Good Alternatives To Fixed Deposits
Find out why you should consider bond funds as alternatives to putting your money in savings and fixed deposit accounts.
(Fundsupermart.com) Fundsupermart's Lim Chung Chun puts forward his case as to why you should consider bond funds as alternatives to putting your money in savings and fixed deposit accounts. At a recent talkshow held by Fundsupermart, he points out the factors that you should consider when looking at different types of bond funds and the likelihood of losing money when you invest in this asset class. And because you remove the middleman, you can get a higher return. That is essentially what the bond fund is all about. Of course you still need to pay maybe 0.5% or 1% management fee to the fund manager for helping you to invest in the bonds, but bond funds will still give you better returns than what you can get from savings and fixed deposits. Question: What are the factors to look at when selecting which bond fund to invest in? Chung Chun: There are several factors that you have to look at. 1. Who are the borrowers and what's the quality of the instrument - is it AAA rated, AA rated, a government corporation, etc. 2. Currency exposure - is this a bond denominated in Singapore dollars or if it's in a foreign currency, then you have a certain amount of currency exposure and currency risk. 3. Term to maturity - whether you're investing in short-term instruments, do you lend the money to corporations for 6 months or for 5 or 10 years. That has an implication on the risk that you face in terms of interest rate risk. Generally, the longer the tenure of the bonds, the higher interest rate risk you face. What I mean is if you buy into a long-term bond and interest rates go up tomorrow then you do see a risk of capital loss. Question: What type of bond funds could investors have in their portfolio? The third category is money market funds. These are funds that invest in very short-term instruments and high quality companies. You're talking about less-than-1-year type of tenure as far as the instruments are concerned. They are as close to your savings and fixed deposits as you can get and they are also in the lowest risk category as far as bond funds are concerned. You can take the money out anytime in the manner that you can take the money out from your savings account. Question: What is the medium to long term potential of each of these categories? Chung Chun: These are ball park numbers. They vary depending on the interest rate environment, from year to year, and from one fund to another. They are rough indicators of what one might expect from these various categories in the long term. I would say for money market funds, 1.5% to 2% in the current interest rate environment. For Singapore bond funds, maybe about 4%. And for global bond funds, 5% to 6%. Question: Can you lose money in bond funds? Chung Chun: The chance of losing (money) in money market funds is almost negligible. Possible in Singapore bond funds. But for say the Deutsche Lion Bond, it generates quite steady growth over time. You may tend to have a bit more volatility in global bond funds, so it is possible to lose your capital value slightly in the short term. But if you have a time horizon of 3 to 5 years, then you'll find that it is the one most likely to be making a decent return. As to which type of bond funds you should buying into, I think that depends on the kind of time horizon you have. If you feel that, okay I'm going to park my money in bonds for the next 5 years, then you can afford to maybe have a global bond fund rather than just money market funds. Money market funds would be for liquidity purposes because they are the ones with the least risk. Related Stories: Bond Funds Have A Place In Most Portfolios If Equity Outlook Is Improving, Why Invest In A Bond Fund? Recommended Bond & Money Market Funds (you need to log in) This article is not to be construed as an offer or solicitation for the subscription , purchase or sale of any fund. No action should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Please read our disclaimers.
Question: Why are bond funds good alternatives to savings and fixed deposits? 
Lim Chung Chun: What banks do is they collect money from the investor and lend it out to various individuals or corporates. What they earn is maybe 4% when they lend out the money, and they pay say, 1% to the investor and make a spread (gain) of 3%. That's how banks work. But it is possible for the investor to go directly to the borrower rather than having to go through a middleman who takes a big spread. Now let's say you give your money directly to the borrower...and in this case the borrower would not be individuals but normally major corporations. It could be HDB, LTA, City Developments, SembCorp, etc. 
Chung Chun: It could be a global bond fund... It could be a Singapore bond fund, which means it invests largely in Singapore names - Keppel Corp, SembCorp, HDB, etc. This type of fund would actually reduce the currency risk to the investor. If the Singapore dollar appreciates substantially against foreign currencies, you still wouldn't be affected too much. But given that the interest rate environment in Singapore is generally quite low, it would tend to give you a lower return in the long run than global bonds.
Lim Chung Chun is the Executive Chairman and Research Director at Fundsupermart.com Pte Ltd. He is a licensed investment representative. You can write to him at chungchun@fundsupermart.com.