What is passive income?
TikTok or YouTube have countless videos on how to earn passive income by selling products or offering services online. However, these activities are not exactly passive. In fact, most require a lot of hard work.
True passive income is cashflow that is generated with minimal effort on your part. A typical example is the income you receive from renting out your property or interest from fixed deposits.
But if you don’t have enough capital to buy property, or you are looking for a more optimal way to achieve passive income, bonds are an attractive option.
What makes bonds so attractive as a source of passive income?
1. Bonds pay regular income
A bond is like an IOU between an investor and a bond issuer. By buying a bond, you are lending the bond issuer money for the tenor of the bond.
In return, you receive fixed interest payments at regular intervals. And when the bond matures, you get back your principal amount, assuming no defaults.
2. Bonds come in all shapes and sizes
There are hundreds of bonds to choose from depending on your investment time horizon, risk tolerance, capital and income requirements. Bonds also come with different quality where a high quality bond is also usually called “investment grade” or IG while lower quality is usually called “high yield” or HY.
In general, bonds that are lower quality and/or longer duration pay a higher rate to compensate for the higher risk of default and greater yield volatility.
3. How can you invest into bonds?
In general, you can invest into bonds directly or through funds. The former would typically require an outlay of S$100,000 per bond while the latter, the minimum outlay is usually just $1,000. Moreover, investing through funds also allow you to quickly diversify in a more affordable way as bond funds would hold various bonds of varying quality, tenor, etc.
4. What kind of returns can bonds provide?
Bonds, like any other investments, its returns are not guaranteed as bonds prices can go up as well as down. However, unlike stocks, bonds typically comes with fixed interest payments at regular intervals. Moreover, when the bond matures, you get back your principal amount, assuming no defaults. Adding together interest payments and principal repayment, bonds can offer total returns with lower volatility than stocks.
Why are today’s economic conditions good for bonds?
To tame inflation, the US Federal Reserve has been raising its benchmark interest rate. This has now reached 4.75 percent, a level not seen since 2008. But in 2022, this rise in yields was accompanied by price falls.
2023 tells a different story. Today, inflation appears to have peaked and interest rate hikes could be coming to an end. In this scenario, bond investors stand to benefit from both higher yields and stable prices. The subdued economic growth this year is also a positive for bonds versus stocks because company earnings are unlikely to see a strong rebound.
As a result, bond yields are at their highest in over a decade. In fact, the 4 to 5 percent interest paid by high quality bond funds now exceed the 2 to 3 percent rental yields offered by Singapore residential properties and also generally higher than the many fixed deposit rates offered by the banks.
How far have you set your sights?
In a fast moving digital world, it is tempting to seek high returns in the shortest possible time. Bond investments serve a different purpose. They add to your monthly spending power, but also let you accumulate wealth throughout your working life.
What can I do next?
For investors new to bond investing, Dash PET Plus offers a simple and easy way to get started. Dash PET Plus is an Investment-Linked Policy (ILP) offering that provides exposure to high-quality government and corporate bonds to help you grow your money as well as exposure to very low risk money market fund to help you preserve your capital when markets are volatile.
What’s even better is that any change in allocation between bonds and money market funds will be taken care by us as driven by our investment views and outlook.
You also have full flexibility over how to invest:
- Choose to re-invest or cash out your dividend earnings
- Make unlimited top-ups and withdrawals*
- Activate automatic top-ups to achieve monthly dollar-cost averaging
*Terms apply, please refer to the product Terms and Conditions for full policy details
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A digital insurance channel that embraces changes to provide simple and convenient protection, Tiq’s mission is to make insurance transparent and accessible, inspiring you today to be prepared for life’s surprises and inevitabilities, while empowering you to “Live Unlimited” and take control of your tomorrow.
With a shared vision to change the paradigm of insurance and reshape customer experience, Etiqa created the strong foundation for Tiq. Because life never stops changing, Etiqa never stops progressing. A licensed life and general insurance company registered in the Republic of Singapore and regulated by the Monetary Authority of Singapore, Etiqa is governed by the Insurance Act and has been providing insurance solutions since 1961. It is 69% owned by Maybank, Southeast Asia’s fourth largest banking group, with more than 22 million customers in 20 countries; and 31% owned by Ageas, an international insurance group with 33 million customers across 16 countries.
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Written in partnership between Etiqa Insurance Pte. Ltd. (Company Reg. No. 201331905K) and UOB Asset Management Ltd. (Company Reg. No. 198600120Z)
Information is accurate as at 13 March 2023.