You will be able to calculate the return your CPF investments need to beat to be worth it.
Jun Hao showed Kelvin a fund that had returned 3.5% a year over the past decade. "That beats the OA," he said. Kelvin wasn't sure it did. The fund's return was before its fees, the OA rate is guaranteed, and the OA money would have earned interest every year whatever the fund did. Comparing the two properly takes one more number.
Every dollar you invest through CPFIS is a dollar that stops earning CPF interest. That interest is guaranteed, it is paid whatever markets do, and for the SA and MediSave it has a floor. So the starting point for any CPF investment isn't zero. It is the CPF rate the money would have earned by staying put.
That is the main difference between investing CPF and investing cash. Cash in a bank account earns very little, so almost any sensible investment has a low bar to clear. CPF money is already earning a guaranteed rate, and an investment has to beat that rate before it has done you any good.
The hurdle rate is the return an investment needs, before its costs, just to match leaving the money in CPF. It has two parts: the CPF interest rate you give up, plus the yearly costs of the investment. For a quick estimate, add them together.
With made-up figures: if the OA rate were 3%, which is not the current rate, and a fund's costs came to 0.7% a year in total, the hurdle for OA money would be about 3.7%. The fund has to return 3.7% a year before costs to leave you where you would have been with no effort and no risk.
For SA money, the hurdle starts from the SA rate. At an example SA rate of 5% and the same 0.7% of costs, the hurdle is about 5.7% a year, every year, with no guarantee. That is a high bar for the lower-risk products the SA list allows, which is why the SA side of CPFIS is used far less than the OA side.
Use the real numbers for your own hurdle. The current OA and SA rates are on cpf.gov.sg, and the fund's costs are in its product highlights sheet and the CPFIS fees the CPF Board publishes. Lesson 4.3, Costs, risks and what happens to gains and losses, lists the costs to look for.
This is the part most people miss. An investment can make money and still leave you worse off.
Take Jun Hao's fund with S$10,000 of OA money over ten years, using the example figures. Left in the OA at 3%, the S$10,000 would grow to about S$13,439.16. In the fund, a 3.5% return minus 0.7% of costs leaves 2.8% a year, which grows the S$10,000 to about S$13,180.48. The fund made money every year on average. It still ended about S$258.68 behind the OA, and it carried market risk all the way.
So "Did it make money?" is the wrong question. The right one is "Did it beat the hurdle?" A return below the hurdle is a loss compared with doing nothing, even when the statement shows a gain.
There is one more thing to check. Extra interest is paid on the first part of your combined balances, as lesson 1.2 explained. CPFIS only lets you invest above an amount that must stay in each account, so in most cases investing doesn't touch the money that earns extra interest. But if your balances are arranged so that investing would reduce the amount qualifying for extra interest, add that extra rate to your hurdle too. Check the current rules against your own balances before you assume it doesn't apply.
The hurdle doesn't say whether to invest. It says what you are betting on if you do. Investing OA money is a bet that your investment will beat the OA rate plus costs over your holding period. Investing SA money is a bet that it will beat the higher SA rate plus costs. You are taking market risk with money meant for your home and retirement, and the reward is only the part of the return above the hurdle.
Some people take that bet with OA money they won't need for decades, using low-cost funds, and accept that some years will be bad. Others decide the guaranteed rate is the better deal for that slice of their savings and take their investing risk with cash instead. Lesson 4.4, Calculate your own hurdle rate, tests your own case at three return levels.
Look up the current OA and SA interest rates, and find the total yearly cost of a typical fund on the CPFIS list, so you can write a hurdle rate for each account.
Write the hurdle rate for OA money and for SA money using current CPF rates and a typical fund cost.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).