Investing in Bonds in Singapore: What you need to know
Even though that’s a statement made over 100 years ago, it still applies today. You don’t need to work for money, rather you should make money work for you. The stock market is the perfect place to execute this strategy. The stock market opens you to a mix of investment options ranging from stocks to government bonds. You can carefully balance your investment portfolio by investing in high-risk and low-risk investments. You have choices like high-yield bonds, blue chip stocks, moderate yield bonds, strip bonds, etc. Of all these options, it is always recommended to invest in bonds.
What is a bond investment?
A bond is offered when a company or an institute wants to raise money. For example, when you invest in a Singapore Savings Bond, you are lending money to the Singapore government. The government will utilise your investment to build better infrastructure for the nation.
When you invest in bonds, the company will pay you back with interest and return the investment when the bond matures.
Bonds are an extremely common form across the world to raise money. Government and companies issue bonds because they do not want to dip into their financial reserves. Company’s use it to raise additional funding for expansion and governments use to raise capital for various projects.
Why is bond investment attractive?
An investment bond is considered a low-risk investment. There is a very low chance that you will lose your investment.
In comparison to other investment options such as equity and blue chip stocks, bonds repay your principal investment at a specific date. Hence, regardless of whether the market is high or low, the original investment will come back to you.
Your bond will generate a certain fixed income. You can decide the schedule on the basis of annually, quarterly or monthly. While, in comparison to other investment options, the income generated may not be very high, the payment is stable.
When’s the right time to invest?
One of the biggest disadvantages of investing in bonds is the low returns. When you compare the dividend return from a blue chip stock and a bond, the blue chip stock offers a significantly higher price. This is why it’s highly recommended that you wait to invest in bonds when the market reaches a high point.
Another strategy of when to invest is to not look at the market at all. Bonds are a safe investment because gives you returns over a period of time. You could also look at bond yields that offer better returns than stocks.
How do you earn from your bonds?
When you apply and purchase a bond, you earn returns in two ways:
You regularly receive a coupon according to the bond you have purchased. For example, if you buy a bond at 100% of the face amount, and you keep the bond till maturity, your return is equal to the coupon your receive.
- The Bonds gain in value overtime
When you buy the bond at a price lower than the face value, the yield is based on the coupon and any capital gain or loss from holding the bond.
This is a decision you need to take when selecting the bond.
When will the bond mature?
Bond maturity will occur according to the bond you select. It usually varies from 2, 5, 10 and 20 years. The general rule is that longer the maturity period, the more volatile the interest rate.
For example, you purchase a 2 year bond for $100. The market interest goes up by 1% and, in turn, your bond price will drop to $90. However, if you have a 20 year bond, purchased at $100, and the interest goes up by 1%, your bond price will drop to $70.
How do you invest in bonds?
Now that all the basic questions on bonds are covered, you may be wondering how to invest in bonds.
Identity which bond to purchase
There are several websites you can check to find bonds available to purchase.
You can bonds that are available for purchase. Ensure you conduct thorough research and pick the best one.
Send in your Application
Each institution has its own system of applying for a bond. For example, Singapore Saving Bonds (SSB) requires you to have a bank account with DBS, OCBC or UOB. Your CDP security account should be linked to your bank account. You can do this through internet banking and the payment for the bond will be deducted directly from your bank account. Once you apply, SSB will announce the application results on the 3rd last business day of the month.
Receive your Interest
If you have tied your bank account with the bond application, you will receive the interest directly. Most bonds have a bi-annual yield.
Investing in stocks can be a violate method to earn returns. Bonds offer a safer option. Use this information to grow your investment portfolio. Another option that you have is to reach out to an investment broker who can assist you in choosing the appropriate bond.
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