How to choose the right cash management solution offered by robo advisors
In the past few days, we’ve seen 2 robo advisors launch their cash management solution products. Today, we have a total of 3 robo advisors (Endowus, MoneyOwl and StashAway) offering investors with cash management solutions to park their cash savings in low risk investments for higher yield that banks are offering.
Every week, I’ll be sharing practical tips and invaluable knowledge to guide you on your path to financial independence.
Here’s a complete list of cash management solutions
|
Product |
Net Projected Yield |
Fees |
Funds |
Minimum Amount Required |
|---|---|---|---|---|
Cash Smart Core |
1.29% |
Total Cost: 0.23%
Total Expense Ratio: 0.27% Trailer Fee Rebate: (0.09%) Endowus Access Fee: 0.05% |
|
No minimum balance, but minimum account size to be maintained is S$10,000 |
|
Cash Smart Enhanced |
2.20% |
Total Cost: 0.35%
Total Expense Ratio: 0.53% Trailer Fee Rebate: (0.23%) Endowus Access Fee: 0.05% |
|
No minimum balance, but minimum account size to be maintained is S$10,000 |
StashAway Simple |
1.90% |
Total Cost: 0.205%
Total Expense Ratio: 0.33% Trailer Fee Rebate: (0.125%) StashAway Management Fee: Nil |
|
No minimum balance |
WiseSaver |
0.64% |
Total Cost: 0.15%
Total Expense Ratio: 0.15% Trailer Fee Rebate: Nil Money Owl Advisory Fee: Nil |
|
As low as $100 for one-time saving or $50 for monthly regular savings plan |
Last updated: 1 July 2020
Important factors when choosing a cash management solution?
If you’re new to cash management solutions, you’re probably wondering what are the key factors in choosing a cash management solution. Here are 3 key factors that you could use as a reference.
Avoid high fee funds from eating away your returns
As cash management solutions will be investing your money in money market funds and bond funds that have lower risks and yields, you need to recognise that the upside of your investment is limited around 2% yield at most. With such a limited upside, you need to be prudent in the costs that’s eating away at the little profits that you’re earning.
Fortunately, all the cash management solutions offered by the robo advisors are quite low in fees when compared to investing in the same funds on your own, thanks to the trailer fee rebates and minimum platform fees (if any).
Choosing funds with the risk level you are willing to accept
To be honest, because the cash management solutions are investing in cash funds, money market funds and short duration bond funds, the risks aren’t super high to begin with.
If you look closely at the underlying funds offered by all the cash management solutions from the robo advisors, you would realise that the underlying funds selected aren’t that different. Essentially, we are only looking at 4 funds:
- Fullerton SGD Cash Fund
- LionGlobal SGD Money Market Fund
- LionGlobal SGD Enhanced Liquidity
- UOB United SGD Fund
I’ve overlaid the performance charts of all 4 funds to illustrate the similarities and differences of these funds.
I need to highlight that all these funds are priced the same over the same period of time, please note that the data points on the X and Y axis for each fund in the chart is completely different and it is not meaningful to interpret anything from the chart above other than the trend lines.
An interesting observation is the red trend line which indicates the performance of UOB United SGD Fund. As you can see, this fund exhibited quite a lot of volatility with the most recent dip during March 2020 due to the pandemic. It has since recovered close to its Feb prices.
With higher risks comes higher returns, UOB United SGD Fund is also the better performing fund out of the 4 with an annualised rate of return of 2.51% over a 1-year period and an annualised rate of return of 3.22% over a 10-year period.
UOB United SGD Fund is what Endowus is using in its Cash Smart Enhanced cash management solution to deliver the higher projected yield.
But of course, past performance is by no means an indicator of future performance.
Your ability to leave your cash savings untouched
Lastly, you want to think about how long you can afford to leave your cash savings untouched, even during emergencies.
If you only have $10,000 in emergency cash savings and you are looking to invest them all in a cash management solution, you might want to consider a cash management solution that will invest your savings in funds that have minimal volatility. That’s because if you need to liquidate your investments during an emergency, you want to be sure that you have a very slim chance of liquidating at a loss.
Reusing the same chart, we can see that 3 of the 4 funds – Fullerton SGD Cash Fund, LionGlobal SGD Money Market Fund and LionGlobal SGD Enhanced Liquidity have exhibited similar performances, having a long uptrend and little volatility. UOB United SGD Fund has more volatility and there are months where there are dips that would require at least a month or more to recover.
This means that if you have kept your cash savings with these 3 funds in the past, you wouldn’t have lost money selling off your investments at any point in time to cash out your cash saving for emergency uses. But if UOB United SGD Fund is part of your portfolio, you may need to be comfortable with waiting for a month or more before liquidating during months where they are experiencing a dip in price, in exchange for higher yields.
Fullerton SGD Cash Fund, LionGlobal SGD Money Market Fund and LionGlobal SGD Enhanced Liquidity are the funds you want to consider if you only have $10,000 and you are investing all your emergency cash savings in a single cash management solution portfolio.
But if you have an emergency cash savings of $100,000, you could consider placing $40,000 in funds like Fullerton SGD Cash Fund, LionGlobal SGD Money Market Fund and LionGlobal SGD Enhanced Liquidity that gives a lower and $60,000 in a more volatile cash management solution portfolio that holds UOB United SGD Fund offering a higher return.
The benefit of splitting your cash savings is that you can tap on the $40,000 during an emergency and if the $60,000 is underperforming, you can afford the luxury of waiting 1-2 months for the portfolio to recover before liquidating.
I should also mention that while the trend lines on the chart look really nice, the data points on the y-axis are very minute and you are not getting amazing returns by staying invested in these funds. Our goal is just to earn a better yield return than the interest rates offered by banks while not experiencing any negative performances that prohibits us from liquidating our investments for emergency uses.
Which cash management solution will you choose?
The purpose of this article is not to advise you on the cash management solution to choose, but to arm you with enough information to make an informed decision and choose the cash management solution that suits your needs.
If you feel that there are other considerations that we should factor in when choosing a cash management solution, please share with me in the comments section. I’d love to hear your thoughts.
Remember, you won’t trust Mickey Mouse to manage your portfolio so there’s no reason to trust Mickey J to make investment decisions for you either.
