After more than a year of high deposit rate frenzy, market expectations are building up for possible rate cuts by the US Federal Reserve in the coming months of 2024.
Local banks are now offering a meagre annual fixed deposit rate of 0.05% for any deposit exceeding S$20,000, regardless of the duration of the deposit. This minimal rate stands at the same as the flexible deposit rate offered by some banks. Even the best fixed deposits–on limited-time promotion–on the market are seen fleeting, prompting depositors to think about the possibility of more local banks reducing deposit rates.
At the juncture of cash yields declining, let’s revisit what depositors earn from fixed deposits and what the limitations are.
Fixed deposit gives a sense of security, but at what cost?
Traditionally, fixed deposits have been the go-to choice for conservative investors. The appeal is straightforward: guaranteed returns.
This is probably seen as attractive because it is unlike other forms of investments, such as popular stocks or mutual funds.
The best fixed deposit rates are more than merely yield levels, as a single yield number comes with multiple factors for gauging each bank’s offers. Factors such as tenure, deposit minimum, and tiers or caps should also be factored into consideration.
In fact, there are some nuances to know about this safe option:
- The price of not keeping up with inflation. Fixed deposit yields could fluctuate and fleet while some promotional high rates might end as well. When they dip below inflation, the real value of the money decreases over time.
- The capital lock-up period. Fixed deposits come with a specific maturity date, and early withdrawal is usually not an easy option. Once locked in, the capital remains committed for the agreed tenure. Withdrawing before this date often incurs a penalty.
- Lastly, the time spent hopping around. If interest rates rise, the fixed interest rate of the deposit remains unchanged, potentially resulting in a missed opportunity for higher returns. However, if interest rates fall, though, the fixed deposit can protect you from the decline for a certain period.
The final point is particularly relevant now.
Imagine an investor with $100,000 looking to generate yields on their liquid cash. While a flexible deposit bank account offers a flat rate of 0.05%, or a meagre S$50 a year, it's clear that pursuing a slightly less flexible option can lead to higher cash yields.
Cash Smart Secure, on the other hand, has never had a negative month of returns and has consistently returned an average of 0.3% per month, or an annualised 3.6% yield between May 2023 and March 2024.
With a projected yield of 3.5% to 3.8 p.a. after fees, Cash Smart Secure portfolio potentially yields S$3,500-3,800 a year on $100,000 invested.
We have already seen the first local bank lower deposit interest rates and with growing expectations of the Fed cutting rates soon, “hopping around” by switching depositing banks is one way to search for the best fixed deposit rates. While requiring much time and effort to compare yields and tenure, to maximise yields, one might even have to divide their capital into multiple parts to meet the deposit minimum or avoid exceeding the cap for promotional yields.
For those who prefer maximising their cash with full flexibility, here is a closer look at money market funds.
Money market funds: 3 reasons why they can even rival the best fixed deposit rates
Money market funds are investment vehicles in nature, but they are considered relatively safe, with underlying assets in high-quality, short-term debt instruments such as Treasury bills, commercial paper, and certificates of deposit.
They can be an option for investors to stay in the market and to continuously earn short-term yields. Beyond yields, there are three major merits of money market funds that make them competitive. This holds true for cash that needs to remain liquid, be it for the forthcoming tax payments or setting up a rainy day fund, money market funds provide flexibility.
1. Maximise yields with no investment caps or tiers
Most banks are capping yields beyond a certain fixed deposit rate in Singapore while buying into a money market fund allows you to invest with no caps on the prevailing yields. At banks, bonus or promotional interest is also capped, a strategy typically used to manage interest expenses, especially if they are paying 3%-plus interest for all accounts.
Unlike fixed deposits, money market funds pool capital from various investors, creating a sizable corpus. These funds are directly invested in safe deposits and other fixed-income products to generate returns. Thus money market funds do not impose maximum investment limits. Without caps, investors do not have to compromise the total amount invested to achieve a desired yield. This flexibility is crucial for aligning capital needs with investment goals and establishing emergency funds of various sizes.
2. Maximise flexibility with no lock-in
Traditional fixed deposits often come with predetermined tenures, tying up your funds for a specific period.
In contrast, money market funds have no such fixed tenure. One of the key strengths of money market funds is their flexibility, as they typically offer daily liquidity, allowing investors to withdraw their funds at any time without incurring penalties.
You can invest for as short or long a duration and withdraw the funds as you prefer. This flexibility suits various financial goals, whether it is short-term parking of surplus funds or maintaining an emergency fund.
3. Convenience to invest and withdraw
Investing in money market funds comes with operational ease. Transactions can be completed with a single transaction executed, with subsequent instructions for withdrawals. This can be done on the Endowus platform at the fingertips.
Another benefit of money market funds is the ease with which investors can withdraw and transfer funds from cash management products to long-term investment goals on the same platform.
Money market funds: Not just a passing fad
Investing in money market funds is not a new or a passing trend. Over the past two years in the US, elevated short-term rates and market volatility drove investors to cash for safety.
In February, assets managed in money market funds in the US surpassed US$6 trillion for the first time in history. In that staggering figure, money market assets owned by US households have risen to US$ 3.8 trillion, according to Goldman Sachs Investment Research cited numbers compiled by the Federal Reserve.
This wave of sustained inflows into money market funds in the US was most recently triggered by the failure of Silicon Valley Bank and several regional commercial banks in 2023.
Depositors basically withdrew from their bank accounts and thereafter reinvested their assets in money market funds. This is beyond a tactical or emotional strategy to avoid a potential bank failure. Choosing money market funds is a strategic move to diversify their portfolios and seek higher cash returns — with maximum flexibility.
A more flexible way to earn more on your cash means a smarter way
Money market funds are not hom*ogenous. The projected yields earned on a diverse mix of underlying assets can vary, allowing for better alignment with an investor’s specific investment goals and yield targets.
Endowus Cash Smart is not a flat rate but provides the flexibility of choice for everyone. No lock-ups, no tiers or caps.
Three optimised portfolios of Cash Smart can cater to all your cash and short term liquidity management needs, at varying risk levels. Managed by Singapore's biggest money managers, our portfolios give you projected yields that are significantly higher.
Cash Smart–Secure combines a cash fund that invests in institutional fixed deposits with one of Singapore’s best-performing money market funds. Projected yield: 3.5% to 3.8% p.a.*
Cash Smart–Enhanced combines a short duration fund with one of the best-performing money market funds offered by Singapore’s largest SGD money managers offering higher yield than Secure. Projected yield: 4.2% to 4.5% p.a.*
Cash Smart–Ultra aims to provide the highest yield among the three Cash Smart portfolios over time by having a diversified allocation across some short duration bond and money market funds. Projected yield: 4.4% to 4.8% p.a.*
Make your cash work smarter for you. If you have money set aside for an upcoming expense, earn higher returns on it instead of letting it sit idle in your current or savings account.
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