The Problems With SSBs And How To Deal With Them

Singapore Savings Bonds have been giving good returns in recent months, and as such have received a lot of attention – and money – since interest rates started to creep up.

As great as SSBs are to put some spare funds in, there are, however, some downsides of SSBs we should be aware of, as well as how we can mitigate some of the shortcomings.

Difficult to invest larger amounts

Due to the popularity of SSBs, they tend to be oversubscribed, particularly months where the interest rates are high. August 2022’s SSB, for instance, was so oversubscribed that the ceiling amount was a mere $9,000.

The relatively liquid nature of SSBs also mean that people can – and have been – withdrawing older SSBs with lower rates to reinvest in newer ones with better rates. A form of “refinancing” if you will, that exacerbates the oversubscription problem and makes it difficult to place larger amounts of funds into SSBs.

How to deal with this

People who are intending to “refinance” older SSBs have to realise that they might not be able to completely reinvest their money if the ceiling amount for the newer, more attractive SSBs is lower than the funds they withdraw.

Those with larger amounts of funds can also subscribe to SSBs each month until they have reached their desired amount, although there is some opportunity cost in leaving funds idling in low-interest accounts. Do check out some other options if you have larger amounts of funds to place and SSBs aren’t working out due to the low ceiling amounts.

Withdrawal takes some turnaround time

Given the relative ease of withdrawing funds, SSBs are a great place to place some amount of spare funds set aside for emergencies. However, it may not be too wise to put too much emergency funds here because withdrawal takes anywhere between a week to even a month.

To withdraw, you have to submit your redemption request before 9PM on the 4th last business day of the month, which is 26th October this month. You would then get your funds by the end of the 2nd business day of the following month . If you miss this cut-off timing, you would to submit your request the next month (November, based on this month), and get your funds only the following month (December, based on this month).

This means that if you require money urgently at the start of the month, you may have to wait an entire month for the funds to be disbursed to you.

How to deal with this

Some – including me, actually – may think that since the turnaround time is only a month or so, we can just keep a month or two of expenses in our bank, then place the rest of our emergency funds in SSBs. The nature of emergencies, however, is that you may need more than just a month’s worth of savings if an exigency arises.

Personally, I would suggest a bit more than just one month of emergency funds in your bank, and how much to set aside in truly liquid savings in your bank thus depends on your risk appetite and personal circumstances like the ability to make short-term loans from relatives, for example.

Returns are not compounded

While the rates given by SSBs have been attractive over the past months, the returns are not compounded. This is due to how SSBs credit the coupons to your bank account every six months, and these amounts of money are not reinvested.

For November 2022’s SSB, $10,000 invested would get you $3,213 of earnings over the entire 10-year duration, which is an effective return of 3.21% p.a. With returns compounded at 3.21% p.a, however, $10,000 invested should get $3,715 of earnings over a 10-year period.

How to deal with this

You should thus ensure that the coupons are put into somewhere where they continue to generate returns if possible. The relatively small quantum of each coupon makes it tricky to be reinvested, and easily “lost” in one’s monthly comings and goings of funds.

I suggest crediting the coupons to a dedicated account where you can more conveniently keep track of the coupon payment, and put those funds to better use, be it investment or higher-yield bank accounts. You can do so by changing the bank account linked to you CDP account where your SSBs are held.

Too conservative

While the returns of SSBs are indeed attractive for an extremely low-risk product, they are arguably still too low to simultaneously grow your wealth while hedging against inflation. Someone, particularly a young investor, with a longer time horizon of 10 years or so should look at investing in equities for better returns.

SSBs are a great place to park some emergency funds for a short to medium duration, but if I think it is too conservative a strategy to put significant amounts of money into SSBs (and t-bills) as one’s main investment strategy.

How to deal with this

I would suggest not to put anything more than 12 months’ worth of emergency expenses into SSBs, then invest sums above that according to your risk appetite and time horizon. Stay subscribed to my Telegram for an upcoming investment webinar for those who are new to investing.

Conclusion

Don’t get me wrong: the recent SSBs are great, and I have bought and intend to continue putting money into SSBs as long as their rates remain attractive. Still, being clear about their downsides as well as recognising that they should only be a small part of my portfolio make them better tools in my journey for financial betterment.

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