“Fixed-Income” – An Alternative that Offers Returns “Higher than Deposits” & “Beats Inflation”
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In the early part of this year, the Bank of Thailand announced a 0.25% cut in the policy interest rate, bringing it to 2.0%. This marked the second rate cut in two years, bringing the total reduction in the policy rate to 0.50% from its peak.
This reflects that Thai interest rates have officially entered a downtrend. This is good news for those who “pay interest” as their debt burden will be lighter. However, for those who “receive interest” from savings deposits or fixed-income investments, it can be a bit disappointing, as we will receive lower returns while Thailand’s inflation rate tends to rise continuously.
So the key question is, how can we invest to make our money grow in a low-interest-rate environment and not have it eroded by inflation?
In the current investment landscape, there are a wide variety of options. However, in this article, I will take you through a relatively safe investment alternative that can generate good returns even in a low-interest-rate environment and beat inflation in the long run.
First, we need to understand the average rate of “inflation,” which is the “enemy” of our investments.
Data from the Bank of Thailand shows that Thailand’s average inflation over the past 5 years was 1.6%, and the average over the past 10 years was 1.35% per year. Therefore, we should use the long-term inflation rate of 1.3% as an investment target.
Now let’s look at which investment options are relatively safe and can generate returns for us.
- Deposits: Safe but Returns May Not Keep Up with Inflation
An investment option everyone is familiar with is placing money in a savings or fixed-deposit account. While this method effectively preserves the principal, as interest rates fall, the returns from deposits may be lower than the inflation rate, which can cause the real value of savings to decrease over the long term.
- Advantages of Bank Deposits
- Low risk and principal is protected.
- High liquidity; can be easily withdrawn.
- Suitable for an emergency fund.
- Disadvantages of Bank Deposits
- During periods of falling interest rates, returns can become low.
- Returns may not be able to beat inflation in the long term.
Historical Returns of Savings & Fixed Deposits
Data from the Bank of Thailand indicates that over the past 10 years, the interest rate for savings deposits has ranged from 0.25% to 0.55% per year, while the interest rate for 12-month fixed deposits has been in the range of 1.4% – 1.7% per year. With an average inflation rate of approximately 1.3% per year, the real return from savings deposits (after accounting for inflation) has been negative, whereas the return from fixed deposits has remained positive.
This is not a difficult query. I will simply translate the text from Thai to English as requested.In summary, long-term savings deposits may not be able to beat inflation, while fixed deposits can still hold their own against it.
- Fixed-Income: An Alternative with the Potential to Generate Higher Returns than Deposits and Beat Inflation
Fixed-income assets are popular during periods of falling interest rates, including investments in government bonds or corporate debentures. This is because fixed-income instruments offer higher interest rates than deposits. Additionally, in a downtrending interest rate environment, the price of fixed-income instruments in the secondary market has the potential to rise due to increased demand. This provides investors with the option to sell for a profit from the price difference in the secondary market.
- Advantages of Fixed-Income
- Offers higher returns than deposits.
- Has the potential to generate returns from increasing bond prices during a downtrend in interest rates.
- Suitable for investors who need consistent interest income.
- Disadvantages of Fixed-Income
- Involves credit risk if the bond issuer defaults on the debt.
- Prices may fluctuate according to interest rates and market conditions.
- Requires holding for an appropriate duration to receive maximum returns.
Historical Returns of Fixed-Income
According to data from the Thai Bond Market Association (ThaiBMA), the average return on government bonds over the past 10 years has ranged from 1.4% – 1.8% per year (depending on the bond’s maturity), while the return on corporate bonds with an Investment Grade rating has been in the range of 2.0% – 3.0% per year. All of these are higher than the interest rates on savings deposits and the inflation rate. Therefore, fixed-income is an interesting investment option for beating inflation in the long term.
- Bond Funds: A Flexible and Well-Diversified Alternative
For investors who want to receive returns from fixed-income assets without managing the portfolio themselves, a bond fund is a suitable option. This is because it has an expert fund manager who manages the investment portfolio and helps diversify risk across various types of fixed-income instruments. It also offers high liquidity, as investors can buy and sell fund units on every business day.
Categories of Bond Funds
- Money Market Funds – Primarily invest in government bonds. Suitable for investors with a low-risk tolerance.
- Short-Term Bond Funds – Invest in government bonds and short-term corporate bonds with a maturity of no more than 1-3 years. Suitable for investors who require high liquidity and have a low-risk tolerance.
- Long-Term Bond Funds – Invest in government bonds and corporate bonds with maturities of more than one year. Suitable for those who want high returns over the long term and can tolerate short-term NAV volatility.
Sample Historical Returns of Bond Funds
- Short-Term Bond Fund: The KKP PLUS Fund had past returns of 4%, 1.8%, and 1.4% per year for the 1-year, 3-year, and 5-year periods, respectively.
- Long-Term Bond Fund: The KFAFIX-A Fund had past returns of 5%, 2.3%, and 1.6% per year for the 1-year, 3-year, and 5-year periods, respectively.
In a low-interest-rate environment, investment alternatives that can generate returns higher than inflation are crucial. While deposits are a safe and highly liquid option, their returns are often lower than the long-term inflation rate.
Fixed-income instruments, on the other hand, offer higher returns, can generate steady income, and beat inflation in the long run.
Meanwhile, bond funds are another suitable choice for those who prefer professional management and need liquidity for buying and selling. They can also provide good returns during a low-interest-rate period.
However, every type of investment has risks. Investors should consider their acceptable level of risk and choose investments that align with their financial goals. If you need more confidence, you should consult an investment advisor before making an investment decision.
