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Navigating the bond market: A deep dive into Singapore’s fixed-income funds


Feb 22, 2024 #bond market

The Singaporean bond market may garner less attention than the bustling equity market. However, within its steady foundations lie an often underappreciated vehicle within financial portfolios: fixed-income funds. Praised for their stability and income-generating properties, these funds stand as a bastion against market volatility and a cornerstone for a well-rounded investment strategy. In this article, we will embark on an educational journey to understand the intricacies of Singapore’s fixed-income landscape, exploring the nuances and opportunities available within this domain.

Understanding fixed-income funds

Fixed-income funds are investment vehicles that pool funds from multiple investors in Singapore to purchase a diversified portfolio of bonds. These funds typically provide regular payouts to investors through interest or dividend income.

Unlike stocks, which are the ownership of a company, bonds are debt securities. When you buy a bond, you are lending money to an entity (government, municipality, corporation) that, in turn, promises to repay the amount borrowed (the principal) plus interest. Fixed-income funds offer diversification benefits, professional management, and regular income distribution while reducing the risk associated with individual bond investments.

Singaporean market dynamics

Singapore’s bond market is known for its high-quality issuances and regulatory environment. The Monetary Authority of Singapore looks after the country’s finance sector, ensuring a well-regulated market.

The financial landscape of Singapore boasts three classes of bonds: government securities, statutory board securities, and corporate bonds. Each offers varying yields, corresponding risk levels, and maturities, catering to various investor preferences. Sovereign bonds, backed by the full faith and credit of the government, offer the least risk, while corporate bonds offer a higher yield and slightly more risk.

Diversification within fixed-income funds

Diversification is crucial to any investment strategy, and it’s no different with fixed-income funds. By investing in Singaporean fixed income, investors can gain exposure to various bond types, such as government, investment-grade corporate, high-yield, and international bonds issued in different currencies.

The benefits of diversification include lowering the fund’s overall risk, smoothing out potential volatility, and increasing the chance of positive returns by offsetting potential losses in one asset class with gains in another.

Risk and return considerations

Investing in fixed-income funds involves assessing and managing against various risks. One of the primary risks is interest rate risk, where bond prices move inversely to changes in interest rates. Existing bonds with lower yields are less attractive in a rising rate environment, causing their market value to decline.

Credit risk is another important factor. It refers to the chance that an issuer might default on its bonds or be unable to make timely interest payments. High-yield bonds offer higher yields but carry greater susceptibility to default to compensate for the increased risk.

Fund managers work to balance these risks within a fund by conducting rigorous credit analyses, diversifying across issuers and sectors, and adjusting duration to manage interest rate changes.

Tax efficiency and yield optimisation

The tax treatment of fixed-income funds can significantly impact an investor’s after-tax return. Singapore’s tax system is designed to be efficient and widely applicable to different investments, including bonds.

Investors in Singapore can benefit from the tax-free nature of Singaporean saving bonds and the potential for tax-exempt income from other bond funds. Understanding the tax implications of specific investments is crucial to optimising a portfolio’s total return.

Yield optimisation techniques, like purchasing bonds at a discount, reinvesting interest payments, and laddering maturities, can enhance the overall yield without taking on additional risk.

Aligning with investment goals

An essential step in investing in fixed-income funds is to align them with your investment goals and risk tolerance. Whether looking for a steady income stream in retirement, capital preservation, or growth, fixed-income funds can meet your needs.

Investors should consider the fund’s investment objectives, strategies, average credit quality, average maturity, and expense ratio to ensure they are aligned with personal financial goals. Additionally, reviewing the fund’s performance history can offer excellent insights into how it has navigated different market environments.

Active vs. passive management

Fixed-income funds can be managed actively by professionals who make investment decisions to outperform a given benchmark or passively through index tracking. Active managers aim to select bonds and adjust the portfolio to capitalise on market inefficiencies and changing market conditions. Passively managed funds mimic the performance of a bond index. They offer lower expense ratios and often greater tax efficiency due to lower portfolio turnover.

Investors in Singapore should carefully consider the pros and cons of each approach, recognising that active management may provide the potential for higher returns but also comes with higher fees and more significant variability in outcomes.

The future landscape of Singapore’s bond market

Singapore’s bond market is poised for growth and innovation. With a solid regulatory framework, a commitment to excellence, and the government’s push to develop the market, Singapore promises to provide an attractive environment for investors seeking to leverage fixed-income funds’ stability and income potential.

The bond market is set to benefit from increased corporate issuance, expansions in green and sustainable bonds, and the growing prominence of the Asian region in the global fixed-income universe. As the demand for fixed-income investments grows, market participants can expect to see a broader array of products and strategies to cater to evolving investor needs. Investors in Singapore are advised to see a broker like Saxo Singapore for an expert view of the market and to help select fixed-income funds that align with their investment objectives.

Wrapping up

Fixed-income funds in Singapore present a compelling opportunity for new investors seeking to balance risk and return within their portfolios. With a thoughtful approach to fund selection, an understanding of market dynamics, and close alignment with investment goals, fixed-income funds can enhance the stability and performance of an investment strategy. For those who will do their due diligence and engage with the market, the serene waters of Singapore’s bond market offer riches in the form of consistent income and prudent wealth management.

By Lucille