Optimising your savings: money market funds vs time deposits
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Optimising your savings: money market funds vs time deposits

7 May
24 May
  • In an elevated rates environment, many savvy local Hong Kong “yield hunters” welcomed higher yields on time deposits from banks after more than a decade of ultra low interest rates. 
  • For some of us with regular cash outflow obligations, it might not be optimal and sometimes frustrating to have money ‘locked’ up for a long period of time in time deposits.
  • Money market funds (MMFs) are alternatives to consider as they are not subject to lock-ups but offer comparable yields as time deposits. 
  • For an overview of money market and cash funds available on the Endowus Fund Smart platform, refer to our investment funds list.

On June 14, 2023, the US Federal Reserve announced it would maintain its Federal Funds target rate steady, between 5% and 5.25%. It was its first pause since embarking on a streak of 10 consecutive increases since March 2022 to combat high flying inflation in the US.

As Hong Kong’s currency has a US dollar peg, the Hong Kong Monetary Authority has to follow in lock-step with the Fed, and has been adjusting the Hong Kong base rate steadily upwards. 

Many local Hong Kong investors and savvy time deposit “yield hunters” welcomed the news after years of ultra low interest rates. However, for some of us with regular cash outflow obligations, it might not be optimal and sometimes frustrating to have money locked up for a long period of time in time deposits, despite the ability to earn higher yields.

For those who would prefer to preserve their cash savings’ liquidity, but not missing out on earnings from this higher rates environment, there is no better time than now to explore alternatives, such as money market funds (MMFs)

What is a money market fund?

A money market fund (MMF) is a unit trust that invests in short-term deposits and high quality money market instruments such as government bills, certificates of deposit, commercial papers, short-term notes and banker’s acceptance.

It offers higher interest rates than regular savings accounts at low risk, which is why it is often compared against time deposits. Similar products include ultra short duration bond funds (higher risk).

What is time deposit?

A time deposit is a type of bank deposit that offers a higher rate of interest than traditional savings accounts.

With a time deposit, you are committed to keeping your money deposited for a fixed term (typically ranges from 1 to 12 months). You are then paid interest on the deposit at the end of the term.

Here is a comparison between money market funds and time deposits:

Similarities: Higher interest, relatively low risk

Both have higher interest rates than regular savings accounts

As of May 2023, Interest rates for regular HKD savings accounts with major banks in Hong Kong stand at around 0.75% per annum. 

Money market funds (MMFs) and time deposits can offer anything from 2.90% up to 3.65% per annum. Thus, both options offer significantly higher interests than a regular banking savings account.

Both have relatively low risk

Because the underlying investment products of money market funds are short-term deposits and high quality money market instruments, risk is relatively low. For example, the Ping An USD Money Market Fund holds USD fixed deposits with high-quality financial institutions and generally will not hold more than 10% of the total NAV with a single entity. Due to this restriction, investors in money market funds are exposed to relatively low risk.

This chart shows the stable returns of the Ping An USD Money Market Fund:

Source: Ping An, as of May 31, 2023

For comparison, below chart shows the performance of the E Fund HKD Money Market Fund:

Source: E Fund, as of May 31, 2023

On the other hand, time deposits are covered by Hong Kong Deposit Protection Scheme regardless of the currency with a maturity not exceeding five years. Under the scheme, if the financial institution fails, any losses up to HK$500,000 per account will be covered by the Deposit Protection Scheme (DPS).

Differences: Interest rates, fees, liquidity

Money market funds' interest rates are variable

Generally, time deposits pay a fixed interest rate, as long as you meet their criteria (promotion period, eligible new funds, new-to-bank clients, etc.)

Meanwhile, interest rates for money market funds are dynamically priced. The advertised yield may not always be reflective of the investment return over a longer period, because MMF interest rates are dependent on the short term interest rates (which can shift up or down) as well as the fund manager's ability to reinvest at the projected yield.

Money market fund investments have fees involved

MMFs are managed by fund managers who invest and manage the underlying assets. The fund expenses, which could range from 0.15%-0.40% per annum, are very low as compared to fixed income and equity funds. It is worthwhile to note that this cost is inclusive of the trailer fees paid to the distributors or the platform service providers.

At Endowus, we worked with fund managers to obtain the cheapest available share class for you to invest into the MMF, such as in the form of institutional or clean share classes. In cases where institutional or clean share classes are not available, we rebate 100% of the Cashback that Endowus receives, so that you can save on fees wherever possible.

Money market funds are highly liquid, separately custodied and not subject to asset-liability mismatch risks

With a time deposit, you are committed to keeping your money in the account for a fixed term which ranges from 3 to 12 months. If you want to withdraw money prematurely, the bank has the right to not pay you interest on the deposit or even levy you a penalty.

On the other hand, money market funds can be traded daily, your investments can be withdrawn at the daily NAV. Investors can use this flexibility to put idle cash to work while waiting for investment opportunities or prepare for emergency use.

It is also worthwhile to note the MMFs are not subject to asset liability mismatch risks and the underlying investments are also custodied separately from the fund house, i.e. your investments in the MMF are not subject to the claims of fund house’s creditors in case of a bankruptcy. These are additional considerations investors are taking note of these days, as the result of a string of regional bank failures in the US such as Silicon Valley Bank and First Republic Bank.

Final thoughts

Ultimately, money market funds and time deposits share some similar key features, including higher interest rates and low risk. 

While time deposits are covered by the Deposit Protection Scheme and the interest rate can be fixed, it has poorer liquidity than money market funds and are subject to meeting conditions set out by each bank. 

Although yields are not fixed, money market funds also provide the advantage of diversification of counterparty risk in case a financial institution runs into liquidity problems. Assets of MMF are custodised separately and are not subject to asset-liability mismatch risks. By contrast, bank deposits are unsecured liabilities on a bank’s balance sheet.

Endowus has curated a list of Best-In-Class money market funds on our Fund Smart platform. You can also choose to invest in one of our popular Endowus CashUp portfolios, which are designed by experts at Endowus Investment Office for your different liquidity management needs.

Read more:


Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

General risk warnings relating to collective investment schemes 

Before making an investment decision, you are reminded to refer to the relevant prospectus/ offering document for specific risk considerations and related fees and charges.

Funds are not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested.  

Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.


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Complex Products

Some of the funds contained in this article are complex products and investors should exercise caution when investing in these products. Though these products have been authorised by the SFC, authorization does not imply official recommendation. SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

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