Alternatives to bank deposits

I was introduced to the world of unit trust (or mutual fund) about two years back when my financial advisor introduced it to me. However, it was about a year back when I started looking into the funds available, and it led me to discovering a class of funds which have very good risk-adjusted returns. They all belong to the "Bond" asset class. I put in apostrophe because unlike traditional bonds, their price or Net Asset Value (NAV) generally rise in tandem with the equity markets. I shall be highlighting two such funds which I think are great alternatives to leaving your cash in banks or fixed deposits.

The first is "Nikko AM Shenton Short Term Bond Fund (SGD)", which has an annualised returns of about 3% (about 30x of bank deposit interest rate). It has very low volatility, and its maximum drawdown is 4.3% during the end of 2008. This means you would have lost the maximum amount of 4.3% on your investments if you had invested during that period, which is much less worse than the 40% drawdown suffered by equity markets around the same period.

Next, there is the "UOBAM SGD Fund Class A", with an annualised returns of about 4.6%. Of course, a higher returns would mean a little bit higher volatility. Its maximum drawdown is 3.4% and it occurred during the a start of the European crisis in Aug 2011.

A 5 year chart of these 2 funds (from dollardex) are shown below, illustrating that both the Nikko AM and UOBAM funds would have netted you about 30% and 12% gains respectively over this period. Their relatively low volatility (minimum price fluctuations) and above average returns are why I park my excess cash in these two funds rather than in banks.

For comparison purpose, I am showing another chart below which factors in the STI and Dow Jones indices. A mix of these 2 bond funds easily beat the Equity indices. Also note their price fluctuations compared to the 2 equity indices.

Hence I personally really like these 2 funds. If you still require additional incentives, some fund distributors (like dollardex) charge 0% sales charge. Thus you pay nothing to buy, hold and sell these funds!

For those who plan to invest in these bond funds, do take note of the "bond bubble" which some experts cautioned will eventually burst. When the economy has really stabilised, the stock market starts entering a bull run, that is when the interest rates will rise. When that happens, I expect to watch the price movements of these funds more carefully.