Had a really busy weekend, was down at the InvestFair booth on both Saturday and Sunday and I got to speak with some of you. But let’s talk about savings account rates.
Did you know that the average bank savings deposit rates in Singapore are now just 0.16% in July? I generally don’t keep much money in my savings account, but it was only when I pulled out the historical data from the MAS website did I realise that they had fallen by so much. At the start of 2003, average bank savings rate stood at 0.44%. While that’s not very high either, but to fall to 0.16%! So, that means that keeping $10,000 in the average bank savings account for an entire year would net just … $16.
The rates are so low we might as well treat it as essentially zero. When I pulled the data on fixed deposits from the MAS website, the results were not much better. Average 12 month bank fixed deposit rates stood at merely 0.53% in July! At the start of 2003, it stood at 1.3%. Savings accounts are more liquid than fixed deposits. The interest rate may change daily, is calculated daily, and you can put in and take money out all the time with no penalties. For 12 month fixed deposits, there is an inherent understanding that you have to keep it there for 12 months. If you withdraw your deposit before it matures, there will be penalties like lost interest which you would not earn. That’s why fixed deposit rates have to be higher than savings account rates. But at just 0.53%? Even the cash fund, whose daily yield you seen on our banner every day shows a yield of 0.482% as at 25 Aug 09. That is only slightly lower than 0.53% and it gives daily liquidity! This means that you can put in and take out money without penalty every day.
There is really a very significant penalty right now for being safe. Because fixed deposits and savings accounts are “safe”, investors keep large sums of money in them. However, given the extremely low interest rates right now, they are simply not being adequately rewarded for keeping money with the banks and being safe. Banks, in the aftermath of the US subprime financial crisis, became very conservative with their lending, you read about how many people couldn’t buy cars because the banks would not grant them a car loan. Similarly, housing loan were reduced to just 70% of the total loan for some cases because banks did not want to take as much loan exposure.
At the same time, investors fearful of the market crash pulled a lot of money out of stock markets, investments, and kept them all in cash since last year September. Many are still in cash even till this day. As a result, the banks are flush with cash and do not need your deposits. This is shown most clearly by the low interest rates being given to depositors. If the banks really wanted your money, they would be willing to give you a higher rate, but they don’t! They have so much cash they can’t loan out of it all out anyway. So they hardly need more.
As investors, we need to recognize that our money can be put to better use. Even if we still want to keep them in low risk, safer investments, there are certainly alternatives which can give better than the 0.16% from savings accounts. As mentioned previously, the cash fund gives 0.48% right now, with similar liquidity. There are low risk funds like DBS Enhanced Income which would give a higher yield than that. The next step up in yield would be Singapore bond funds. SGS bonds also can be considered. There is no law that insists that you have to hold a 15 year SGS bond to maturity. Although I would caution that holding a very long maturity bond carries the risk that if interest rate moves up, the value of the SGS bond will drop. Fundsupermart has a list of the SGS bonds and their current yield to maturity on the website.
What does this also mean for equities? Historically, when interest rates are at such low levels, assets like property and equities benefit. Equities (stock) can trade at higher than normal valuations simply because the alternative of holding cash or being in fixed income gives such lousy returns. Similarly, because interest rates are low, property loans are also giving low rates, and again since the return from being in cash is so negligible, there is greater interest in putting the money into property instead. This effect is compounded if the market starts to trend upwards, confidence comes back to the market, and more and more people start to shift money from cash into investments like stocks, unit trusts and property.
So, please review the money you have in fixed deposits and savings accounts and check on the rates you are receiving for them. Banks love to roll over fixed deposits automatically when they mature and at their current levels which are very low. Even if you still want to keep them in safe investments, there are alternatives out there which are also very low risk, yet gives a better return than what savings accounts is giving.
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