Alternatives to Fixed Deposits
There is high demand from many clients for an instrument which gives them more returns than fixed deposit but just slightly more risky than common instrument. Now, there are a few alternatives to the good plain old fixed deposit. Let’s examine the returns, risks, as well as the characteristics like liquidity and convenience.
- Bond Funds
Bond funds invests in bonds which essentially are instruments guaranteed by the companies or government entities issuing them. Advantages of bond funds is that they are easily available and the denomination of the investment is relatively small at a thousand to a few thousand dollars. One disadvantage are bond funds do fluctuate slightly in value as underlying bonds in the fund do fluctuate in prices during their lifetime.
In the current environment, with low interest rates just after the financial crisis. Since interest rates are likely to rise, there are risks that longer duration bonds will become cheaper, therefore so does bond fund value. However, prices of shorter term bonds are not as susceptible to interest rate increases.Below are examples of performance of fund investing in shorter term bonds.
New Short Term Bond Fund
Short Term Bond Fund - Short Term Endowments
Time to time, when the insurance companies managed to source for quality bonds with reasonable yields to address the short term saving needs of our policyholders, they will come up with short term guaranteed products. These products tend to be between 2 – 5 years in duration and application will be closed once the amount reaches the cap of the bond. They may carry reduced or no underwriting.
These savings plans are largely invested in SGD bonds, and the expected return grows proportionately with the duration of the plan. During the financial crisis there have been quite a lot of such products from the insurance companies as shown from the example.Another example of payout from a different company, payout of 2% and 1.6% for 2 different tranches respectively.
There is another option for affluent clients and this can give potentially higher interest. This will be directly buying bonds.
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