Maximising returns with minimal risks - for the ultra conservative investor

Most of us probably are guilty of unnecessary 'expenses' that could have been avoided with a little bit more education and interest.  And you don't have to avoid that cup of Starbucks coffee to do so!

Tax Avoidance


Not the illegal kind of course!  But one could easily avoid paying tons of tax by establishing a Supplementary Retirement Scheme (SRS) account and maxing out the annual contribution of $12,750.  Contibutions to your SRS are tax deductible.  If you were at a tax bracket of 17% for instance, this translates into a tax avoidance of $2,167.50!  In addition, that $12,750 should be further invested to achieve higher returns. 

The catch: SRS cannot be withdrawn till after retirement age (62-65 years old), and has to be extracted over a period within 10 years thereafter, taxable at half the amount.  That means that if one had no other sources of income by then, withdrawal of $40,000 annually would be tax free since the first $20,000 of taxable income enjoys 0% tax.  This assumes the taxation system remains unchanged.

Caveat: My take on the subject of SRS is that it may not be meaningful to do so if your tax bracket is still very low.

More Tax Avoidance

If your spouse is earning less than $2,000 a year, you could contribute up to $7,000 to your spouse CPF-SA (Speical Account) which is then tax deductible for you!  That's a further $1,190 of tax avoidance at the 17% tax bracket - i.e. an immediate 17% yield!  Consider in addition that the $7,000 in your spouse's CPF-SA would be benefiting from 4% returns as well.  Of course, there is no guarantee the interest rate for CPF-SA would continue to be 4%, since officially it is now benchmarked against SGS 10-year bond + 1%.

The catch: CPF-SA is of course not withdrawable till after 55 years of age, subject to any balance left after the minimum required transfer to CPF-RA (Retirement Account).  Check out the CPF website for more information.

Risk-free Investments

Aside from low risk but rather hopeless options of putting our money into savings account (earning a pittance of a return) or fixed deposits (equally miserable returns), other options would be Singapore Government Securities (SGS) Bonds and Money Market Funds. 

SGS Bonds can be bought off secondary markets such as from Fundsupermart. The yield is in the region of 2-3% for 10-20 year maturity. Not bad, compared to 0.5% in savings account. These days, SGS Bonds are publicly traded on SGX.

Money Market Funds (MMF) on the other hand are unit trusts that invest in short-term (<1 year) maturity and probably yield about 1% right now, although it could well be 2-3% over the longer term.  MMF are however very fluid.  While it carries slightly more risk than savings account, the risks are relatively low given the short term maturities and AAA-rated holdings.  I view MMF as 'equivalent' to a savings account, but with a latency of 1-2 weeks when the money needs to be cashed out.  Such funds would include LionGlobal Money Market Fund, Philip Money Market Fund, and Pru Cash Fund.

There are various Singapore Corporate Bonds, including from government or statutory boards, which may well offer better yields than SGS Bonds.  Unfortunately, these are not easily accessible for the typical retail investor for now.  But recent news suggest that SGX is looking into opening up this market in the not so distant future.

There is a good video presentation from Mah Ching Cheng to explain this subject (a SIAS event): Investing in Bonds.

In Summary

For the ultra conservative investor therefore, the above would reap immediate benefits in maximising the little cash that we could put to better use, avoiding unnecessary wastage, and simple solutions to getting better returns, rather than leaving our money in the bank idling away.

We start off by working hard for our money.  It's time to make our money work harder for us.

Retirement:
Supplementary Retirement Scheme [IRAS]
Investing in Bonds [SIAS MyMoney investor education]
SRS & CPF Cash Top Up Schemes [Nexia Pulse]