Monday, January 19
Saturday, January 17
SGS: An alternative to fixed deposits
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This post is part of a series of posts that discuss about SGS in detail. To access the other posts in this series, click here.
As compared to SGS treasury bills and bonds, fixed deposits is the more widely known product that is known to carry very little or no risk. This is because most of us are aware that the Singapore Goverment currently guarantees the money that you deposit at the bank up to a certain amount. However, not many people know about SGS. SGS has some distinct advantages which makes it a superior form of investment over fixed deposits in its class that is suitable for conservative investors.
As compared to SGS treasury bills and bonds, fixed deposits is the more widely known product that is known to carry very little or no risk. This is because most of us are aware that the Singapore Goverment currently guarantees the money that you deposit at the bank up to a certain amount. However, not many people know about SGS. SGS has some distinct advantages which makes it a superior form of investment over fixed deposits in its class that is suitable for conservative investors.
1. Superior returns
SGS treasury bills and bonds are likely to offer a better rate of returns as compared to fixed deposits. I have attached a chart of the historical yield of SGS bonds with an average year to maturity of 2 years.
Chart taken from fundsupermart
If you take a closer look at the chart, you will realize that the yield for the SGS with an average year to maturity of 2 years.is rather attractive as compared to fixed deposits. Furthermore, the lowest yield for the SGS, which is slightly less than 1% is comparable than the yield offered by fixed deposits, which is generally below 1%. There were also instances where the yield of the SGS with an average year to maturity of 2 years is even greater than 3% and at its highest point, the yield has gone up to more than 4% before. This shows that generally, SGS treasury bills and bonds offer a better yield than fixed deposits.
2. No locked-in period
As compared to fixed deposits which has a locked-in period, SGS treasury bills and bonds have no locked-in period. You can always choose to sell your SGS treasury bills and bonds in the secondary market before maturity. However, since the price of SGS such as the treasury bills or bonds can fluctuate, there is a chance that you will make a small loss if the price that you sell your treasury bills or bonds is lower than your purchase price. If your selling price is higher than your purchase price, that will bring me to my new point.
3. Potential Gains
Since one is able to sell SGS treasury bills and bonds on the secondary market, if the selling price of your treasury bills or bonds is higher than your purchase price, you will be able to have some capital gains. However, the price of the SGS treasury bills and bonds are usually not so volatile, thus any capital gain is likely to be rather small.
As we can see, SGS treasury bills and bonds have a few distinct advantages over fixed deposits and one should seriously consider them over fixed deposits. In my next post, I will be covering on how one can go about in buying SGS treasury bills and bonds.
Thursday, January 15
What is SGS ?
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This post is part of a series of posts that discuss about the SGS in detail. To access the other posts in this series, click here.
So what is SGS ? SGS stands for Singapore Government Securities and they are marketable debt instruments issued by the Singapore Government. The link for the official website of the SGS can be found here. In other words, the government actually borrows money from you and will promise to return you your capital with some amount of interest after a agreed period of time.
What is so special about SGS as a form of investment ? The special feature about SGS is that it is a virtually risk-free investment. This is because they are backed by the full faith and credit of the Singapore Government. The Singapore Government has consistently run budget surpluses consistently over the years thus it has the ability to pay back debts. Furthermore, SGS are given the highest debt rating by various international rating agencies such as Moody's, Standard and Poor's and Fitch. As compared to fixed deposits, SGS generally gives a higher interest. Furthermore, fixed deposits have a locked-in period whereas you can always sell your SGS for cash on the market after buying them.
SGS are generally dividend into two categories. They are Treasury Bills which are more commonly known in short as T-bills, and Bonds.
Treasury Bills are short-term debts that have a maturity period of one year or less. It is being sold or bought at a discount to their face value which is $100. At the end of the maturity period, the Singapore Government will pay back the face value thus the interest is simply the difference between the purchase price and the face value.
For example, a Treasury Bill is being sold at $99.04 for a face value of $100 which the government will pay back to you at the end of the maturity period thus it is being sold at a discount to the face value. If you bought it at $99.04, at the end of the maturity period, you will receive back $100 and your profit will simply be $100 - $99.04 = $0.96. Thus your yield will be $0.96 / $100 * 100 = 0.96%. As such, the discount is actually the interest of the Treasury Bill.
Currently, the Singapore Government currently issues 3-month and 1 year Treasury Bill although 1 year Treasury Bill has been issued before and the minimum purchase amount is $1000. The 3-month Treasury Bill is being issued every week while the 1 year Treasury Bill is being issued twice a year.
Bonds are longer term debts that have a maturity period of more than one year. During the holding period of the bonds, the Singapore Government will give out the interest which is also known as coupon, twice annually with the payment dates six months apart from each other until the end of the maturity period. This is one of the main difference between Treasury Bills and Bonds. For Treasury Bills, the interest is given in the form of a discount to the face value of the Treasury Bills whereas for Bonds, the interest is given out in the form of coupons.
For example, you bought $1000 worth of a SGS Bond that has a yield which is also known as a coupon rate of 4% on a face value of $100 and it will mature on 1st March 2015. Every year, the total interest you will receive will be 4% * $1000 = $40. Since the coupons is being given out twice a year, you will receive $20 for each coupon payment which are six months apart until 1st March 2015.
So what is SGS ? SGS stands for Singapore Government Securities and they are marketable debt instruments issued by the Singapore Government. The link for the official website of the SGS can be found here. In other words, the government actually borrows money from you and will promise to return you your capital with some amount of interest after a agreed period of time.What is so special about SGS as a form of investment ? The special feature about SGS is that it is a virtually risk-free investment. This is because they are backed by the full faith and credit of the Singapore Government. The Singapore Government has consistently run budget surpluses consistently over the years thus it has the ability to pay back debts. Furthermore, SGS are given the highest debt rating by various international rating agencies such as Moody's, Standard and Poor's and Fitch. As compared to fixed deposits, SGS generally gives a higher interest. Furthermore, fixed deposits have a locked-in period whereas you can always sell your SGS for cash on the market after buying them.
SGS are generally dividend into two categories. They are Treasury Bills which are more commonly known in short as T-bills, and Bonds.
Treasury Bills are short-term debts that have a maturity period of one year or less. It is being sold or bought at a discount to their face value which is $100. At the end of the maturity period, the Singapore Government will pay back the face value thus the interest is simply the difference between the purchase price and the face value.
For example, a Treasury Bill is being sold at $99.04 for a face value of $100 which the government will pay back to you at the end of the maturity period thus it is being sold at a discount to the face value. If you bought it at $99.04, at the end of the maturity period, you will receive back $100 and your profit will simply be $100 - $99.04 = $0.96. Thus your yield will be $0.96 / $100 * 100 = 0.96%. As such, the discount is actually the interest of the Treasury Bill.
Currently, the Singapore Government currently issues 3-month and 1 year Treasury Bill although 1 year Treasury Bill has been issued before and the minimum purchase amount is $1000. The 3-month Treasury Bill is being issued every week while the 1 year Treasury Bill is being issued twice a year.
Bonds are longer term debts that have a maturity period of more than one year. During the holding period of the bonds, the Singapore Government will give out the interest which is also known as coupon, twice annually with the payment dates six months apart from each other until the end of the maturity period. This is one of the main difference between Treasury Bills and Bonds. For Treasury Bills, the interest is given in the form of a discount to the face value of the Treasury Bills whereas for Bonds, the interest is given out in the form of coupons.
For example, you bought $1000 worth of a SGS Bond that has a yield which is also known as a coupon rate of 4% on a face value of $100 and it will mature on 1st March 2015. Every year, the total interest you will receive will be 4% * $1000 = $40. Since the coupons is being given out twice a year, you will receive $20 for each coupon payment which are six months apart until 1st March 2015.
If you wish to view a more detailed explanation on the SGS, you can download the guide by MAS here. In my next post, I will be doing a comparison between SGS and fixed deposits.
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