Monday, December 16, 2013

Where to invest your mum's 50k

Interesting assignment that my mum gave me this morning.

She wanted to put in 50k for her savings to get more returns instead of the usual savings. I think she got this lump sum after her previous fixed deposits expired. She wanted me to look into some instruments where she can get better returns but she don't want to put it into the stock market for fear of eroding her capital. I also won't recommend that she put it into the stock market when I cannot guarantee her capital won't be lost in the process.

Here's what I found out:

1. Firstly, most fixed deposit rates suck. The three local banks are so full of money that they don't even pretend to like more additional funds. Certainly, that's the idea I had when I saw the returns on their timed deposits. The rates are not worth mentioning - better than savings accounts of course, but not much better. Usually foreign banks are more generous, so I looked into that direction but came out disappointed.

2. Certain banks/financial institutions have a special fixed deposits for senior citizens aged above 55 year old. I looked into Hong Leong finance. They have a 1.21% pa for a period of 24 months for people with some bird's nest thrown in as well. That's a notch better than most DBS/POSB, which gave about 0.55% for the same time period. People's bank? Bah. Maybank is not too bad either. For a period of 24 months, you get to have 1.25% pa, slightly better than HL finance and way better than any of the 3 local banks.

I'm still not satisfied though. So I looked into money market funds from POEMS. In it's heyday, it's giving 2% pa which is really a good deal. But that's the time when interest rates overall are high too. Anyway, it's now less than 0.5% pa. For people considering putting in less than 50k in a period of less than 2 years, that still beats fixed deposit rates in most banks considering that the money market fund is so liquid and safe. But no, money market fund isn't going to do for me.

Next, I looked at SG bonds/bills. As safe as the solvency of this government, if you hold the instrument to maturity, you'll be able to get back the capital. The interest, in the form of coupons, are usually given twice a year. I looked at the fundsupermart platform, which charges 0.1% custodian per annum on the coupon payments and also 0.1% for initial processing fees. That's okay, considering how they make life easier for me. I worked out on their calculator for this NX11100X, with a coupon of 2.225% and maturity on 1st June 2021, which is about 7.47 years to maturity.

What I'm concerned is how much I'll get over how much I paid for the instrument, on an annual basis. Based on the estimated amount that I've to pay ($49,829.40), I'll get $1,057.50 per year, spread over two payments (each $528.75) on 1st June and 1st Dec per year until maturity. At the end of 7.47 years on 2021, I'll get back $47,000. My only concern is that the yield will be 2.122% (1,057.5 / 49,829.4 = 2.122%) ; I'll leave the rest of the jargon to academics.

That's a lot better than the fixed deposits that my mum wanted initially, giving a returns of about 70% better and not significantly more risk. In fact, the fixed deposits will also be invested directly into high grade bonds and bills like the one that I'm looking at, so effectively I'm just cutting the middle layer of fees by going semi-direct (direct will be to bid straight from MAS).

Then there's the problem of getting bonds in a low interest rate environment, knowing that the tapering of funds injected into the system will probably slow down or stop in the near future. I reasoned it out that it doesn't matter because any drop in price of the bond when the interest rate increases is of not concern to a investor holding the bond to maturity. Just don't sell it before maturity.

I suggest doing this in stages:

1. First 20k to put into the sg bonds to get a yield of 2.122% pa

2. The remaining 30k to put into 12 or 24 mths fixed deposit with Maybank at 0.95% pa or 1.25% pa respectively

3. After the fixed deposit matures, look at the interest rate environment and decide whether to put in the funds into fixed deposit again or sg bonds. When the interest rate increases, we might be able to get more from either fixed deposit or from the sg bonds.

I'll meet up with my parents and tell them about my plan. Ultimately it's up to them. Knowing them, they will instinctively flock to fixed deposits but I'll have to try to convince them that it's worth taking that extra tiny risk to get almost 70% more returns.


Sgftfund said...

Have you consider corporate bonds listed in sgx? Or preference shares from the big 3 banks? Maybe 10-20% allocation on that?

Not sure what's the liquidity period yr parents looking for when you lock up a FD period of 24 mths. Any redemption within this period usually will lose the interest.

SCB used to have quite a good deal for FD a yr back where interest rate gets step up every 6 mths and you get to decide whether u want to redeem the FD every 3 mths at no penalty. Maybe u can check it out if still available. I am current getting 1.2% after stepping up for 12 mths. I like the liquidity of every 3 mths.

I am managing my parents money so I understand their concern of losing capital. With such a low interest rate environment, definitely needs more effort to find yield.

All the best!

la papillion said...

Hi sgftfund,

My parents are used to the certainty of endowment funds and fixed D, so they get very jumpy when it comes to stocks or something remotely resembling them. They bought into chartered semicon in its heyday, so I guess that's understandable.

They wanted some liquid, because part of the money belongs to their friend too. That's why it had to be pretty liquid. Their initial plan was to have fixed D with lockup period of 1-2 yrs only, then rinse and repeat when the time lapsed. I guess they do want some cashflow.

Haha, don't talk about corporate bonds, if I can even convince them to invest in govt bonds, that'll be a good start already!

However, I did look at the list of corporate bonds available at sgx. Only 1 interest me, and that's the LTA n4.17%160510 10k. However, the yield to maturity is something like 1.7% pa at current price, maturing in 2.4 yrs later, so it's not going to be much better. Any more to recommend? haha

Pref shares might not be suitable if they want to cash out. It's not guaranteed that they will redeem, so if they needed the capital when the interest rate environment is higher than present, chances are they will make a loss.

Regarding the scb step up deposit, I found this:

After stepping up for 22 to 24 months, the interest is hua leh, haha

Thanks for your helpful comments!

Sgftfund said...

No worries. I guess all depends what is the purpose of this 50k, if its needs to be 120% risk free then better just keep it to FD or Govt bonds so they could sleep at night.

It's not easy to convince older generation, I started FD placement for my mum as well. But She ask me how to get higher yield when interest rate went from 3 to below 1%.. Thus making her first foray into equities, bonds and no turning back.

Now She sees benefits of having passive income generated from her savings to pay off expenses while also keeping liquidity. I keep around 30% of total capital in bonds/cash/FD for any emergency use.

Who knows, she might ask you abt Singtel dividends yield one day? Never says never!

Sgftfund said...

Sorry to add on ... Asset diversification is the key to balance yield, stability and liquidity in my humble view! All the best!

la papillion said...

Hi Sgftfund,

Indeed..I'll warm them up with bonds first before going to equities haha! Good suggestion ;)

Derek said...

Hi LP,

I agree that it will take a fair amount of convincing. My mom buy shares but only with her CPF, and seeing how her stock goes south every year, she is even more hesitant.

I hope this 50k is on top of your mom's own emergency fund ya. For me, it's both my parents emergency and retirement fund, hence on top of returns, I have to ensure liquidity. I went through the same thought process as you and in the end decide to park it in an ordinary savings account for the time being.

Going forward, I may take a small loan from my parents fund to purchase a property. I will guarantee their capital and pay them a higher interest rate. Win - Win.


Serendib said...

Since you'll have to hold the govt bond to maturity in 7+ years, why not borrow it yourself? Issue an LP bond at 2.5%pa coupon - I'm sure you can make a much higher return on the $20k and if you're feeling generous, you can give them a kicker at the end. Take a leaf from how our good govt uses CPF =)

CreateWealth8888 said...

I use mini Madoff method to do monthly fixed income payout.

So far the two "investors" didn't bother to check whether their money still around or not.


Anonymous said...

You mentioned Fundsupermart charges fee to keep your mom's Spore Govt bonds there.
A cheaper alternative is to keep it in a Spore bank.
I used such a bank service and I think there is NO charge for the account (my accounts are now empty but they still send me null statements every year). You need to ask about it. Their staff may not be familiar but there is such a service. Unfortunately, no online services - need to fill in paper forms every time you want to purchase bonds (but they tell me to just drop into cheque deposit box -- no need to queue).

My 15HWW said...

Hi LP,

How about CPF top-ups? Higher risk-free returns although the trade-off is obviously liquidity.

la papillion said...

Hi Derek,

My mum don't have emergency funds, so I think this is her 'spare' cash, meaning that it's money that she don't need but can be used for travelling and also doubles up as a emergency fund. In other words, a certain portion had to be liquid. Even in fixed D where the bulk of the capital is locked up, she said she'll get the interest payment out every year to spend (the HL finance product she's interested in allows her to do so).

Haha, I've parked like 30k in savings acct for a year already, then she suddenly wanted to put in 20k more to have a higher returns :)

Borrow from parents? Wah, you good! Most pple would just get it from their parents as a gift!! Good for them :)

la papillion said...

Hi Serendib,

Good idea! I totally forgot that I can do that! I'll explore that option with my mum too, and see if she's interested, haha! Thanks for the wonderful suggestion :)

Hi bro8888,

I know what you do ;) Last time I asked you about it too, lol

la papillion said...

Hi anonymous,

Ya, I know about keeping it in banks, but it's really a lot of hassle. First, there's a lot of things that we have to do without a platform, so there's a lot of hassle. Then there's also the part about the bidding. Haha, I think i'll go to the secondary market where people trade their bonds instead of the primary market from MAS. Thanks for the suggestion though! :)

Hi 15 HWW,

Nope, I don't think it's suitable. There's the problem about liquidity... my parents need to get it out instead of being locked up. Don't think my parents even hit the min sum so there's going to be a problem. Anyway, thanks for the suggestion!

Numbers said...

After you "borrow" the money with interest, you can then go for a relatively safe higher returns like covered call options with insurance.

Your risk is about 5-10%, but your min. return is about 36% or more.

Upside is more than twice the downside risk.

la papillion said...

Hi numbers,

Unfortunately, I'm not versed in options at all :( Thanks for your suggestions though!