China's mutual fund industry takes another step forward this week with its latest innovation. For the first time, investors in China will be able to invest their cash in safe, liquid and low interest funds similar to the Money Market Funds in the United States.
One of the first to gain approval from the China Securities Regulatory Commission (CSRC) on December 10 was the fund management joint venture between ING Investment Management and China Merchant's Securities. Their new product, the China Merchant Cash Plus Fund launched on December 15.
"This fund is targeted to fulfil a similar function to bank deposits but provide a more attractive rate of return, about two to three times the interest on regular bank deposits," says Chuak Chan, regional business development director at ING Investment Management.
On this measure, the fund aims to provide returns of 1.5% to 2%, which is remarkably higher than the rates of return earned by Money Market Funds in the US. Chan attributes this to the maturity profile of the securities they invest in. "We invest in longer dated securities which allow us to play the yield curve a bit more." For example, the Cash Plus Fund, will invest only in investment grade bonds that have a maturity of not less than 397 days. This compares with the US money market funds, which tend to invest in securities that have a term of less than 90 days.
Chan says, "In China we have to invest in a broader range of securities as the market is not as well developed. As a result, some of the longer dated securities fall under the CSRC approved cash and fixed income investments."
The newly approved fund will invest in Chinese investment grade bonds, government bonds, treasury bills, repurchase agreements, floating rate notes, and other CSRC approved securities.
Together with China Merchants Fund Management, Boshi Fund Management and Huaan Fund Management have also gained approval to launch similar cash-based products. Chan says that the Cash Plus Fund distinguishes itself by its ability to credit investor bank accounts the morning after any redemption. Competing funds tend to take longer to return money to investors.
In addition, the Cash Plus Fund offers investors the opportunity to subscribe to the fund and conduct transactions online, which is a first in the Chinese market. The fund also has a simple per annum fee structure, of 0.68% of assets under management. Investors incur no front or back-end fees.
According to Chan, "The Chinese market has been seeking this type of product for a while, and the response has been very positive." The Cash Plus Fund is open ended and has a minimum investment amount of RMB1,000. Being one of the first in its genre, Chan hesitates to quantify the expected level of investor interest. He does however expect to see interest from all quarters, including retail, corporate and institutional. QFII investors may also be interested in the fund as a liquid interim investment to hold their cash between other investment opportunities.
"This is an important step forward in the development of the investment industry in China," said Chris Ryan, ING Investment Management CEO, in a statement. "The China Merchants Cash Plus Fund represents a good opportunity for investors to diversify their portfolios and invest in relatively secure assets with a steady stream of earnings."
According to Chan the rallying equity markets will not deter interest in the new fund. "Investors have different needs and risk profiles," he says. "There will always be a market for money market funds."