What about inflation?
Have we mentioned inflation yet? Given that most parents are persuaded to buy endowments to save for children's education with a sufficiently long timeframe, you may find endowments cannot meet that need. The numbers given in the Investment Moats calculations must be seen against the backdrop of inflation. Inflation is on the low side now, but we cannot assume that it will remain that way indefinitely; just look at the short-vol traders who got caught with their pants down when VIX spiked up at the beginning of this year.
The Etiqa endowment that Bigoya shared is interesting. It's a direct sales model, so the returns look decent because no agents need to be remunerated. It's also a very bond-like product. Closing yields on 29 March of the benchmark 5-year SGS and the benchmark 10-year SGS were 2.05% and 2.29% respectively. Doing a simple linear interpolation, 6-year rate for SGS should be about 2.10%.
The questions are:
1.) do you want to receive 2.23% against A- rated Etiqa versus 2.1% from AAA Singapore government?
2.) do you think you can get covered for that endowment death benefit sum assured in your existing term insurance for cheaper (and potentially at a longer term than just the 6 years offered here).
3.) the lock-in of endowment means that you can't really roll into another higher-yield product like you can with bonds that you hold.
4.) you will also forego the semi-annual coupon interest that you can use in other higher-yielding investments during the six year period.
I think TS was looking at a longer tenure product though.
Also, for the people who say that well, at least the returns are non-zero, I think that's missing the point. It's your hard-earned money and you would want to maximise your returns on a risk-adjusted basis. I'm not a proponent of active management, but over a long-enough timeframe (defined as more than 10 years), a passive, low cost index-tracking equities-bond mix would provide for better returns, and returns that are also inflation-adjusted. Certainly if you have a newborn baby today, the better way to save for his or her university tuition in 18 or 21 years is not an endowment. If you are lazy, don't be lazy because it's your money. If you don't know how, then learn how because it's your money.
