This article was written in collaboration with Endowus. All views expressed in this article are the independent opinion of DollarsAndSense.sg. You can refer to our editorial policy here.
To combat the economic fallout of the COVID-19 pandemic, the U.S. Federal Reserve (Fed) has flushed the banking system with cash to keep its economy going. The Fed has also cut their interest rates to near zero, making borrowing cheap during this period.
While that can be seen as a good thing (and the stock market certainly seems to agree), one unfortunate effect of this move is that interest rates across the world have also declined. This has impacted many Singaporeans who will now find themselves earning a lower interest rate return than we previously enjoyed. Similarly, many banks have also revised their interest rates down over the past month to align with 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 since your money will not be able to grow as much.
For example, the July 2020 allotment of the Singapore Savings Bonds (SSB) is only paying an interest rate of 0.3% p.a. if we hold it for one to two years. Even if we hold the bonds over the maximum period of 10 years, we will only earn an average interest rate of 0.8%. p.a, which is not good enough to beat the current inflation rate (MAS core inflation rate was 1.0% in 2019 and 1.7% in 2018) in Singapore, let alone grow our wealth.
At the same time, given the volatility in the financial markets currently, it’s also understandable why some investors would not be willing to invest all their savings into the market at once. Even for those who are keen to invest, we may prefer a dollar-cost averaging (DCA) approach where we invest a smaller fixed sum of money each month.
What this means 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 during this low-interest rate period, some companies, including Endowus, have launched what is called a Cash Management Account. Through these Cash Management Account, investors can park their money in extremely low-risk and high liquid cash funds and money market funds. These funds typically hold only short-term debt instruments issued by high-quality issuers such as the government or corporations rated with high credit score, or even Singapore Dollar deposits with eligible financial institutions, making them extremely safe.
By placing our savings in a Cash Management Account, we can earn a higher interest rate for our money, even as we are deciding how and when we want to deploy it into longer-term investments we wish to make.
If we have $10,000 waiting to be deployed, we will only earn an interest rate of 0.05% p.a, or a paltry $5 in interest, by leaving it in our bank account each year. However, by using a Cash Management Account that gives you an interest rate of 1.1%, you will earn a more respectable interest of $110 each year.
At the same time, we don’t have to make any compromise in terms of liquidity. Whenever we wish to deploy our funds into the financial markets, we can withdraw and invest the money within 3 to 5 business days. There is no lock-in period or a cap on how much we can transfer out at any point in time. Neither do we have to pay any sales or transaction fees.
The best part about cash management accounts is that unlike high-interest rate savings accounts that require us to fulfil specific criteria, such as crediting our salary, hitting a minimum spend on our credit cards or investing with the bank to earn bonus interest, there is no need 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. If you have $500,000 (or more) that you wish to invest for higher yield, you can. This is unlike most high-interest savings accounts which tend to have a limit of up to $75,000.
A Cash Management Account Is A Complement To A Savings Account
That said, it’s important to remember that a Cash Management Account is not the same as a savings account. For example, while you can withdraw the money in your savings account via an ATM, transfer funds to people, or pay for your bills using a debit card, these payment solutions don’t exist for a Cash Management Account. Cash Management Accounts are meant to manage short term liquidity needs for your cash with higher interest rates.
It’s also worth noting that interest rates paid on our Cash Management Account are subject to market interest rates movement. So, while we would still be earning higher interest rates compared to what the banks would typically offer on their savings accounts, the rates that we earn are variable rates determined by the financial markets, and not the 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 is being used.
Thus, your Cash Management Account can be seen as a complement to diversify your savings alongside your savings accounts, rather than as a replacement for savings accounts, which you would likely still need.
For example, if you are trying to accumulate a pool of money 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 is still very low risk.
Endowus Cash Smart: Core & Enhanced
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 access to two different cash offering portfolios: Core and Enhanced.
As you can see from the projected returns, Core is a portfolio that takes on lower volatility. As such, expected returns are comparatively lower than the Enhanced portfolio, which is projected to deliver a return of up to 2.2% p.a. after all fees have been paid.
Generally speaking, if you have a shorter time horizon for your funds, you should opt for the Core portfolio. If your time horizon is longer, you can opt for the Enhanced portfolio, which gives you higher interest with slightly higher volatility.
To provide transparency, Endowus will provide a weekly update on projected yield on their website so you can have an accurate sense of how hard your money is working for you in your Cash Management Account while you build interest on the money before you 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 pays to a distributor who sells the fund to investors. It is part of the reason why unit trusts fund costs are high, and lead to conflicts of 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, on 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 received from the fund managers. which is at 0.09% and 0.23% per annum respectively. Thus, the Total Expense Ratio is lower at 0.23% (Core) and 0.35% (Enhanced) respectively. The trailer fee rebate is always higher than anything you pay Endowus with the 0.05% access fee.
Lastly, it’s important to remember that placing your money in a Cash Management Account, such as Endowus Cash Smart, isn’t a substitute for needing to invest. Ultimately, to grow your wealth for the future in an effective manner, you will need to deploy your funds in the stock and bond markets. This is where Endowus can also offer you a globally diversified low cost investment portfolio comprising of stocks and bonds that is tailored to your risk appetite.
You can read 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 can also use the Endowus Cash Smart without having to invest in any of the Endowus investment portfolios.
If you are intending to open an account with Endowus today, DollarsAndSense readers opening an account for the first time with Endowus can enjoy $20 off their access fee. If you are keen, sign up today on this link, or learn more through their live webinar.