Investing Opportunities Beyond Stocks for Young Beginners
With a potential for reaping impressive returns, investing money in individual stocks may be one of the popular ways for investors in Singapore to achieve their financial aspirations. Yet, with its intricate nuances and unpredictability, the stock market can be intimidating, especially for beginners still grasping the basics. Fortunately, stocks are but one galaxy in the universe of investment vehicles.
Above all, the golden rule is not just about chasing high returns but understanding the dynamics of different tools, planning, and diversifying wisely, and starting young. If you’re unsure how to tap into market opportunities, here are some avenues beyond individual stocks that you can consider.
1. Exchange-Traded Funds (ETFs)
Exchange-traded Funds, commonly known as ETFs, offer a passive way of investing in the stock market. Instead of investing in individual stocks, you're buying a 'basket' of assets created by professional trading houses that compose these assets into funds.
Advantages and Risks
An ETF typically tracks the performance of an index, which is, in essence, a collection of stocks that represent a segment of the market. For instance, the Straits Times Index (STI) mirrors the performance of the top 30 listed companies on the Singapore Exchange (SGX). As such, investing in an ETF that tracks the STI enables you to indirectly invest in all 30 companies without buying their stocks individually.
In Singapore, ETFs can also be a relatively accessible investment option. With as low as S$100 a month, young investors can also start investing in ETFs easily. Moreover, the Supplementary Retirement Scheme (SRS) – a flexible alternative to the CPF from which you can withdraw at any time – can facilitate the recurring payments for this investment.
Since ETFs comprise various assets across different sectors, they can reduce the risks tied to one specific market or industry, which is advantageous for diversifying your investment. Furthermore, they generally come with lower fees than other investment avenues like unit trusts, making them a relatively inexpensive choice for beginners.
However, like all investments, ETFs aren't without risks. For starters, they are not principal-guaranteed, meaning an investor can lose part or all their capital in adverse conditions. The 2008 market downturn serves as a poignant reminder, with the STI plummeting to a low of 1776 points.
2. Real Estate Investment Trusts (REITs)
Dreaming of diving into the property market in Singapore but lack the substantial capital required? Real Estate Investment Trusts (REITs) might be your answer. A REIT pools money from multiple investors to invest in real estate ranging from commercial spaces to shopping malls and rental properties.
Advantages and Risks
With REITs, the dream of investing in Singapore's premium real estate becomes tangible, minus the heavy investment capital. Aside from this, REITs also pad your wallet through two avenues, with these returns exempt from tax:
- Dividends: REITs essentially allow you to own a portfolio of real estate assets that churn out steady rental incomes. In Singapore, REITs listed on the SGX are also legally bound to distribute at least 90% of their taxable annual income back to investors, ensuring a predictable cash inflow.
- Capital Gains: The real estate assets nested within a REIT's portfolio aren't static; they grow in valuation. This appreciation can stem from strategic moves like snapping up undervalued assets, enhancing the worth of existing properties, or reinvesting in high-potential ventures. Take, for instance, a commercial space in Singapore. By continually attracting high-profit tenants, it can appreciate and enhance the REIT's valuation, translating to capital gains for you, the investor.
However, being traded on stock exchanges, REITs are susceptible to the unpredictable ebbs and flows of market conditions. Like ETFs, their principal is also not guaranteed, and the mandatory requirement for REITs to distribute 90% of their profits as dividends leaves them with a mere 10% (or less) to reinvest and expand. This can throttle their growth potential in comparison to other market entities.
Additionally, the prosperity of REITs is inextricably tied to the health of the underlying real estate markets. Factors like economic downturns or an oversaturation of properties in specific regions can cast shadows on expected returns. Therefore, they may be better suited for the wealth-building phase rather than when you're guarding your nest egg.
3. Corporate Bonds
Like individuals, businesses sometimes require funds—for diversification, debt clearance, or acquisitions, and corporate bonds are one significant avenue to raise the required funds. Through a corporate bond, investors loan money to the company and, in return for the sum they invest, are promised periodic interest payments and the eventual return of the loaned amount at maturity.
Advantages and Risks
Compared to fluctuating stock dividends, the fixed interest on corporate bonds offers greater predictability. However, their yields are often more rewarding than vehicles like treasury bonds, primarily because they come with higher credit risks. Their reliability also hinges on the issuer's creditworthiness. In other words, think of this as the company's financial health check, akin to an individual's credit score. Besides this, investing in corporate bonds also comes with several risks:
- Credit Risk: If the issuing company faces dire straits, it might fail to honour your interest payments or even the principal amount.
- Call Provisions: Some bonds empower the issuer to repurchase the bonds before maturity. This becomes problematic for investors if market conditions have shifted favourably since the bond's issuance.
- Pricing Opacity: Unlike stocks, bonds, especially those from private or smaller entities, might not always be transparently priced.
- Interest Rate Sensitivity: Bond values are inversely proportional to interest rates—rising rates can lower bond prices.
- Inflation's Bite: Over time, inflation can diminish the real value of interest payments and the bond's face value at maturity.
As such, always practise due diligence before investing.
4. Other Investment Tools in Singapore
Apart from ETFs and REITs, there are also other investment opportunities you can explore. These include Singapore Saving Bonds (SSB), CPF Investment Scheme and fixed deposits discussed in earlier blogs, as well as structured deposits and Supplementary Retirement Scheme (SRS).
Structured Deposit
Structured deposits combine the features of a traditional deposit with the characteristics of an investment product. The returns of this investment vehicle are dependent on the performance of an underlying financial instrument, which could be an eclectic mix of market indices, shares, fixed-income securities, interest rates or foreign exchange rates.
What makes structured deposits stand out is the potential access they provide to assets or markets that retail investors in Singapore might find elusive. Unlike fixed deposits, structured deposits offer potentially elevated returns, but with this comes an elevated risk spectrum and lower-than-expected returns.
When the structured deposit's tenure concludes, you are assured the principal amount. However, just as with traditional deposits, the return of both the principal and any potential returns hinge on your chosen bank's creditworthiness. An early withdrawal could also dent your returns, potentially not recouping the entire invested amount.
Supplementary Retirement Scheme
Meanwhile, the SRS offers a voluntary contribution platform designed to empower you with an added layer of financial cushioning for your golden years by supplementing your standard CPF contributions. As of now, you're allowed to deposit S$15,300 annually into your SRS account. But here's the real kicker: the money you contribute grants you personal income tax reliefs, and you can subsequently use to invest in a rich array of vehicles, including:
- Bonds
- Singapore Government Securities/SSBs
- Fixed deposits, both in local and foreign currencies
- Shares
- Unit trusts
- Single premium savings or investment-linked plans
These options make it especially appealing for those looking to diversify their portfolio. Generally perceived as relatively lower-risk investment avenues, they are ideal for beginners and those inclined towards passive investment strategies.
Nonetheless, it’s crucial to keep in mind the balance between risk and returns. For example, the current interest rate for SRS stands at a modest 0.05% p.a., a rate that might struggle to keep pace with inflation. If striking a balance between moderate returns and risks is your goal, then exploring an ILP may be for you.
5. Investment-Linked Policy (ILP)
An ILP is a fusion of an insurance plan and investment. A segment of the premium you pay is channelled towards your insurance protection, and the remaining finds its way into investments. With an ILP like Income Insurance’s AstraLink, you can benefit from starting small with a modest monthly commitment of S$100. This low entry barrier enables you to build wealth and stay protected without locking in a substantial chunk of money, making ILP a viable avenue for beginners with a smaller capital or risk appetite.
Life is dynamic, and your financial strategies should mirror that. That is why ILPs like AstraLink offer the latitude to recalibrate your plan in alignment with your evolving circumstances, be it changing, topping up,withdrawing1 your investment or opting for premium holidays2.
Above all, you can sail on the assurance of having seasoned investment consultants manage your portfolio, whose expertise can strengthen your risk management. Through these ways, ILPs like AstraLink set the stage for an enriched wealth management journey.
Seize Investing Opportunities with Income
For budding investors in Singapore, the initial steps aren't about sprinting after stellar returns but ensuring each stride aligns with your distinct financial aspirations. Recognising your financial objectives, understanding your risk tolerance, and setting clear investment timelines while diversifying positions you to weather financial storms and tap into multiple growth avenues.
As you contemplate the strategy to adopt, arming yourself with the right knowledge is paramount and Income is here to be your guiding star. Connect with our financial advisors today and let us help chart a tailored roadmap that seamlessly aligns with your aspirations.
1 Charges may apply; refer to the policy conditions for details.
2 Policyholders can stop paying regular premiums temporarily during the MIP from the 2nd anniversary, provided the policy value is sufficient to cover the applicable fees and charges. Premium holiday charges apply if a premium holiday is taken during MIP.
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income Insurance products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income Insurance advisor. This advertisement has not been reviewed by the Monetary Authority of Singapore.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org. sg).
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