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03-10-2010, 10:06 AM
Oct 3, 2010
INFLATION: UP
How to make your money work harder
INTEREST RATES: DOWN
As price rises outstrip the rates paid by banks, there are some products you may wish to consider
By Lorna Tan, Senior Correspondent
A double whammy of rising inflation and low interest rates is taking a toll on the pockets of people here.
Anyone who keeps most of their spare cash in bank deposit accounts may well be going backwards in real terms, as inflation outstrips the meagre rates paid by the banks.
It was recently reported that inflation is now at an 18-month high, no thanks to costlier transport, housing and food. For the full-year, inflation is expected to come in between 2.5 per cent and 3.5 per cent.
By global standards this level of inflation is manageable, but it is getting on the high side for Singapore.
Compare that to the paltry 0.45 per cent interest paid by major banks on a hefty $50,000 on a one-year fixed term deposit.
The regular average rate is even more minuscule, at 0.1 per cent.
Financial experts believe low interest rates are here to stay for some time. Rates in Singapore are largely influenced by the main rate in the United States, where the central bank is keeping credit cheap to try to kick-start the ailing US economy.
Mr Dennis Ng, financial adviser and founder of www.MasterYourFinance.com, expects interest rates to remain low for at least the next six to 12 months.
In its latest quarterly report, DBS Group Research stated that the three-month Singapore Interbank Offered Rate (Sibor) is expected to trade sideways in a narrow range. This may continue till the third quarter of next year.
DBS Bank expects inflation to hit 3 per cent this year before coming down to 2.7 per cent next year. That means the interest on the savings and fixed deposits would not be enough to preserve the purchasing power of the cash, said Mr V. Arivazhagan, managing director of regional investment and treasury products at DBS Bank's consumer banking group.
If you're fretting about the low interest rates on your savings and wish to keep up with the rising living costs, here are some products you may wish to consider.
But bear in mind that products that offer potentially higher returns come with higher risks, said Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent. They are also not guaranteed, unlike your Singapore dollar-denominated deposit account, which is insured by the Singapore Deposit Insurance Corporation for up to $20,000.
1 Structured deposits
A structured deposit is a combination of a deposit and an investment product, where the return is dependent on the performance of some underlying financial instruments. They include market indexes, equities, interest rates, fixed-income instruments, currencies, or a combination of these.
Structured deposits typically offer returns that are potentially higher than those on traditional fixed deposits. Investors should note that the issuer is obligated to repay the principal in full only upon the maturity of the structured deposit.
'Risk-averse Singaporeans can consider these investments which guarantee the principal amount invested if held to maturity, and can potentially earn higher interest income than savings accounts,' said Ms Gemma Tay, head, deposits, investments and insurance (Singapore) at United Overseas Bank (UOB).
However, return of the principal is subject to the credit risk of the bank, so if the bank defaults on payment, the investor could lose his investment.
And if you choose to redeem your investment earlier, you may lose a substantial portion of the principal. The amount payable will then depend on the market value of the underlying financial instrument that the structured deposit is linked to.
During the last financial crisis, structured instruments such as Lehman minibonds and DBS High Notes 5 were wound up as a result of the collapse of investment bank Lehman Brothers.
Banks and other financial advisers were taken to task for not highlighting the risks of these investments. Do make sure that you ask about how these instruments are structured and what risks your money is exposed to. Understand the product before you make an investment.
Examples of such products are UOB's Growth Deposit Series 9 and POSB Invest Yield Series 9.
The latter starts from as little as $5,000 and has a five-year tenure.
If the bank does not redeem the investment early and the investment is held till maturity, you will earn a total payout of 6 per cent plus your principal.
2 Bonds
When a firm issues bonds, it borrows money directly from investors.
In return, it promises to pay it back after a specified period of, say, three to 10 years. In the interim, it provides a regular flow of cash 'coupon' payouts which are typically higher than the fixed and savings deposit rates.
Corporate bonds are usually offered to well-heeled and institutional investors in big sizes of $250,000 or more. But this is set to change as the retail bond market takes off.
Recently, Singapore Airlines issued a corporate bond. Due to hot demand, retail investors have been offered $150 million out of its $300 million bond offering. The minimum subscription was $10,000 for the retail tranche and the bond yields an annual rate of 2.15 per cent over five years. The rate is lower than some other corporate bonds but is still more appealing than putting money in the bank.
Of course, such products come with some risks, such as the issuing firms defaulting on either the coupon or principal payments if they run into financial trouble.
Most corporate bonds are 'rated' by ratings agencies like Moody's and Standard & Poor's, based on the likelihood that this will happen, so make sure you ask about this. For example, a rating of 'AAA' from S&P means the company has 'extremely strong capacity to meet financial commitments' but a rating of 'BB' means it is 'less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions'.
Bond investors may also have liquidity concerns during strong market turbulence when there could be few buyers.
Furthermore, bond prices fluctuate inversely to changes in interest rates. So, if an investor decides to sell the bonds before maturity amid a rising interest rate environment, there is a chance that investors may be incurring capital losses, added Mr Arivazhagan.
And in the event that the Singapore investor is considering bonds issued in other denominations, they will also be taking on currency risks.
3 Bond funds
As its name suggests, a bond fund is a unit trust that invests in bonds, usually with the objective of providing stable income with minimal capital risk. It is suitable for the retail investor as the minimum required sum is often small, at $1,000.
Another plus point is that this option offers diversification across many issues of bonds, reducing the impact of possible defaults of some issues, said Mr Arivazhagan.
'Bond funds offers exposure to bonds that are not typically available to retail investors. They are managed by specialists and some bond funds offer dividends payouts,' he said.
However, they are not risk-free. During market turbulence, downside risks could be high, especially for bond funds focusing on high yield bonds and emerging market debt.
Also, bear in mind that there are several fees.
The bank or financial institution that sells you the fund typically charges you a sales fee of between 1 and 5 per cent.
Management fees are deducted from the fund every year to pay for the fund's expenses, even if the fund manager fails to beat his benchmark. And you are exposed to currency risks if the fund invests in non-Singapore dollar denominated bonds.
Like a structured deposit, you are exposed to credit risk when an issuer fails to make principal and interest payments when due. However, the risks are much smaller here and the assets in the fund are spread across a number of bonds by different issuers.
Examples of bond funds are Schroder Global High Yield Fund, Templeton Global Total Return fund and DBS Shenton Income fund, which had a 6.08 per cent return year-to-date.
4 Stocks offering dividend yields
Unlike bonds, which have a fixed payout, investing in stocks for their dividend payouts allows investors to enjoy potentially regular payouts with the prospect of appreciating stock prices, said Mr Terence Wong, co-head of research at DMG Securities .
When selecting stocks offering good dividend prospects, he suggests looking for firms with a history of dividend payouts. Find out how consistent the counter has been when it comes to paying dividends. The longer the track record, the greater the level of comfort that you get.
Also, find out the firm's dividend policy, that is, how much of the earnings will be paid out to shareholders. Usually, the more mature companies typically have higher payout policies as little money is needed for expansion.
Another gauge is the 'free cash flow' or the cash generated from operations minus capital expenditure. The higher the free cash flow, the higher the potential dividends, said Mr Wong.
Furthermore, firms with key shareholders who own large chunks of shares may be more inclined to pay out more as this would benefit them.
The firm's debt-servicing ratio, which is the amount of cash flow used by a company to service the interest payment on its debts, should be low. This is to ensure that the firm is not borrowing to the hilt to pay the high dividend.
Mr Wong recommends the following stocks for their dividend yields: United Overseas Bank (4.4 per cent), ST Engineering (4.3 per cent), StarHub (7.9 per cent), CDL Hospitality Trusts (5.2 per cent), M1 (6.4 per cent), ParkwayLife Reit (5.9 per cent), Armstrong (8.8 per cent) and 2nd Chance (9 per cent).
Still, stock investing is not for the faint-hearted and Mr Ng cautions that it is always possible that the share price may drop more than the dividends paid out. He recommends that this mode of investing is suitable only for those who know how to assess stocks and are willing to take calculated risks.
5 Cheaper home loans
Low interest rates are bad news for depositors but good news for home loan borrowers, noted Mr Ng, who is also founder of mortgage consultancy portal HousingLoanSg.com.
'Now it is possible to lock in a fixed rate on your home loan at below 2 per cent, or you can opt to pay about 1 per cent for housing loans which are pegged to Sibor or Swap Offer Rate rates,' he said. If you are planning to re-finance your home loan, consider the penalties and administration cost as well.
Having a lower rate mortgage means that home owners can enjoy a positive cash flow if their rental yields are higher than their monthly mortgage instalments.
Still, homeowners should be mindful that interest rates may shoot up, say, two years from now, after a period of low interest rates. After all, this has happened before. For instance, annual interest rates on housing loans were 4-5 per cent in 2007.
Mr Ng's advice is that homeowners should use an interest rate of 4 per cent to calculate their affordability and monthly instalment commitment, instead of using the current historical low interest rates of 1-2 per cent to calculate.
So do your sums first. For a $500,000 25-year loan, the monthly instalment shoots up by 32 per cent, or $639, to $2,639 when interest rates move up from 1.5 per cent to 4 per cent, he cautioned.
lorna@sph.com.sg
--------------------------------------------------------------------------------
Higher risks with higher returns
Bear in mind that products that offer potentially higher returns come with higher risks, said Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent. They are also not guaranteed unlike your Singapore dollar-denominated deposit account which is insured by the Singapore Deposit Insurance Corporation for up to $20,000.
INFLATION: UP
How to make your money work harder
INTEREST RATES: DOWN
As price rises outstrip the rates paid by banks, there are some products you may wish to consider
By Lorna Tan, Senior Correspondent
A double whammy of rising inflation and low interest rates is taking a toll on the pockets of people here.
Anyone who keeps most of their spare cash in bank deposit accounts may well be going backwards in real terms, as inflation outstrips the meagre rates paid by the banks.
It was recently reported that inflation is now at an 18-month high, no thanks to costlier transport, housing and food. For the full-year, inflation is expected to come in between 2.5 per cent and 3.5 per cent.
By global standards this level of inflation is manageable, but it is getting on the high side for Singapore.
Compare that to the paltry 0.45 per cent interest paid by major banks on a hefty $50,000 on a one-year fixed term deposit.
The regular average rate is even more minuscule, at 0.1 per cent.
Financial experts believe low interest rates are here to stay for some time. Rates in Singapore are largely influenced by the main rate in the United States, where the central bank is keeping credit cheap to try to kick-start the ailing US economy.
Mr Dennis Ng, financial adviser and founder of www.MasterYourFinance.com, expects interest rates to remain low for at least the next six to 12 months.
In its latest quarterly report, DBS Group Research stated that the three-month Singapore Interbank Offered Rate (Sibor) is expected to trade sideways in a narrow range. This may continue till the third quarter of next year.
DBS Bank expects inflation to hit 3 per cent this year before coming down to 2.7 per cent next year. That means the interest on the savings and fixed deposits would not be enough to preserve the purchasing power of the cash, said Mr V. Arivazhagan, managing director of regional investment and treasury products at DBS Bank's consumer banking group.
If you're fretting about the low interest rates on your savings and wish to keep up with the rising living costs, here are some products you may wish to consider.
But bear in mind that products that offer potentially higher returns come with higher risks, said Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent. They are also not guaranteed, unlike your Singapore dollar-denominated deposit account, which is insured by the Singapore Deposit Insurance Corporation for up to $20,000.
1 Structured deposits
A structured deposit is a combination of a deposit and an investment product, where the return is dependent on the performance of some underlying financial instruments. They include market indexes, equities, interest rates, fixed-income instruments, currencies, or a combination of these.
Structured deposits typically offer returns that are potentially higher than those on traditional fixed deposits. Investors should note that the issuer is obligated to repay the principal in full only upon the maturity of the structured deposit.
'Risk-averse Singaporeans can consider these investments which guarantee the principal amount invested if held to maturity, and can potentially earn higher interest income than savings accounts,' said Ms Gemma Tay, head, deposits, investments and insurance (Singapore) at United Overseas Bank (UOB).
However, return of the principal is subject to the credit risk of the bank, so if the bank defaults on payment, the investor could lose his investment.
And if you choose to redeem your investment earlier, you may lose a substantial portion of the principal. The amount payable will then depend on the market value of the underlying financial instrument that the structured deposit is linked to.
During the last financial crisis, structured instruments such as Lehman minibonds and DBS High Notes 5 were wound up as a result of the collapse of investment bank Lehman Brothers.
Banks and other financial advisers were taken to task for not highlighting the risks of these investments. Do make sure that you ask about how these instruments are structured and what risks your money is exposed to. Understand the product before you make an investment.
Examples of such products are UOB's Growth Deposit Series 9 and POSB Invest Yield Series 9.
The latter starts from as little as $5,000 and has a five-year tenure.
If the bank does not redeem the investment early and the investment is held till maturity, you will earn a total payout of 6 per cent plus your principal.
2 Bonds
When a firm issues bonds, it borrows money directly from investors.
In return, it promises to pay it back after a specified period of, say, three to 10 years. In the interim, it provides a regular flow of cash 'coupon' payouts which are typically higher than the fixed and savings deposit rates.
Corporate bonds are usually offered to well-heeled and institutional investors in big sizes of $250,000 or more. But this is set to change as the retail bond market takes off.
Recently, Singapore Airlines issued a corporate bond. Due to hot demand, retail investors have been offered $150 million out of its $300 million bond offering. The minimum subscription was $10,000 for the retail tranche and the bond yields an annual rate of 2.15 per cent over five years. The rate is lower than some other corporate bonds but is still more appealing than putting money in the bank.
Of course, such products come with some risks, such as the issuing firms defaulting on either the coupon or principal payments if they run into financial trouble.
Most corporate bonds are 'rated' by ratings agencies like Moody's and Standard & Poor's, based on the likelihood that this will happen, so make sure you ask about this. For example, a rating of 'AAA' from S&P means the company has 'extremely strong capacity to meet financial commitments' but a rating of 'BB' means it is 'less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions'.
Bond investors may also have liquidity concerns during strong market turbulence when there could be few buyers.
Furthermore, bond prices fluctuate inversely to changes in interest rates. So, if an investor decides to sell the bonds before maturity amid a rising interest rate environment, there is a chance that investors may be incurring capital losses, added Mr Arivazhagan.
And in the event that the Singapore investor is considering bonds issued in other denominations, they will also be taking on currency risks.
3 Bond funds
As its name suggests, a bond fund is a unit trust that invests in bonds, usually with the objective of providing stable income with minimal capital risk. It is suitable for the retail investor as the minimum required sum is often small, at $1,000.
Another plus point is that this option offers diversification across many issues of bonds, reducing the impact of possible defaults of some issues, said Mr Arivazhagan.
'Bond funds offers exposure to bonds that are not typically available to retail investors. They are managed by specialists and some bond funds offer dividends payouts,' he said.
However, they are not risk-free. During market turbulence, downside risks could be high, especially for bond funds focusing on high yield bonds and emerging market debt.
Also, bear in mind that there are several fees.
The bank or financial institution that sells you the fund typically charges you a sales fee of between 1 and 5 per cent.
Management fees are deducted from the fund every year to pay for the fund's expenses, even if the fund manager fails to beat his benchmark. And you are exposed to currency risks if the fund invests in non-Singapore dollar denominated bonds.
Like a structured deposit, you are exposed to credit risk when an issuer fails to make principal and interest payments when due. However, the risks are much smaller here and the assets in the fund are spread across a number of bonds by different issuers.
Examples of bond funds are Schroder Global High Yield Fund, Templeton Global Total Return fund and DBS Shenton Income fund, which had a 6.08 per cent return year-to-date.
4 Stocks offering dividend yields
Unlike bonds, which have a fixed payout, investing in stocks for their dividend payouts allows investors to enjoy potentially regular payouts with the prospect of appreciating stock prices, said Mr Terence Wong, co-head of research at DMG Securities .
When selecting stocks offering good dividend prospects, he suggests looking for firms with a history of dividend payouts. Find out how consistent the counter has been when it comes to paying dividends. The longer the track record, the greater the level of comfort that you get.
Also, find out the firm's dividend policy, that is, how much of the earnings will be paid out to shareholders. Usually, the more mature companies typically have higher payout policies as little money is needed for expansion.
Another gauge is the 'free cash flow' or the cash generated from operations minus capital expenditure. The higher the free cash flow, the higher the potential dividends, said Mr Wong.
Furthermore, firms with key shareholders who own large chunks of shares may be more inclined to pay out more as this would benefit them.
The firm's debt-servicing ratio, which is the amount of cash flow used by a company to service the interest payment on its debts, should be low. This is to ensure that the firm is not borrowing to the hilt to pay the high dividend.
Mr Wong recommends the following stocks for their dividend yields: United Overseas Bank (4.4 per cent), ST Engineering (4.3 per cent), StarHub (7.9 per cent), CDL Hospitality Trusts (5.2 per cent), M1 (6.4 per cent), ParkwayLife Reit (5.9 per cent), Armstrong (8.8 per cent) and 2nd Chance (9 per cent).
Still, stock investing is not for the faint-hearted and Mr Ng cautions that it is always possible that the share price may drop more than the dividends paid out. He recommends that this mode of investing is suitable only for those who know how to assess stocks and are willing to take calculated risks.
5 Cheaper home loans
Low interest rates are bad news for depositors but good news for home loan borrowers, noted Mr Ng, who is also founder of mortgage consultancy portal HousingLoanSg.com.
'Now it is possible to lock in a fixed rate on your home loan at below 2 per cent, or you can opt to pay about 1 per cent for housing loans which are pegged to Sibor or Swap Offer Rate rates,' he said. If you are planning to re-finance your home loan, consider the penalties and administration cost as well.
Having a lower rate mortgage means that home owners can enjoy a positive cash flow if their rental yields are higher than their monthly mortgage instalments.
Still, homeowners should be mindful that interest rates may shoot up, say, two years from now, after a period of low interest rates. After all, this has happened before. For instance, annual interest rates on housing loans were 4-5 per cent in 2007.
Mr Ng's advice is that homeowners should use an interest rate of 4 per cent to calculate their affordability and monthly instalment commitment, instead of using the current historical low interest rates of 1-2 per cent to calculate.
So do your sums first. For a $500,000 25-year loan, the monthly instalment shoots up by 32 per cent, or $639, to $2,639 when interest rates move up from 1.5 per cent to 4 per cent, he cautioned.
lorna@sph.com.sg
--------------------------------------------------------------------------------
Higher risks with higher returns
Bear in mind that products that offer potentially higher returns come with higher risks, said Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent. They are also not guaranteed unlike your Singapore dollar-denominated deposit account which is insured by the Singapore Deposit Insurance Corporation for up to $20,000.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/