Fixed deposit rates are falling: Here are 5 easy, low-risk alternative investments

Remember when fixed deposit rates in Singapore hit four per cent at the start of 2023? What a way to start the year! To put things into perspective, the last time 12-month deposit rates went above even three per cent was November 1998. That's almost 25 years ago!

But you know what they say, good things don't last forever, and what goes up must come down. Since the four per cent high in January 2023, Singapore's fixed deposit rates have been falling and falling. Now, as of June 2023, some banks have even brought their rates down to below three per cent.

With fixed deposit rates continuing to decline, you might be wondering, what other investments are there that are just as safe as good ole' fixed deposits? Here are five low-risk alternatives to fixed deposits that you can invest in virtually worry-free.

1. Are fixed deposits good investment tools?

Fixed deposit accounts get you to park a certain amount of cash with a bank for a certain period of time. In return, the bank will pay you interest at a pre-agreed upon interest rate. The biggest draw for fixed deposits is that they're very low risk investments-you are guaranteed back your deposit amount and some interest with it. You'll also know upfront exactly how much interest you'll earn.

Fixed deposit rates are also easy, passive, and low effort. There's no need to watch the stocks like a hawk all day-all you need is a pile of cash you know you're not going to need to touch for a while. Then, just park it in a fixed deposit account, sit back, and relax. The best thing to do is forget about it and receive the returns later.

On the other hand, what's not so great about fixed deposits? For one thing, your returns aren't going to be very high compared to what you may be able to earn off riskier investments-low risk, low returns. Another issue is low liquidity. When you park your money in a fixed deposit account, you cannot withdraw it before maturity. Well, you can, but the bank is going to charge you a penalty fee for that.

All in all, fixed deposits are good investments if you're looking for something safe and low risk to earn you a little extra cash. If that sounds like you, read on to find out about similar low-risk investments-some with greater liquidity too.

2. Overview of low-risk investment tools

3. Singapore Savings Bonds

Singapore Savings Bonds - what are they? 

Singapore Savings Bonds (SSBs) are bonds issued by the Singapore government. They're actually a way for the government to raise funds-you lend them a bunch of money, along with many other like-minded Singaporeans, and the government amasses a healthy pool of cash to fund what they need to.

Singapore Savings Bonds - how much can I earn?

In return for lending them money, the Singapore government will pay you interest every six months until you decide to sell the bond and get back your principal sum, or until it reaches maturity after 10 years. How much interest will you earn? If you asked us in December 2022, we'd be happy to report record-high SSB rates — a 10-year average return rate of 3.47 per cent, and a first-year interest rate of 3.26 per cent. While this month's SSB has lower rates, they're still going to earn you fairly decent rates: an average return over 10 years of 2.82 per cent, with first year interest at 2.76 per cent.

Singapore Savings Bonds - how safe are they?

Because SSBs are issued by our government, they're really safe. Singapore is one of just a few countries in the world with a AAA credit rating. Essentially, this means that the Singapore government can be reliably counted on to pay you back the money you lend them. (In case you're curious, other triple A countries include Canada, Germany, Luxembourg, and Switzerland.)

4. Singapore Government Bonds

Singapore Government Bonds - what are they? 

Hold up. Didn't we just talk about Singapore Savings Bonds? If SSBs are from the Singapore government, what the heck are Singapore Government Securities (SGS) bonds? Like SSBs, SGS bonds are fully backed by the government. They also involve you lending money to the Singapore government-this time, specifically for market or infrastructure development in Singapore. And finally, they also earn interest the same way, with payouts every six months.

One big difference between SGS bonds and SSBs is liquidity. You cannot redeem your SGS bond before maturity, which can be two, 5, 10, 15, 20, 30 or 50 years. Whereas for SSBs, you can take your money out at any time with no penalty. So if you don't want to tie up your cash, go with an SSB for greater liquidity.

Singapore Government Bonds - how much can I earn?

SGS bonds pay you by way of "coupon" payments" at a fixed rate of interest every six months. The last SGS bond that closed on 29 May 2023 saw a coupon rate of 1.25 per cent p.a.-meaning if you invested $1,000 into an SGS bond, you'll receive $12.50 in a year over two payouts.

Singapore Government Bonds - how safe are they?

SGS bonds are as safe as SSBs. In other words, pretty much as safe as bonds get in Singapore, being fully backed by the Singapore government. You may not get a ton of interest out of them at the current rates, but you can sleep easy at night knowing the money you've invested is going to safely come back to you upon bond maturity.

5. Treasury bills (T-bills)

T-bills - what are they?

Here's yet another government-backed investment instrument you can count on. Treasury bills (T-bills) are just as safe as SSBs and SGS bonds, but work a little differently. When you buy a T-bill, you get instant gratification-the interest you'll earn will magically appear in your bank account.

Hoorah! Money made, right? Not exactly. After that, you're going to be waiting for the six-month or one-year tenor to pass. Then, the principal sum you used to buy the T-bill will come home to you, and you can finally say you grew your money from a T-bill.

T-bills - how much can I earn?

Like the government bonds we talked about before this, the interest rates for T-bills fluctuate. However, for the latest T-bill auction on June 8, 2023, the average yield was 3.36per cent p.a.. That's comparable to, if not better than, a lot of current fixed deposit interest rates!

T-bills - how safe are they?

Very safe. Just like SSBs and SGS bonds, T-bills are fully backed by our AAA-credit rating government. There's no such thing as a zero risk investment, but these come really close. 

6. Savings accounts

Savings accounts - what are they?

Savings accounts are bank accounts that earn you a higher interest rate than a regular, checking account. There are minimum balances you need to maintain (or risk paying a fall below fee!), but otherwise your cash remains liquid-i.e. you can withdraw it at any time.

Savings accounts - how much can I earn?

Most savings accounts start you off with a very low base interest rate, usually around 0.05 per cent p.a., although we've also seen a paltry 0.01 per cent. That sounds almost like just a token interest rate, but savings accounts currently can even cross the seven per cent p.a. mark-at least on a portion of the money you put in them.

The trick to get the good stuff is to transact more with the bank via credit card spending, salary credit, insurance payments, bill payments and more. Most of these transactions come with minimum amounts you have to hit, and each transaction that meets these requirements gives you bonus interest.

Savings accounts - how safe are they?

Savings accounts are as safe as the bank you put your money with. Let me guess-now you're probably recalling the triple bank collapse of Silvergate Capital, Sillicon Valley Bank, and Signature Bank earlier this year. While shocking, MAS assures us that "[b]anks in Singapore are well-capitalised and conduct regular stress tests against interest rate and other risks," so the chances of your bank collapsing overnight here are pretty low.

On top of that, most banks here are insured by the Singapore Deposit Insurance Corporation (SDIC) for up to S$75,000 per person, per bank. So as long as you keep a maximum of S$75,000 only in any one bank, you'll be able to get your money back even if your bank does breathe its last breaths.

7. Regular savings plans

Regular savings plans - what are they?

Did you have a piggy bank as a kid for your savings? Do you remember dropping in some coins every day to save up money? Now imagine that that piggy bank gets sprinkled with pixie dust, and after a while magically starts churning out more money from the coins you put in it.

That's how regular savings plans are supposed to work. You regularly put in a sum of money, and the financial institution acts as the pixie dust, investing your money for you via dollar cost averaging. That's an important thing to note, because dollar cost averaging works by buying stocks consistently whether the market is doing well or not, and over a longer period of time earning from the overall upward trajectory of the market.

So if you're considering a regular savings plan, know that it's a mid- to long-term commitment if you want to see returns. On the plus side, regular savings plans afford you a great deal of flexibility and liquidity. You can stop investing or change the amount you invest at any point.

Regular savings plans - how much can I earn?

This varies. Since regular savings plans invest your money in blue chip stocks, REITs and/or ETFs, how much you can earn really depends on the stock/fund you're buying. Trying to peg an earn rate to them is like trying to put a number to the number of cars on a road-which road? What time of day?

We suggest you focus on the transaction fees involved in savings plans instead-these can be pretty hefty! Don't forget to look out for minimum transaction fees and monthly caps too instead of just the fee percentage.

Regular savings plans - how safe are they?

Regular savings plans aren't like fixed deposits in that you go in with full knowledge of the prevailing interest rates and how much you can earn over a fixed amount of time. As we mentioned early, these plans work on the principle of dollar cost averaging.

This method of investing doesn't guarantee returns in X amount of time, and works on the long term growth potential of stocks and funds. We suggest you ask yourself this: How confident are you that markets in the longer term move along an upward trend? That's how confident you can be that you will make a profit if you stick with a savings plan over time.

8. How do I choose the best investment instrument for me?

Choosing an investment instrument isn't like choosing what clothes to buy. There's no room to try it out and get a "refund". So before you jump into any investment decision, no matter how low-risk it is, consider these factors:

• Your risk profile: All of the instruments we've covered in this article are lower risk ones, and are hence suitable for beginner investors.
• Rate of returns: Low risk, low returns. If you know the slower and/or smaller returns are going to frustrate you, check out other higher risk investment tools like crypto, options trading, or forex trading. If such speculative trading sounds too intimidating to you, consider money market funds, which are less risky, or robo advisors for a low effort alternative.
• Liquidity: Fixed deposit accounts, T-bills, and SGS bonds are less liquid than SSBs, savings accounts, and regular savings plans. While you can exit or withdraw your money anytime for the latter 3, you'll incur a penalty if you take your money out of the former 3 before maturity.

ALSO READ: Interest rates and returns for Singapore Savings Bonds (SSB) (June 2023)

This article was first published in MoneySmart.