As seen on http://dollarsandsense.sg/various-types-of-bond-investing-for-the-average-singaporean/
Article by Timothy Ho
In the investing world, there are two broad types of investment that an investor can make. They are equity or bond investing.
Equities vs. Bonds Investing
Equity investing refers to the investment of money in return for ownership in a company. Bond investing refers to the lending of money to a company that issues a bond or a debt obligation.
When you invest in equity, you generate returns through an increase in the share price and/or a dividend pay out. When you invest in bonds, you generate return through interest payment make by the company to you.
Regardless of whether you are investing in equity or bonds, the idea is that you want to invest your money in a good company, rather than a bad one.
Bonds For Retail Investors
Despite Singapore’s claim to be a global financial hub, bond investing for the average person has not really taken off yet. Most investors would be more familiar with property or stock investing, which is interesting because these instruments typically bring a higher risk level, which you would think retail investors would prefer avoiding.
Bond investing, like equity, is not all entirely the same. The risk you take when you lend money to the Singapore Government is a lot lesser compared to lending to an Small Medium Enterprise (SME). Naturally, this is reflected in the higher interest rate you can earn when you lend to an SME.
Singapore Savings Bonds – Risk Free
The Singapore Savings Bonds (SSB) allows all Singaporeans to buy up to $100,000 worth of bond per person. Aside from the low minimum subscription required ($500), bondholders can also choose to redeem their bonds at any point in time directly from the government. This makes it not only risk-free, but also extremely liquid as well.
Read Also: Should SSB Be Part Of Your Portfolio?
ABF Singapore Bond Fund – Very Safe
The ABF Singapore Bond Fund (ABF Bond Fund) consists of some of the safest bonds in our country. These include bonds issued by the Singapore Government and quasi-Singapore Government entities such as HDB, LTA and PSA.
Unlike the SSB, the ABF Bond Fund has no maturity date. The portfolio manager will use the proceeds to make another purchase into a similar bond. In other words, the bond fund simply rolls the principle over and over again.
One thing to note about the ABF Bond Fund is that unlike the SSB, you would need to “redeem” your bond from the open market. That means the ABF Bond Fund is expose to factors such as interest rate risk, which may cause the value of the bond to fluctuate from time to time.
Corporate Bonds – Riskier With Decent Returns
There are some corporate bonds that can be bought or sold on the Singapore Exchange. Most of these bonds are issued by big companies that are also publicly listed on the Singapore Exchange as well.
The interest paid by these companies would reflect the risk that was priced at the point in time in which their bonds were issued.
Here is what you need to know. Unlike the ABF Bond Funds which tracks a variety of the safest bonds in our country, the performance of these corporate bonds are highly dependent on the company that issued them. If the company that issued the bond faces difficulty, it is probable that bondholders would only be able to sell in the open market if they were to lower the bond’s price.
For example, let’s say you in invest $10,000 in the bonds of Company X which provides an annal interest payment (also known as coupon payment) of 5%, that gives you a return of $500 per year. One year later, Company X performance deteriorates and there are rumours that it has some cashflow problems. Naturally you are worried and would like to take your money out of this loan. However, the financial market also agrees with you and would now expect a higher return on Company X’s bond. This will require the price of Company X’s bond to reduce to say $9500 so that returns on the bond will increase to 5.26%.
Peer-To-Peer Lending – Riskier, High Returns
Peer-To-Peer lending is a concept that is relatively new in Singapore. Unlike bonds that are issued by big companies and subsequently traded on the stock exchange, Peer-To-Peer lending targets SMEs that are looking to raise cash to tide over their short-term credit requirement.
Retail investors who are looking for higher returns on their money can consider using some of the peer-to-peer lending platform such as Funding Societies. What these platforms do is to screen SMEs for background check and to ensure that these SMEs are credit worthy businesses.
Companies like Funding Societies will do the underwriting of the lending contract with the investor lending directly to these SMEs. Interest rates are typically in the region of 12% to 16% per annum.
It is fair to expect that lending to an SME is riskier than buying a corporate bond from an MNC; however, given the much higher return an investor can get, this fits perfectly the risk-return concept and would be suitable for investors who are willing to stomach a higher risk for a higher return.
Read Also: How Peer-To-Peer Lending Can Help SMEs
Understand Your Own Risk Profile
The general perception people is that equity investing are for younger people who are able to stomach higher risk. However, it is entirely possible to build to your wealth portfolio using the various bond instruments available in the market today.