High-interest rate environments can be daunting for investors, as the equities market may not seem so rosy for most investors, and many would prefer to preserve their cash for future investment opportunities while still maintaining liquidity. However, should you just park your idle cash in your bank account or are there other opportunities when you could grow this idle cash while waiting for the time to deploy? Well in this short write-up today, we will take a look at what are some facilities you could park your dry powders and grow them while waiting.
The first product that we will be sharing would be Fixed Deposits (FD) or some people might call it time deposits. A fixed deposit is an instrument that is offered by the bank that allows investors to deposit a lump sum of money for a fixed period of time at a stipulated fixed rate. The deposited amount accrues interest at a fixed rate, providing the investor with regular interest payments along with the principal amount upon maturity.
Fixed deposits are typically offered by banks or financial institutions and the safety of these investments depends on the reputation and financial stability of the institution. In many countries, including Singapore, deposits up to a certain amount are insured by the government, adding an extra layer of security for depositors. In Singapore, the Singapore Deposit Insurance Corporation (SDIC) administers the Deposit Insurance Scheme (DIS) which is a government-backed program that protects small depositors from losing their money if a bank fails. The DIS covers non-bank depositors (individuals, charities, sole proprietorships, partnerships, companies, and unincorporated entities) by covering their Singapore dollar (SGD) monies placed with a DIS member bank or finance company, for up to $75,000 per depositor per DIS member and all full banks and finance companies in Singapore are required to be members of the DIS.
When it comes to liquidity, fixed deposits may not be the most liquid out of the different types of facilities out there because premature withdrawals of fixed deposits might incur penalties or a reduction in the interest rate. Therefore, investors usually head into fixed deposits with the thought of holding it till the stipulated date to receive the full payout.
(Investment Time Horizon)
Fixed deposits are suitable for investors with a shorter investment horizon, such as those looking to accumulate funds for upcoming expenses or emergencies because it usually requires the investor to lock in their funds for a period of around 6 months to 2 years period.
As of 25th August 2023, the returns that our local banks are offering are:
- DBS Bank – 12 months, 3.2% p.a., Min $,1000
- OCBC Bank – 6 months, 2.70% p.a., Min $30,000
- UOB Bank – 6 months, 2.70% p.a., Min $10,000
Singapore Treasury Bills (T-bills)
Next up on the list would be our local Singapore Treasuries such as the 6 & 12 months treasury bills. These bills are short-term debt instruments issued by the Monetary Authority of Singapore (MAS) to raise funds for its financial needs and have a minimum investment amount of $1,000. T-bills are issued at a discount to their face value and mature within a specified period. When the T-bill matures, the investor will then receive the face value, effectively earning the difference between the purchase price and the face value as interest.
T-bills are issued by the government of Singapore, making them virtually risk-free. The Singapore government which is one of the 9 countries left in the world that carries an impeccable credit rating of AAA, which assures investors of the safety of their investment. This makes T-bills one of the safest investment options available.
T-bills offer greater flexibility when it comes to liquidity. Since they have shorter maturities, investors can choose to hold them until maturity or sell them on the secondary market. This secondary market trading allows investors to liquidate their investments before the maturity date if needed.
(Investment Time Horizon)
T-bills are more aligned for investors with shorter-term investment goals due to their relatively brief maturity periods. They are well-suited for those who want to preserve capital and earn returns over the short term.
As of 25th August 2023 the results:
- Latest Singapore 6-Month Treasury Bill result
Cut-Off Yield: 3.73%
- Latest Singapore 12-Month Treasury Bill result
Cut-Off Yield: 3.74%
Last but not least would be corporate bonds, which are debt securities issued by corporations to raise capital for various purposes, such as funding expansion, financing projects, or refinancing existing debt. When you invest in a corporate bond, you are essentially lending money to the issuing company in exchange for regular interest payments and the return of your principal amount at the bond’s maturity date. The minimum investment amount for SGD corporate bond issuance would be SGD$250,000 while US corporate bond issuance would be USD$200,000. Bonds that are opened to the retail market (e.g. Astrea 7B 6% or Frasers 4.49%) will be available at a minimum investment of $1,000.
Corporate bonds carry varying levels of risk, depending on the financial health of the issuing company. Credit rating agencies assign ratings to corporate bonds based on their assessment of the issuer’s ability to make interest payments and repay the principal. Higher-rated bonds e.g. AAA or AA are considered lower risk, while lower-rated bonds e.g. BB or B are considered higher risk but may offer higher yields.
The liquidity of corporate bonds can vary significantly as well, and some of the various factors that may affect its liquidity could be due to its credit rating, maturity, demand and supply in the market, or perhaps the issuer’s profile.
(Investment Time Horizon)
Corporate bonds are usually for investors who have a longer time horizon and are looking to lock in a particular rate that they are satisfied with for a period of time. However, the tenors for corporate bonds can vary from 1 year to perhaps 50 years, or for perpetual bonds, its tenor will be indefinite. Therefore, investors are then rewarded with a higher coupon rate when they are investing in a bond with a longer tenor.
Source: Phillip Bond Desk
In conclusion, both fixed deposits, Singapore Treasury Bills and Corporate bonds have their unique advantages and considerations. Fixed deposits provide stability and a guaranteed return, making them suitable for those who prioritize capital preservation. On the other hand, Singapore Treasury Bills offer safety, liquidity, and potentially higher returns, making them a compelling choice for investors with a short-term outlook. While Corporate bonds offer much more customization in terms of the yields that the investor is looking for depending on their risk appetite and also the duration in which they would like to lock the rates. Ultimately, the choice between the three depends on an investor’s risk tolerance, investment horizon, and financial goals.