AN ATTRACTIVE ALTERNATIVE FOR SAVINGS DEPOSITS

Money market funds may be the answer to falling savings rates

According to statistics from the Monetary Authority of Singapore, non-bank customer deposits in the local banking system stood at a sizeable $180 billion at the end of last year.

Banks are flushed with liquidity as cash-rich individuals have turned risk averse in the face of global uncertainties and volatile stock markets.

But with falling interbank rates, banks are being forced to cut their interest rates for savings deposits.

In fact, savings rates have fallen to such low levels that it makes little sense for investors to keep their money in savings deposits.

SAVINGS RATE (LOCAL BANKS)

OCBC	0.375%
UOB	0.375%
DBS	0.125%

Source: The Straits Times, February 19; For the first $47,000 to $50,000

Unlike fixed deposits, savings deposits have greater liquidity as withdrawals can be made at any time without a penalty.

Liquidity may be important to some cash-rich investors who are looking to re-enter stock markets when the equity cycle turns.

But how can you beat the low savings rates and at the same time enjoy the liquidity that comes with savings deposits?

In developed markets like the US, money market funds are seen as an attractive alternative to savings deposits. Currently, US investors have more than US$2 trillion invested in money market funds.

Here in Singapore, retail investors have a choice of four money market funds. Three of the four (listed in the table below) are available at finatiQ.

What are money market funds?

Money market funds are unit trusts that are largely invested in instruments with short-term maturities.

For instance, OCBC Asset Management's Savers Singapore Dollar Money Market Fund, which is the largest money market fund here, is invested in high quality short-term money market instruments and debt securities. These include government bonds, commercial bills and deposits with financial institutions.

What's the attraction of money market funds?

A key attraction of money market funds lies in the fact that unlike most unit trusts, investors do not pay any initial sales charge and management and trustee fees are significantly lower than equity funds.

Also, unlike savings deposits, returns on money market funds are not taxable.

Money market funds can offer better returns compared with savings deposits. For example, according to data from Lipper, the Savers Singapore Dollar Money Market Fund, returned a net 2% p.a. over the last three years to 7 February 2003. The corresponding net return for the fund in the last 12 months is 1.3%. These are higher than current savings deposit rates. They are also tax-free.

	12-mth return*	Annualised return*
AIGIF - SGD Money Market Fund	0.60%	0.85%
CitiMoney Singapore Dollar Fund	NA	NA
Savers SGD Money Market Fund	1.3%	2.0%

*Source: Lipper Asia Limited, bid to bid, net income reinvested in Singapore dollars as at 7 February 2003