The weakened interest rate environment, coupled with central banks increasing monetary support, has led to interest rates for savings accounts being revised downwards drastically.
As banks depend on interest revenue from loaning out monies deposited into savings accounts, it is difficult for banks to sustain the interest rates they have advertised in the past: OCBC 360 has undergone 2 downwards revisions, while Standard Chartered Bank Jumpstart has undergone 1 revision.
Many of us are frustrated with the rate of adjustment and the many different criteria that we need to meet to get the bonus interest associated with High-Interest Savings Accounts (HISA).
To ensure that our cash savings are kept in a liquid account that gives a competitive interest rate without the frustration, there is no better time than now to explore alternatives, one of which would be a Money Market Fund (MMF).
What is a Money Market Fund (MMF)?
A Money Market Fund (MMF) is a unit trust that invests only in highly liquid instruments such as cash-equivalent securities, high-quality institutional fixed deposits and ultra short duration fixed income instruments. It is highly liquid and low risk, which is why it is often compared against HISAs. Similar products include cash funds (lower risk) and short-term duration bonds (higher risk).
What is a High-Interest Savings Account (HISA)?
A High-Interest Savings Account (HISA) is a bank account that offers higher rates of interest on your deposits than traditional savings accounts do. Some have requirements for a minimum balance or other criteria in order to maintain the interest rate that you can earn.
Here is a comparison between Money Market Funds and High-Interest Savings Accounts:
Both Money Market Funds (MMFs) and High-Interest Savings Accounts (HISAs) have higher interest rates than regular savings accounts
Interest rates for regular savings accounts in Singapore start from 0.05% per annum. MMFs and HISAs can give anything from 1.0% up to 3.68% per annum. That is significantly more than for similarly low-risk current account deposits.
Both have minimal investment risk
Because the underlying investment products MMFs are ultra low-risk products issued by high credit quality companies (think DBS), there is very minimal risk involved. For example, the Fullerton SGD Cash Fund of holding SGD fixed deposits of high quality financial institutions that is due within a year. Due to this restriction, the MMF investor is exposed to minimal risk.
The diagram below shows the stable returns of the Fullerton SGD Cash Fund.
High-Interest Savings Accounts are risk free because most financial institutions* that take deposit in Singapore are members of the Deposit Insurance (DI) Scheme. Under this scheme, if the aforementioned financial institution fails, up to S$75,000 per account will be covered by the Singapore Deposit Insurance Coverage (SDIC).
Money Market Funds' projected interest rates are purely variable
Generally, HISAs (including the likes OCBC 360, Standard Chartered Jumpstart) give a "fixed and guaranteed" interest rate, as long as:
- We meet their bonus criteria (credit salary, meeting minimum credit card spend requirement are common requirements), and
- The interest rate environment remains the same.
What we have observed is that any changes to interest rate for HISAs are normally effective 1-2 months after announcement, and it is very inconvenient for us to change our salary crediting and credit card spends with another bank.
We can earn a $50 or more worth of interest a month when we switch between bank accounts, but in the process, we will also have to switch over all the criteria that needs to be met to the new bank account, such as our salary credits, credit card spends, bill payment and so on.
In comparison, MMF interest rates are dynamically priced-in. The interest rates that are advertised can be misleading as MMF interest rates are dependent on the fund's price, which can shift up or down, and the fund manager's ability to reinvest at the projected yield.
Money Market Fund investments have fees involved
As mentioned above, MMFs are managed by fund managers who invest and manage the underlying assets. The fund expenses are very low relative to equity funds and ETFs, at around 0.15% per annum. This cost is inclusive of the trailer fees paid to the distributors or the platform service providers.
However, as retail investors, we are unable to directly invest in MMFs. We have to buy it through an intermediary, such as a financial advisor or an online platform. These platforms often charge a platform fee to cover their operational cost. Overall, while the fund management fees and platform fees are low, it can significantly impact the projected net interest paid out because of the lower returns of MMFs.
HISAs do not charge any fees at all, unless our deposits fall below their stipulated minimum amount, in which case they will charge a fall-below administrative fee.
Money Market Funds are purely for investments
We can use our HISAs for other purposes, such as bill payments, transfer of cash, or salary crediting. These are all part of the services that we get from using banking services.
However, for MMFs, the platform that they are based on is purely for investment purposes. Their range of functions are limited compared to what a bank account can offer.
Money Market Funds have no investment limit
The bonus interest for HISAs are often capped (ranging from the first $35,000 to $60,000). This helps the bank to manage interest expenses that can be hefty especially if they are paying 3.68% interest.
However, MMFs have no cap in investment amounts as these funds are directly invested into safe deposits and other fixed income products to generate a return. There is no "promotional rate" per se to acquire clients, because MMF fund managers are merely investing the money on our behalf to get a higher yield.
Ultimately, Money Market Funds and High-Interest Savings Accounts have the same key features, including high liquidity and low risk. While HISAs have had their run in providing higher interest rates, these higher rates are a marketing effort from the banks to encourage their customers to use various bank services and products more.
With greater technological innovation and its associated cost efficiency, MMFs might one day rival the features and ease of use of HISAs, and provide the masses with a fuss-free alternative to growing their money safely.