Useful Facts About ABF Singapore Bond Index Fund Every Investor Must Know
ABF Singapore Bond Index Fund is the earliest Exchange-traded Fund established in Singapore. Since its inception in 2005, the ETF has pooled a large Asset Under Management (AUM) of over S$870 million. It invests in the components of the iBoxx ABF Singapore Bond Index. This index tracks high-quality bonds initially issued by the Singapore government and quasi-government entities.
The fund’s growth has won it recognition such that it is approved under the CPF scheme. Investors can use CPF money to invest into ABF fund. This fund continually demonstrates resilience even during volatile market conditions. Investors prefer it because it invests in the high-yielding Singapore government bonds.
Over its lifetime, it has continually gained by 2.7% p.a, a rate that beats most Singapore’s fixed deposits rates. This fund’s rate has overtaken even the CPF ordinary accounts’ interest rate of 2.5%.
ABF Fund is among the excluded investment products that investors don’t need to be prequalified to make purchases. The characteristics this fund depicts over its existence shows that it is an ETF that suits investors with different risk-appetites. Here are three facts about the ABF Singapore Bond Index Fund.
1. ABF Singapore Bond Index Fund is a Low-risk Product
Governments bonds are considered risk-free investments. Investors thus associate this fund with little risk since it invests in bonds issued by the Singapore government. The fund also involves bonds issued by other governments like that of the People’s republic of China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines or Thailand.
However, the government of Singapore has a larger holding in the fund’s portfolio and previously were rated AAA across the three major credit rating agencies. This rating has made them the world’s highest yielding.
It’s therefore wise to say that this fund is for the risk-averse (cautious investors). An investor who fears to invest in the ever-volatile stock market can consider putting money in less volatile bonds. This will give you peaceful night’s sleep, but on the other hand, you will get slightly lower returns.
Another aspect of bonds that Investors like is that there is a legal obligation to pay interests and the principal amount at maturity. With Bonds, you are not likely to lose much of your investment capital like in stocks. Therefore, if you are a cautious investor who is not in a rash, ABF fund is for you.
2. The ABF Singapore Bond Index Fund Can Help to Reduce Portfolio Risk
This fund can act as a portfolio diversifier that exhibits directly inverse correlation to other classes of assets. This essentially means the fund dilutes the effects felt by other assets during unfavorable market conditions. For instance, you are an equity investor who is subject to considerable exposure from stocks. You can lower your risks by purchasing this fund.
If we go by modern portfolio theory, diversification is the vehicle to low-hanging fruits. According to studies, a mixer of stocks and bonds could achieve higher returns at lower risks. Diversification works best when some of a portfolio components move in opposite directions. ABF fund depicts a negative correlation with stocks. This makes it therefore suitable for use by a stock investor.
An investor with the ABF Singapore Bond Index Fund in his portfolio would afford to smile amid a hostile market condition. For instance, investors would have appreciated the value of bond diversification during the Global Financial crisis in 2008. During this time, the stocks lost over half of their value while the ABF fund performed exceptionally well during the same period.
The divergent movement of the two assets also present the investors with a chance to rebalance their portfolio. They can sell the assets that have gone up, and buy the ones that have gone down. This act of buying low and selling high helps investors generate additional returns.
3. The ABF Fund Requires Little Capital to Start
Beginner investor may shy away from investing in bonds thinking they require large capital to start. The Bonds-investing that requires substantial Capital is over-the-counter corporate bonds which usually need about S$250,000. Therefore, ABF Singapore Bond Index Fund is affordable to a beginner and at the same time offer a low-risk bond portfolio. Additionally, they provide the ease to buy and sell over the Singapore Exchange.
The minimum number of ABF fund you can buy from Singapore Exchange is 100 units as from the year 2015. This means that if the fund is trading at S$ 1.176, the minimum investment will be only S$ 117.6. Thus, ABF fund is quite affordable even to the beginners in the trade. For instance, for investors looking to invest small amounts regularly, they can do so. POSB/ DBS charge little for regular investment plans.
It is therefore evident that this investment is ideal even for school leavers. However, you should always bear in mind that there are risks involved with the ABF Singapore Index Fund. As a beginner investor, it is advisable to have full information about what you are getting into. This essentially means you should read the Prospectus, the product Highlight, and Fact Sheets. Additionally, ask for professional guidance.
Some of the risks involved include:
- The interest rate risk: ABF fund can be sensitive to the change in interest rate which may make the bond prices to go low
- The downgrade of credit rating: Downgrade in any of the Fund’s Bonds may cause the bond prices to reduce
- The tracking error: The fund may fail to closely replicate the index it is trailing, leading to deviations in fund performance.
In conclusion, you may be an investor who is cautious about risks and thus prefers a higher level of certainty. Or, an investor in equity looking to diversify or a newbie in assets investments. ABF Singapore Index Fund suits you if you belong to any of the categories. It is easily accessible, secure and affordable investment option. You now have no excuse to fear to take a plunge in this fund.