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All too long now, investors have often veered between two extremes when it comes to investing. Often, many investors either go overboard in terms of taking risk when they invest, by jumping into investments which are too volatile for their tastes, or at the other extreme end, staying in savings accounts for safety, where the returns are overly low. There is a middle ground, and that middle ground is fixed income funds.
Yet, despite the fact that there is such a middle ground, and there are alternative fixed income funds which are only slightly higher risk than fixed deposits, but deliver a higher return, most continue to keep cash in savings. Part of the reason is due to the unfamiliarity with fixed income funds, the other reason is the perceived cost. Any kind of investment, be it funds, stocks, buying a property will usually entail some sort of front end fee. It could be the brokerage fee, the front end sales charge, or the property stamp duty plus agent fees. But this fee indirectly creates a holding period, and makes investing very different from keeping money in a savings account or fixed deposit. If buying a fixed income fund cost 1%, then an investor is down 1% the minute he places money into such a fund, and has to wait until the fund rises by 1% just to break even.
Now however, investors can have the best of both worlds. Fundsupermart has lowered a group of 50+ fixed income funds to zero sales charge. This changes the ball game for investing. Now, an investor can buy a Singapore bond fund, and start to make money from day 1. No longer is there a need to wait until the front end sales charge is covered before a return can be enjoyed because there is no longer any front end sales charge on that fund! And this range of 51 funds covers a wide range of fixed income funds ranging from very low risk short duration bond funds, to the more higher octane high yield bond funds, which can sometimes fluctuate almost as much as equities.
Everyone has money they keep in savings. Some of this will have to be kept there because of the need for liquidity. There are bills to be paid, you need money in your pocket for everyday spending and expenses. However, beyond a certain amount which will cover the expenses each month, what happens to the excess monies? Few people will take all of their excess monies and invest it entirely because investing is seen as risky, and no one is comfortable placing all of that excess money solely into the stock market, or equity funds, or property. Thus, a substantial amount remains in savings accounts, or at most channelled into 12-month fixed deposits where they keep on getting rolled over, for minimal interest (12-month fixed deposit rates are at only 0.29%).
This is not doing your money justice. There are viable alternatives which can return up to 2 times more than of 12 month fixed deposits, for only a small step up in terms of risk. We looked at one portfolio made up of 4 low risk funds, and found that since 1999, that portfolio would have returned 2.3 times that of 12 month fixed deposit. And yet, the worst period drawdown was barely 6 months, and during that time, it fell only 0.9%. In fact, every single calendar year for such a portfolio was a positive return. (See chart 1).
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Table1: FD Alternative Portfolio, Constituents and Other information
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Schroder S$ Reserve Fund Cl A
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25%
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Max Drawdown
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-0.90%
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LionGlobal SGD Money Market Fund
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25%
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Worst Drawdown Period
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29-Aug-03 to 27 Feb 04
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United SGD Fund
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25%
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Drawdown Period
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6 months
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Legg Mason WA Singapore Bond Fund
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25%
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FD Substitute Annualised Return
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2.30%
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Total
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100%
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12 month Fixed Deposit Return
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1.00%
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Outperformance in bold. Source: iFAST compilations, performances are based on bid to bid prices, and are net of all annual expenses and fees.
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Table 1: 12mth fixed deposits vs. FD Alt. Port., end-1999 to end-2011
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Year
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12 month Fixed Deposit
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Fixed Deposit Alternative Port.
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2000
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2.50%
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2.80%
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2001
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2.20%
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1.80%
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2002
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1.40%
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2.80%
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2003
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0.90%
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0.90%
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2004
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0.70%
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1.40%
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2005
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0.80%
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1.00%
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2006
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0.90%
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2.90%
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2007
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0.80%
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3.00%
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2008
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0.70%
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1.10%
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2009
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0.60%
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4.30%
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2010
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0.50%
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2.50%
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2011
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0.40%
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1.00%
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Outperformance in bold. Source: iFAST compilations, performances are based on bid to bid prices, and are net of all annual expenses and fees.
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As the chart and table shows, such a portfolio is very stable, and of very low risk. Every single year was a positive one. And most people, if asked if they can accept a maximum downside of just 0.9%, will say that it is an acceptable level of risk. I will use some numbers to give a better perspective. Let’s say a person called John needs $$15,000 to cover any possible daily expense each month in his savings account. Very often, his savings account will have far more than that. Let’s assume that he has $100,000 on top of that. But he is afraid of investing and losing that monies so he keeps all that $100,000 in excess in a savings account as well. That $100,000, at an interest rate of 0.29% will only earn him $290 in the first year. If the same amount is placed into a portfolio of low risk fixed income funds, including short duration bond funds and Singapore bond funds. The yield could be as high as 1% to 2% per annum.
While it doesn’t look like much expressed in percentages, when it is compounded over the years, it makes up to a substantial amount. In the chart, a $100,000 portfolio 12 years ago will see a $17,000 difference between the portfolios vs. 12-month fixed deposit by the end of 2010. But what about liquidity?
Take John’s case again. He doesn’t know when he might need $100,000, but it’s not an everyday thing for sure. Most likely he won’t touch it for a long, long time, and in the meantime, it could build up even more. But he just feels that he needs to be able to draw on that money if he needs, because life is unpredictable. Here is what most people don’t realise. The settlement time for most fixed income funds is only 4 days, and some can return your money upon selling them in even less than that. While it isn’t exactly like an ATM, it is still liquid enough for most purposes. After all, if you are going to take $100,000 or more out to buy something, surely you can think about it for a couple of days before committing. In fact, most large expenses, be it buying a car, going on a holiday, wedding, house, can be budgeted for a long time before the money is committed, so you don’t need to have instant liquidity for such monies. Being able to get it within a few days is more than enough for most purposes.
So, we need a change in the way of thinking when it comes to savings in the bank. Given the very low, almost negligible interest in banks right now, excess monies above our daily liquidity needs to be put to much better use. There are such funds out there, and now, Fundsupermart is selling them at 0% sales charge so you can make money starting from day 1.
With this, you don’t have to be a big risk taker to enhance your returns. So don’t hesitate, put your monies to work now!
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