Where should I park my cash?

You must be hurting from the falling interest rates offered by banks – CIMB, DBS, OCBC, UOB and Stanchart, among others, have all cut their deposit rates significantly following interest rate cuts in the US.

Then, when you thought, oh – we still have Singapore Savings Bonds right – you’ll be sad to find out that SSB yields have also fallen off the cliff and now averages under 1% after holding for 10 years.

10 years! For just 0.8% per year!

Interest Rates for SSB July 2020 Issuance

Alternatives exist, but they are riskier

Cash in bank deposits and cash loaned to the government via SSBs are two of the safest BUT lowest yielding investment options to park your cash. However, for those looking to seek a higher yielding option but retain the properties of cash, there are still alternatives in the market… thankfully.

Before we even go there, let’s quickly understand why those two options have super low yields.

Bank deposits are usually guaranteed by SDIC under the Deposit Insurance Scheme, meaning deposits with with a member bank are insured up to S$75,000.

Next, Singapore Savings Bonds are super risk free because they are money loaned to the Singapore government, and they have never defaulted on their loans and have the world’s best credit rating by credit agencies – demonstrating their strong creditworthiness and low probability of default.

Credit ratings of the Singapore Government by credit agencies

Now you understand why they are super low yielding, because they are super safe! Low probability of default means you are very very very likely to get back 100% of your cash, plus interest.

With that knowledge, what are some other sources that you can put your money in?

I know there are fixed deposits…

Yeah, the first option is a fixed deposit.

A fixed deposit (or time deposit) is basically an investment scheme where you park your money with a bank for a fixed period of time, lock it in and earn a higher yielding interest rate.

The drawback is that you cannot touch your funds and the interest rates are locked in, that’s why it’s called a fixed deposit.

Fixed Deposit Rates (June 2020). Credits: Moneysmart

If you look at the table above, fixed deposits lock your money for a short period of time (tenure) and pay you a fixed interest rate that’s higher than bank deposits.

This is a good option only if you know you don’t need to touch your funds for the duration of the tenure, and if you want to lock it up at the prevailing interest rate in anticipation of further drop in interest rates.

… those are too low yielding, what else do I have?

Another popular option is short term endowment plans offered by insurers or financial institutions.

These products usually offer attractive guaranteed maturity returns on a single endowment premium that’s paid upfront, and come with a life insurance component thrown on top.

Examples of such products are Tiq 3-Year Endowment Plan, Income’s Gro Capital Ease, among others such as Great Eastern’s GREAT SP that regularly pop up with a limited trache.

You basically take on the risk of the insurer defaulting, but in return, they offer you a higher yielding investment with a life insurance plan thrown in.

Most of these insurers are also quite credit worthy, not as worthy as the government but still quite highly credit worthy, so they are able to pay you higher interest rates.

However, they come with a minimum investment amount of a few thousand dollars, they also lock your money up for the duration of the endowment, and terminating the policies early would result in losses.

… but what if I need some flexibility in the funds?

That’s where you can consider cash management funds.

Cash management funds are financial instruments, similar to stocks and bonds. They are highly liquid and low-risk and they usually invest in a basket of short-term bonds and money market instruments.

Different cash management funds invest in bond funds of different durations (which measures how sensitive the prices of the bond funds move in relation to interest rate changes).

Shorter bond duration funds usually have debt with shorter maturities (perhaps a few months to 1-2 years), so they are less sensitive to interest rate changes. A 1% increase in interest rate might mean a price decrease of 1% on a shorter duration fund, but a decrease in 5% in a longer duration fund.

The technicalities for this are beyond the scope of this article, but a simplified summary is that when interest rates rises in future, new bonds of similar characteristics will be issued at a higher interest rate, decreasing the price of the old bonds to give the same yield to maturity.

Anyway, I hope I haven’t scared you off yet. Let’s go back to the topic of cash management.

Most cash management funds will invest in shorter duration bond funds to easily reinvest in higher yielding yield-to-maturity funds when interest rates rise in future. At the same time, bond funds benefit from receiving interest payments from debtors, increasing their yield for taking on that small probability of default in the short term.

There are a couple of cash management products in the market, and popular ones include LionGlobal SGD Money Market Fund, Phillip Money Market Fund, UOB United SGD Money Market Fund, Eastspring Investments Cash Management Fund (for Malaysians), or through managed solutions like FSM One’s AutoSweep and StashAway Simple, among others.

What I like about cash management funds is that they are super flexible and don’t have any lock in period – you can easily sell and cash out your investments and retrieve your capital back! There’s a slight risk of losses because the funds are not guaranteed, and interest rates are not fixed, but it’s very minimal! I’m surprised they haven’t really taken off in Singapore – maybe it’s due to the lack of awareness – who teaches us these things anyway.

So what do you say betterspider?

Of the three options, among countless other options out there which I did not cover, I personally favour cash management funds for their flexibility and rewards. They aren’t so low yielding like bank deposits or SSBs that you wouldn’t want to bother with them.

At the same time, in return for taking a little bit extra risk, I get to enjoy that flexibility – I can withdraw my funds at any time, reinvest into SSBs when interest rates go up, or put it in the stock market when it falls further.

In other words, flexibility is very undervalued, and when there are opportunities to invest, it pays to have funds ready at your disposal to take advantage of such opportunities.

I also recommend keeping emergency funds separate from this pot of funds. Emergency funds (3-6 months of income) should be super liquid, kept in a bank account (hidden away if possible) so you always have immediate access to them when you need it (it’s for emergency, don’t touch it!)

That’s it for this article. Any other ideas to share? Let me know!

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4 comments
  1. Aren’t cash mgmt fund / money mkt fund returns quite low too, due to expense ratio and management charge eating into returns? StashAway Simple might fare better than DIY MMF in this aspect, because it has fund management fee rebates and an enhanced liquidity fund. Having said that, Stashaway Simple’s projected return of 1.9% is likely lower than stated as Stashaway uses projected returns for the 2 funds in it, when the historical annualized returns for those 2 funds are a fair bit lower. One might end up only getting 1.5-1.6%, which is already relatively achievable by high-interest yielding accounts like DBS Multiplier etc.

    So I feel it’s better to still park spare cash in high-interest yielding accounts. I suppose for people that can’t qualify for the rates offered by these accounts, then StashAway Simple / DIY MMF would be a good alternative.

    1. If you compare what high yield savings accounts (HYSA) are yielding today, with all the clauses and conditions – salary credit, spend on card etc, tiered caps – versus what managed MMFs solutions like StashAway is doing – net of management fees and expenses, there’s still a strong reason for choosing them.

      For me, for example, my company doesn’t credit salary as SAL, so I don’t qualify for any salary crediting bonus. I’m sure there are many others who don’t meet some of those requirements in HYSA that will see MMFs a good alternative.

  2. I think another great option that’s being overlooked is ABF Singapore bond index fund. The index tracks a basket of AAA-rated government bonds issued primarily by the Singapore government and quasi-Singapore government entities so it is very safe.

    The YTD performance so far is 7.22%, so it is way better than all the fixed deposits, SSB, endowment and other offerings on the market! Annualized performance for one year is 11.86%, three years is 4.86% and five years is 4.19%.

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