Chart 1

Chart 2

Keynotes

• Malaysia’s benchmark rate is at its low of 2.0%. Savings account interest rates are from 0.05% to 2.0%.
• Cash Management Fund is an alternative for investors who seek high liquidity and potentially higher return than that of the savings account rate.
• Cash Management Fund also serves as a cash parking tool for unit trust investors and an ideal means to facilitate a regular savings plan.

Rate Cuts Have Resulted in Unattractive Returns

Recessionary threat, weak external environment and low inflationary pressure have prompted the Malaysian authorities to lower the benchmark rate, Overnight Policy Rate (OPR) in an effort to revitalise the country’s growth. The OPR dropped from its peak of 3.5% in October 2008 to its current low of 2.0% (refer to Chart 1).

Subsequently, savings account rates by major banks also fell from an average rate of 1.47% to 0.91%. With such a low interest rates, investors would wonder if there are other alternatives in the market that provide comparable features to a savings account.

OSK-UOB Cash Management Fund as an alternative to savings account

At Fundsupermart.com, we provide the OSK-UOB Cash Management Fund (“Cash Management Fund”) as an alternative for investors to park their money, while waiting for the best opportunity to enter into desired unit trusts or simply as a means to reap higher return compared to savings accounts.

Seeking Liquidity

In line with the age old saying of ‘saving for a rainy day’, most of us know that it is prudent to keep an amount of money aside in lieu of an unpredictable event in the future. Some would keep a portion of their money into savings accounts. However, the interest rates earned from savings accounts are rather unattractive. Currently, Malaysia’s savings account rates range from as low as 0.05% to 2.0% (daily compounded rate) on deposits as low as RM100.

Another popular savings choice for many are fixed deposit accounts, which in turn, offer higher interest rates compared to savings accounts, but impose a restriction on the minimum ‘lock-in’ period, ranging from one month to 12 months. If fixed deposit holders do not keep their money until its maturity, the higher fixed deposit interest rate would be forfeited.

Taking into account the liquidity of the Cash Management Fund, we believe that a comparison with the savings account is more appropriate.

What is the Cash Management Fund ?

The Cash Management Fund is a unit trust managed by professional fund managers from OSK-UOB Unit Trust Management Bhd. The fund manager will place the funds collected from investors as bank deposits of different maturity periods. With huge sum of monies collected from investors that can be deposited, the fund would have more bargaining power as compared with individual investors in securing better deposits rate. A simple illustration below would better describe our point.

Table 1 shows the savings rate for deposits of various amounts at 3 local banks, namely: MayBank, Public Bank and Hong Leong Bank. While interest rates differ for different deposits at the 3 banks, investor would note that for sums below RM10,000, he could only earn a low 0.10% to 0.25% interest rates. But for sums that are larger, the interest rates get higher.

Table 1

The Cash Management Fund accumulates small sums of monies (from as little as an initial RM 500 and subsequent RM 100) from investors and if the fund manager were to place as basic savings deposits, he would be entitled to savings rate at the highest tier. As end of July 2009, the Cash Management Fund has actually assets of RM156 million. So imagine Cash Management Fund as someone who has RM156 millions, he is likely to have greater bargaining power in securing more attractive interest rates.

Cash Fund invests into fixed deposits which pay higher interest than savings account!

We have mentioned that if the fund manager were to place the monies collected from investors in a basic saving account, he would be able to achieve the interest rate of the highest tier (i.e 1% at Maybank and Hong Leong Bank). However, the good news is that Cash Management Fund actually invests part of its money into fixed deposits which pay higher interest rate compared with savings rate. Chart 2 shows us the likely deposits rates that the fund may actually receive. The rates reflect Kuala Lumpur Interbank Offered Rates, the rate at which financial institutions lend to each other. Even the overnight deposit rate is 1.99% per annum, higher than the 1% offered on basic savings deposit.

Cash Management Fund offers daily liquidity

We have explained how investors with smaller sums of money would benefit from the higher interest rates from the deposits by the Cash Management fund as compared with putting money in the savings account. We move on to explain how the fund is able to offer daily liquidity which means investors can buy and sell the Cash Fund on every business day.

As mentioned, the Cash Management fund places deposits at close to fixed deposits and the deposits are at various maturity dates and also the fund holds some cash in overnight deposits which can cater to investors’ redemptions. By holding a combination of overnight deposits and the rest deposited into fixed deposits of various maturities, the fund is able to provide daily liquidity, i.e investors can choose to buy and sell the fund on every business day. However, investor should note that there is a lag time of 4 days after the sell transaction before the monies are deposited back into their bank account.

Indicative interest rate is known

Because the fund holds deposits only, it is possible to get an indicative interest rates on all the deposits that the fund holds. After netting off the capped expense ratio of 0.40%, we are able to show investors the interest rates that the investor receives on a daily basis. As at 27 August 2009, the Cash Management Fund has a net interest rate of 1.809%. The net interest rates would fluctuate on a daily basis when the fund manager places deposits (due to previous deposits maturing or new subscription monies) at new interest rates on a daily basis.

The interest from underlying deposits of the Cash Management Fund gets reflected in the daily price (or net asset value) of the fund and investors can choose to utilize these interest by selling off the units. This is unlike the savings accounts whereby depositors will only receive the returns when the bank makes the interest distribution on a monthly or semiannual basis.

Speed up transactions by using Cash Fund as payment method!

For unit trust investors, there is no place as ideal as the Cash Management Fund to park your money while waiting for the right time to invest into unit trusts. Parking your cash into the Cash Management Fund would allow you to invest without any lag time, as opposed to the other payment methods. For purchasing of funds using funds transfer or cheques, there would be a lag time before the purchase order is carried out as we need to confirm the availability of the funds being transferred to us. In the case of purchase using Cash Management Fund, we already know that you have the money with us and therefore we are able to process your transaction order on the same day you place the purchase order (before 3pm). This reduces the lag time and prevents investors to exposure to undesirable events such as the unit prices moving up significantly before the purchase order can be processed.

Therefore, the Cash Management Fund is one of the most convenient ways for investors to buy unit trusts for their funds. In addition, the Cash Management Fund facilitates the execution of a regular savings plan as Fundsupermart allows the hassle-free deduction of funds from the Cash Management Fund to buy into selected funds on a regular basis.

The speeding of transactions by using Cash Management Fund as a payment method and the higher interest rates offered by the Fund makes it an ideal parking tool or simply a better alternative to savings deposits. As such, we believe all investors should take advantage of the higher interest rates and ease of transactions by owning the Cash Management Fund.