rate at the start.
For example, in the illustration below, a $1000 investment in the SSB in July 2015 based on that month’s interest rates would yield the following coupon payments:
The effective return over 10 years is 2.4%, which is similar to the yield of the average SGS yield in June 2015.
How can I visualise my interest payouts?
You can use the interest calculator to visualise your interest payouts based on your investment amount and duration.
In the example above, a S$5000 investment in June 2018 SSBs will yield an effective return of 2.43% per year (or S$1231 after 10 years).
Why should I buy them?
They are risk free, income producing (and pays a higher interest than your bank!), no penalties for early redemption or withdrawals, no minimum lock-in period, flexibility in investment amount (minimum S$500, up to S$100,000 in S$500 increments) and withdrawals (withdraw anytime), low-cost (only $2 for application fee), no other hidden fees, no risk in investment value (i.e. guaranteed capital returns or in layman terms, money-back guarantee).
Why buy the SSBs instead of other bonds?
Conventional bonds have higher default risks, are subjected to price fluctuations (i.e capital loss before maturity), and may require a higher capital to purchase.
What about comparing them to stocks?
Stocks (or equities) tend to have greater fluctuations in value, higher risk of capital loss, have no capital guarantees, may not distribute cash to shareholders and are generally a riskier investment class (therefore they usually have higher returns to reward investors for taking on the risk). One is not better than the other, but rather, appeal to different investors with different risk appetites.
Are there really no risks?
The only risk I can think of is that the interest rates on the newly issued SSBs are unpredictable – we would not know if the next month’s SSBs would be at a higher or lower interest rate than the current month’s.
How do I buy them?
You need a bank account with one of the three local banks, DBS/POSB, OCBC or UOB and a Central Depository (CDP) account linked to any of your bank accounts. CDP is the custodian for SSBs and will process applications, interest payments and redemptions.
You can apply through internet banking or the ATMs from 6pm on the first business day till 9pm on the fourth last business day of each month. Important dates can be tracked here.
The SSBs will be issued on the first business day of the following month.
What’s your personal advice on SSBs?
I believe SSBs are a great asset class for investors who want to leave their money in a safe place that offers higher interest rates than banks, and offer the flexibility to withdraw without huge penalties unlike an endowment plan.
For example, if you are hoping to save for a downpayment for a flat, you can buy SSBs at quarterly intervals; and withdraw them all when you need them. You would have gained all the interest, plus capital returned in full.
Investors who are thinking of timing the stock market and waiting for a crash can also park their cash into SSBs while waiting for the next recession. Of course, while I do not advice timing the market, it is a worthwhile consideration if you personally feel that the stock market is overpriced.
Where can I get more useful information?
The official website for the SSB offers a useful range of content for investors to explore, many of them already simplified and summarised in this post.