Instead, consider investing in bonds, where your money will be kept out of reach while it grows at a steady rate.

What are bonds?

A bond is a low-risk investment where you’re lending money to either the government or a company at a fixed interest rate for a predetermined time. You’ll receive interest payments on your investment on a regular basis, with the principal amount paid back to you at the end of the term.

Before deciding to invest in bonds, you should carefully compare your options, as some will pose more risk than others.

Types of bonds

Government bonds

Corporate bonds

You have a few different options when investing in bonds. Each choice has its own risk and return potential, making it important that you compare your options carefully before deciding on any one product:

Government bonds

There are 3 different types of government bonds that you can invest in: treasury bills (T-bills), Singapore Government Securities Bonds (SGS) and Singapore Savings Bonds (SSB).

These bonds are used to generate money for cash flow, financing debt, funding capital investments and more. In addition, these bonds are issued and backed by the Singapore government, rendering them risk-free but often have lower interest rates than other options.

• Types of government bonds

  • T-bills. Issued by the Monetary Authority of Singapore (MAS), T-bills are short-term bonds with a 1-year maturity period. Sold at a minimum denomination of $1,000 via the ATM at any of the 3 local banks (DBS/POSB, OCBC or UOB) or on the secondary market. T-bills don’t pay out coupons, but they are normally sold at a discount to their face value.
  • Singapore Government Securities Bonds (SGS). A longer-term counterpart of T-bills, SGS Bonds are issued for terms of 2, 5, 10, 15, 20 and 30 years. Coupons are paid every 6 months until their maturity.
  • Singapore Savings Bonds (SSB). SSB is a 10-year bond backed by the Singapore government. It provides step-up interest at every issuance, which means that the interest paid out increases each year as long as you don’t redeem the bond. Investors are allowed to withdraw their SSB at any moment (with 1 month’s notice) without any penalty. The maximum holding for the SSB per individual is $100,000.
  • Quasi-Government Bonds. Issued by government-linked entities such as the Housing & Development Board (HDB) or the Land Transport Authority (LTA). Quasi-Government Bonds are usually sold at over-the-counter (OTC) markets in denominations of $250,000.

Corporate Bonds

This type of bond is usually a part of a public offer, where a company will issue a prospectus that informs consumers about the offering and allows them to make a direct investment. This is different from buying stocks, where you are a part-owner and your investment is affected by the cash flow of the business.

With corporate bonds, you are a creditor and your return is limited only to the agreed-upon interest payments and the return of your principal investment. They usually offer better returns than government bonds, savings and fixed deposits but carry more risk – if the company fails, it may default on the debt.

Most corporate bonds are only traded on OTC markets, while some retail bonds are listed on SGX. Also, note that not all bonds are available in small denominations or suitable for retail investors.

• Types of corporate bonds

  • Investment-grade bonds. These bonds have a high credit rating (BBB- or higher), which suggests that the company is in a relatively strong financial position and can repay the bonds.
  • High-yield bonds (junk bonds). Issued by companies with a less healthy balance sheet, these bonds have a lower credit rating (BB or lower) and thus are less safe than investment-grade bonds. However, junk bonds generally promise higher interest rates in exchange for the increased risk.
  • Convertible bonds. Typically issued by companies with low credit ratings and high growth potential, these bonds can be converted to a predetermined amount of common stock or cash.

• Characteristics of corporate bonds

  The majority of the retail bonds pay out coupons every 6 months (similar to SGS Bonds) with the principal being repaid upon bond maturity. However, some retail bonds come with a variety of characteristics:

  • Callable Bonds. Callable bonds allow the issuer to redeem them before their maturity date, on dates that were specified beforehand. Companies typically recall their bonds when the bank interest rates are low so that they may refinance their debt at a lower rate of interest.
  • Puttable Bonds. Also known as retractable bonds, puttable bonds allow bond investors to demand early repayment of the principal, on dates that were specified beforehand.
  • Perpetual Securities. This type of bond doesn’t have a maturity period. This means that the company that issued the bond may never need to repay the principal, and only continue paying coupons. However, these bonds are usually callable at specified dates, giving the issuer the option to redeem the bonds if they need to.

Bond ETF

A bond exchange-traded fund (ETF) is a pooled investment vehicle that holds a portfolio of bonds. It aims to track the performance of certain bonds or bond indices and tries to replicate the index performance through the use of derivative products like swaps.

Bond ETFs can have different strategies.

• Characteristics of bond ETFs

  • No maturity period. Bond ETFs do not have a maturity date so investors can hold them indefinitely. However, they maintain a constant maturity, which is from the weighted average of the maturities of all the bonds in its portfolio and will continuously rebalance itself to meet the index objective that it is replicating.
  • Liquid even in illiquid markets. Unlike most corporate bonds, which are traded OTC, bond ETFs trade on exchanges like stocks. This means that bond ETFs can be bought and sold at any time during market hours giving them the additional advantage of intraday tradability.
  • Frequent coupon payout. Typically, bond coupon payments happen every semi-annually. But since bond ETFs hold many different issues at once, and at any given time, some bonds in the portfolio may be paying their coupon. This means that instead of receiving your coupon payment every 6 months, you gain interest payment from bond ETFs more frequently, though the value of this payment may vary from month to month.

Are bonds safe?

Government bonds are considered to be very safe, but there are bond options that can carry a high level of risk if you aren’t careful.

Bonds are typically less volatile than other types of investments, such as stocks, but it’s still possible to lose money with government-issued bonds. Bonds do come with a credit rating, but you will need to consult with a licensed financial adviser in order to access that type of information.

Pros and cons of bonds

Like any investment, bonds have their own set of pros and cons:

How are bonds valued?

A bond’s capital value can increase or even decrease before the maturity date based on the current interest rates.

The amount of interest accrued since the last payment will also have an effect on the value of a bond. If interest rates drop, you’ll see an increase in the value of your bonds, whereas if they rise, the value of your bonds will drop as a result. These fluctuations are only relevant if you’ve invested in floating rate bonds as opposed to fixed-rate bonds because the interest varies in line with the benchmark interest rate.

This investment has the potential to earn higher returns but there is also a risk of lower returns if the interest rate drops.

How do I choose a bond to invest in?

If you are interested in diversifying your investments with bonds, you’ll first need to decide which type of bond is right for your financial strategy:

Individual bonds

*As there’s no capital gains tax in Singapore, all individual investors are exempted from tax payment for interest earned from their bonds.

Bond funds

If you’d like to diversify your investment even further, you can invest in something called a bond fund. A bond fund is a mutual fund or ETF that is comprised of multiple bonds with varying risk levels, maturity dates and yields.

This provides instant diversification and allows investors to participate in multiple bonds without paying individual transaction fees. Instead, you’ll pay an annual expense ratio, which also gives you access to a professional portfolio manager that will do all the research, analysis and management for you.

How to buy bonds

Now that you’ve decided which type of bond you’d like to buy, there are a few ways to make an initial purchase.

Primary market

If you’re looking to buy new-issue bonds, you can purchase them on the primary market, which is usually directly from the issuer.

Individual investors may purchase T-bills, SGS and SSB at MAS Bills Auction. The auction typically takes place 3 business days before issuance and is announced on the SGS website 5 business days prior. You may apply for the auction through local banks’ ATMs or Internet banking portals as well as your SRS/CPFIS funds. The minimum denomination to purchase SGS is $1,000, and you can invest in multiples of $1,000. For SSB, the minimum investment amount is $500.

New-issue corporate bonds are not usually available to the public, as most of them are sold to large institutions and banks that sell them in the secondary market. While unlikely, you may be able to purchase them directly from the underwriting investment bank in an initial bond offering.

Secondary market

The secondary market is where you’ll find investors and other institutions looking to resell existing bonds. This is done through brokers, which are third parties that allow you to purchase bonds from another entity on your own or with the help of an investment representative. You’ll specify which bonds you’d like to purchase and the broker will search for another person selling them and then purchase them for you, often with a markup to cover commission.

Brokers can also help you resell bonds before they reach maturity. Once you’ve purchased a bond, you can choose to hold it until maturity or sell it on the secondary market. You’re not required to pick one or the other, so there’s nothing stopping you from collecting interest and then reselling the bond if its value increases.

Bottom line

Bonds can be a prudent way to keep your money safe over a long period and are a great way to diversify your portfolio. Splitting your savings between a traditional savings account and a government or corporate bond can help you earn interest on your money without taking on too much risk.

Assess your financial situation and compare your investment options to determine whether buying a bond is right for you.

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