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Picking the Right Low-Risk Investments

Picking the Right Low-Risk Investments in 2023
Written by
BigFundr Team
Published on
June 3, 2024
January 18, 2024

Looking to grow your funds in these challenging times? What are the best low-risk investments to consider in 2023?

In this article, we will cover the major global and local challenges facing investors in Singapore and highlight various low-risk investment options to consider. Finally, we will suggest why you should spread your investment funds across various asset classes. 

Recent Global Economic Challenges   

The financial landscape has certainly been on a rollercoaster ride recently. In the past few months, we have seen the collapse of Silicon Valley Bank, Signature Bank, First Republic Bank, and Credit Suisse. These events have stoked concerns of a wider credit crunch and uncertainty.

Furthermore, the US Federal Reserve raised interest rates by another 0.25% in May, bringing the range to 5.00% - 5.25%. They are trying to bring down the current inflation rate from 5% to their target of around 2%. 

Here is the revelation — this increase in the cost of capital could increase business risks and even drive the US economy towards a recession!

Even Charlie Munger of Berkshire (Warren Buffett’s esteemed business partner) recently bemoaned that investing is tougher today than a few years ago. 

"I think value investors are going to have a harder time now that there's so many of them competing for a diminished bunch of opportunities. So my advice to value investors is to get used to making less," Munger said. 

This remark was made against the backdrop that the Federal Reserve's hikes would squeeze both consumers and businesses by increasing borrowing costs.

Cooling Singapore’s Property Market

Closer to home, the Singapore government has been trying to tame escalating residential property prices. To do so, they have implemented a slew of cooling measures to curb demand. 

For example, they have recently hiked the additional buyer's stamp duty (ABSD), which is affecting foreign investors, increasing from 30% to 60% for the purchase of any residential properties. This is a 'preemptive measure' amid growing demand by foreigners who see Singapore as a relatively safe haven for their investments. Thankfully, locals and permanent residents who are buying their first residential property are relatively unaffected. 

Source: IRAS

With bank mortgage interest rates peaking at more than 4%, the risk of default in mortgage loan repayments has increased. We might see an increase in mortgagee sales in 2023. As a result of this uncertainty in the residential property market, investors are adopting a ‘wait-and-see’ approach before diving in.

Low-Risk Investments Options in Singapore

So, what happens in volatile market conditions like this? 

Well, if you are like many investors who prefer to play it safe, you might find yourself becoming more cautious. You start thinking about where you can stash your extra cash where it is not only safe but can also keep up with inflation. 

And let us not forget, inflation is not exactly taking a break — especially in Singapore, where the core inflation rate was still hovering around 5.5% as of April 2023. 

In this risky business environment, where can you look for safety? Risk-averse investors could look for investment options with guaranteed principal and returns in Singapore to hedge against inflation. 

Let us look at some of these secure investment options.

1. Singapore Government Treasury Bills (T-Bills)

T-bills are short-term Singapore Government Securities (SGS) issued at a discount to their face value. Investors receive the full face value at maturity. The Government issues 6-month and 1-year T-bills. 

SGS T-bills are fully backed by the Singapore Government. They are typically useful for investors who are looking for very short-term investments of between six months to one year, without taking on much investment risk. Their current returns hover on the average of 3.62% per annum.

Due to their demand, T-bills are often over subscribed.

2. Singapore Government Bonds (SGS Bonds)

SGS Bonds are issued and guaranteed by the Government of Singapore. They are considered a very safe investment as they are backed by the full faith and credit of the Singapore Government, which has a AAA credit rating. These government bonds are available in tenors ranging from 2 years to 30 years, providing a wide range of options for investors with different investment horizons. 

The interest rates for these bonds are fixed when they are issued and are paid semi-annually. The rates are determined based on the prevailing market conditions at the time of issuance.

(Source: MAS)

3. Singapore Savings Bonds (SSBs)

Singapore Savings Bonds (SSBs) are a special type of government bond that are designed to be accessible and safe for individual investors. They are fully backed by the Singapore Government, making them a very low-risk investment. The interest you earn increases the longer you hold the bond, up to a maximum of 10 years. Unlike other bonds, you can get your investment amount back in full with no capital loss at any time.

Here is the rate of each SSB issue, if you held it for the full 10-year time frame, since its inception in October 2015.

SSB Interest rates 2023
(Source: MAS)

4. Fixed Deposits

Fixed deposits are a type of financial instrument provided by the banks. They are considered to be very safe investments. The interest rates of fixed deposits are normally higher than that of regular savings accounts. 

In Singapore, fixed deposits offer a wide range of tenures (from 1 month to 36 months) with differing interest rates depending on the bank and the tenure. Below is a summary of June 2023 Fixed Deposit Rates in Singapore with a range of 3.00% to 3.90%. 

(Source: MAS, Seedly, June 2023)

5. Real-Estate Backed Notes: BigFundr 

Real-estate backed notes are debt investments secured by real property. This means that if the borrower defaults on the loan, the lender can seize the property and sell it to recoup their losses.

The benefit of such instruments is that they allow investors to reap the benefits of investing in property without the hassle of owning a property. 

BigFundr is the first and only MAS-licensed fintech platform that offers such investment products with principal and interest guaranteed by our strategic partner and shareholder, Maxi-Cash. We are able to provide investors access to shorter term, principal and interest guaranteed products with higher returns through our proprietary platform. 

Our current product offers Australian real estate-backed loan notes with guaranteed principal and interest repayments of 5.68% - 6.00% per annum with tenure of three months to one year. This is a good hedge against current inflation rates.

Diversifying Your Investments to Beat Inflation 

In summary, the above ‘principal-returns guaranteed’ products provide yields between 2.8% to 6.0% per annum compared to MAS 2023 Core Inflation expectation of 3.5% to 4.5%. This means that not all low-risk investment options are able to keep pace with the rising cost of living.

What then should retail investors like you do?

To understand the wisdom of diversification, let us study how BlackRock — the world's largest asset manager, with over US$9.09 trillion in assets under management as of 14 April 2023 — spreads its investment risks. 

From the BlackRock Asset Return Map of riskier assets (see below), we can see the annual returns for selected asset classes, tracked by BlackRock, ranked from best to worst within each calendar year over the last 10 years. Return rankings change dramatically from year to year — while diversification cannot eliminate the risks of investing, it illustrates why investing across a variety of asset classes could help.

BlackRock Investment Returns Map 2014-2023:

Source: BlackRock Investment Institute, with data from Refinitiv Datastream, May 2023.

Note that the average annualised returns of the combination of equities, bonds and private markets/commodities asset classes from 2024 to 2023 is only about 3.4% per annum. 

Conclusion

In these uncertain times, it is more important than ever to diversify your risks across various investment options while keeping pace with inflation. 

While the options listed above are considered low risk, it is crucial to do your own research and consider your financial goals and risk tolerance before making any investment decisions.  

Always remember, the higher the returns, the higher the risks. It is always wise to diversify your investments and not put all your eggs in one basket.

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Please note that the links provided are for informational purposes only and do not constitute financial advice. Always do your own research or consult with a financial advisor before making any investment decisions.

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