Making Investments in Singapore: What Can I Invest In and How
Are you considering making an investment? Don’t know where to invest your hard-earned income? This article will provide a brief overview of the possible types of investments in Singapore as well as things to consider before investing.
Why Make an Investment?
Learning to invest your money well is one of the wisest things you can do financially. Here are some good reasons for investing:
To earn higher returns and avoid losing value due to inflation
Statista estimates Singapore to have an inflation rate of 0.99% to 1.47% from 2020 to 2024. This means that prices of goods and services are expected to rise in the future, which ultimately means that your cash will be worth less and can buy fewer goods and services.
Storing the money in a bank account is a good idea if you expect to use it soon but is a bad idea for the long-term due to the interest rates on bank savings accounts that can be as low as 0.05% a year.
To avoid losing the value of your hard-earned money, you should invest it for returns of greater than the current inflation rate.
Investing your money elsewhere comes with greater risks, but also offers the possibility of earning vastly higher returns. An overview of the average returns and risks for different investments is provided below.
Utilising the power of compound interest
Depending on the type of investment, the interest rate or returns each year may also be different. This difference in returns for different types of investments will be huge over the long run due to the concept of compound interest.
Compound interest means that any interest earned from an investment will itself be able to generate interest in future, such that a relatively small change in interest rates could result in a huge difference in outcome in the long run even though the same amount of money was initially invested.
To illustrate how compound interest works, assume that there is no inflation and that we have only two kinds of investment vehicles – bank deposits yielding 1% interest per year and stock market investments yielding 6% interest per year. Over 30 years, a $1,000 investment into each will become:
|1% Bank deposits ($ value of investments)
|6% Stock investments
($ value of investments)
As shown in the table above, the initial difference in interest obtained between bank deposits and stock market investments was relatively small. However, this difference added up over time such that the stock market investment was worth over 4 times that of the bank deposit 30 years later, even though the initial invested amount was the same.
Younger investors with a long investment horizon may thus want to seek investments with higher returns in order to leverage the power of compounding.
What to Consider Before Making an Investment
A wise man once said “If you know the enemy and know yourself, you need not fear the results of a hundred battles”. One of the most important things to do before making an investment is to understand your own financial situation. This will help you choose the investment best-suited for your needs.
Here are some things you should consider before making an investment:
1) Whether you can afford to invest
It is important for an investor to first consider his financial situation and whether he can afford to invest, before deciding to invest. This is because if an investor’s only source of income is his salary and he is retrenched, he may not have the funds to invest. Similarly, a major illness or emergency may lead to a sudden need for money, leaving the investor with less available funds for investment.
As a result, it is generally prudent that a potential investor has sufficient backup funds and/or a regular source of income (e.g. through REITs), before making an investment.
2) How much to invest and the method of investment
How much you wish to invest influences your method of investment. Many investments have minimum capital requirements such that you cannot directly invest in them unless you have sufficient money. For example, it is difficult to buy an investment rental property unless you have a very large sum of money to make the initial down payment.
In such cases, one idea may be to invest indirectly through a collective investment vehicle instead. For example, you may be unable to afford to buy the property outright, but you can invest indirectly through a Real Estate Investment Trust (REIT) instead. An REIT is a collective investment scheme where your money is pooled with other investors.
The revenue generated from the real estate property invested (e.g. through rental income) is then distributed among the investors. This method allows you to invest in smaller amounts and still gain returns.
Furthermore, the size and method of your investment may affect the level of risk involved . Investing $500 into a diversified mutual fund might result in less risk than investing $200,000 into a company.
A mutual fund holds a bunch of securities from different industries (in which a group of investors invest in). This means that if your investment in one security falls and the other rises, you are still able to balance out your investment earnings and not face a huge loss. This is as compared to solely investing in a single company where you risk facing a substantial loss if the company were to fail.
In such cases, it is best that you consider your ability to tolerate risk as well before making the choice to invest. This includes how much of a loss you’re prepared to handle. It may even be necessary to seek services from the relevant financial and legal experts to minimise the risks faced, which may also incur costs.
3) Investment timeline
Next, it is important to consider your investment timeline – that is, how long you are prepared to invest before you want or need your capital back. This is one of the most important things to consider when making an investment since investments with higher returns also tend to be riskier and more volatile (prone to suffer drastic changes in value) in the short term. This means:
- A person with a short investment timeline may have to settle for less volatile investments even if these provide lower returns. Alternatively, he may be forced to sell off the investments at an inconvenient time when they have lost value.
- A person with a long investment horizon may be able to take on more volatile investments and thus reap the higher returns associated with such investments.
One consideration of note here is your age – a young investor could potentially have a very long investment timeline ahead of him, which means that he may be able to make riskier, higher-yielding investments.
4) Alternative uses for money
Finally, an investor should consider if he has any other more effective uses for his money. For example, an investor who owes student or housing loans may be wise to pay that off first – paying off a 4.5%-interest student loan is financially equivalent to making an investment with 4.5% guaranteed interest, an excellent risk-return scenario in most situations.
What can I Invest in?
There are hundreds of different types of investments each with their own advantages and risks. The table below shows some of the most common investments as well as how to invest in them:
|Bank Fixed-Term Deposits
|Risk: Extremely Low
|Returns: Extremely Low
|Investment Difficulty: Very Easy
One of the simplest forms of investment is the bank fixed deposit. An investor deposits money with a bank and agrees not to withdraw it for a certain period in exchange for slightly higher interest rates (than that of a savings account).
This is generally a very low-risk investment and the investment returns are almost guaranteed. Naturally, this also means that the investment returns are also very low, ranging from 1.55% to 1.80% per annum for 12-month fixed deposits in Singapore in 2020.
It is very easy to invest in fixed-term deposits simply by applying at a nearby bank branch. Most banks in Singapore also allow application via online banking, though some may have special requirements for this.
|Risk: Very Low
|Returns: Very Low
|Investment Difficulty: Very Easy
Government bonds are essentially debt issued by a government. These bonds generally make interest payments (known as a “coupon”) on a regular basis and will be redeemed at the end of the bond period (known as the “maturity date”). Since government bonds are backed by the financial strength of the government, they are usually considered very low risk unless the government in question is financially/politically unstable.
Singapore’s government bonds have a AAA credit rating (the lowest possible risk for bonds) and coupon rates of 2% to 3% (for bonds issued in 2019). These bonds are issued by auction and individuals may bid for them through local bank ATMs or through internet banking.
|Investment Difficulty: Medium
Corporate bonds are essentially debt issued by a company. Like government bonds, these bonds generally make regular coupon payments and are redeemed at the maturity date. Unlike government bonds however, corporate bonds involve investors lending money to companies and thus involve a much higher level of risk. The riskier the loan, the higher the coupon rate on the company’s bonds.
Corporate bonds are treated preferentially in the event the issuer goes bankrupt and are thus less risky than stocks, as the investor has a priority in receiving his investment back. However, the investor may not always get much of his investment back, given that in a bankruptcy the company’s assets are liquidated and the cash is used to repay secured creditors first before (if any remains) going to investors. Investing in corporate bonds thus requires careful investigation of the issuer’s financial strength and the risks of it going bankrupt.
There are three main ways to invest in corporate bonds. The majority of corporate bonds are traded on Over-The-Counter markets and can be purchased via online investment platforms. A much smaller number of corporate bonds can be purchased on the Singapore Exchange (SGX) by opening an account with a brokerage firm. Finally, it is possible to purchase bond-centered funds on SGX and other international exchanges through an account with a brokerage firm.
|Investment Difficulty: Medium
Stocks are one of the most famous investment vehicles. When you buy a company’s stocks, you essentially purchase a “slice” of the company and become one of its owners. When a company has a profitable year, it may pass those profits to stockholders by declaring a dividend (though it is not legally required to do so). If the company is perceived by the market to be doing well, its stock price can rise drastically and provide its stockholders with exceptional returns.
However, a year of poor performance can also cause a fall in stock price, and in the event of bankruptcy, stockholders are paid last and often fail to recover any part of their investment at all. Investing in stocks thus requires very careful investigation of the company’s financial strength, its competitive prospects and the economy as a whole.
It is easy to invest in stocks by simply opening an account with a brokerage firm. While an investor can invest in stocks by himself, it may be prudent for investors to obtain advice from a financial professional where larger sums are involved – please note however that a financial professional who is paid by commission for selling stocks faces a very strong conflict of interest and any recommendations made by such a financial professional should be treated with a healthy amount of scepticism.
|Risk: Somewhat High
|Investment Difficulty: High
Real estate investment has traditionally been a favorite investment method in most Asian countries. Starting from his own home, investors may purchase other properties for rental and in anticipation of rising property prices. Investing in real estate has a huge advantage in that the investment can be financed largely via mortgage, thus allowing an investor to purchase a property with a smaller downpayment.
However, it must be noted that investment in real estate generally involves many costs (including agent fees, stamp duty and property taxes) and that returns can be mediocre after deducting such costs. Due to the size of the investment, real estate can be considered a high-risk investment to a certain extent, especially since there is no guarantee that property prices will keep rising forever.
Technically, it is possible to invest in real estate by yourself, but most investors do so with the assistance of others. Identifying good real estate options may require the assistance of property firms and investment groups, and legal advice may be required in the process of negotiating the sales agreement.
Unless the investor plans on managing the property himself, he may also need to hire a property management company to deal with tenants, chase for rent and to maintain the property. Investing in real estate beyond one’s own home is thus a relatively high difficulty endeavour suited for more experienced investors.
|Investment Difficulty: Easy
Funds are investment vehicles where a large group of investors pool their money in order to invest in a certain class of assets. There are funds specialising in virtually any kind of asset, thus allowing a fund investor to gain exposure to the investment class of their choice. The key advantage of funds is diversification – since a fund contains a large number of assets, it is not overly exposed to any single one of them. For instance, a stock-based fund containing the stocks of 500 different companies will not be too affected if a single company performs poorly.
At the same time, the size of a fund allows it to obtain financial, valuation and legal services unavailable to smaller individual investors, thus allowing it to lower risk. This generally means that investors may take a more hands-off approach to investing in a fund (where they do not need to actively monitor the company’s performance), though they must still do the necessary due diligence to ensure that the fund provider is competent.
The method of investing in a fund depends on the type of fund. Exchange-Traded Funds (ETFs), as their name suggests, are publicly traded on the SGX and other international exchanges and can thus be purchased via an account with a brokerage firm. More specialised mutual funds might be traded on specialised fund platforms or via the platforms run by the mutual fund provider itself.
|Real Estate Investment Trusts (REITs)
|Investment Difficulty: Easy
A REIT is a type of fund which owns and operates real estate for income. REITs are a popular way of investing indirectly in real estate while lowering the risks and costs for individual investors. Due to the size of a REIT, it is able to invest in larger and more profitable real estate projects such as commercial property and property development. Investors in REITs can gain exposure to real estate with a lower minimum investment and are able to benefit from the greater expertise of the REIT manager in developing and managing property.
However, as investors do not directly manage the property in question, they are unlikely to have as much information about real estate held through a REIT, where this creates its own set of risks. As a result, investors still need to do some due diligence into the properties being held in a REIT before investing in it.
Most REITs in Singapore are publicly traded on the SGX and other international exchanges and can thus be purchased via an account with a brokerage firm.
|Risk: Very High
|Returns: Very High
|Investment Difficulty: Very High
Venture capital involves financing small, early-stage startups which are considered to have high growth potential. Naturally, the untested nature of these startups (i.e. there being no consistent data showing the company’s performance as of yet) means that the risks are very high, but the possible returns can also be enormous.
The multitude of risks faced by venture capital investments means that significant expert assistance (in the form of lawyers, valuation experts, industry experts etc.) is almost certainly required. If the investor does not have adequate experience and chooses to simply “gamble” on the possibility that a venture capital investment could succeed, he runs the very real risk of losing his entire investment.
While it is technically possible for individuals to make venture capital investments directly, this is extremely rare in practice due to the large amounts of capital and expert assistance required. The more common method is to invest in a venture capital fund, which in turn invests in promising startups. However, there is no single way to invest in venture capital funds; different funds may have different methods of raising capital.
Unlike other types of funds, investing in a venture capital fund may lower the costs of venture capital investment but CANNOT eliminate their risks as it is entirely likely that the fund as a whole could make wrong investments and go bankrupt. As a result, an investor should very carefully consider his risk tolerance and the specific funds’ characteristics before making a decision.
|Risk: Very High
|Returns: Very High
|Investment Difficulty: Very High
Hedge funds are a form of fund which employs special strategies to actively earn outsized returns on the market. Unlike other funds which simply trade and hold assets, hedge funds actively utilise risky techniques such as directional trading (i.e the use of advanced quantitative techniques to analyse the overall direction of the market and to profit from it) to try to beat the returns available on the market.
This means that the risk borne by hedge funds is very high (often magnified by their constant use of leverage) and that different funds can have hugely contrasting performances depending on the circumstances.
In addition, the fees charged by hedge fund managers can also be very high (the common pay structure is for the manager to receive 2% of assets under management and 20% of profits each year). Like venture capital investments, an investor in a hedge fund can run the risk of losing most or all of his investment in a short period of time, but it is also entirely possible that the investment could succeed and provide huge returns.
Due to the high level of risk, hedge funds are usually only available to accredited investors whose net personal assets exceed S$2 million or whose annual income exceeds S$300,000. Such funds are also not usually publicly traded on the SGX or other international exchanges and it can be very difficult for most individual investors to invest in one without knowing the right people.
|Other Collective Investment Schemes
|Investment Difficulty: Medium
Apart from the above investments, there are also many types of collective investment schemes structured to cater to different investment audiences. These may include:
Collective investment schemes offer the possibility of investment returns structured differently from the other “traditional” investments described above. However, the risk of fraud in such schemes can also be extremely high due to the relative lack of regulation and the fact that they are often marketed to inexperienced and unsophisticated investors.
While the Monetary Authority of Singapore (MAS) has been working hard to regulate such schemes, the reality is that schemes can identify loopholes faster than MAS can close them. As a result, it is good to maintain a healthy amount of scepticism towards collective investment schemes and to perform sufficient due diligence on them before making any investment decision in them.
How Do I Open a Brokerage Account?
You may notice that a brokerage account is required for a number of the investments described above, particularly to purchase and hold bonds, stocks, funds and REITS. Such an account can typically be opened in person at your nearest broker’s office. There are 3 steps to opening a brokerage account:
1) Choose if you would like to open a CDP account or a nominee account
As part of opening a brokerage account, you will also need to choose between opening a Central Depository (CDP) account or a nominee account.
Assets held in a CDP account are directly held under your name, which means that you are their direct owner and have all rights associated with them (for instance, stock would provide you voting rights and the ability to attend annual general meetings).
In contrast, a nominee account means that the brokerage firm will buy the assets and hold them in your name, which means that you are NOT their direct owner and cannot exercise rights associated with them. However, brokerage fees for a nominee account are also typically lower, so the question is whether you wish to trade off some of your asset rights for lower fees.
To open a CDP account, you need to first have a bank account with a Singapore bank. The CDP account can be opened directly using an online form on the SGX website or through the bank itself. In most cases, the CDP account is opened together with the brokerage account and the broker will generally assist with the paperwork.
2) Choose your broker
There are many local and international brokerage firms operating in Singapore. Things to consider here include:
It is important to consider the track record of a brokerage firm and the risks of it being fraudulent or going bankrupt. Most major brokerages in Singapore are highly reputable and have been serving customers for decades, but it is still important to consider if the brokerage in question is at risk of financial weakness in the near future.
Brokerages charge commission fees on trades made through them. These are usually expressed as a percentage of the value of the transaction. Commission fees can vary depending on the size of the transaction, the asset being traded as well as whether the asset is held in a CDP or nominee account.
Most brokerages also charge minimum fees on trades made through them, which can be punishing if you plan on making small trades regularly.
Usually, no fee is charged for simply opening an account, though the brokerage may charge a fee for maintaining it.
For investors interested in a more global portfolio, an important consideration when choosing a brokerage firm is whether it offers access to assets listed on overseas exchanges such as those in China, Japan, Malaysia and Thailand.
If you plan on investing in non-stock assets such as bonds or funds, you may also wish to check if the brokerage firm actually offers access to such assets. If you are planning on using a CDP account, please note that foreign assets will NOT be held in the CDP account, but in a nominee account opened on your behalf by the brokerage.
3) Open your brokerage account
Having selected your brokerage firm, you can open an account with it. Most brokerage accounts can be opened by mailing an application form to them with the requested supporting documents, with some brokerage firms also supporting online applications. However, it may also be worthwhile to open a brokerage account in person at their local office since the brokerage firm can then advise you on the most suitable accounts as well as assist you with opening a CDP account if necessary.
Legal advice is generally not required for opening a brokerage account, but some overseas brokerage firms may request for you to have your identification documents and forms certified by a lawyer or notary public.
Beware of Fraudulent Investments!
When investing your hard-earned money, it is very important to keep a lookout for scams and fraudulent investment vehicles. This is particularly significant for investments not made through a bank or brokerage, since such investments are not subject to the relevant financial regulations administered by the MAS or other competent authority. Some common considerations when identifying fraudulent investments are:
Does the investment promise unrealistic returns?
Fraudulent investments seek to attract investors by promising unrealistically high returns for the level of risk. One example was the Profitable Plots scheme set up in 2005, which guaranteed 12.5% returns within 6 months. Considering that the stock market with all its risks has provided historical average returns of 10% annually, the Profitable Plots scheme appeared quite unrealistic in contrast.
Is the investment regulated by MAS?
If the investment is not regulated by the MAS or other competent authority, investors may not have adequate legal protection and are thus at risk of being defrauded. It is important not to take the investment manager’s words at face value and to perform your own due diligence, since there have been cases of entities falsely claiming to be licensed by MAS when they were not. When in doubt, it is always prudent to seek external advice and to contact MAS to verify any such claims.
Does the investment scheme recruit very aggressively?
Many fraudulent investment schemes recruit aggressively using pressure tactics in order to rush investors into committing their money without thinking too much. Methods include saying that the investment is available “for a limited time only” or that special deals are available for early investors.
Fraudulent investment schemes may also offer commissions to investors for referring the investment to their friends or family in order to quickly enlarge their customer base. Such commissions and tactics are very rarely used by legitimate investment schemes and should be a key thing to watch out for.
Is the investment supported by legitimate paperwork?
Secrecy is one of the worst red flags which hint at a fraudulent investment. Before making an investment, it is important to obtain as much information about it as possible, including asking for offering documents and prospectuses. Investors must also verify information independently, such as by checking in online registries and databases to see if the company that is to be invested in does exist.
If you suspect that you have been defrauded in an investment, the Singapore Police Force and National Crime Prevention Council have launched a helpline at 1800-722-6688 to advise victims and formulate plans of action.
If payment to the perpetrator was made via credit/debit card, it may be possible to obtain the assistance of your bank or credit card company to reverse the payment, though this should be done as early as possible (within 1 month) or the transaction may become irreversible.
It is also theoretically possible to commence legal action and sue the perpetrator in the courts to get your money back. However, in many cases, the perpetrator in question may be unidentifiable or may have already spent the money such that nothing can be recovered.
Prevention is always better than cure and the best defence against fraudulent investments is to do your due diligence or to obtain external financial/legal advice before investing your hard-earned money in Singapore.