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Business Advice

Helping SMEs manage excess cash

Bond funds offer higher yields, better liquidity and tax savings compared to fixed deposits.
The Business Times - October 9, 2012
By: Lee Meixian
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Helping SMEs manage excess cash Group chairman and chief executive officer of iFAST Lim Chung Chun named two other advantages such bonds have over fixed deposits: better liquidity and tax savings -PHOTO: FILE PHOTO

LACK of access to finance and timely credit as well as escalating costs are often cited as the primary reasons for the under-performance - and even bankruptcy - of small and medium-sized enterprises (SMEs).

Financial advice outfits which have sprung up recommend that SMEs invest in bond funds, which give better yields than cash or fixed deposits.

iFAST Corporation's manager of content and communications Nicholas Tay said his company identified sound advice on which bonds to go for as "a gap, a market niche that needed to be filled".

In August, encouraged by the returns from putting its own reserves into bond funds, iFAST started advising SMEs on the kind of portfolio to build in order to manage their excess cash, and in so doing, get better yields.

Large companies are already using bond funds to earn higher returns on their cash reserves. For example, Microsoft held US$1.75 billion in mutual funds as at last year while MasterCard went for US$516 million in short-term bond funds in 2010 and US$203 million last year.

Locally, Singapore Press Holdings held $259 million in investment funds last year.

Erik Hon, the director of pensions, trusts and investment services at iFAST, said most SMEs simply resort to parking their money in fixed deposits and take these funds out as and when they are needed.

"SMEs here are not about the yield. Fixed deposits work for them because there is so-called 'no risk' of losing their money," he said.

But this "cash preservation" mentality is disadvantageous, especially in an environment of near-zero interest rates for deposits, and with inflation rates of up to 5 per cent threatening to eat away the nest egg.

There are alternatives to sources of credit for SMEs, a sector which often takes a backseat to bigger corporations - bankers are usually uninterested in the very small margin and commissions to be made from SMEs, along with the higher risks involved.

Most SMEs may be reluctant to lock in their funds because they need flexibility in managing their cash flow. Mr Tay said this issue can be resolved by carefully selecting the bond funds which match the company's risk appetite.

The variety of such funds in the market includes money market (essentially cash equivalents), short-term bonds of one to three years, and Singapore bond funds - high-quality, town council-linked funds with no exchange rate risk.

Such bonds can give annualised returns of about 2.3 per cent, compared to one per cent from fixed deposits and 0.4 per cent from savings deposits (see graph).

Take for example an SME that put $1 million into a bond fund in 2000. The amount would have grown to $1.31 million in 12 years; the same investment would have yielded $1.13 million from a 12-month fixed deposit, and $1.05 million from a savings deposit (see table).

On the risk side, Mr Tay said that for the 12 years from 2000 to 2011, its weakest quarter return was -0.87 per cent - "less than one percentage point" - which he feels is "manageable".

"Of course, if you put your money in fixed or savings deposits, you won't have negative returns because there are always some rules that require them to preserve their capital," he said.

He pointed out, however, that bond prices move in response to demand and supply; returns will thus fluctuate.

"This is the nature of the asset. The degree of volatility is also how it manages to give its high returns," he said.

Group chairman and chief executive officer of iFAST Lim Chung Chun named two other advantages such bonds have over fixed deposits: better liquidity and tax savings.

He told BT: "Funds are even more liquid than fixed deposits because for fixed deposits, you have to lock in the amount for six months, 12 months, etc. But funds are a product with daily liquidity. You put in today, you can take out tomorrow. That's the nature of funds."

He added that returns on bonds are generally exempted from tax because capital gains in Singapore are not subject to tax, whereas interest income from deposits for companies will be taxable.

iFAST is targetting its services at SMEs with $20 million or less to invest, said Mr Hon.

Mr Tay, on the other hand, is casting his net wider: "We are looking at $10 million and below, even $1 million - or even $100,000, we are keen to manage."

Describing what iFAST can do for its clients, Mr Hon said it will first set out to understand the company's target yield, how liquid it needs the money to be, how long it can park the money and the company's risk appetite.

From there, it will build a portfolio based on the company's needs, and monitor the performance of the bond funds on a quarterly basis.

"There is no sales charge, so it works like a fixed deposit," he said, although the company charges a 0.2 per cent fee per annum, deducted on a quarterly basis.

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