To combat the economic fallout of the COVID-19 pandemic, the U.S. Fed (Fed) has flushed the banking system with cash to help keep its economy going. The Fed has also maintained their interest rates at near zero to have an extended period of time.
While that can be seen as a good thing (and the stock market certainly appears to agree), one unfortunate effect of this move is that interest rates around the globe have remained low over the past year. This has impacted many Singaporeans who will now find themselves earning a lesser interest rate return than we previously enjoyed. Similarly, many banks have also revised their interest rates down over the past month to align using the lower interest rate environment today.
The Problem With Holding Cash During A Low-Interest Rate Environment
Generally, holding cash during a low-interest rate environment is a bad idea as your money will not be able to grow just as much.
For example, the May 2021 allotment of the Singapore Savings Bonds (SSB) is only paying mortgage loan of 0.51% p.a. if we hold it for one to 2 yrs. Even if we hold the bonds over the maximum period of 10 years, we'll only earn an average rate of interest of 1.5%. p.a, that is barely enough to beat the present inflation rate (MAS core inflation rate was 0.3% in December 2021) in Singapore, not to mention grow our wealth.
At the same time, given the volatility in the financial markets currently, it's also understandable why some investors wouldn't be willing to invest all their savings into the market at once. Even for those people who are keen to invest, we may prefer a dollar-cost averaging (DCA) approach where we invest an inferior fixed sum of money each month.
What what this means is is that our savings, when left undeployed, will earn us barely any interest.
Using A Cash Management Account To Earn Higher Interests
To support investors in this low-interest rate period, some companies, including Endowus, have launched what is called a Cash Management Account. Through these Cash Management Accounts, investors can park their money in extremely low-risk and high liquid cash funds and cash market funds. These funds typically hold only short-term debt instruments issued by high-quality issuers such as the government or corporations rated rich in credit score, or even Singapore Dollar deposits with eligible banking institutions, making them extremely safe.
By placing our savings in a Cash Management Account, we are able to earn a higher interest rate for the money, even as we are deciding how and when we want to deploy it into longer-term investments we want to make.
If we have $10,000 waiting to be deployed, we will only earn mortgage loan of 0.05% p.a, or a paltry $5 in interest, leave it in our bank account each year. However, by using a Cash Management Account that provides you an interest rate of 0.8%, you will earn a more respectable interest of $80 every year.
At the same time, we don't have to make any compromise in terms of liquidity. Whenever we wish to deploy our funds in to the financial markets, we can withdraw and invest the money within 6 business days. There is no lock-in period or a cap how much we can transfer out at any point in time. Neither do we need to pay any sales or transaction fees.
The best part about cash management accounts is that unlike high-interest rate savings accounts that need us to fulfill specific criteria, such as crediting our salary, hitting the absolute minimum spend on our credit cards or investing using the bank to earn bonus interest, you don't have for you to jump through any hoops to enjoy higher interest rates.
Also, there is no limit to how much we can place in the cash management account. For those who have $500,000 (or more) that you wish to invest for higher yield, you are able to. This is unlike most high-interest savings accounts which generally have a limit of up to $75,000.
A Cash Management Account Is really a Complement To A Savings Account
That said, you need to remember that a Cash Management Account isn't the same as a savings account. For example, while you can withdraw the cash in your savings account via an ATM, transfer funds to individuals, or pay for your bills utilizing a debit card, these payment solutions don't exists for a Cash Management Account. Cash Management Accounts should manage short term liquidity needs for the cash with higher interest rates.
It's also worth noting that interest rates paid on our Cash Management Account are susceptible to market interest rates movement. So, while we would still be earning higher rates of interest compared to what the banks would typically offer on their savings accounts, the rates that we earn are variable rates based on the financial markets, and not banks or the providers offering the Cash Management Account.
While Cash Management Accounts and Savings Accounts are both generally safe, it is important to understand the difference in risk and how it's being used.
Read More: Comparing Money Market Funds and Savings Account
Thus, your Cash Management Account can be seen as a complement to diversify your savings alongside your savings accounts, instead of as a replacement for savings accounts, which you would likely still need.
For example, if you're trying to accumulate a pool of cash for your housing renovation in 6 months' time, and would like to earn a bit more interest rates from it, then it would make sense to consider using a Cash Management Account because it is still a relatively liquid store of wealth that's still very low risk.
Endowus Cash Smart: Core, Enhanced And Ultra
An example of a Cash Management Account in Singapore is the recently launched Endowus Cash Smart. Offered by FinTech Digital Advisor Endowus, this Cash Management Account provides investors use of two different cash offering portfolios: Core, Enhanced and Ultra.
As you can see from the projected returns, Core is really a portfolio that takes on lower volatility. As a result, expected returns are comparatively lower (1.0%) than the Enhanced and Ultra portfolio, that is projected to deliver a return of up to 1.5% and 2.0% p.a. in the end fees have been paid.
Generally speaking, for those who have a shorter time horizon for your funds, you should opt for the Core portfolio. If your time horizon is longer, you are able to opt for the Enhanced and Ultra portfolio, which provides you higher interest with slightly higher volatility.
To provide transparency, Endowus will provide a monthly update on projected yield on their website so you can have an accurate feeling of how hard your money is working for you in your Cash Management Account when you build interest on the money before you decide to need to use it, or while you wait for the opportune moment to invest your money in other long-term investment instruments.
Being Transparent & Staying Independent
One other thing we should notice on the screenshot above is that there are two types of fees we are incurring: i) the net fund-level fees after trailer fee rebates and ii) the Endowus Access Fee per year.
A trailer fee is a fee that a unit trust manager is effective a distributor who sells the fund to investors. It is part of the reason why unit trusts fund cost is high, and lead to conflicts of great interest between financial advisors and their clients.
By rebating trailer fees, Endowus stays transparent and honest to its clients. While there are other fund platforms that charge very minimal, or no fees, for their cash management funds, with an all-in cost basis, they are more expensive because of the fund level cost and the hidden trailer fees paid to them. Endowus, as an independent financial advisor, rebates all trailer fees caused by the fund managers. which is at 0.09%, 0.23% and 0.25% per annum respectively. Thus, the Total Expense Ratio is lower at 0.23% (Core), 0.35% (Enhanced) and 0.58% (Ultra) respectively. A clip fee rebate is always greater than anything you pay Endowus with the 0.05% access fee.
Lastly, it's important to remember that placing your money inside a Cash Management Account, for example Endowus Cash Smart, isn't a replacement for needing to invest. Ultimately, to grow your wealth for the future within an effective manner, you will need to deploy your funds within the stock and bond markets. This is where Endowus can also offer you a globally diversified low cost investment portfolio comprising of bonds and stocks that is tailored to your risk appetite.
You can see up more about Endowus Cash Smart in this detailed article by Endowus.
If you are not yet an Endowus account holder, you can get started by opening an account with Endowus. It is free with no commitments to explore the products before you take the plunge. If you wish, you may also use the Endowus Cash Smart without having to invest in any of the Endowus investment portfolios.
If you're intending to open an account with Endowus today, DollarsAndSense readers opening a merchant account for the first time with Endowus can enjoy $20 business access fee. If you are keen, register today on this link, or find out more through their live webinar.