A Singaporean’s Alternative To Saving Accounts : Money Market Funds (2021)

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By choosing to put your money in a “high yield” savings account, you might want to consider more options.

When it comes to ensuring liquidity i.e fast and simple withdrawals, most Singaporeans would likely go for a savings account from one of the three local banks. They are after all, one of the best options around in terms of interest yields.

Sadly, gone are the days when we used to earn rates above 1% per annum on our funds using such accounts. In this global low interest rate environment, anything that nets us close to half that deserves our attention.

If you’ve been casting a wider net, you would likely have heard about Money Market Funds. These investment vehicles can offer modest returns on similar liquidity terms at admittedly better rates. They are are also extremely safe in general.

We know the walls of text can be daunting. For the uninitiated, let’s cut through the jargon and delve deeper into how Money Market Funds can value-add to your portfolio.

What Are They Exactly

Similar to Unit Trusts, Money Market Funds are actively managed investment vehicles meant to preserve monetary value and prioritize liquidity. Most only invest in cash and cash equivalents which are generally liquid short term instruments with high credit quality.

These can include fixed deposits, short term corporate & government bonds, commercial bills, and cash. As a guide, most of these instruments have periods which do not last beyond a year.

Because Money Market Funds are actively managed, they also levy annual management fees similar to Unit Trusts. As they are meant for liquidity, there are normally no sales charges involved when entering and exiting the fund.

Advantages

As a financial instrument, Money Market Funds have some great benefits;

Liquidity. One of the significant advantages of Money Market Funds is just how easily holdings can be converted into usable cash. The absence of tie-up periods means that investors can enter and exit within a matter of days.

By investing in instruments with varying shorter tenures and marketable demand, fund managers are able to buy and sell investments efficiently.

Stability. Money Market Funds are much more inherently stable than stocks or bonds, due to their investments in commercial bills and short term bonds of high credit quality institutions.

Due to their credit quality, it’s unlikely that these companies will default on their loans. Furthermore, the short term nature of their holdings minimizes overall risk for the fund. Diversification also plays a part here to reduce concentration risk.

Mitigates interest rate risk. As most instruments that Money Market Funds invest in expire within a year, the fund is not as susceptible to interest rate increases as the manager can reinvest his capital for higher interest rates in a timely manner.

Negatives

Of course, no investment is without it’s risks. Drawbacks include;

Variable Returns. The actual return on your capital will vary. This is because as global interest rates fluctuate, the returns the fund generates also changes as well.

While the fund manager will constantly reinvest the funds, he will be limited to what prevailing rates and opportunities are available during that period. This is also known as reinvestment risk.

Relatively Low Returns. Because Money Market Funds invest in instruments from highly secured institutions, investors can’t expect a high interest rate on their capital.

The short term duration of the investments also lowers the interest return in accordance with the lower risk profile.

Breaking The Buck. Although Money Market Funds are commonly touted as being similar to cash, they’re not. In extremely rare cases, investors can make losses on their investment.

This can happen in extreme cases such as the 2008 Lehman Brothers crisis when bank runs occurred due to lack of confidence in financial institutions, causing unexpectedly large draw-downs in these funds.

In this case, the fund manager may impose restrictions on withdrawals, or opt to return leftover funds to investors, likely resulting in a loss.

Zooming In

As a developed financial center, Singapore has a variety of Money Market Funds being offered. Some examples include;

Lionglobal SGD Money Market Fund and Philip Money Market SGD. This funds invest in high quality short-term money market instruments and debt securities. These include short term government and corporate bonds, commercial bills and fixed deposits.

Fullerton SGD Cash Fund. This fund mainly works with Singapore Dollar deposits with credible financial institutions. These include the Monetary Authority Of Singapore and selected banks with excellent credit ratings.

Interested parties can invest in these funds through their respective banks, as well as through online investment platforms such as Fundsupermart and Dollardex. Some are also available through Robo-advisors such as Endowus & Syfe as well.

To Conclude

While these funds are not ideal for long term capital appreciation, they can still find a place in an investor’s portfolio by allowing us to park our funds in anticipation of future use or upcoming opportunities.

As the fed continues to sound the horns on interest rate hikes in 2022, Money Market Funds are also in a good position to benefit from rising rates due to their short term investment mandate.

If you’re looking for a safe, short-term investment for your cash, Money Market Funds could be the perfect choice.

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