Savings plans for investors: the pros and cons

So-called safe-haven investments such as savings accounts and government bonds (treasuries) don’t offer much in the way of growth. Unfortunately, that’s not what many investors are looking for when they invest in stocks and funds, which is where we get the saying, “The higher the risk, the higher the reward,” or something like that.

With this in mind, I’ve often thought there should be a third-tier: low risk/medium reward options for those who want to accrue some wealth but aren’t interested in playing too close to the edge.

One popular strategy among investors is to buy savings plans for their mutual funds instead of purchasing individual pieces; this gives them access to instant diversification at a lower price. Some of these plans can be purchased directly from the issuer, but others come through financial brokers who charge their services. The following list will go over some of the key benefits and drawbacks associated with this type of investment plan:

Pros

• If there’s one thing I’ve learned here at The Finance Buff, it’s that diversification is one of the most important aspects of investing. When you buy a savings plan, you get instant access to various funds at once, so you don’t have to go out and buy each piece separately. It can save time and money in terms of transaction fees. Savings plans are easy to use because they exist mainly for people who need access to their accounts but don’t have enough money for an entire mutual fund purchase all at once. All you do is put your money into the plan and let the issuer know which pieces you want; they will automatically send those pieces as soon as there’s enough money in there for them.

• If your investment strategy centres around asset allocation, then a savings plan is the perfect choice for you because you get to divide your money up into different funds and don’t have to worry about putting more than the minimum in each one.

• There are no taxes on most of these plans until they’re withdrawn; this means that all the growth is yours, and you don’t have to hand it over to Uncle Sam. It’s like getting free money from your investments! (Just make sure not to withdraw too much and trigger UBTI tax penalties.)

There are some not-so-obvious benefits as well. While traditional retirement accounts limit how much money you can put away each year, savings plans have no restrictions and won’t penalize you for overfilling your quota. That means that the accounts are perfect for people who don’t entirely trust themselves to save diligently.

Cons

• For most people, mutual fund investment plans aren’t as good as buying individual pieces; you’ll save a lot more with those instead of paying fees for someone else’s time. However, if investing in unique pieces is more than you can handle, this might be a good option.

• Most of these plans don’t accept partial withdrawals; this means that if you decide to take money out, they’ll send it all at once. It makes sense because the issuer doesn’t want you to withdraw more than your plan allows before they get their cut. However, if there’s an emergency and you need some quick cash for something important like medical bills, it may be hard to use one of these plans for its intended purpose.

• The tax benefits are excellent, but most mutual funds have them too, so it won’t make as big of an impact on your total return as lower fees would

The main problem with savings accounts—and most types of financial institution accounts is the lack of liquidity they offer. If you’re trying to buy something that costs $5,000 and put it on a credit card, you can use your savings account as collateral and withdraw the necessary funds.

Bottom line

Savings plans in Singapore are great for people who want to invest their money but don’t have enough knowledge or time to do it on their own, and they’re perfect for people who want instant diversification. Since there are benefits and drawbacks associated with these plans, you must weigh them before deciding which one is best for your situation.