With central banks continue to keep interest rates low to stimulate the economy and falling yields, interest rates on cash deposits are on a downward trend.
Roboadvisors offering cash management solutions as an alternative are not adverse to rate changes that are determined by the markets. StashAway announced in an email that their StashAway Simple will have its projected rate decrease from 1.4% to 1.2% from 1 March 2021.
At the same time, Endowus is also reducing the projected yields on its cash management solutions Cash Smart Core and Cash Smart Enhanced. For Cash Smart Core, the new rate is now 0.8% to 0.9% while the new rate for Cash Smart Enhanced is now 1.2% to 1.4%.
The good news is that Endowus claims that these are just projected yields, which are estimated in a conservative manner. In fact, they demonstrated that their cash management funds have performed better than projected since launch.
Endowus has also shared a nice chart of interest rates offered by competing products (e.g. 12-month fixed deposit and Singapore Savings Bonds) with yields remaining lower than what’s offered.
In fact, cash management products from Stashaway and Endowus remain competitive despite their lower yields. Syfe has also recently launched a new cash management solution Cash+ with projected returns of 1.75% p.a.
However, it comes with added risks. The portfolio is constructed with a 35% allocation to the LionGlobal Short Duration Bond Fund, which carries a higher credit risk and duration risk.
Higher credit risk introduces a level of default risk since the fund is lending to issuers with lower credit ratings and financial profile for a higher interest rate, and there’s a higher likelihood of default (non-repayment).
Higher duration risk can be problematic when interest rates change in future, since the bond price moves inversely to the interest rate changes. Owning a bond with higher duration will expose an investor to larger fluctuations in the bond price.
Optimizing for higher yields on cash
Personally, I am opting for Endowus’ cash management portfolio through Fund Smart, which allows customisable cash smart portfolios to my liking. I took the Endowus Cash Smart Enhanced as a starting point, and then made some tweaks to boost the yields slightly, while accepting the higher risks that comes with it.
You can read about how to do it here.
For those who are not so keen in optimising so much, there is also an Endowus Cash Management Ultra portfolio built as an alternative to Cash Smart Enhanced.
It is projected to give a slightly higher return profile compared to Cash Smart Enhanced with lower volatility than a bond portfolio like the Ultra Defensive Portfolio.
The expected annualised returns for the portfolio is 1.7% to 1.9%.
Consider equities as well
With yields on cash so low, longer term investors should consider putting idle cash to work through stocks (annualised returns: ~5-7%) and bonds (annualised returns: 2-4%). A balanced portfolio should give higher yields with manageable volatility if you are able to stomach the occasional drops in your portfolio value.
Divide your cash into short-term liquidity needs and long-term growth needs and you should do fine in finding a good balance between short-term cash needs and returns.
If you’re still concerned about the all-time high in stock markets, maybe a CPF contribution might be worthwhile too.
New clients who use this exclusive link and fund their cash management account with at least S$10,000 will earn S$100 worth of Lion-Global Investors All Seasons Fund (Growth) credited into their account by 30 April 2021.
Endowus is also offering a limited time minimum investment amount of S$888 (usual: S$10,000) until end of March.
Use this exclusive link to get the first S$10,000 managed for free for 6 months on StashAway. Stashaway Simple has no fees.