When to Opt for the Smart Deposit and When for the Intelligent Wallet?

Finax edited its stock of conservative investing solutions significantly over the course of the last year: it launched its most conservative product, the Smart Deposit, and adjusted the strategy of the Intelligent Wallet, lowering its risk and adjusting it to the recommended investment horizon.

You might be asking what it means for an investment solution to be conservative. The term denotes products with lower risk. Their value is less volatile when compared to dynamic portfolios, therefore their drops are not so significant, and their returns are more predictable. However, this kind of security comes at a price; their average long-term return is lower when compared to dynamic solutions.

Therefore, conservative strategies are more appropriate for careful and defensive investors who cannot afford the risk of greater fluctuations of the portfolio’s value. There might be many reasons for this preference; they may need their savings within a short timespan or too high of a risk would simply prevent them from resting peacefully at night.

At the beginning, I want to state clearly that there is no need to avoid the risk of the financial markets, especially with your long-term savings (those you won’t need sooner than in 5-10 years). This is exactly the type of investing where you’re able to wait for recoveries from potential market drops. In that case, stripping yourself of higher returns may unnecessarily cost you large sums of money. However, with short-term investing, you should be more cautious.

For the most cautious investors, there’s not one, but two products in our offer: the Smart Deposit and the Intelligent Wallet. However, due to their similar compositions, people often find themselves unsure on which product is more appropriate for them. We regularly get asked what the difference is between the two, and which to choose according to your situation.

The aim of this blog is to answer these questions. We’ll examine the compositions of the portfolios and how they differ, thoroughly describe the associated risks and potential returns, while presenting several concrete examples from the real life.

Intelligent Investing vs Conservative Products

Although the Intelligent Investing already contains limited-risk strategies (in the form of its bond portfolios), the Smart Deposit and the Intelligent Wallet took a step further in their risk mitigation.

For instance, they don't contain any equities: securities that enable their owners to participate in a company’s profit. Due to the absence of income guarantees (the equities of a firm will lose all their value if the firm goes bankrupt), these instruments are riskier and their value fluctuates more significantly over time.

Both the Smart Deposit and the Intelligent Wallet are comprised of fixed-interest (or debt) instruments, also called bonds – these securities pay out predetermined fixed payments. Each has its own maturity period, during which it pays out the interest and then ceases to exist afterwards.

This, however, does not mean that they are risk-free and that the payments have a 100 % guarantee. There are two main types of risks associated with bonds:

• Credit risk: The threat of the issuer (firm or a government) not possessing enough resources to pay its debt and declaring bankruptcy. The owners of the bond might not be able to get all the promised payments in that case.
• Interest-rate risk: If the interest rates in the economy increase, newly issued bonds will pay out greater yields, thus making the existing bonds less attractive. Therefore, due to the lower interest of investors, their price will fall, pushing the value of bond portfolios down. It goes both ways, if the interest rates in the economy decrease, the prices of existing bonds will rise.

The Smart Deposit and the Intelligent Wallet mitigate these risks in two ways. In order to lower the credit risk, they are comprised exclusively of bonds belonging to the so-called investment grade. These bonds have been highly rated by rating agencies, thus reflecting the extremely low chance of their issuers going bankrupt. In practice, such rating is awarded only to governments of developed countries and the biggest global firms.

Conversely, the strategies of the Intelligent Investing also contain so called high-yield bonds (issued by riskier firms or governments of developing countries), carrying higher risk, but yielding higher returns.

You may take a look at the comparison of the default rates for these two kinds of bonds in the graph below. You see that the proportion of investment-grade bonds gone bankrupt did not hit 1 % even during the worst economic crises in the last 40 years. With a broadly diversified portfolio, such events become practically unnoticeable.

Source: FIIG Securities, S&P Global Ratings

The interest-rate risk, on the other hand, can be lowered by decreasing the maturities of the bonds you include in the portfolio. The lower the maturity period, the less sensitive the bond becomes to changes in interest rates. Therefore, the Smart Deposit and the Intelligent Wallet both contain instruments with much lower maturity periods than the strategies of Intelligent Investing.

How Do the Smart Deposit and the Intelligent Wallet Differ from Each Other?

Both portfolios are comprised of fixed-interest debt instruments, the main difference lies in their maturity period.

The Smart Deposit contains ETFs comprised of instruments with extremely short maturities. Bonds with maturity up to one year are also called the money market instruments. The Smart Deposit consists of only such instruments. More specifically, you will find the following in its portfolio:

• ETFs that replicate the interest rate at which large banks lend their excess reserves to each other for one day (so-called overnight deposits) – the return of these ETFs therefore tracks the Euro short-term interest rate. Since these loans are being repaid every day, their maturity is practically immediate, making their values immune to changes in interest rates.
• Investment-grade government and company bonds with maturities up to one year, which also ensures their extremely low sensitivity to changes in interest rates, as well as minimal risk of not being repaid.

The Wallet too does contain its portion of the money market instruments: 40 % of its value is made up of the ETFs tracking the overnight rate which you can also find in the Smart Deposit. However, the rest is comprised of instruments with longer (but still short compared to market averages) maturities, particularly:

• Government bonds with maturity up to 3 years
• Company bonds with maturity up to 5 years

Therefore, the Wallet has a slightly higher value volatility and sensitivity to interest rate changes in the economy (though still much lower than the Intelligent Investing). 

How Do They Differ in Terms of Risk?

Since the Intelligent Wallet contains longer maturity instruments, it is more vulnerable to interest rate hikes in the economy. Therefore, the Wallet will yield a lower return than the Smart Deposit during the months when the interest rates rise (e.g. due to them being raised by the central bank or due to rising expectations that the central bank will hike them in the future). It may even slide into declines.

You may observe it on this graph, depicting the real performance of the Wallet and the Smart Deposit since the beginning of 2024 (including our fees). During this period, the markets have tamed their ambitious expectations of declining interest rates in the second half of the year, especially due to the resilient inflation. Thus, the Wallet fumbled (even though you can see that the decline was minimal) while the Smart Deposit was left unshaken by the news.

Please note: Past performance is no guarantee of future returns, and your investment may also result in a loss.

The graph also shows that due to the prolonged maturity, the Wallet's value is more volatile than the Smart Deposit whose value continues to steadily grow. The Smart Deposit is thus less risky than the Wallet.

You may verify the stable development of the Smart Deposit by checking out Dominik Hrbatý’s transparent account.

However, Smart Deposit’s short maturity might turn to be a disadvantage the moment the interest rates start to decline. Its instruments have maturities ranging from one day to a few months. Once their maturity expires, they cease to exist, getting replaced by newly issued instruments that will, in an instance of declining interest rates, pay out lower yields.

Therefore, in such situation, the Smart Deposit starts to pay out lower interest almost immediately, and its growth pace slows down. Its return is not guaranteed for a fixed period, it instead depends on the current interest rates in the economy.

Conversely, the Wallet's prolonged maturity turns into an advantage in such periods. If the interest rates decline (or the markets start expecting them to be lowered by the central bank), the price of its bonds will grow in response. It is thus more secured against possible declines in interest rates.

We can showcase this on the example of development towards the end of 2023, when the markets adopted expectations of incoming rate cuts. As you can see, the Wallet performed better than the Smart Deposit over this period.

Please note: Past performance is no guarantee of future returns, and your investment may also result in a loss.

What About the Expected Returns?

At this point, the yield to maturity of these two products is almost the same, with the instruments of the Smart Deposit having slightly higher yields. That is due to the abnormally high interest rates of central banks that are expected to be steadily lowered in the near future: in such situations, the short-term interest rates are higher than the long-term ones.

Through the majority of history, however, the yields of longer-term instruments were slightly higher than those of the short-term ones. And it is quite logical: the greater yield is a reward for the risk of higher sensitivity to changes in interest rates.

The principle can be observed on the graph below, which depicts the historical difference between the return of a 10-year and a 3-month German government bond. If the curve is above zero, the 10-year security offered a higher yield. You can see that this was indeed the case throughout the majority of historical periods (except for the periods of increased economic uncertainty).

Even though it is not a perfect comparison (since the Wallet contains instrument with maturities much lower than 10 years), it still goes to show the point. With the greater risk of long-term instruments usually comes a reward in the form of a greater yield.

Source: Haver Analytics, Bloomberg, Economic Cycle Research Institute a Federal Reserve Bank of St. Louis

So, the expected return of the Wallet will be slightly higher most of the time, compensating for its slightly higher risk.

When to Opt for the Smart Deposit?

We advise to go for the Smart Deposit in the following cases:

• You will need the deposited money within approximately one year’s time.
• You don’t want to see any value fluctuations of the deposited money (you’re looking for an equivalent to a high-interest savings account).

Below are a few examples of concrete situations where the Smart Deposit is the perfect solution:

1. Taxes: Are you creating a reserve in your account which you plan to use to pay the income tax once it's due? You will sure need them within a year, until then however, they will just sit in your account for months. Therefore, it would be pity not to exploit the high interest rates and grow their value a bit. Set up a standing order to ensure you retain the discipline needed to save the required amount. You may also use this strategy with other larger annual payments, e.g. for the insurance.
   
   
2. Vacation: A summer trip to the sea or a winter ski trip all belong to expenses you should be ready for in advance. Pulling them off at the last minute from a one-month salary or, God forbid, from a loan can cause solid amount of stress, making you not enjoy your well-deserved rest. Exploiting the returns of the Smart Deposit will allow you to enhance your saving. Since you’ll earn a certain return from the deposits, you’ll be able to reach your target amount more quickly or have a larger sum at the end, allowing you to treat yourself more during the vacation.
   
   
3. Christmas: Another group of expenses that can turn the holiday time from peaceful to stressful, unless you find a way to get ready for it beforehand. The Smart Deposit, automated standing orders, and elevated interest rates can assist you with this once again. All it takes is to send 50 Euros a month starting in summer, and you will have a solid base for comfortable purchase of presents, food, or travel expenses in December.
   
   
4. Part of an emergency fund: We’ve been teaching people for years that an emergency fund of 3-6 times your monthly expenses should be the absolute cornerstone of your investment journey. Furthermore, we claim that there’s no need to keep this entire sum in a savings account with low interest. The vast majority of emergencies will not require withdrawing the entire amount, emergencies this large come only once a few years maybe even decades. So, you can invest a part of the emergency fund to protect it from inflation (however, at least a part of it, let’s say twice your monthly expenses, should be kept in your savings account so that it is at your disposal whenever needed). Hence, a part of the fund may be directed to the Smart Deposit. You can withdraw the reserve from it within a week.
   
   
5. Purchase of electronics: It works the same as with the previous examples. You may have a feeling that your phone might die soon, and you want to put aside some money to buy a new one. You may be planning on buying a new laptop, modern fridge (so you will save on electricity bills) or you may want to get a smart TV. Regardless of the exact goal, it will be easier to prepare for such targets by saving in the Smart Deposit.
   
   
6. Savings for the university: Lastly, I will provide an example from my own experience for people who are still students. We have (with friends who are also still studying at a university) often got quite large amounts ready in our accounts, which we cannot put into more risky investments, since we’ll most likely use them before the end of our studies. For instance, I hold an uninvested amount larger than what I will need as an emergency fund after graduating – it is enough money to help me finish my studies in case I lost my job tomorrow or, God forbid, something happened to my family. If you’re in a similar situation and you have some larger savings that you’ll need during the next 1-2 years to finance your studies, you may deposit them in the Smart Deposit and appreciate them a bit over the time without taking unnecessary risk.

When to Opt for the Wallet?

We recommend opting for the Intelligent Wallet in the following situations:

• You’ll need the deposited money no sooner than 1-3 years. If you’re going to need them within a year, go for the Smart Deposit instead. If it is more than 3 years, go for a balanced portfolio of Intelligent Investing.
• You’re willing to put up with a slight value fluctuation and occasional small declines in exchange for a larger expected return or for an opportunity to fix the current elevated rates for a longer time period (a “safety net” in case the interest rates decline).

Below are a few examples of concrete situations where we personally would opt for the Intelligent Wallet.

1. A greater renovation: You know that you will have to change the heating or the roof in the next couple of years? An amount you would like to set aside for this purpose can be deposited into the Intelligent Wallet, with new deposits being regularly added via a standing order. The same goes for creating a general fund for home repairs, which you’ll use according to momentary needs. If you expect to withdraw something from it every 2-3 years the Intelligent Wallet is the destination to go (this isn’t a hypothetical example, it's exactly how our CIO, Rado Kasík, uses it).
   
   
2. Purchase of a real estate: The Wallet may also assist when purchasing real estate. For instance, you may know that you will have saved enough for a down payment within a year. Once you have it, you will start to look around for a good property, meaning that you will be closing the purchase in 2-3 years. Even though it is sensible to let the money work, it is not the best idea to subject it to too large of a risk. Deposit them in the Intelligent Wallet or transfer them to it from a riskier portfolio you’ve used for this goal so far.
   
   
3. Wedding: If you start to have that very pleasant feeling that you or one of your children will be having a wedding soon, you shouldn’t leave the financing for the last minute. With food, music, photographers, the rings, or the cake associates a great amount of money. The Wallet may help you to get ready for this great day.
   
   
4. Reserves to start a family: A similar thing applies when you start planning on starting a family, and you begin to realize that with a kid come a lot of new expenses that you cannot even imagine in advance. You can get ready for these financial surprises with the Intelligent Wallet, building a nice reserve to finance this period more comfortably, so that you may enjoy this time to the fullest.
   
   
5. Change of cars: Since we’re talking about starting a family, with the addition of kids to your life, you might want to start considering buying a larger car where you will all be able to travel more comfortably. Alternatively, you might be OK with the size of your car, but due its older age, service and maintenance charges are becoming more frequent, thus making it less worth to keep. In both cases, you get a part of the funds to purchase a new car from the sale of your current one, and you’ll have to save up the rest in the upcoming years. Again, we recommend considering the Intelligent Wallet. By the way, if you’re dealing with a purchase of a car, be sure to read this blog series by our CEO and founder Juraj Hrbatý. His texts have already convinced a lot of people that buying a used car instead of a new one might be one of the best financial decisions of your life.

I hope that this blog helped you to understand the differences between the Smart Deposit and the Intelligent Wallet, making it easier to decide which product is more appropriate for you. For any further clarifications or inquiries, be sure to contact us at +421 2 3244 7760 or at client@finax.eu.

Thank you for your trust and interest in our conservative solutions! We’ll be happy to see you decide to appreciate your savings with us!