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Published August 29, 2009  |
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Wealth insights
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They can be equally safe but offer better returns than the dismal rates paid by banks
DID you know that the average bank savings deposit rate in Singapore was just 0.16 per cent last month? At the start of 2003, the average bank savings rate stood at 0.44 per cent but that has since fallen to the current low of 0.16 per cent. This means that assuming it stays at current levels, keeping $10,000 in the average bank savings account for an entire year would net just $16. The rates are so low, we might as well treat it as essentially zero. When we pulled the data on fixed deposits from the MAS website, the results were not much better. The average 12-month bank fixed-deposit rate stood at merely 0.53 per cent in July! At the start of 2003, it stood at 1.3 per cent. Savings accounts are more liquid than fixed deposits. The bank savings rate may change daily, is calculated daily, and you can put in and take money out any time with no penalties. For 12-month fixed deposits, there is an inherent understanding that you have to keep it there for 12 months. If you withdraw your deposit before it matures, there will be penalties such as lost interest. That's why fixed deposit rates have to be higher than savings account rates. But at just 0.53 per cent? Even the cash fund, whose daily yield you see on our banner every day, yielded 0.482 per cent on Aug 25 (this yield can be viewed like a daily savings rate). That is only slightly lower than the 0.53 per cent and it gives daily liquidity! This means that you can put in and take out money without penalty every day. There is a significant penalty right now for being safe. Because fixed deposits and savings accounts are 'safe', investors keep large sums of money in them. However, given the extremely low interest rates right now, they are simply not being adequately rewarded for keeping money with the banks and being safe. Banks, in the aftermath of the US sub-prime financial crisis, became very conservative with their lending. It was reported that some people could not buy cars because banks would not grant them a car loan. Similarly, housing loans were reduced to just 70 per cent of the selling price in some cases because banks did not want to take on too much loan exposure with riskier home owners.
At the same time, investors fearful of the market crash pulled a lot of money out of stock markets and investments, and have kept it all in cash since last September. Many are still sticking to cash till this day. As a result, the banks are flush with cash and do not need more deposits. This is shown most clearly by the low interest rates being given to depositors. If the banks really wanted your money, they would be willing to give you a higher rate, but they don't! They have so much cash that they can't loan out it all out anyway. As investors, we need to recognise that our money can be put to better use. Even if we still want to keep them in low-risk, safer investments, there are certainly alternatives which can give better than the 0.16 per cent from savings accounts. As mentioned previously, the cash fund gives 0.48 per cent right now, with similar liquidity. The next step up in terms of yield would be Singapore bond funds which buys into higher yielding corporate bonds not easily accessible to retail investors. Singapore government bonds (SGS) can also be considered. SGS with longer maturities give higher yields and there is no law that you have to hold a 15-year SGS to maturity. Investors should take note though that holding a very long maturity bond carries the risk that if interest rate moves up, the value of the SGS will drop. Fundsupermart has a list of the SGS and their current yield to maturity on its website. In general, for fixed income, the higher the yields, the higher the risk. In conclusion, please review the money you have in fixed deposits and savings accounts and check on the rates that you are receiving for them. Banks love to roll over fixed deposits automatically when they mature and at their current interest rate levels which are very low. Even if you still want to keep them in safe investments, there are alternatives out there which are also very low risk, yet give a better return than what savings accounts yield. By Wong Sui Jau General manager Fundsupermart.com |
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