Fixed Deposit (FD) Rates are Low and Falling - What is Your Plan B?
Bond funds are an attractive alternative to Fixed Deposits (FDs) as they can potentially enhance returns in the medium to long-term, but also provide investors with peace of mind knowing that the bond funds are being professionally managed.
Potential Return Enhancement without Excessive Risk-Taking
The Overnight Policy Rate (OPR) has been reduced by a total of 125 basis points to a low of 1.75% thus far this year to cushion the slowdown in economic activities resulting from the Covid-19 pandemic. What does this mean to depositors?
The OPR is the interest rate at which one bank lends to another bank. While a lower OPR means consumers are now able to obtain loans from the bank at a lower lending rate, it also implies lower savings rates. Therefore, holders of Fixed Deposits (FDs) will experience lower returns. To compound the challenges, FD rates are likely to remain low for a prolonged period of time given the weak economic outlook.
To enjoy potentially higher returns, investors may consider investing in bond funds as an alternative to enhance their returns in the medium to long-term. In fact, the accommodative domestic monetary policy is anticipated to underpin the domestic bond market in 2020.
Our bond funds are mainly invested in bonds with sound credit fundamentals, primarily in the banking, telecommunication and infrastructure sectors, as the funds seek to preserve the credit quality of their bond investments in the slowing growth environment. As at end-July 2020, our bond and sukuk funds have achieved higher returns than fixed deposit over the various periods as shown in the table below:
Table 1: Public Mutual’s Bond & Sukuk Fund Performance Ended 30 July 2020
||Total Return (%)
||Fund Volatility Class (FVC)
||3-Year Fund Volatility Factor
|PB Infrastructure Bond Fund
|Public Enterprises Bond Fund
|PB Fixed Income Fund
|PB Bond Fund
|Public Bond Fund
|Public Strategic Bond Fund
|Public Select Bond Fund
|Public Islamic Infrastructure Bond Fund
|PB Aiman Sukuk Fund
|PB Islamic Bond Fund
|Public Islamic Bond Fund
|Public Sukuk Fund
|PB Sukuk Fund
|Public Islamic Strategic Bond Fund
|Public Islamic Income Fund
|Public Islamic Select Bond Fund
|Fixed Deposit Rate
|Public Bank 12-Month FD Rate
*Based on the fund’s portfolio returns as at end-June 2020 (Source: Lipper)
Sources: Lipper & Public Bank, August 2020
Past performance of the funds is not a reliable indicator of future performance
Bond Investments in Malaysia
Bond investments have seen increasing popularity among domestic institutional investors such as pension funds, insurance companies, commercial banks and asset management companies as well as retail investors due to their outperformance against FD returns over the medium to long-term. The domestic bond market has more than doubled its size from RM651.40 billion in 2009 to RM1.49 trillion in 2019 as shown in chart 1, supported by sustained demand on bonds from domestic institutional funds alongside higher levels of debt fundraising by the government and corporates over the years.
Chart 1: Malaysian Bond Market Size (2009 – 2019)
Source: Bond Pricing Agency Malaysia (BPAM)
Bond investments are also gaining traction among corporate investors as returns generated from bond funds are tax-exempted for corporate investors. This compares favourably with FDs whereby interest income generated is taxable for corporate investors.
Early upliftment of FD prior to the contracted maturity date will be subjected to a penalty involving loss of interest income. However, investors in bond funds can redeem their holdings on any business day without a penalty.
Bond Fund Provides Diversification and Professional Management
For retail investors that undertake direct bond investment, investors need to be aware that each bond may carry different credit and interest rate risks that warrant an assessment prior to investing.
Credit risk refers to the non-payment of interest (or coupon) or the principal amount by the bond issuer whereas interest rate risk refers to the potential fluctuations in bond prices caused by movements in interest rates as an increase in interest rates generally leads to higher bond yields, which lead to lower bond prices; and vice-versa.
In comparison, bond funds that invest into a portfolio of bonds provide diversification which allows investors to reduce their concentration risk of investing into one or a few individual bonds. Bond funds’ investors can also gain access to professional management which helps to mitigate investment risks of investing directly in individual bonds.
To manage credit risk, bonds are analyzed by credit analysts to ensure that our bond funds only invest in bonds with sound credit fundamentals and are issued by issuers with proven management track records. Our credit analysts also closely monitor the financial positions of bond issuers as well as corporate developments that could impact the bonds held by our funds. These measures help mitigate the credit risks for our bond funds.
Last but not least, investors are advised to adopt a medium to long-term investment horizon to ride through any potential volatility in bond funds’ returns if bond yields increase due to an increase in interest rates. Nevertheless, as bond funds are being rebalanced on an on-going basis to ride through the interest rate cycle, this helps to mitigate the interest rate risks for our bond funds.
In summary, bond funds are an attractive alternative to FDs as they can potentially enhance returns in the medium to long-term, but also provide investors with the benefit of professional management and flexibility of redeeming their investments on any business day without a penalty.
Investors are advised to read and understand the contents of the Master Prospectus 1 of Public Series of Funds, Master Prospectus 1 of Public Series of Shariah-Based Funds and Master Prospectus 1 of PB Series of Funds dated 30 April 2019; 1st Supplemental Prospectus of Master Prospectus 1 of Public Series of Funds and 1st Supplemental Prospectus of Master Prospectus 1 of Public Series of Shariah-Based Funds dated 22 January 2020 and the relevant fund’s Product Highlights Sheet (PHS) before investing.
Investors should understand the risks of the funds, compare and consider the fees, charges and costs involved in investing in the funds.
A copy of the Prospectuses, Supplemental Prospectuses and PHS can be viewed at our website www.publicmutual.com.my.
Investors should make their own assessment of the merit and risks of the investment. If in doubt, investors should seek professional advice.
This document seeks to advertise capital market product or capital market-related services. The contents of this document have not been reviewed by the Securities Commission Malaysia (SC).
Past performance of the funds is not a reliable indicator of future performance.
Please refer to www.publicmutual.com.my for our investment disclaimer.
Lipper Fund Volatility
The Volatility Factor (VF) means there is a possibility for the fund in generating an upside return or downside return around this VF. The Volatility Class (VC) is assigned by Lipper based on quintile ranks of VF for qualified funds. VF is subject to monthly revision and VC is revised every six months or other interval as advised by FIMM. The volatility banding for the “Very Low”, “Low”, “Moderate”, “High” and “Very High” VCs as at 30 June 2020 are 0.000 ≤ VF ≤ 3.315, 3.315 < VF ≤ 9.550, 9.550 < VF ≤ 12.800, 12.800 < VF ≤ 15.380 and VF more than 15.380 respectively. For this period to 31 December 2020 the VCs for the funds are based on the VFs of the respective funds as at 30 June 2020. The fund’s portfolio may have changed since this date and there is no guarantee that the fund will continue to have the same VF or VC in the future. Presently, only funds launched in the market for at least 36 months will display the VF and its VC.