Investments can often seem daunting, and you may not be sure how and where to start. In our latest series, we break down the different types of investments available in Singapore and guide you through the various steps to investing.
The Singapore Savings Bonds (SSB) and Straits Times Index Exchange-Traded Fund (STI ETF) as introduced in the previous two articles should be fairly enough if you’re just a beginner investor starting out.
But if you still have some leftover cash that you’d hate to see idling in your bank account, here is a brief summary of three popular investment types that can perhaps make your money a bit harder!
How Bonds Work
Bonds are essentially IOUs. When you purchase a bond, the company issuing the bond owes you a debt. Periodically, usually twice a year, the company pays you interest on the debt. This is known as a coupon payment. Eventually, when the bond reaches its maturity date, the company returns the debt it owes you.
While stocks offer regular payments as well in the form of dividends, the company has the prerogative to determine the dividend amount. It can even decide not to distribute dividends. This is not the case for bonds. Interest payments are mandatory, as much as you cannot refuse to pay interest on your house loan!
Bonds are also much less risky as compared to stocks since you are guaranteed your money back when the bond matures. You would only make a loss if you sell your bonds before maturity at a low price or if the bond-issuing company defaults. In the case of stocks, you hold onto your stocks indefinitely and their value rests on the ups and downs of the share market.
And so it can be said that bonds and stocks are great complements of each other. Bonds are generally less risky, providing you with a stable form of investment that can weather rough economic times. On the other hand, its wilder cousin stocks can reap you massive returns in a prospering market at a higher risk.
How To Buy
Some bonds can be purchased just like you would for stocks on the Singapore Exchange (SGX). Most bonds, however, are sold on Over-The-Counter (OTC) markets. This requires you to go through a banker or use online platforms such as Fund Supermarket, dollarDEX or Phillip’s On-line Electronic Mart System (POEMS).
- Par Value/Nominal Value: The company’s debt to you, the sum of money that would be returned when the bond reaches the maturity date.
- Price: The price you pay for the bond may not be the same as its par value. For example, someone might choose to sell his bonds to you at a price lower than its par value if he wants to cash out his investment before the maturity date.
- Maturity date: The date where the bond expires and the company returns its debt to you.
- Coupon Rate: The annual interest rate relative to the bond’s par value
- Credit Rating: This is a measure of how likely the company is to default on its loan, and therefore the risk the bond carries. A rule of thumb: a credit rating from A to AAA is generally safe. A high credit rating however often means a low coupon rate since risk and returns are inversely related.
Real Estate Investment Trust (REIT)
REITs are listed companies that are devoted to purchasing and managing real estate properties. They are an affordable alternative for investing in the real estate market for those who have yet to cobble together enough savings to purchase a private apartment. Rental income from the properties owned by the REIT is paid out as dividends and a hike in property value can lead to an appreciation in share price.
REITs in Singapore are divided into six broad sectors—industrial, commercial, residential, hospitality, healthcare and retail—depending on the nature of the properties held by the REIT. Familiar names include retail REIT Capitaland Mall Trust, which owns shopping centres like Tampines Malls and Bugis Junction, and healthcare REIT ParkwayLife, the owner of Mount Elizabeth Hospital and Gleneagles Hospital.
The key highlight of REITs is their high annual dividends, for REITs are compelled to pay out at least 90% of taxable income each year to enjoy tax transparency treatment. This makes them highly favourable to those who wish to enjoy a steady stream of income from their investments.
It is unwise, though, to simply invest in the REIT that has historically distributed the highest dividends. Various other factors must be considered, such the countries in which the REITs’ properties are based and the actual value of the REIT’s underlying assets.
If you’re of the sort who simply can’t be bothered with these things, then perhaps you should consider purchasing a REIT Exchange-Traded Fund (ETF) such as the Philip SGX APAC Dividend Leaders REIT ETF. Such ETFs help to diversify risks as their underlying properties belong to a variety of sectors and countries, although a fraction of the returns would inevitably go to paying the fund managers.
Exchange-Traded Funds (ETF)
The previous article explaining ETFs in detail can be found here. In short, an ETF is an investment fund that typically tracks an index by investing in the basket of assets that the index measures. For example, the Straits Times Index (STI) is a weighted index that tracks the performance of the top 30 stocks listed on the Singapore Exchange (SGX). An STI ETF would therefore invest in these top 30 stocks so that its performance matches that of the STI.
But why just invest in Singapore’s stock market when there are plenty of other ETFs that track the indices of overseas markets? For example, there is the SPDR S&P 500 ETF, which tracks the performance of the 500 largest public corporations on the USA’s stock exchange. Or the United SSE 50 China ETF, which tracks the 50 largest stocks of good liquidity listed on the Shanghai Stock Exchange.
These ETFs can be be easily purchased on SGX as well.
There are also ETFs that dedicated to other asset types. For example, the aforementioned Philip SGX APAC Dividend Leaders REIT ETF that consists of REITs in Australia, Hong Kong and Singapore. Or the fairly low-risk ABF Singapore Bond Index Fund, which tracks a basket of high-quality bonds issued primarily by the Singapore government and quasi-Singapore government entities.
These can help you to quickly construct a more balanced and varied portfolio even if you have little capital to start with.
This is the third article in a series of articles on investing for first-time investors. Read our second part here.