What does it mean to have cash and manage it properly? Proper cash management is about having liquidity that you can count on for emergencies and your short-term needs.
Most of us know better than to put our cash under a mattress, because it’ll only lose value to inflation. Savings accounts aren’t ideal either – they come with too many conditions that make it difficult for you to manage your cash properly.
Instead, consider putting your cash in alternative cash management offerings that give you a return on your cash while ensuring its liquidity. With a growing number of cash management options out there, it’s important to realise that not all cash management offerings are the same.
Cash management portfolios invest your cash in one or more high-quality short-term funds, to help you earn a return on your cash while ensuring its liquidity.
The funds your cash management portfolio invests in affects its risk level.
Funds with higher asset quality, shorter maturities, and stable net asset values (NAVs) are generally lower-risk. (More about NAVs later.)
Cash management offerings invest your cash in one or more high-quality short-term funds to help you earn a return on your cash. As these products are technically investments, they inherently carry a level of risk.
Your top priority for your cash should always be to ensure that:
It isn’t overexposed to risk
Its value keeps up with inflation as much as possible
That’s why it’s important that you look beyond the advertised rate on an offering to also look at the funds used to structure it. When you know how an offering is structured, you’ll have a clearer picture of how much risk your cash is exposed to.
Cash management offerings typically invest your cash into the following types of funds, which we’ve listed from the least risky to the most risky:
Cash funds are generally the safest form of investment – they invest mostly in bank fixed deposits. They may also invest into some money market instruments, which are securities that provide governments, businesses and banks with capital for short periods of time at a low cost.
MMFs are slightly riskier than cash funds, but are still very low risk compared to other types of investments. They invest mostly in money market instruments and some high-quality short-term debt issued by governments, banks, or large companies.
Ultra-short and short duration bond funds mostly invest in high-quality short-term debt instruments. Ultra-short duration bond funds invest in securities that mature in less than a year, while short-duration bond funds invest in debt maturing in 1 to 3 years.
We’ve established that a cash management offering’s risk level directly relates to the types of funds it invests in. Cash funds, MMFs, ultra-short duration bond funds, and short-duration bond funds all have different risk levels, depending on:
the type and quality of asset the fund invests in;
the average maturity of the assets in the fund; and
how the fund values its assets.
A fund in an offering can invest in any of these 3 short-term financial assets:
money market instruments such as commercial papers and Treasury bills; or
short term debt such as government bonds and corporate bonds.
Each asset has a different risk level that, in turn, influences a fund’s risk level. For instance, a short duration bond fund that holds mostly short-term debt is riskier than a cash fund that holds mostly bank deposits. That’s because a short-term debt issuer could default on its obligations while a bank rarely, if ever, defaults on its deposits.
The quality of the assets matter too. A short-duration bond fund that invests in high-quality bonds is less risky than a bond fund that invests in junk bonds.
Funds that use assets with shorter maturities are less risky because the fund will likely get its principal back quicker. Simply put, there’s less time for things to go sideways.
For example, a MMF that invests in assets with a 1-month maturity will get its principal back much quicker than a short duration bond fund that holds assets with a 2-year maturity. Hence, the MMF carries less risk than the short duration bond fund.
What’s a net asset value, or NAV? Funds use NAVs to indicate an asset’s value. The more this value fluctuates, the riskier the asset.
Some funds that invest in money market instruments and short-term debt value those assets at current market prices. For instance:
A fund buys a short-term bond at $100 SGD today
That bond’s price goes down to $90 SGD tomorrow
Then, the fund will report that $10 SGD loss in its NAV.
A fund that values its assets at current market prices has a fluctuating NAV – and these funds carry more risk than funds with NAVs that don’t fluctuate.
Why does it matter to check to see if a fund has a fluctuating NAV? Because an untimely drop in a fund’s NAV eats into your cash right when you might want to use it.
Say you need to use your emergency fund to pay for an unexpected medical bill. If your cash is exposed to a fluctuating NAV, you could end up withdrawing it at a loss to pay off that bill. Even if that loss isn’t substantial, making sure that your cash is always liquid and safe is fundamental to cash management.
We designed our cash management portfolio, StashAway Simple™, with a money market fund and an enhanced liquidity fund (a type of ultra-short duration bond fund). We chose these funds because they both have predictably stable NAVs, which means your cash isn’t overexposed to market conditions.
While short-duration bond funds can yield a slightly higher return, we don’t use them in Simple because their fluctuating NAV overexposes your cash to risk. Here’s a comparison of the performance of our underlying funds (in blue) versus the funds that you might see in other cash management offerings.
Because we pay close attention to what underlying funds we use for Simple, we’re able to keep its risk level incredibly low.
True enough, StashAway Simple™ hasn’t seen a single month of negative returns since its inception in 2019, no matter the interest rate and economic environment. Simple has a projected 3.3% p.a. return on any amount, with none of the hassle of investment requirements, credit cards, tiered earning structures, and whatever else the banks have come up with to make it painful to manage your cash. You can withdraw any amount of your funds at any time without penalties.