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Market Insights10 Mins Read

Money Market Funds: value CASH Alternatives for Investors to enhance their Portfolio

Key Takeaways:

  • Money Market funds serve as better cash alternatives for investment compared to bank savings accounts and are more diversified than cash-equivalent securities.
  • Money Market funds help to preserve capital, enhance income and provide high liquidity to investors in portfolio construction and ongoing management.
  • Investors may explore and invest in Money Market funds for transitory purposes and re-invest for any new opportunities in the markets when necessary.

Since the Covid-19 outbreak at the end of 2019, the interest rates across the world have dropped to ultra-low levels as the result of ultra monetary and fiscal policy easings to support the global economy. As the vaccines are rolling out, the global economy is recovering steadily and inflation has picked up strongly. Inflation pressures continue to build up but the interest rates are still stagnantly low. The divergence between the interest rates and the inflation rates continues to grow wider. Interest rates are expected to remain low for a long period of time. 

The Forecast of Interest Rates and Inflation Rates in various Economies

The Forecast of Interest Rates and Inflation Rates in various Economies
*NTM= next 12 months; Source:TradingEconomics.com. Data was taken on 15 Aug 2021.

The Historical Inflation Rates vs Interest Rates for USD

The Historical Inflation Rates vs Interest Rates for USD

Left axis(Blue): US FED Funds Rate
Right axis (Dotted): US Inflation Rate
Source:TradingEconomics.com

The Historical Inflation Rates vs the Interest Rates for SGD

The Historical Inflation Rates vs the Interest Rates for SGD

Left axis(Blue): Singapore Overnight Rate Average (SORA)
Right axis (Dotted): Singapore Inflation Rate
Source:TradingEconomics.com

Interest rate is a very important benchmark as the rate of return for investor’s cash deposits in the banks. Interest rate raises usually lag behind inflation and there is no certainty on the pace of interest rate rise and how long it will happen.  

As we can see from the forecast above, cash continues to depreciate in developed economies and grow slowly in emerging markets for the next 12 months. Under such a low-interest environment, it should encourage investors to maximize their investment amount. However, the markets have turned volatile in recent months. For example, market rotations in May-Jul 2021, spread of Covid-19 Delta variant, and China’s crackdown on business which is still ongoing. 

So, we come out with some curated cash alternatives – Money Market funds for investors to park their excess funds into and navigate through the volatile environment.

What is a Money Market Fund?

A money market fund is a diversified mutual fund that invests in low-risk, highly liquid, high quality, and short duration assets. These assets include cash deposits, government bills, and bonds, high credit rating corporate debt securities that usually come with a short maturity (<1 year). Some fund managers will invest a small portion of slightly longer duration bonds with a maturity of 1-3 years in order to boost the yield of the funds. The funds aim to preserve capital, enhance cash income and provide high liquidity for investors in the short to medium term.

Why park your cash into a Money Market Fund? What is the catch?

Summary of Pros and Cons of Money Market Funds

*Readers may skip the below section of explanations if comprehending the summary above.

Like all other investment instruments, money market funds are not capital guaranteed. The NAVs may fluctuate to a minimal extent in the short term. In the US, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC) unlike the deposits in commercial and savings banks which are insured up to certain amounts. In Singapore, money market funds are not insured by the Singapore Deposit Insurance Corporation (SDIC)

The yield of a Money Market fund is usually low and slightly better than the interest rates of the respective currency of the underlying assets. For USD Money Market funds, the yield is currently around 0% – 0.5% pa. SGD Money Market funds currently yield 0.7% to <2% pa. 

In addition, the yield is sensitive to interest rates and monetary policy. However, this can be a double-edged sword, i.e. when the interest rates are adjusted upwards/downwards, money market funds will generally yield higher/lower for investors respectively.

Despite offering higher returns than bank deposits in general, it is highly liquid and investors may redeem their fund at any time and receive the process within 1 – 5 business days. The NAV fluctuation is very small, attributed to the low-risk nature of the underlying assets in Money Market funds. We will demonstrate the volatility of the Money Market fund with some examples in the following section.

Also, Money Market funds have an extremely low cost of management (~0.3% pa or less) depending on the yields to investors. Thanks to the low fee and transparency in the asset management industry nowadays, investors can always invest and redeem money market funds without any upfront or backend fees – technically zero fees other than the necessary and low management fee collected by the fund manager itself. 

Money market funds are well-regulated. In the US, money market funds are governed and regulated by the Securities Exchange and Commission (SEC). SEC provides guidance and guidelines on the characteristics, allowable assets, durations for Money Market funds. For example, the maximum maturity of securities invested by money market funds are permitted up to 13 months in general, or 25 months for Government security only. This definitely ensures liquidity and low-risk characteristics of Money Market funds compared to risky investments.

In-depth Analysis of curated Money Market funds in Kristal

Currently, our top curated Money Market fund is Lion Global SGD Enhanced Liquidity “I” ACC for SGD and Goldman Sachs US$ Liquid Reserves “I” ACC for USD. We may look to add better or more suitable alternatives in future.

Lion Global SGD Enhanced Liquidity “I” ACC: (For Accredited Investors only)

The investment objectives are to preserve capital, enhance income and provide high liquidity. The Fund invests in short-term, high-quality debt securities with a weighted average portfolio credit rating of A- and a weighted average duration of around 12 months. 

Why this fund?

  • Low volatility (max drawdown = -0.32%), high liquidity (settlement T+1) and extremely low expense ratio (0.25%)
  • Higher yield (1.43% p.a.) compared to SGD saving accounts and other cash equivalents
  • High Sharpe ratio of 3.26
  • Zero subscription/redemption fees with Kristal

The price volatility of LionGlobal SGD Enhanced Liquidity since its inception

The price volatility of LionGlobal SGD Enhanced Liquidity since its inception
Source: Bloomberg. Data was taken on 15 Aug 2021.

Goldman Sachs US$ Liquid Reserves “I” ACC: (For Accredited Investors only)

The investment objectives are to preserve capital, generate income, and complement the overall portfolio. The Fund invests in investment-grade government and non-government money market securities.

Why this fund?

  • Low volatility (max drawdown = -0.02%), high liquidity (settlement T+1) and extremely low expense ratio (0.20%)
  • Very short duration (weighted average maturity = 34 days only) and capable to react positively for any rate hikes in USD
  • High Sharpe ratio of 1.61
  • Zero subscription/redemption fees with Kristal

The price volatility of Goldman Sachs US$ Liquid Reserves “I” ACC since its inception

The price volatility of Goldman Sachs US$ Liquid Reserves "I" ACC since its inception
Source: Bloomberg. Data was taken on 15 Aug 2021.

(For Accredited Investors only)

*All these Money Market Funds have zero subscription/redemption fees with Kristal. Data was taken on 15 Aug 2021.

How do Money Market funds enhance your portfolio?

An investor may invest in Money Market funds for a couple of good reasons. A very straightforward rationale is to reduce the opportunity cost (against inflation) of parking cash into cash accounts that yield very little like 0.05% p.a. in bank’s savings accounts. 

Besides, Money Market funds can generate some (despite low) income for investors who leave their cash sitting idle. The income is usually paid out in the form of dividends or re-invested into the fund and shows some growth in NAV. When the market is volatile, investors may not find good opportunities to deploy the excess cash. The low-risk nature of Money Market funds makes them ideal solutions for investors to prepare/consolidate their cash in order to re-enter the markets when the outlook becomes better.

In addition, Money Market funds help investors to manage their cash more effectively and efficiently for liquidity purposes. It adds an additional cushion for investors to meet any immediate/near-term cash outlay without liquidating their risky investments. As a result, investors would not commingle their investment cash with emergency funds. 

However, investors are reminded that Money Market funds may not be good for long-term investment as there is not much capital appreciation in the long term. Nevertheless, Money Market funds can act as perfect liquid and transitory instruments in the short to medium term to complement the overall portfolio while enhancing the income and reducing the risk of the portfolio.

Bottom line

We would like investors to explore diversified Money Market funds as an effective and efficient strategy to manage their liquidity and transitory needs in portfolios.  

Investors may do cost-dollar averaging from time to time to increase or adjust their holding of Money Market funds, but may not find much of the growth opportunities in the long term. More often, Money Market funds help you to provide the liquidity for new risky investments when the opportunity comes. 

As the global economy recovers steadily, the central banks and governments across the world may work out their ways to raise interest rates timely or unexpectedly in order to contain inflation. The yields of Money Market funds may improve when the broad interest rates go higher later in the future. However, since Money Market funds are considered as investment instruments, there is no guarantee in capital and performance, especially in the short term within days, weeks, or even months. We may look for meaningful returns at least in more than 3 months to <1 year.

If you would like to discuss Money Market funds and how to use them to enhance your portfolio management, you may contact us and talk to our dedicated Kristal Advisors via +65 9239 1022 or kristaladvisors@kristal.ai.

 

Disclaimer

This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.

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This is offered only to Accredited and Institutional Investors as defined under the Securities and Futures Act, Chapter 289 of Singapore (“Act”), which broadly comprises of regulated financial Institutions, large corporates, high net worth individuals and sophisticated investors.

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