In The Money
Money market funds are gaining traction in Singapore, with returns from 2.5%
SINGAPORE – Investors often forget that apart from stocks and bonds, there is a third key building block to a diversified investment portfolio – cash. Holding too much or too little of any of them will affect your investment goals.
Everyone holds cash for various reasons, including emergencies or for the right opportunity to deploy it. Unfortunately for the majority, cash is left accumulating in their banks because they do not know what to do with it or fear losing the hard-earned money.
But leaving your cash in the bank and earning a meagre 0.1 per cent interest from ordinary savings accounts does not make financial sense as its value is being eroded, with inflation for 2025 forecast at 1.5 per cent to 2.5 per cent.
Fortunately, fund managers in Singapore are seeing an increased appetite for money market funds (MMFs) in addition to Singapore Government Treasury bills, fixed deposits and Singapore Savings Bonds from those looking to preserve capital while generating modest returns.
An MMF is a type of unit trust that invests in low-risk instruments that have short maturities of less than a year, in particular, three months or less. Investors can liquidate holdings and withdraw their money whenever they need to.
Globally, a record US$7.03 trillion (S$9.35 trillion) has been poured into MMFs as investors seek refuge from uncertainties fuelled by new US trade policies. The key S&P 500 index has tumbled nearly 8 per cent since President Donald Trump’s Jan 20 inauguration.
Domestically, the total net assets of MMFs domiciled here have more than doubled from $5.9 billion in January 2024 to $11.1 billion in January 2025, according to data from investment application Morningstar Direct.
Mr Isaac Lim, chief market strategist at investment trading platform Moomoo, says investors here are typically aged 45 to 55 and established professionals.
They are either too busy to monitor their investments or are new to investments and worried about making the wrong decision. Thus, they prefer to seek the help of fund managers who invest and manage the assets.
The Straits Times takes a closer look at money market funds.
Cash-like
Most of the MMFs in Singapore invest in fixed deposits, government securities and commercial papers. Commercial papers are high-quality, short-duration unsecured debts issued by corporates that pay higher interest rates than government bonds.
The exact composition of an MMF’s portfolio can vary, depending on the fund’s specific strategy and market conditions, but the focus remains on highly liquid, short-term and low-risk investments.
There are also money market exchange-traded funds, or ETFs, that track broad money market indexes.
MMFs are considered low risk as they offer a relatively stable return due to their short-term nature, and are typically issued by high-quality issuers.
“This makes them less volatile than stocks and bonds,” says Ms Lorna Tan, head of financial planning literacy at DBS Bank.
Given that MMFs are a subset of mutual funds, they are an example of a pooled investment product where the financial resources of investors are pooled together to invest in securities, she says.
Some examples of MMFs in Singapore include UOB United SGD Fund, Fullerton SGD Cash Fund, LionGlobal SGD Enhanced Liquidity Fund and Maybank Money Market Fund.
MMFs v CPF v mutual funds
Investors tend to view MMFs as a safe and easily accessible place to park their money, earning a return that can exceed that of fixed deposits and regular savings accounts.
The yield for MMFs is around 2.5 per cent to 4 per cent, depending on the fund and risk profile. This is in contrast to the 0.1 per cent per annum interest rate for regular savings accounts in Singapore; 2.7 per cent to 2.9 per cent for fixed deposits; and the cut-off yield of 2.56 per cent for the latest six-month T-bills on March 13.
When deciding between MMFs, Central Provident Fund (CPF) savings and mutual funds, investors should consider factors such as yield, risk profile, investment horizon and stability, Mr Lim says.
With interest rates likely to decline over the longer term, investors with a bigger risk appetite can consider allocating a portion of their portfolio to mutual funds, which have the potential for higher returns than MMFs, albeit with a greater degree of volatility, he says.
If you desire stability and liquidity, MMFs are the better option.
Many investors use both in a balanced portfolio: MMFs for short-term cash needs and mutual funds for long-term growth.
“However, for long-term stability and retirement planning, CPF remains a strong option, while mutual funds suit investors with a longer time horizon and higher risk appetite,” Mr Lim says.
For the more conservative investor, CPF savings are a greater tool that offers guaranteed returns with no risk, especially for long-term retirement planning.
However, investors should be mindful that money deposited in their CPF accounts does not offer the same flexibility of withdrawal compared with MMFs.
“While your CPF balances earn at least 2.5 per cent per annum, you can’t make cash withdrawals until age 55. You can use your CPF for healthcare and housing needs, and for investing under the CPF Investment Scheme,” says Ms Tan.
Buying and selling MMFs is straightforward too. Unlike fixed deposits, T-bills and Singapore Savings Bonds, there are no set subscription or redemption dates you have to adhere to without penalty.
Other considerations
When choosing an MMF, remember that while such funds are generally low risk and offer predictable returns, it’s crucial to compare net returns after fees, as expense ratios vary, Ms Tan says.
The expense ratio is the fee an investor has to pay the fund manager for managing the fund and includes administration, marketing and management costs.
If the expense ratio is 0.2 per cent, it means that for every $1,000 put in, an investor pays $2 in fees annually.
After taking into account fees, the returns from some money market funds may be comparable to those of fixed deposits. This might lead some investors to prefer fixed deposits for their guaranteed returns and reduced uncertainty.
Other key factors to consider include historical performance. Ms Tan says to look for consistency, not just high numbers, stressing that past performance is not indicative of future results. The reputation and experience of the fund manager are also key considerations.
Risks
While MMFs are generally considered low risk, it’s important to understand that some fluctuation in value is possible, and a small risk of loss exists.
Over-reliance on them within an investment portfolio can present challenges as a portfolio heavily weighted in short-term investments may not generate sufficient long-term returns to outpace inflation, Ms Tan says.
This is particularly so for younger investors with longer time horizons who may miss out on potentially higher growth opportunities that would help them ensure that their retirement nest eggs last their entire life.
This is especially true in Singapore, which has an ageing population with an increasing life expectancy of 83 years, as at 2023, and is projected to be a “super-aged” society by 2026, with more than 20 per cent of the population aged 65 or older.
With MMFs, there is also reinvestment risk, says Ms Tan, adding that this is particularly relevant in an environment where interest rates are falling.
Typically, central bank rate cuts usually lead to lower yields on short-term cash instruments like MMFs, as interest rates across the market tend to follow the central bank’s lead.
If you receive income from an investment that yields a high return, and interest rates then drop, you may only be able to reinvest that income at a lower rate, reducing your overall return.
It’s important to remember that MMFs are investment products, not savings accounts. Unlike fixed deposits, capital is not guaranteed by the Singapore Deposit Insurance Corporation.
For those looking to invest in US dollar-denominated MMFs, beware of a weakening greenback, Mr Lim warns, adding that US-dollar MMFs are also subject to withholding taxes.
Singapore investors are taxed a 30 per cent withholding tax on dividends from US-listed securities, including ETFs and unit trusts. This applies whether you buy these securities through a broker, fund platform or robo-adviser.
Should you?
As with most things in life, much of whether an MMF is suitable comes down to your needs and financial situation.
Your investment choices will depend on your risk tolerance, time horizon, financial knowledge and investment objectives.
Before you begin investing, ensure you understand your financial goals and when you may need the funds. Consider your ability to absorb short-term losses and assess your overall financial situation.
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