Most of us in our early youth consider a premium subscription to Netflix or a classic pair of sneakers as a ‘worthwhile investment’. At the end of a long, tiring day, splurging on food and entertainment is the investment supposedly worth made by a sensible grow up. Only after a significantly emptier bank account, one realizes that this is so true.
A full stomach is great, but a proper investment that can reward you with actual financial returns and security. Unlike what is commonly misperceive, investing isn’t something that only older adults or wealthy people can do; if you are currently working your first part-time job, it is something that even you can start considering.
Now, there aren’t many investments that guarantee your principal as well as returns in Singapore. Of those that do, you need to weed the potential scams – i.e., those that sound too good to be true.
One other thing to understand is when you get to enjoy safety in your investments and cash flow visibility; you need to accept a rate of return that is close to the risk-free rate.
The risk-free return refers to a commercial rate of return expected to achieve even if you don’t take any risk. Theoretically, there is no such investment where there is no risk face upon investing.
Given below, we look at the six types of investments which guarantees your principal and provides a guaranteed return. This is a good way for those who are extremely risk averse or just unsure about investing.
Singapore Government Treasury Bills
For Singaporeans, a good proxy for the risk-free rate is the return that the government of Singapore pays on its 1-year treasury bills. The shortest-term government security is available to Singaporeans. This is close to the risk-free rate achievable as it offers a rate of 1.94% per annum (p.a.) – which points that you will be able to multiply your capital by 1.94% p.a., even without undertaking any investment risk.
Singapore Government Bonds
The Singapore government issue longer-termed bonds, between two and thirty years. These typically pay higher returns than the one-year bond, as it is estimated to carry slightly more risk being longer-termed. It is regarded close to risk-free and hence, offer a rate of return that is close to the risk-free rate.
It is one of the safest investments that you can make. Since it is by the government, you can trust that it is relatively risk-free than most – but it will provide you with lesser returns. It is also flexible, in that you can withdraw your cash whenever you want (except after a grace period of 30 days), with no penalty.
Singapore Savings Bonds (SSB)
By now, you will see a common theme occurring. The investment that is most likely to guarantee your capital and your returns are fix income investment issuing by government.
The Singapore Savings Bonds, launched in October 2015, pays a step-up interest every year, up to the 10th year. This means that the bonds pay a lower return in the initial years. And if investors do not redeem the bond, it pays a higher rate each year, until the 10th year. This is duly to recognize the fact that investors are holding the bonds for a longer-term.
Recent launch of the SSB, its 1-year interest rate returns 1.89% p.a., and its 10-year rate returns 2.57% p.a. This is similar and slightly varies as it is lesser than the recent Singapore Government treasury bill launch. Offering 1.94% p.a., and the most recent 10-year Singapore Government bond launch, contributing 2.61% p.a. The reason for this is that you can redeem the SSB at any point – the superior liquidity provided by the SSB accounts for the slightly lower returns it offers.
Although uncommonly referred to as an investment, fixed deposits offer a better way to earn returns on your money than leaving it in a savings account. Of course, many other banks are offering their fixed deposit schemes and promotional rates. Many of them, including the three above, come with certain conditions you have to fulfill to achieve the effective rates.
Additionally, deposits with banks and finance companies in Singapore are covered under the Deposit Insurance Scheme, insuring up to $50,000 of your deposits in each account. All full banks and finance companies in Singapore, a total of 37 featured on the website, are members of the Deposit Insurance Scheme.
To earn better interest on your funds, you can make Central Provident Fund (CPF) top-ups into your Special Account (SA). These funds guaranteed by the Singapore government offer a guaranteed return of a minimum of 4.0% p.a.
It is noteworthy that the first $60,000 of your CPF monies, with up to $20,000 in your CPF Ordinary Account (OA), earn an additional 1.0% in interest returns. This means your top-ups may earn up to 5.0% p.a. if your top-up in CPF SA is in early years.
However, before you do this, you need to know that unlike the other investments, which can be sold or redeemed early, this is irreversible.
Savings plans that are offering by insurance companies, especially those that are non-participating, guarantee your capital as well as returns. Also, note that savings plans that ensure your equity but do not guarantee returns also exist.
When investing in a savings plan, you are typically expected to lock your money over a fixed time frame or continue contributing over a set time frame. Failing to do so may result in losing a substantial amount of the returns you expected to receive.
Savings plans are also covered by the DIS in Singapore and may also offer an insurance component that pays out in the event if something unfortunate happens to you.
Much like getting your first insurance policy, there is plenty about investing and adulting general. That may have you feeling a little bit stumped before you even start. Keep at it anyway, especially if you want to have a financial future that is relatively more gainful than one where you rely on bank interest.
As the cost of living increases, so will the likelihood of your expenses overtake your income. Investments help you avoid this by letting your money work for you – perfect for the work smart 21stcentury adult.
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