Alternatives To Savings & Fixed Deposits

Investors should really consider moving a substantial portion of their medium or long-term savings into bonds or bond funds, says Fundsupermart's Research Director.

by Lim Chung Chun


GOOD ALTERNATIVES TO FIXED DEPOSITS & SAVINGS

When it comes to choosing a safe place to park their money, most Singaporeans simply leave it in a bank, in the form of savings or fixed deposits. While that is certainly convenient, it may not be the best solution from the viewpoint of generating a good return, particularly if the savings will be held for the long term. Investors should really consider shifting a substantial part of their medium- or long-term savings into fixed income products (bonds or bond funds) if they wish to generate a higher return without the volatility that is associated with investing in equities. In Singapore today, buying bond funds is more convenient and viable than buying bonds directly as the retail corporate bond market is not that developed.

HOW BANKS MAKE MONEY

There is a simple reason why bond funds will generally give you higher returns than bank savings and fixed deposits in the medium to long term. Banks are really the middlemen between the depositors (or investors) and the borrowers. They collect money from investors (in the form of savings and deposits) and lend it to individuals and companies. The banks may pay investors 1% per year, while they earn 3-4% by lending out the money. The banks therefore make a spread (gain) of 2-3%. That's how banks make profits.

BOND AND MONEY MARKET FUNDS

But it is possible for investors to go directly to the borrowers (in this case, the borrowers are not individuals but major corporations and governments) rather than go through a middleman who takes a big spread. By bypassing the middleman, investors can get a higher return. Fund managers who offer bond funds essentially facilitate this process in return for annual management fees of 0.5-1%. Even after deducting the management fees, bond funds generally will still give investors better medium- to long-term returns than what savings and fixed deposits offer.

Depending on what your needs are, you can choose from a range of bond funds with different levels of risk and volatility. Bond funds are different from each other in the tenure of their underlying bonds (long-term or short-term bonds), currency exposure, and quality of the issuers. At the conservative end, you have money market funds that are very stable. And at the more aggressive end, investors can buy products such as Emerging Market bond funds which can be quite volatile.

Many Singaporeans may not realise it, but when they buy capital guaranteed or protected funds, or life insurance policies, they are buying products with substantial exposure to bonds. While many of these products have their plus points (e.g. the protection feature), investors should note that they may not be the most suitable forms of investment for building up long-term savings. Generally, packaged products such as capital guaranteed funds and insurance policies carry higher distribution costs - consumers may often be paying a premium for the packaging.

FIXED INCOME PRODUCTS WILL CATCH ON

Investing in fixed income products is still a concept not well understood by most Singaporeans. In many developed countries such as the US, bond and money market funds (as well as equity funds) are part and parcel of the average investor's financial portfolio. Over the next few years in Singapore, consumers are likely to start embracing this asset class in a far more substantial way, thanks to the ongoing liberalisation of the financial sector. The changes will bring about more, and in many cases, better financial products, and just as importantly, better investor education.