Various Investment Instruments And Their Pros And Cons

It is never too early to plan for your retirement. In fact, some analysts advise that retirement planning should start from 35 years old. By planning early, you will be able to spread out the investment period and hence ride out the economic downturn. If you are convinced of the above benefits of planning for your retirement early, let us proceed to study the various investment instruments. There are a wide range of investment instruments available in the market for your selection, from government and corporate bonds, to endowment plans, unit trusts and stocks.

Fixed Deposit and CPF

Fixed deposit and CPF are your safest bets. You will get back your principal amount plus the accumulated interest for sure unless in the event of bank or government default. The return of fixed deposit is very low in Singapore and close to zero in other countries such as the United States. Therefore, fixed deposit is not a wise choice as it does not even generate enough return to cover the inflation, which is about 2 per cent in Singapore. In contrast, CPF offers pretty good return. Savings in your ordinary account offers a return of 2.5 per cent per annum. If you do not need to use the money in your ordinary account, you can transfer it into your special account which gives you a much higher return of 4 per cent per annum. This moderate return, coupled with power of compound interest rate gives you a decent return in the long run. For example, if you put ten thousand Singapore dollars in your special account today, the ten thousand Singapore dollars will double to twenty thousand dollars in close to 18 years. The risk of this is close to zero as chances of Singapore government default are extremely low. There is common misconception among Singaporeans when it comes to CPF. With assistance from your economics tutor in economics tuition, explain why CPF is a good choice for retirement investment. Sign up for economics tuition today if you need help with the subject. Principal economics tutor Mr Edmund Quek is a highly-acclaimed economics tutor in Bishan. He has over 20 years of experience in teaching economics tuition and has published a couple of economics textbooks which are among the best sellers in Popular bookstores.

Government and Corporate Bond

Depending on the risk of government default, government bonds offer varying yearly returns. For example, countries like Greece have a much higher risk of default. Government bonds issued by the Greek government on average offer a yearly return of five per cent depending on the term of the bond. In contrast, Singapore government has a very low risk of default. Therefore, government bonds issued by the Singapore government on average offer a yearly return of only 1.5 to 2 per cent.

As for corporate bond, the risk involved is much higher. A company may look sound now. But who knows what will happen in five years’ time? In the event that the company is bankrupt, all your investment will be gone. The risk of corporate bonds is often underestimated. In consultation with your economics tutor in economics tuition, explain why corporate bond could be the most risky investment instrument among all.

Endowment Plan

Endowment plan is a life insurance contract designed to pay a lump sum after a specific term. A unique combination of savings and insurance, its return is typically divided into 2 portions, the guaranteed return and the unguaranteed return. The guaranteed return is usually close to your principal amount. Guaranteed return grows over time as part of unguaranteed return will be declared as guaranteed return. A typical endowment plan allows you to double your principal amount, in about 20 years’ time, depending on the amount invested. In the event of economic downturn, you can still get back the guaranteed return.

Unit Trust and Stocks

Unit Trust and Stocks are in the high risk category. In the event of economic downturn, there is a possibility that you will suffer tremendous loss. Unit trusts invest in a diversified range of assets to spread its risk. The performance of the unit trust is highly dependent on the investment decision of the fund manager, which you have absolutely no control of. To the contrary, if you invest in stocks, you will be in full control of your own investment decision, including what stocks to pick, when to buy and when to sell. However, in the meantime, you are also fully exposed to the market volatility.

In closing, all investment instruments have their pros and cons. One should carefully assess his risk appetite and expected return in order to make the best decision.

Benjamin Tay

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