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Monday, July 06, 2009

Where to park your hard-earned cash

Savers are at a loss these days with interest rates getting perilously close to zero.

The latest to turn the screw was DBS Bank and POSB, which revised their rates downwards last Wednesday.

POSB savings and passbook account holders now get just 0.125 per cent for the first $50,000, down from 0.25 per cent. So a deposit of $10,000 earns $12.50 less a year.

DBS Savings Plus customers get 0.1 per cent for the first $50,000 while OCBC customers have been getting 0.125 per cent for the first $10,000 since April.

No wonder savers are at a loss as to where to park their cash. After all, there are not many options if your priority is to have funds available within a short timeframe.

That is why you should weigh the advantages of having cash at hand against other better-yielding options offering higher returns but requiring you to lock up your cash for a longer period - and shoulder a bit more risk.

Here are some options to consider.

Savings and fixed deposits

If your top priority is to have cash at hand, then savings or fixed deposits are the usual places to park money.

If so, check out higher-yielding savings products at foreign banks like Maybank and Standard Chartered. These banks typically try to offer higher rates than local banks, which already have a larger share of retail customers' deposits.

Maybank is offering savers 0.25 per cent for the first $50,000 and 0.375 per cent for the balance above $50,000. For Internet-savvy customers, the bank will pay 0.5 per cent for amounts between $5,000 and $49,999 and 0.75 per cent for deposits of $50,000 and above.

For amounts between $1,000 and $50,000, Maybank is offering 0.875 per cent for a one-year fixed deposit and 1 per cent per annum for an 18-month term deposit.

Standard Chartered is paying 0.4 per cent for the first $50,000 on e$aver Internet accounts. For a one-year fixed deposit for amounts below $50,000, the annual return is 0.54 per cent, while it is 1.1 per cent for an 18-month fixed deposit.

For one-year and 18-month fixed deposits for amounts below $1 million, POSB is offering a lower 0.45 per cent and 0.6 per cent, respectively.

Money market funds

A money market fund invests in high-quality short-term instruments and debt securities, which are loans sold by firms and governments to borrow money.

It is a good alternative for investors looking for a stable, low-risk instrument with potentially higher returns than bank savings deposits.

For instance, the Phillip Money Market Fund, one of the largest Singdollar money market funds here, has a prevailing net rate of 1.1 per cent with $1,000 the minimum amount.

Such funds often have no sales charge and come with a low annual management fee of about 0.5 per cent.

Although most money market securities are considered very low-risk investments, there is a possibility that the borrower will not repay the loan as promised. However, such a default risk is non-existent if it is a government bond.

But the interest rate earned usually does not exceed inflation.

You can use these products to park money that you want to keep safe and available for as short as a few months or for several years. It may take up to four working days to get your money back if you want to withdraw your principal.

It is suitable for all age groups, particularly retirees.

Still, not all money market funds are the same. When shopping around, read the fund's prospectus and annual reports and check what kind of debt instruments it invests in.


Credit cooperatives, or thrift and loan societies, were introduced in the 1920s as an alternative source of funds to loan sharks and moneylenders for the man in the street.

The Registry of Cooperative Societies regulates the various cooperatives under the provisions of the Cooperative Societies Act, governing things such as the restrictions on loans and borrowings and membership criteria.

It also defines the scope of investments a society's funds can be channelled into - fixed deposits, trustee stocks, buildings and shares of other cooperatives.

Not all cooperatives are open to the public. Membership eligibility can be confined to a certain group of people, either by profession, religion or employee status.

For instance, the Straits Times Press Co-operative Thrift & Loan Society accepts only staff of Singapore Press Holdings as members.

But the Telecoms Credit Cooperative, which started in 1928 and is one of the oldest cooperatives around, threw its doors open to Singaporeans and permanent residents in 1996. Before that, it catered exclusively to staff of the present SingTel and SingPost.

Its website states that it is offering annual interest rates of 0.8 per cent and 1 per cent on its savings and Young Savers accounts, respectively.

Members can earn interest of up to 3.25 per cent per annum on fixed-term deposits, based on length of membership. It has 36,000 members.

Singapore Government Securities (SGS)

These are debt instruments issued by the Government and can be in the form of Treasury bills (T-bills) or bonds. When you invest in SGS and T-bills, you are lending your money to the Government in exchange for interest payments.

Bond holders will typically receive fixed interest payments and the Government must pay the principal sum on the maturity date of the securities.

T-bills are short-term debt securities that mature in one year or less from the issue date while SGS are bonds with maturity of two, five, seven, 10, 15 or 20 years.

Since last Wednesday, retail investors have been able to easily apply for SGS via the ATMs of DBS, OCBC and United Overseas Bank. The minimum investment is $1,000 and you can invest in multiples of $1,000.

Unlike money market funds, SGS have maturities that exceed 12 months from the date of issue.

With a range of annual yields from 0.35 per cent to 2.58 per cent for its one-year T-bill to the 10-year bond, SGS give a higher yield than bank deposits.

The main advantage of SGS is the rock-solid financial security that comes by having the Singapore Government as issuer.

This means the chances of a default occurring are simply unthinkable, said Mr Ben Fok, chief executive of Grandtag Financial Consultancy.

However, the returns may not keep pace with inflation, said Mr Patrick Lim, associate director of financial advisory firm PromiseLand.

Note that SGS cannot be cashed in with the Government before their maturity dates but you can sell them at the prevailing market prices on the secondary market to other investors such as banks.

That means there is a potential for the bond to appreciate in value or a risk that it may decline in value, due to the inverse relationship between bond prices and interest rates.

Still, experts consider SGS a relatively safe and low-risk instrument that can help bring stability to an investor's portfolio.

Generally, it is common for retirees to hold a higher percentage of bonds in their portfolios. And the lower the risk appetite, the higher the percentage of bonds in the portfolio and vice versa.

Structured deposits

With the unpleasant experiences of buying failed structured products still fresh on consumers' minds, some people are locking up their money with simple forms of the products that are deemed safer but pay relatively low returns.

Since the collapse of investment bank Lehman Brothers in September last year, banks here have been offering the safer, lower risk form of structured products, otherwise known as structured deposits.

Recent examples include the POSB Invest SingGrowth Account and OCBC four-year SGD equity- linked structured deposit which is linked to a single stock's performance.

For instance, the POSB structured deposit is a five-year, equity- linked product where investors get their principal back if held to maturity.

It is linked to four local blue chips - SingTel, UOB, Singapore Press Holdings and Sembcorp Industries - and offers yearly fixed payouts, with a first-year payout of 2.78 per cent. The minimum investment is $5,000.

Mr Lim points out that the investor can enjoy higher returns from the second year onwards if a specific redemption event is triggered.

This occurs when the returns of each of the four stocks are at or above 15 per cent on a certain day of each year from the second year. The product is then terminated and the principal returned in full.

If the event does not happen throughout the five-year tenure, the customer receives five annual payouts amounting to a total return of 7.7 per cent or about 1.53 per cent per year.

If the event occurs in the second year, the effective rate is 2.14 per cent, and 1.92 per cent if it happens in the fifth year.

Mr Fok said investors should be aware that they may get less than their principal sums if they terminate early. The value of the POSB product is indicated on the bank's website daily.

Another disadvantage is that it may take a few weeks to withdraw the principal sum if you decide to redeem it prematurely.

'It is most suitable for low-risk investors like retirees who prefer to receive a fixed payout,' said Mr Fok.

Endowment plans with fixed returns

An example is local insurer TM Asia Life's Nest Egg (SP-Guaranteed 3), a five-year single premium endowment plan with yearly cash dividends of 2.5 per cent a year. This works out to a total return of 12.5 per cent.

The minimum single premium is $15,000 and the product is targeted at individuals aged between 40 and 60 who wish to get more out of their money, said Mr Fok.

There is a guaranteed lump sum equivalent to the single premium paid if the policy is held to maturity.

As with other insurance plans, you should hold it to maturity or risk losing part of your initial single premium if you opt for an early surrender.

Where to park your hard-earned cash [via]

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