Monday, March 29, 2010

Low yield for a 5 year investment

Dear Mr. Tan,
My mother is thinking of buying a 5 years insurance plan with a single premium of $10,000. She is still in good health and the reason she's buying is to get safe returns that are higher than the bank interest. I've attached the
benefit illustrations and hope you can give your view on this.



REPLY
The non-guaranteed yield varies from 1.55% to 2.8% p.a. for 5 years. It is rather low for an investment that is locked up for 5 years. However, I am not able to suggest any better investment.  Let me post this in my blog and see if someone else has better suggstion.



21 comments:

Anonymous said...

Return is a function of time and risk.

Better than the bank is a misrepresentation and misleading (which MAS has outlawed for comparison)becuase the bank rate is NOT the benchmark of risk free rate for 5 years. The risk free rate is about 2% and to bear so much more risk which the 5 year endowment has you need to be compensated by another 2% to make 4% before it is worth considering otherwise go for the 5 year bond.
Tell your mother to buy bond from the banks or some portals. This bond is more liquid and can be sold anytime and can be sold for a profit or held to maturity.
The 5 year endowment is loss for 1st 3 years and you NEVER get the return as projected. Even $10K is a small amount it is a wrong product to buy.

Anonymous said...

I saw from dbs on its latest product:
http://www.dbs.com/posb/insurance/myplusplan/howitworks/default.aspx
2.25% payout every year for 5 years and min 10k.
Note: I am not advertising anything.

wjsim said...

ABF Singapore Bond Index Fund

Some may think that the bonds held by the fund are so safe that you don't have to diversify, the factsheet and prospectus are useful at least for identifying the various coupon rates.

Looks safe. Not affected by the various economic disasters. What do you think?

LWL said...

i believe that there should be alternatives if you are looking for a yield of guaranteed 1++%. Recently NTUC Income launched a single premium that paid something along that lines, guaranteed...

which my mother, on my advise, subscribe.... as she is totally risk adverse and is not keen in anything that requires a stock broking account.

these investments opportunity like the one from NTUC Income happen every now and then, so you should capitalise on them if you find them attractive.

Many do not find it attractive because the know that the insurance company actually uses the money collected to subscribe to Temasek bonds or HDB bonds, etc and earn a yield of about 4%, with the money.

As 10K is not really a big sum, it may be better off being placed in an EFT, if you are prepared to stomach the risk, which is really not that great....

You can also consider the preference shares of our local bank that give a higher rate of return....

Ex-Con said...

Whoa! Since it is single-premium endowment, hence the projected returns are based on 3.75%pa and 5.25%pa returns achieved by the insurance fund. And the customer (that's you) gets only 1.55%pa and 2.8%pa returns?!?

That's an expense ratio of 2.2%pa to 2.45%pa. I don't know about you, but I'd be real pissed for the insurance company to take away 50% or more of the returns just because they got posh lifestyle expenses.

I'm sure there is also penalty for early withdrawal in the first 2-3 years? So you may face some capital loss if some emergency comes up and you need to terminate the policy.

Sorry I can't give you a clearer direction. You need to decide for yourself.

As for me, I'll rather enjoy the liquidity and no penalties -- plain vanilla savings deposits and money market funds.
Imagine you provide the money to insurer, he locks it up for 5 yrs and imposes penalties for early termination, and at the end he takes away 50% of the returns. Sheesh!

A Singaporean said...

I have no suggestions, but here are my observations. It seems to me that there's a lot of such products coming out in the past two years, and their market seems huge. Their yield is low, but they target those who want guaranteed principal protection and guaranteed returns (assuming that the company doesn't go bankrupt). These people are the ones who complain of getting burnt by the stock market, or scared by Minibond-like products. Unless they get out of the fear of taking risk, I don't know what better investment to suggest either.

DareToAct said...

We all should, especially the older we get, to think more about return OF investment rather than return ON investment

Anonymous said...

Since you are willing to lock up your money for 5 years, Why dont they consider bank Preference Shares, as the dividends is 5-6%, and it is liquid, in the way that you could sell it in the market if there is an urgent need of funds
( downside is that price could be lower than you bought but this could be made up from the pass dividends that you have already collected).

I think people should study this option a little more and weight the pros and cons... ( to me there is more pros )

Vincent Teo said...

Maybank offers their 1 yr FD at 1.125% (0.875% board rate plus 0.25% senior citizen preferential rate). I recently place one for my mum.

I agree that the return is not impressive but what it can offer are:
1) Liquidity - you do not lock up your funds for long term. You also do not incurr huge penalty if you withdraw early, maybe just forgo the interest.
2) Reasonable return - Maybank offer the highest FD rate in town.
3) Safety - Since SGD FD is guaranteed by the govt (till end of this year), and insurance for amt below $20k. This is an important consideration as old folks should not be subject to big risk.

gerimegaly said...

AVIVA has a tie-up with POSB for a 5yr non-participating endowment. Would be a good alternative, in my view.

Anonymous said...

why not invest the $10,000 in a reit that is below book value and can give a yield of about 7%
As Singaporean said this group of people must remove their adversity to risk. Investing in reits at this point in time is not risky as the economy is impoving and propery values are going up.

Anonymous said...

Talked to POSB/AVIVA about the yearly 2.25% return. Some points to note:

i) POSB is the distributor thus does not hold on to the investment.

ii) Capital gurranteed upon maturity.

iii) Early withdrawal is 80% of principal anytime before the maturity.

iv) The risk is AVIVA goes belly up.

The above is the information I gathered from POSB on the phone. Better to get some black and white if you learn anything from Minibond.

My other question is how AVIVA is using the invested money. There don't seems to be an answer if AVIVA decided to default. POSB said that AVIVA will try tp return you some money while I take it as another salesman pitch.

So, do more work before buying. Don't just take it that AVIVA will not default but ask POSB what happen to your money if AVIVA default. Also is there any clause in the prospectus that says "investor can loss all or a significant amount of their investment if AVIVA default".

Anonymous said...

I am surprised that many are still blur about investment or the meaning of investment.
They are still having these ," I want this and i want that" or My mother is risk averse" or "this is better than the bank" or "this is safer" .
They just want to buy a product which they FEEL is good for their temperament.This is emotional.
They don't consider their needs or the goal of the investment.
Goals can be
Eg. to protect my $10K what should I do. Which product protects my $10K for the next 5 years during which I don't need it.or
I want to grow my $10K into $15K so that I can put it as down payment for a car in 5 years time.What kind of product and risk I NEED to take.
Putting into an endowment without considering the end is like throwing a stone into a pond hoping to hit a fish. The best is a splash.Is that all you want , a splash for the sake of a splash.
This is real waste of resources.For the rich $10K may be just nice piece of special paper to light his cigar, for the poor it must be prudence.
Higher than the bank mentality has screwed up a lot of people and it is a mentality exploited by the insurance agents. That is why many insurers rolled out these sure to lose products lately. They don't care but to con you.

Anonymous said...

CPF should consider banning insurance agents from investing members' money and stop allowing CPF to be invested directly in stocks and shares. The current limit at 35% is too high.
The CFPIS is still reeling from heavy losses since 2001 when it was liberalised.
What does it tell you?
Insurance agents are salesmen and they don't have knowledge and skills about investment.They should not be allowed to screw up members balance for retirement.
CPF should not be a source of commission for these agents.

Anonymous said...

Another point to bear in mind is that interest rate is rising. That's why they want to lock your money for 5 years.

Anonymous said...

Anon March 29, 2010 10:44 PM,
please wake up.... You have advised your mother in investing in a money losing capital plus.It may be better than the bank but you still lose although lesser . $10K is still a hard earned money but you are not making your money work harder to remain the same value, same purchasing power.
By the time the capital plus matures your $10K has lost at least 3.2% of its value.

Anonymous said...

I think you need to compare apples to apples before you do a comparison. Low risk = low yield, high risk = higher yield. Before we know the person's risk appetitie, the product is condemned to low yield. This is not objective.

Are we looking at where the fund is investing and what percentage? For example, if 20% in global equities, and 80% in fixed income, then what kind of returns is reasonable as an entire entity?

Tommy S. W. Wong said...

NTUC Growth Plan suppose to give a return 3-4% for 5 years.

Anonymous said...

Tommy,
you must have been conned by ntuc agent. If you can get 2% after 5 years you should thank your lucky star.

Anonymous said...

Anon March 30, 2010 9:52 PM,
the problem is high risk low yield and that is what the 5 year endowment is all about. First 3 years is heavy loss, the forth year is loss and at maturity is still loss.So what do you think of this product? The outcome is loss. When you invest what is your objective? To make extra real value, right? or no loss no win.But this product is sure loss.

Anonymous said...

To be fair, please dont invest in any of the insurance products as the the first 2 yrs most of your money is working for the aagent
(commision) If you want your money to earn a return, please avoid insurance and bank products,
Do some research on Bank Preference shares, there is worth there. (No lock up period, cost is exteremely low)

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