When it comes to asset allocation, most retail investors would typically think of stocks, bonds, properties, gold and cash. We invest in assets for any return, and choose to hold cash if we believe asset prices are due for any negative correction and prefer liquid funds within our war chest.
The problem with holding cash is that there is an opportunity cost. During the period where we watch for our next investment opportunity, our cash holdings, that is typically kept in a savings account, only provide a return of as little as 0.05% p.a.
This creates a dilemma for retail investors. Hold on to too much cash and we get in a hefty opportunity cost while awaiting opportunities, as cash doesn't generate a good return for all of us. At the same time, if we hold too little cash, we may not have sufficient ammo to take advantage of any dips on the market.
So, what can we do as investors?
Money Market Funds: Short-Term Trading Of Debt Instruments
To generate returns on funds that people choose not to plough into the markets, many institutional investors rely on the money market to provide a return that is higher than what the banks pay.
Money Markets are where the trading of short-term debt instruments takes place. These debts could be issued by government, banks and big companies, and have short-term maturity of as little as a couple of days or up to a year.
Because of their short-term timeframe, holding these short-term debt instruments is seen to be risk-free, especially if these debts come from high-quality issuers such as the government or triple A-rated corporations. Think of this as lending $99.50 to the Singapore Government today, knowing that they will return you $100 at the end of the month.
Besides treasury bills from the government and debt which are being traded by banks lending to one another, other short-term debt instruments which make up the money market includes commercial paper from high-quality companies, short-term certificate of deposits and banker's acceptances.
Money Market Funds: Making Your Idle Funds Generate Higher Returns
A money market fund invests in a variety of these short-term debt instruments. Doing so allows the money market fund to generate a higher interest return for investors, as opposed to merely leaving the unused funds inside a savings account.
Investors use money market funds, as opposed to leaving it in fixed deposits, when they want to have cash-like liquidity while earning higher returns. This means while investors enjoy mortgage loan that is similar or even higher as compared to a fixed deposit, they are still able to deploy their funds as and when it's required, without the fear of the money being secured in a fixed deposit.
Fund managers who manage Money Market Funds typically only purchase high-quality, short term bonds. For example, the Phillip Money Market Fund (A category) has an average credit rating of A and a weighted average maturity of 51.Three days (as at 31 December 2021) and, the biggest Money Market Funds.
How Money Market Funds Supports Your Investment Portfolio
As cash does not give a return, the more cash we hold, the larger our opportunity cost. The more we hold cash, the larger our opportunity cost too.
To solve this problem, we can decide to put our money into a Money Market Fund made for retail investors such as the Phillip Money Market Funds (PMMFs). This can be done via the Phillip SMART Park.
The Phillip SMART Park is definitely an excess funds facility that parks idle cash, that you have already set aside for investing once you see the right opportunities, into Phillip Money Market Funds (PMMFs). So, when you wait for the right opportunities to present themselves, your idle cash is automatically deployed into Phillip Money Market Funds managed by Phillip Securities to earn you a higher return than simply leaving it uninvested with daily liquidity
This can be obtained for both your cash savings in Singapore Dollar (SGD) or US Dollar (USD).
As of 24 February 2021, interest rate returns are at 1.326% for SGD and 1.892% for USD funds.
Source
Since its inception in April 2001, the fund's annualised return reaches 1.05% p.a. (as at 31 December 2021), after taking into consideration fund management cost.
If you have a S$100,000 bond which just matured, and therefore are waiting for the right investment opportunity, deploying your funds in Phillip Money Market Funds via the Phillip SMART Park in the meantime will generate you a return of about $1,050 (based on the current annualised return from the fund since inception) each year, or about $87.50 per month.
It's important to note that similar to all types of investments, the Phillip Money Market Funds isn't entirely risk-free. Neither is the interest returns guaranteed as this is based on the market interest rate.
Here’s a handy infographic to summarise the key advantages of using Money Market Funds inside your portfolio:
Use The Phillip SMART Park To finance Your Investments
As there is no sales charges or lock-in period for that funds, the Phillip SMART Park is a great option to consider keeping excess investment funds that you have to earn a higher interest when you wait for your next investment opportunities.
To get started doing the Phillip SMART Park, you need to be an existing POEMS account holder. As an account holder, you can opt-in towards the SMART Park facility whenever you open a new account by providing a one-time authorisation. After that, any excess funds above S$100 in your POEMS accounts will be parked into the Phillip Money Market Funds through the SMART Park.
And even if you do not plan to invest immediately, you can still make use of the Phillip Money Market Funds to help you earn higher interests around the savings that you have.
When you do finally invest, funds will automatically be deducted from your holdings in the Phillip Money Market Fund via the SMART Park facility to fund your investment purchase. You can also withdraw funds from the Phillip Money Market Fund whenever you want to, similar to making withdrawals from the regular investment account.
