One of the most common barriers to getting started with investing is the belief that you must first have a large sum of money. While this is a prevalent myth, it is not uncommon to hear. Fairly speaking, not everyone has S$100,000 on hand. But the good news is that you don’t even need that much to get started.
Investing is assumed as an adulting milestone. After all, only a few of us would have considered investing for ourselves unless we attended business school or financial programs. You can’t smell, touch, or hear it, hence it is intangible.
However, there are numerous accessible investment options available today, and it pays to have the following things before you begin:
- 3–6 months’ worth of emergency funds
- Insurance plan(s) in place
- Good control over your debt (being able to make on-time payments on all monthly loan obligations)
If you’ve already done all of that, here are 4 low-cost investments you can start with:
Singapore Savings Bonds (SSBs)
Singapore Savings Bonds (SSBs) are a type of government-issued retail savings instrument offered by the Singapore government. These bonds were introduced by the Monetary Authority of Singapore (MAS) in October 2015 as a way to provide individuals with a safe and flexible savings option.
The most commonly tracked index in Singapore is the Straits Times Index (STI), which represents the performance of the top 30 companies listed on the Singapore Exchange (SGX). Here’s an overview of index investing in Singapore:
Low Risk: SSBs are considered one of the safest investment options available to Singaporeans because they are backed by the Singapore government. Due to the Singapore government’s backing and the bond’s high credit rating from international rating organizations, it is thought to be almost risk free.
Accessibility: SSBs are accessible to individual investors, including both residents and non-residents of Singapore, as long as they have a Central Depository (CDP) account and a bank account with any of the three local banks: DBS/POSB, UOB, or OCBC.
Tenor and Flexibility: SSBs have a fixed term, usually ranging from 2 to 10 years, with interest rates that vary depending on the term. Investors can choose to redeem their SSBs at any time without incurring penalties. This provides flexibility for investors who may need to access their funds before the bond matures.
Interest Rates: The interest rates on SSBs are determined based on the average Singapore Government Securities (SGS) yields over the last month. These rates are typically higher than the interest rates offered by traditional savings accounts. SSBs also include having a 10-year maturity, which incorporates step-up interest rates. This implies that your coupon payments will increase the longer you hold your investment.
Monthly Application and Redemption: Investors can apply for SSBs during specified application periods, and the bonds are issued monthly. Similarly, they can redeem their SSBs monthly without penalties.
Investment Limits: There are minimum and maximum investment limits for SSBs. The minimum investment amount is relatively low, making it accessible to a wide range of investors.
Interest Payments: Interest payments are made every six months from the issuance date of the bond. Investors receive their principal amount back when the bond matures.
Index investing in Singapore, like in many other countries, involves investing in a portfolio of stocks or other assets that replicate the performance of a specific stock market index.
Exchange-Traded Funds (ETFs)
ETFs are one of the most popular ways to invest in Singapore’s stock market index. There are several ETFs listed on the SGX that track the STI. These ETFs offer investors a convenient and cost-effective way to gain exposure to a diversified portfolio of Singaporean stocks. Some well-known ETFs tracking the STI include the SPDR Straits Times Index ETF and the Nikko AM Singapore STI ETF.
Unit Trusts and Mutual Funds: There are also unit trusts and mutual funds managed by various financial institutions that focus on tracking the STI or other specific market indices in Singapore. These funds pool money from multiple investors and invest in a diversified portfolio of stocks that closely mimic the index they track.
Robo-Advisors: Robo-advisors in Singapore often offer index-based investment portfolios as one of their investment strategies. They use algorithms to create and manage diversified portfolios of ETFs or index funds tailored to an investor’s risk tolerance and financial goals.
Diversification: One of the primary benefits of index investing is diversification. By investing in an index fund or ETF, you gain exposure to a broad range of companies and industries within the Singaporean stock market. This reduces the risk associated with individual stock picking.
Low Costs: Index funds and ETFs typically have lower management fees compared to actively managed funds. This cost efficiency can be particularly appealing to long-term investors.
Dividends and Returns: Investors in Singaporean index funds or ETFs can potentially earn dividends and capital gains based on the performance of the underlying index. The returns will closely mirror the index’s performance.
Liquidity: ETFs and index funds are traded on the stock exchange, which means they offer high liquidity. You can buy and sell them throughout the trading day at market prices.
Risk Management: Index investing in Singapore can be a suitable option for investors who want to participate in the stock market while managing risk. Since you are investing in a diversified portfolio, your investment is less affected by the performance of individual companies.
Regular Savings Plans (RSPs)
These are a specific type of investment plan designed for individuals who want to save and invest regularly over time. These plans are commonly offered by financial institutions, including banks and investment firms, to help Singaporeans accumulate wealth for various financial goals, such as retirement, education, or wealth preservation. Here are some key features and details about RSPs in Singapore:
Regular Contributions: Singapore RSPs involve making consistent, fixed contributions to your chosen investment portfolio. These contributions can be scheduled on a monthly, quarterly, or annual basis, depending on the plan and your preferences.
Investment Options: RSPs offer a range of investment options, including mutual funds, exchange-traded funds (ETFs), stocks, bonds, and other asset classes. Investors can typically select the combination of investments that align with their risk tolerance and financial objectives.
Dollar-Cost Averaging: RSPs employ the dollar-cost averaging strategy, where you invest a fixed amount of money at regular intervals, regardless of market conditions. This strategy can reduce the impact of market volatility on your investments by allowing you to buy more shares when prices are low and fewer shares when prices are high.
Flexibility: Most RSPs in Singapore offer flexibility in terms of contribution amounts and the ability to change your investment portfolio or adjust your contribution frequency as needed. This adaptability allows you to respond to changes in your financial situation.
Long-Term Focus: RSPs are well-suited for individuals with long-term financial goals. They provide a disciplined approach to saving and investing over time, helping you accumulate wealth for retirement, a home purchase, or other major expenses.
Cost-Effective: RSPs generally have lower fees compared to making individual transactions, making them a cost-effective way to invest over the long term.
Automatic Deductions: Many RSPs allow automatic deductions from your bank account, simplifying the contribution process and ensuring that you stay on track with your savings and investment goals.
Tax Benefits: In Singapore, certain RSPs may offer tax benefits. For example, the Supplementary Retirement Scheme (SRS) is a tax-advantaged RSP designed specifically for retirement savings. Contributions to the SRS may be eligible for tax relief, and investment gains are tax-deferred until withdrawal during retirement.
Supplementary Retirement Scheme (SRS)
Investing through the Supplementary Retirement Scheme (SRS) is a tax-efficient way to save for retirement in Singapore. The SRS is a voluntary savings program established by the Singapore government to encourage individuals to set aside money for their retirement years. Here’s how you can invest through the SRS:
Open an SRS Account: To start investing through the SRS, you first need to open an SRS account with one of the participating SRS operators, such as banks and financial institutions in Singapore. These operators will facilitate your contributions and investment options. You can open an SRS account as a Singaporean citizen, Permanent Resident, or foreigner with employment income in Singapore.
Make Contributions: Once your SRS account is set up, you can make contributions to it. Contributions to the SRS are eligible for tax relief, which can reduce your taxable income for the year. There is an annual contribution cap, which may vary from year to year. Be sure to check the current contribution limits set by the government.
Choose Your Investments: The funds in your SRS account can be invested in various financial instruments, including stocks, bonds, unit trusts (mutual funds), exchange-traded funds (ETFs), fixed deposits, and insurance products. The specific investment options available to you will depend on the SRS operator you choose. You can create a diversified portfolio based on your risk tolerance and investment goals.
Enjoy Tax Benefits:
Tax Deduction: Contributions to your SRS account are eligible for tax relief. A portion of your SRS contributions can be deducted from your taxable income, reducing the amount of income subject to taxation. This can lead to significant tax savings.
Tax-Deferred Growth: Investment gains and interest earned within your SRS account are tax-deferred until you start making withdrawals, typically after the statutory retirement age, which is currently set at 62. This means your investments can grow without being subject to annual taxes.
Retirement Withdrawals: When you reach the statutory retirement age (currently 62), you can begin making withdrawals from your SRS account. Withdrawals can be made over a specified period or as a lump sum. Withdrawn amounts are subject to income tax, but they may be taxed at a lower rate because you are likely to have lower income during retirement.
Penalties for Early Withdrawal: If you make withdrawals from your SRS account before the statutory retirement age, you may incur penalties and have to pay taxes on the withdrawn amount.
Investing through the SRS can be a valuable component of your retirement planning strategy, providing both tax benefits and a disciplined approach to long-term savings. However, it’s essential to consider your investment choices carefully, stay within the contribution limits, and consult with a financial advisor to create an investment strategy that suits your individual financial situation and retirement objectives.
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