Author: Timothy Ho, dated 17 March 2020
Money Market Funds: What Are They And How Singapore Investors Can Use Them
Even as you wait on the sideline to strike, your uninvested monies can (and should) continue to earn you a decent return.
This article was written in collaboration with POEMS by PhillipCapital. All views expressed are the independent opinion of DollarsAndSense.sg
When it comes to asset allocation, most retail investors would typically think of stocks, bonds, properties, gold and cash. We invest in assets for a return, and choose to hold cash if we believe asset prices are due for a negative correction and prefer liquid funds in our war chest.
The problem with holding cash is that there is an opportunity cost. During the period where we wait for our next investment opportunity, our cash holdings, which is typically kept in a savings account, only provide a return of as little as 0.05% p.a.
This creates a dilemma for retail investors. Hold on to too much cash and we incur a hefty opportunity cost while awaiting opportunities, as cash does not generate a good return for us. At the same time, if we hold too little cash, we may not have sufficient ammo to take advantage of any dips in the market.
So, what can we do as investors?
Money Market Funds: Short-Term Trading Of Debt Instruments
To generate returns on funds that we choose not to plough into the markets, many institutional investors rely on the money market to provide a return that is higher than what the banks pay.
Money Markets are where the trading of short-term debt instruments takes place. These debts could be issued by government, banks and big companies, and have short-term maturity of as little as a few days or up to a year.
Because of their short-term timeframe, holding these short-term debt instruments is seen to be risk-free, especially if these debts are from high-quality issuers such as the government or triple A-rated corporations. Think of this as lending $99.50 to the Singapore Government today, knowing that they will return you $100 at the end of the month.
Besides treasury bills issued by the government and debt which are being traded by banks lending to one another, other short-term debt instruments which form the money market includes commercial paper issued by high-quality companies, short-term certificate of deposits and banker’s acceptances.
Money Market Funds: Making Your Idle Funds Generate Higher Returns
A money market fund invests in a variety of these short-term debt instruments. Doing so allows the money market fund to generate a higher interest return for investors, as opposed to merely leaving the unused funds in a savings account.
Investors use money market funds, as opposed to leaving it in fixed deposits, if they want to have cash-like liquidity while earning higher returns. This means while investors enjoy an interest rate that is similar or even higher as compared to a fixed deposit, they are still able to deploy their funds as and when it’s required, without the fear of the money being locked up in a fixed deposit.
Fund managers who manage Money Market Funds typically only invest in high-quality, short term bonds. For example, the Phillip Money Market Fund (A Class) has an average credit rating of A and a weighted average maturity of 51.3 days (as at 31 December 2018) and, the Largest Money Market Funds.
How Money Market Funds Can Support Your Investment Portfolio
As cash does not provide a return, the more cash we hold, the higher our opportunity cost. The longer we hold cash, the higher our opportunity cost as well.
To solve this problem, we can choose to put our money into a Money Market Fund created for retail investors such as the Phillip Money Market Funds (PMMFs). This can be done via the Phillip SMART Park.
The Phillip SMART Park is an excess funds facility that parks idle cash, that you have already set aside for investing once you see the right opportunities, into Phillip Money Market Funds (PMMFs). So, while you wait for the right opportunities to present themselves, your idle cash is automatically deployed into Phillip Money Market Funds managed by Phillip Securities to earn you a higher return than simply leaving it uninvested with daily liquidity
This is available for both your cash savings in Singapore Dollar (SGD) or US Dollar (USD).
As of 10 May 2020, interest rate returns are at 1.1985% for SGD and 1.6362% for USD funds.
Since its inception in April 2001, the fund’s annualised return is at 1.05% p.a. (as at 31 December 2018), after taking into consideration fund management cost.
If you have a S$100,000 bond which just matured, and are waiting for the right investment opportunity, deploying your funds in Phillip Money Market Funds via the Phillip SMART Park in the meantime will generate you a return of about $1,050 (based on the current annualised return of the fund since inception) each year, or about $87.50 per month.
It’s important to note that similar to all types of investments, the Phillip Money Market Funds isn’t entirely risk-free. Neither is the interest returns guaranteed since this is based on the market interest rate.
Here’s a handy infographic to summarise the key advantages of using Money Market Funds in your portfolio:
Use The Phillip SMART Park To Fund Your Investments
As there is no sales charges or lock-in period for the funds, the Phillip SMART Park is a good option to consider keeping excess investment funds that you have to earn a higher interest while you wait for your next investment opportunities.
To get started with the Phillip SMART Park, you need to be an existing POEMS account holder. As an account holder, you can opt-in to the SMART Park facility when you open a new account by giving a one-time authorisation. After that, any excess funds above S$100 in your POEMS accounts will automatically be parked into the Phillip Money Market Funds via the SMART Park.
And even if you do not intend to invest immediately, you can still make use of the Phillip Money Market Funds to help you earn higher interests on the savings that you have.
When you do finally invest, funds will automatically be deducted from your holdings in the Phillip Money Market Fund via the SMART Park facility to fund your investment purchase. You can also withdraw funds directly from the Phillip Money Market Fund as and when you want to, similar to making withdrawals from any regular investment account.