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Cash just won’t do; Consider Money Market and Bond Funds

Facing up to what’s real, not nominal

It is not uncommon to hear the older generation lament the loss of the value of a dollar, time and again providing captive listeners with anecdotal evidence as to what a dollar could have purchased back in their day.

Indeed, the worth of our savings in the future is largely dependent on the prices of the goods we intend to buy. If a dollar affords us less at tomorrow’s prices than it does today, then certainly the value of the dollar has decreased. However, this is a point we heed particularly because we are too focused on the nominal figures in our savings account to consider the effects of inflation on the true value of our savings.

It is perhaps time we pay attention, for the statistics are not in our favour.

Consider an individual who leaves her money in a traditional deposits account in 1989. The blue line in Chart 1 tracks the progress of her savings through the next 15 years, taking into account the compounding effects of historical deposit interest rates and assuming that she does not spend her interest earnings. Up and up the line goes – the law of compounding seems to work.


Source: Bank Saving Deposits Rate from Monetary Authority of Singapore and Inflation Rate from Department of Statistics Singapore, for the period 1989 to 2014.

Yes, nominally the money grows. But to assess the real value of her savings, we need to factor in the effects of inflation. The green line shows the inflation-adjusted value of the individual’s savings over the 15 year period. Quite clearly, from the middle of 2007 onwards, inflation has eroded the real value of her savings to levels below what it was worth in 1989. This is the bleak reality that most of us have to face – the money you set aside in your deposit accounts today may not afford you the same level of consumption many years into the future.

The push and pull of inflation and interest rates

Why is this so? This is due to the effects of interest and inflation rates on returns to savings. While interest earned in deposit accounts serves to increase the dollar amount of your savings, inflation diminishes its purchasing power.

Since the great financial crisis of 2008, most central banks across the world have slashed interest rates to historical lows to provide a boost to the economy. This may continue for a protracted period of time considering that we are stuck in a slow growth environment. Meanwhile, it doesn’t help that inflation, while at multi-year lows, has consistently kept at rates above prevailing interest rate levels.


Source: Bank Saving Deposits Rate from Monetary Authority of Singapore and Inflation Rate from Department of Statistics Singapore, for the period 1989 to 2014.

Consequently, this means that savings placed in deposit accounts have not kept up with inflation. If this is our only source of income for the future, we would likely have to face the brutal reality that we may not be able to afford our current standard of living at tomorrow’s prices.

Seeking low risk alternatives to deposits

If the return on savings is the problem, perhaps it is time to consider other alternatives with higher rates of return. Of course, the fundamental rule of finance applies – higher risk for higher returns.

For new investors, the good news is that there are liquid and low risk investment options that they may consider to boost the returns on their savings without having to subject their hard earned money to the gyrations of an unforgiving stock market.

These take the form of money market funds or investment-grade bond funds. On a risk-reward spectrum, these options are able to generate fairly reasonable rates of return relative to fixed deposit accounts without engaging in too much risk-taking in comparison to traditional high-yield bond funds and equity funds.


Source: OCBC Wealth Management

Assessing funds through 3 criteria

1. Quality of the investment portfolio

When selecting the right funds to invest in, one should focus first and foremost on the quality of the underlying investment portfolio.

Typically, money market funds and bond funds actively manage a portfolio of investment-grade bonds. By definition, these bonds have a low risk of default, meaning that bond issuers are more likely to pay back the principal as well as the coupons on the bonds.

Also, a portfolio of investment-grade bonds diversifies risk across many different issuers, further safeguarding against the risk of a single credit issue having a big impact on the portfolio’s value.

2. Mind the currency risks

Besides paying attention to the quality of underlying issuers to assess default risks, investors should also pay attention to the currency exposure of the fund as fluctuations in foreign exchange rates can adversely affect the portfolio’s value, especially if a substantial portion of the portfolio is invested in foreign denominated assets.

Funds that are managed from a SGD perspective minimises such risks. This means these investment portfolios either take predominantly SGD currency exposure or hedges any non-SGD exposure. Hedging effectively minimises the currency risk of non-SGD denominated bonds.

3. Cost-effective, liquid investments

Generally, funds are liquid investments as they are valued daily and can be redeemed in a matter of days. Also, investors could invest in these funds with relatively little cash outlay, with a minimum investment amount of S$1000.

This is a compelling proposition considering that a single investment-grade bond issue may require a minimum investment outlay of S$250,000. In contrast, with a S$1000 outlay, investors can access a portfolio of investment grade bonds diversified across multiple issuers.

SGD Money Market and Bond Funds on OCBC Shelf

In this regard, OCBC offers three SGD money market and bond fund options which investors may consider to enhance the returns on their savings in a relatively low risk manner. They are:

  1. LionGlobal SGD Money Market Fund
  2. LionGlobal Singapore Fixed Income Investment
  3. LionGlobal Short Duration Bond Fund

Source: LionGlobal Investors; Information accurate as at 30 June 2016; *Includes cash & equivalents, takes the worst of S&P, Moody’s, Fitch or Internal ratings and based on a straight-line model.


Source: Monetary Authority of Singapore; Bloomberg; *Return comparisons are based on the average 5 year fixed deposit interest rates calculated from July 2011 to July 2016 and annualized total returns for the three funds calculated during the same period.

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