If you have been in town searching for yield on your spare cash lying around, you probably would have heard of a popular option called CASH MANAGEMENT ACCOUNTS. These are one of the alternatives, amongst other shorter term duration cash instruments such as Fixed Deposits or T-Bills that have shot up in popularity over the last few months.
Companies offering these solutions include fund houses, robo-advisors, banks and brokers, and in today’s context – there are MANY choices. Now once again, our good friends at the Seedly community have already put together an extensive comparison of all the different providers and the pros and cons of each solution – so there is no need for us to re-invent the wheel.
That said, if this is your first time dealing with these products, it’s easy to get lost in the plethora of options, and commit some newbie mistakes.
Let me walk you through three mistakes to avoid when choosing your preferred Cash Management Account!
1. Not Knowing What The Cash Management Accounts are Investing In
No! Not All Cash Management Accounts are the Same!
At its core, Cash Management Accounts are simply vehicles that take your cash and invests it into various type of funds. Syfe shared a relatively good table that summarizes the different types of funds in any provider’s repertoire, and illustrated the differences in terms of risk and reward in each of those.
It’s important to know what type of funds would a specific cash management account be investing in, to be able to reasonably judge if a certain advertised projected yield would be attainable with a degree of certainty.
For instance, EndowUs’s cash management product “Cash Smart” has 3 different tiers – Secure, Enhanced and Ultra.
To the untrained eye, one might simply look at the projected returns on the upper tier of 4.9% p.a on the ULTRA plan, and be drawn to it straight away, without understanding what it comprises of.
And that’s a major mistake!
Quoting this chart from Syfe – as the EndowUs Cash Smart Enhanced and Ultra have exposure to short duration funds, the return can be more volatile as it now depends also on the reaction of the fund underlyings to changes in interest rates. Despite a projected yield of 4.9% p.a in the initial diagram above, the fact is the account actually suffered a drawdown of more than 2%!
2. Choosing the Product Simply Based on the Highest Yield
Of course! Why would I choose a product that yields me less than another? All we need to do is to choose the one with the highest yield, right?
Of course not!
If the section from above hasn’t already shown why simply choosing the product with the highest yield (in the case of EndowUs Cash Smart Ultra) without knowing what it comprises of isn’t the best idea, another consideration would be FX Risk.
For instance, MooMoo’s Cash Plus Funds provide two options, a SGD-denominated fund that yields approximately 3.9%, and a USD-denominated fund that yields approximately ~4.45% p.a
Numerically we know a higher yields = a higher return on our money. However, if you only focus on that, you are ignoring a key component here in the form of FX Risk. If you had converted your SGD to USD to get the higher yield, but over time USD depreciates against SGD, you might still end up worse-off as compared to simply just sticking with the SGD denominated option.
The only time you would want to consider this is when you have an actual intention to hold US Dollars. This could be because you might be saving for an expense in that currency, or you might have a view that the US Dollar will appreciate against SGD over the long run.
3. Not Accounting for Liquidity
Liquidity is defined as the ease or speed of converting assets into the most liquid asset of all – Cash.
To some, it might not matter if you do not need this amount that you are parking away as spare cash in these cash management accounts. But to me, I value the ability to easily access the cash in the event of any sudden opportunity that arises out of the blue.
And that is why I personally would only park my spare cash in cash management accounts AFTER I max out my preferred High Interest Savings Account, which is the UOB One Account. As a deposit savings account, there is true liquidity in that I can access the cash anytime I want. I wrote extensively about this so you can read more about it here : Why UOB One Account is the Best High Interest Savings Account in 2023 (for me)
Aside from that then, it is important to then evaluate the various cash management accounts on how well they perform in terms of withdrawal time to bank. In fact, it is something highly valued that even Syfe uses “NEXT-DAY WITHDRWALS” as a key feature in advertising its Syfe Cash+ product!
