Amid the prolonged low-interest-rate environment in 2018, the Cash Management Account (CMA), a financial product that yields interest even when deposited for only one day, is attracting attention as an essential wealth management tool in South Korea. Unlike traditional bank deposits with an annual interest rate of 0.1%, CMA accounts provide daily interest at an annual rate of 1.1%. This has increased its appeal as a better alternative to traditional banking savings and deposit products, with additional benefits such as preferential rates based on transaction history, including salary transfers, automatic transfers, and card usage.
The CMA is a dividend-type financial product where comprehensive financial companies invest the customer's money in short-term financial products such as government bonds, sharing the profits with the customer. It can be opened at banks associated with securities companies. As there are no restrictions on the amount to be deposited for a certain period, unlike fixed deposits or savings, it is often used as a payroll account or emergency fund account due to the flexibility of deposits and withdrawals and higher interest benefits than conventional banks.
There are four types of CMA: Comprehensive Money (CMA), Repurchase Agreement (RP) type, Money Market Fund (MMF) type, and Money Market Wrap (MMW) type.
The Comprehensive Money type is a short-term product in which financial companies issue negotiable promissory notes for business funding and sell them to general investors. It's the only type where depositors are protected up to KRW 50 million per person.
The RP type involves the securities company directly investing the money deposited in the CMA account into Repurchase Agreements, with its profits distributed to the customers. It's a popular option, making up 70-80% of all CMA products, due to its lower risk and guaranteed interest rate.
The MMF type is managed by asset management companies, investing in short-term government bonds, commercial paper (CP), and negotiable deposit certificates (CD), among others. Depending on the performance, there can be a difference in dividends.
Finally, the MMW type involves securities companies investing in short-term financial products of high-credit-rating financial institutions such as Korea Securities Finance and returning the profits to customers. One can witness the compounding effect as the principal and interest are reinvested after daily settlement.
When choosing a CMA account, one must consider the interest rate level, stability, linked bank, and the ratio of government bonds involved. As many CMA accounts are not covered by deposit insurance, it's crucial to compare interest rates across securities companies and thoroughly check the amount returned at maturity. Remember, while the CMA can be a useful wealth management tool, the risk of capital loss must also be considered.