The past few weeks saw us being excited and talking about the new Singapore Savings Bonds, a much more flexible variation than the existing SGS Bonds currently available over -the -counter at our local banks and even on Fundsupermart.
We see a comparison between the new initiative targeted at Singaporeans to save with more flexibility, yet receiving a step-up interest return at the same time, without sacrificing a portion of the initial capital or accrued interest when withdrawn before maturity.
This provides an additional option between the Banks’ typical fixed deposits and even to some extent, savings insurance endowments (~2-3% returns). Below is an article put together by The Business Times, Kenneth Lim:
The Monetary Authority of Singapore (MAS) has also provided a factsheet to provide some basic information here:
So when we look at the Singapore Savings Bonds vis-a-vis with the Banks’ Fixed Deposit Rates, we do note that Bank promotional rates for fixed deposits are still more attractive for larger amounts (>S$20,000) than placement in the Singapore Savings Bond.
Who Would Benefit The Most?
Now that we know how the Singapore Savings Bonds (SSB) work, who would these Singapore Savings Bonds be suitable for?
1) Younger people – From teens to new working adults, the SSB would help you accumulate your savings in simple and measurable amounts which are manageable. You won’t be required to place a large sum upfront as compared to promotional fixed deposits.
2) No Risk / Conservative Investors – For this special group who feel that they want 100% capital preservation (not to be mistaken with effects of inflation, merely adverse to capital loss), this is one wealth instrument which is still cash in nature, though given the title of “bonds”.
3) Savvy Investors – You’re an investment guru, well at least you know the names of the wealth accumulation instruments out there. With a balanced portfolio, you realise that you may have overlooked having some cash assets set aside to tap on market opportunities. This is one asset class you can diversify to, just to amass cash for when the opportunity arises.
4) Parents with very young children – So you’ve read this article about rising university fees locally. Starting to get cold feet? Well, the savings bonds will help you build up the funds surely and steadily for your children so you can offer the opportunity for them to get educated and have that extra edge. The longer you save and leave the amount untouched, the more the interest steps up for you.
What Would Be Nice To See In the Savings Bonds
Arthur Lee writes about some additional arrangements to make the savings bonds more attractive which can be found here. I would agree with having the semi-annual interest compounded annually, automatically. This would mean you’d be earning an interest-on-interest (compounded interest) on your principal. What would be nice to have is also to have a statement with a graph plotted with the reinvested coupons against one, if they had it taken out (not-reinvested).
Secondly, it’d be good for disciplined savers to have the option and avenue to do a recurring GIRO transfer at regular periods of their choice. This cuts down the hassle and strengthens the conviction to save.
What can we expect as well from the SSB?
At this point, we would have understood most of the features of the SSB. However, should we take it up and have a really large participation rate from the country, how will this affect the Banks, the Government and us?
Impact on Banks
Well firstly, the SSB is not meant to be a short term savings solution for individuals, hence, the Banks’ fixed deposit promotions / savings accounts should still appear attractive. However, we don’t deny that it will compete with Banks’ somehow for fixed deposits. This could potentially convince the banks to play out their cards to increase fixed deposits interest rates for the people.
As the SSB does not incur a penalty when withdrawn prematurely, this means that it gives much more flexibility as compared to typical cashback endowments. This would mean that bancassurance sales may take a hit, albeit slower to respond.
Impact on the Government
I would think that now with more participation from the citizens to save into the SSB, this could potentially mean that the Government may have more funds to juggle with for their agencies to bring better improvement / enchancements to our Singaporean infrastructure, goods and services.
How they could achieve this could be indirectly via their subsidiaries and government linked agencies. What would this mean for government linked listed companies?
I bet their share price would increase, now that they may have improved (or increased) cashflow for their operations and core revenue generating activities. This would raise the Singapore Stock Index (STI) overall performance as a result now that there will be injection of cash assets.
Should the FED raise interest rates, we’ll also see a competition for yields between the deposits and the savings bonds. However, that would require the interest rates for deposits to go up above 2% to compete over the longer term with the SSB.
Impact on You and Me
This could only mean that should we invest in quality blue chips on our index (STI index), we could expect better performance in this companies in the later half of the year due to better capital efficiencies and the injection of funds for the Government’s utilisation.
Secondly, besides our CPF, we now have something similar as an alternative without a lock in for our cash reserves.
So either way, through stocks investments (in the companies owned by the Government), we will still be better off receiving higher returns through the dividends (>3%) or saving in the savings bonds (~2-3%), if we have a longer time horizon.
This appears to be more advantageous than my existing bond ladder as I now have more flexibility in withdrawing once an investment opportunity presents itself.
What do you think about the new savings initiative by the MAS? Would you be taking action saving in it for a rainy day / for investment opportunities in future?