Complete Guide to Bond Funds in Singapore: Top Strategies & Picks

What happened? 

Interest rates have been falling in recent months. 

After all, the US Federal Reserve recently cut its benchmark rate by a massive 0.5%, and indicated that there may be more rate cuts in the coming year. 

When rates drop, yields on fixed deposits and T-bills tend to decline, making them less attractive. 

For example, I shared earlier that the T-bill yield falling below 3% in the most recent auction on 26 September.

Bonds, on the other hand, stand to gain in such an environment. 

The inverse relationship between bond prices and interest rates means that when interest rates fall, bond prices tend to rise. 

One way to gain exposure to bonds is through bond funds, which offer a diversified portfolio of bonds that could give not just income but also potential capital appreciation should rates continue to fall.

Here, I will cover what bond funds are, what to consider when investing in bond funds, and how to choose one that aligns with your investment objectives.

What are bond funds? 

A bond fund is a type of mutual fund that pools money from many investors to invest in a diversified portfolio of bonds, all managed by a professional fund manager. 

Depending on the fund’s objective, bond funds aim to capture opportunities for income generation by investing in various types of bonds and capital appreciation by buying and selling bonds.

Bond funds can invest in a wide range of bonds across the market, from short-term and long-term government bonds (such as Singapore and U.S. government bonds) to corporate bonds.

Why invest in bond funds? 

#1 - Steady income

Bond funds are often considered by investors seeking passive income.  

While individual bonds typically pay a fixed income every six months, bond funds offer the flexibility of more frequent income payouts, such as monthly or quarterly, depending on the fund’s distribution policy. 

The returns from bond funds are derived from the interest payments and the price fluctuations of the underlying securities held within the fund. 

#2 – Professional management team

One of the key advantages of investing in bond funds is access to a professional management team that handles the complexities of the bond market on your behalf. 

By investing in a bond fund, you benefit from the expertise of experienced portfolio managers, supported by dedicated research analysts who specialise in specific markets or industry sectors. 

The fund management team conducts thorough analyses of each bond in the portfolio, assessing both the opportunities and risks. 

This includes evaluating factors such as credit strength, interest rate movements, and broader economic conditions to position the fund for longer-term outperformance. 

#3 – Diversification

When purchasing a single bond, your portfolio is exposed to the credit risks of the specific issuer.

In the event of a credit issue, such as a downgrade in the bond's credit rating or the issuer's failure to meet interest or principal payments, the market value of that single bond could decline sharply.

This concentration of risk makes investing in individual bonds less appealing, particularly if you're only holding a few bonds in your portfolio.

A bond fund, however, typically holds a wide range of bonds spread across different markets, industries, and issuers. 

This diversification helps to mitigate the risk of poor performance from one bond. 

#4 – Smaller investment sum 

This broader exposure through a bond fund may be achieved with a much lower capital outlay compared to investing in individual bonds.

For instance, directly investing in a single bond often requires a significant minimum capital investment—sometimes as much as S$250,000.

In contrast, bond funds allow you to achieve diversification with a much smaller initial investment, with minimum investment amounts as low as $1,000. This makes bond funds far more accessible to individual investors.

What to consider when choosing a bond fund

When I tried to compare the returns of various bond funds, I noticed that their returns have varied significantly across a 1-month, 1-year and 5-year period. 

This made me dive deeper to understanding what might be causing the divergence in performance, as well as the key factors we should then consider when buying a bond fund. 

In choosing a bond fund for my portfolio, I would consider the following factors:

• Yield to maturity
• Credit quality
• Duration
• Fund positioning and holdings
• Income distribution frequency
• Management fees

#1 - Yield to maturity

When comparing bond funds, Yield to Maturity (YTM) is an important measure to consider. 

YTM represents the bond’s expected rate of return if it is held until maturity, accounting for both the interest payments and the repayment of the bond’s principal at maturity. 

YTM can also be used to compare bond funds. In this comparison, the PIMCO GIS Income Fund has a highest YTM of 6.86%, compared to the Dimensional Global Short Term Investment Grade (STIG) Fixed Income Fund, which has the lowest YTM of 2.96%. 

This suggests that the PIMCO GIS  Fund could offer a higher expected return if held to maturity, given its higher YTM. However, it’s important to remember that a higher YTM often reflects higher associated risks, such as interest rate or credit risk.

Some of the bond funds with a yield to maturity of above 5% include the PIMCO GIS Income Fund, Schroder ISF Global Credit Income Fund, Fullerton Short Term Interest Rate Fund, and DBS CIO Liquid+ Fund. 

This may be due to their holdings of bonds in foreign currencies such as US Dollar, which currently offer a higher yield versus a comparable Singapore Dollar denominated bond. 

#2 - Credit quality

Credit quality assesses the creditworthiness of a bond's issuer, rated by agencies like Moody’s, S&P, and Fitch on a scale from AAA (highest) to D (default). Bonds rated BBB or higher are considered "investment-grade" and are seen to be safer.

Bond funds that invest in high-credit-quality bonds, such as government or AAA-rated corporate bonds, tend to offer more stability but with lower returns. 

Conversely, funds investing in lower-credit-quality bonds, such as high-yield or "junk" bonds, offer higher potential returns but come with greater risk of default.

Here are some examples of bond funds and their average credit rating: 

#3 - Duration

Duration measures a bond's sensitivity to changes in interest rates. 

Funds with short-term bonds (1-3 years) offer more stability and are less affected by interest rate changes. 

Funds with long-term bonds can be more sensitive to interest rate changes.

To illustrate, let’s compare the effective durations of two bond funds: the Schroder’s ISF Global Credit Income Fund and the Lion Global SGD Enhanced Liquidity Fund A Acc SGD. 

As we can see, Schroder’s fund has the longest duration of 3.8 years compared to the Lion Global SGD Enhanced Liquidity Fund of 0.31 years. This may mean that Schroder’s fund is likely more sensitive to rising and falling rates.  

#4 – Fund positioning and holdings 

Understanding a bond fund's positioning is key to determining if it aligns with your investment goals. 

For example, the PIMCO GIS Income Fund and Schroders ISF Global Credit Income invests in bonds from global markets including the US and Europe, while the United SGD Fund focuses on specific markets like Asia. 

#5 – Income distribution frequency

Some bond funds may provide regular income payouts on a monthly, quarterly, or semi-annual basis, while others may reinvest the income back into the fund. 

Payouts are generally distributed based on market performance and the fund’s underlying assets. 

However, we would need to make sure that the payouts are sustainable based on the yields generated by bonds held in the fund. 

Here, it is useful to check how much of the payouts are supported by income generated from the bonds in the portfolio, and how much are driven by capital distributions. 

#6 – Management fee

Bond funds typically charge a management fee, which is a percentage of your investment used to cover the costs of managing the fund. 

A lower management fee is generally preferable but it’s also important to balance the cost with the quality of management. 

Do note that there may be other fees involved when purchasing the fund including sales charges and broker platform fees. 

How do bond funds compare to Singapore Government Securities (SGS), Singapore Savings Bonds (SSB), and T-bills?

When comparing bond funds to instruments like Singapore Government Securities (SGS), Singapore Savings Bonds (SSB), and T-bills, the key differences lies in the level of risks and exposure offered. 

Bond funds invest in a wide range of income-generating securities, including government and corporate bonds from various regions and sectors. 

Meanwhile, SGS, SSB, and T-bills are Singapore government-issued instruments.

In terms of yield or returns, bond fund yields are derived from the performance of the underlying portfolio of securities, which may include a mix of different types of bonds. 

In contrast, SGS bonds have fixed interest rates, SSB rates are linked to the Yield-to-Maturity (YTM) of the corresponding tenor of SGS bonds, and T-bill yields are determined by the cut-off yield from successful bids during the auction.

The September 2024 SSB allotment offers annual returns between 2.59% and 2.77% for holding periods ranging from 1 to 10 years.

The most recent 6-month T-bill yield stands at 3.13%, with the 1-year T-bill yielding 3.38%. 

SGS bonds, depending on their tenure, yield between 2.57% for 2 years and up to 2.87% for 50-year bonds (as of 2 September 2024).

Below we compare other features of bond funds against SGS, SSB and T-bills:

How to buy bond funds in Singapore?

You can buy bond funds in Singapore through a licensed platform, including banks, brokerages, and digital wealth platforms.

In choose a platform to buy a bond fund, I would compare the sales charge, redemption fee and platform fee in buying the fund. 

For example, Moomoo Singapore and Tiger Brokers do not impose any subscription fee, redemption fee and platform fee for the purchase of bond funds on its platform. 

FSMOne does not impose any sales charge and redemption fee, but charges a platform fee of 0.05% per quarter (0.2% per annum)

Endowus rebates 100% of trailer fees, and gives access to the institutional share class of funds, which typically are half the cost of a retail share class of the same fund. However, a platform fee of 0.3% per annum wll be imposed. 

What would Beansprout do?

I would consider bond funds to take advantage of cuts in interest rates. 

By investing in a diversified portfolio of bonds, bond funds offer not only regular income but also the potential for capital appreciation as interest rates fall. 

The key factors I would consider when selecting a bond fund include the fund positioning and holdings, yield to maturity of bonds held by the fund, credit quality, duration of bonds, income distribution frequency, and management fees. 

Some of the bond funds with a yield to maturity of above 5% include the PIMCO GIS Income Fund, Schroder ISF Global Credit Income Fund, Fullerton Short Term Interest Rate Fund, and DBS CIO Liquid+ Fund. 

For investors looking for funds holding bonds with a longer duration, the Schroder ISF Global Credit Income Fund has an effective duration of 3.8 years and PIMCO Income Fund has an effective duration of 2.93 years. 

For investors looking for funds holding bonds with a slightly shorter duration, the Fullerton Short Term Interest Rate Fund, DBS CIO Liquid+ Fund, Lion Global Short Duration Bond Fund, NikkoAM Shenton Short Term Bond Fund and United SGD Fund have an average duration between 1 to 2 years. 

For investors looking for regular distributions, the PIMCO Income Fund and Schroder ISF Global Credit Income Fund, and United SGD Fund have fund classes that offer monthly payouts. The DBS CIO Liquid+ Fund and Lion Global Short Duration Bond Fund have fund classes that offer quarterly payouts. 

If you are looking for funds that may present lower risk with a greater focus on liquidity and capital preservation, it might be worth considering a money market fund through a cash management account. 

If you are looking for bond funds that are traded on an exchange just like a stock, learn more about how to choose the best bond exchange traded fund (ETF) in Singapore.

Are there other bond funds you would like us to compare? Let us know in the comments below!

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