How much investment returns can one achieve on excess funds? A simple question but one that is hardest to answer. One may desire a return of 10 per cent on their investment but can this be achieved without risks? Assuming that we are not talking about investments in real estates or own businesses, could an average person with a salary still get that 10 per cent return every year on their savings?
There will be trade-off between returns and risks. The higher the returns expect higher risks on the investment. Take the case of Lehman Brothers minibonds and you will know what I am saying. There is no free lunch as the saying goes. If someone promised super returns on investments, be wary of this promise. See the example of land banking deals of Profitable Plots Pte Ltd, which was placed under Investor Alert List by the Monetary Authority of Singapore.
Taking a lower risk on investments comes with lower returns. Take the example of savings and fixed deposits with local banks. The interest rates range from 0.1 per cent to 0.6 per cent per annum based on rates offered by one local bank. Singapore government bonds (SGS bonds), which are almost risk-free, pays at best a coupon of 3.5 per cent per year for bonds with long-dated maturity on 1 March 2027.
Venturing into foreign currency deposits may offer higher returns in the region of 3.5 to 4.5 per cent for Australian dollar fixed deposits with different durations. But this comes with foreign currency risk and this can wipe out the interest earned quite quickly if the currency rate is volatile. See the example of Australian dollar, which declined as result of massive flooding in Queensland and Victoria states.
If you put your money in Singapore equity and invested in blue chips, you may get total returns (including realised capital gains and dividends) of about 8 to 10 per cent on your diversified portfolio. Equity is volatile and share prices can move either way from your cost of investments. Dividend yields for some blue chips and some real estates investment trusts (REITS) may range from 1 per cent to 5 per cent and hardly more than 10 per cent.
Banks are now offering structured deposits based on linkages to specific equity, interest rate, currency etc. These deposits typically offer interest of about 1.5 – 2.5 per cent per year. Credit linked notes are also offered by local banks and their returns range from 2 to 3.5 per cent per year. The risk here is that the principal amount is not guaranteed on maturity.
In this recent year, bonds are floated on the Singapore Exchange. The SIA bonds and CapitaMalls Asia bonds offer interest payouts of 2.15 per cent per annum. DBS offered its Preference Shares and the dividend payout is 4.7%. Though not guaranteed, the latest offerings gave retail investors an avenue to invest their funds.
As for investment in unit trusts, picking winners is just not easy. My experience with unit trusts had not been positive. Investing in various types of commodities, both soft and hard commodities, such as wheat, oil, copper, gold, etc, requires specialised knowledge of the industry. It is a risk not worth taking. Investing in foreign currencies fall into the latter category.
Investors can avail themselves to buying endowment policies of local life insurers, which provide protection as well as growing your invested amounts on maturity. The returns consist of two portions: guaranteed payout amount and non-guaranteed amount that is dependent on the performance of the Life Participating Fund of the insurer. Returns range from 3 to 5 per cent depending on performance of the fund.
Going back to the question whether investors could get 10 per cent per year on their savings, it will be difficult without taking certain risk. There is no sure-win investment where the principal amount can be protected and still receiving regular investment returns yearly. I suggest that one must be contented with lower returns without having sleepless nights.
Copyright © 2011, limkimtong for Living Investment
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.