Why Singapore savings bonds should be a part of your portfolio

The second half of 2015 saw the Monetary Authority of Singapore introduce the Singapore Savings Bond (SSB), which are a special type of Singapore Government Securities (SGS). The following features of the SSB make it a highly recommended product for any Singaporean’s investment portfolio.

1. Virtually risk free:

The capital and accrued interest of the SSB is backed by the government of Singapore, the sole AAA-rated country in Asia. Thus, there is virtually no risk in investing in these bonds.

2. Facilitates portfolio diversification:

Portfolio diversification, as a means to mitigate risk, is a must for every investor. The SSB would serve this purpose in a very satisfactory manner. A 60/40 portfolio basket (60% stocks and 40% SSB) would greatly assist in capital preservation during equity downturns.

3. Low minimum investment requirement:

The Singapore government issues SSB once/month. An investor can participate in an SSB issue with a minimum investment of as little as $500. The maximum investment per issue is $50,000, provided the overall SSB holdings of the investor does not exceed $100,000.

4. Attractive interest rates:

The average yields of 1, 2, 5 and 10-year Singapore Savings Bonds are 2.3%, 1.5%, 0.7% and 0.5% respectively. Thus, in the case of a 10-year bond, an investor can earn approximately $2.30 per annum for every $100 invested. This compares favorably with fixed deposits; Singapore banks offer a maximum interest rate of only 1.8% per annum. Another appealing feature of the SSB is that interest rates are determined by the holding period rather than the sum invested.

5. No early redemption charges:

An individual can redeem the bond at any time without any monetary loss. This is unlike a fixed deposit or a mutual fund scheme which would invariably penalize an investor for early redemption through special charges deducted from principal.

6. Interest rate direction does not affect yield:

Interest rate fluctuations dictate the traded price of a conventional bond. The bond price will decrease when interest rates rise, and vice-versa. The redemption value of an SSB, however, is not directly linked to the move in interest rates. Irrespective of a rise or fall in interest rates, an SSB can be redeemed without loss, and as early as within one month, on the condition that the application is submitted during the first four days of a month.

Finally, to participate in an SSB issue, the following is required:

- A Central Depository (CDP) securities account
- A UOB (United Overseas Bank) savings/current account with ATM card
- A Direct Crediting Service (DCS) that links the CDP securities account with a bank account
- The Minimum investment amount of $500

The features discussed above make SSB a compelling investment for those who are looking for capital growth with downside protection. However, it should be noted that SSBs are suitable only for investment with a longer time horizon.

(By Karthikeyan Narayanan)

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