Cash Smart is a diversified investment portfolio of cash, money market, and short duration fixed income funds. Cash Smart is not a bank deposit. There are different risks associated with bank deposits as with a solution like Cash Smart.
When you make a deposit at the Deposit Insurance (DI) member bank in Singapore Dollars (SGD), it is insured by the Singapore Deposit Insurance Corporation Limited (SDIC) for up to S$75,000 in the event that the bank fails. This means that you have concentrated counter-party risk with that bank for any assets above S$75,000.
One way to mitigate this risk is to open many bank accounts at different DI member banks and spread your deposits across the banks. Another way is to use a product like Cash Smart, which has credit diversification and potential to yield higher returns through flexibility in the underlying holdings.
Cash Smart invests in funds. The funds have their assets ring-fenced by trustees and custodians (in the case of Cash Smart, the trustees and custodians are HSBC for Fullerton and Lion Global, and State Street for UOB Asset Management). You, as the investor, have a custodian as well (in our case this is UOB Kay Hian, Singapore’s largest broker).
With the custodians in place, Endowus (your financial advisor), as well as Fullerton, Lion Global and UOB Asset Management (the fund managers) never touch your money. The fund managers have strict guidelines for what the fund can and cannot invest in and a team dedicated to working your money harder within their guidelines, executed through the custodians.
The funds have a diverse set of underlying holdings and counterparties such as bank deposits, fixed deposits, government and corporate debt securities. The funds also have a diverse investor base ranging from financial institutions, sovereign wealth funds, corporations, charities, to individual investors.
Endowus Cash Smart is not insured by SDIC but has much broader diversification than a bank deposit, with many more counterparties and custodians. It also has the potential for high returns given its diversified holdings.
It is important to remember that bank deposits and Cash Smart both have credit risk with counterparties. Deposits may be loaned out to individuals or companies that can default on the loan, just as a company or government can default on a bond. However, both have very low risk as the risk is diversified across the bank’s loan book in the case of deposits, and diversified across various holdings of institutional deposits, government bills and high quality corporate debt in the case of Cash Smart. If banks, governments and high quality companies go bankrupt then there is a risk of loss. If your bank goes bankrupt then your bank deposit is insured up to $75,000 through the SDIC. None of these scenarios is a common occurrence in Singapore, and the SDIC has never been activated in Singapore in its history.
This article from State Street Global Advisors, a global fund custodian and fund manager, provides additional context into the risks and rewards associated with bank deposits versus products like Cash Smart.