You will be able to work out the return your CPF investments must beat to be worth making.
Jun Hao shows Kelvin a fund that returned 3.5% a year over the past decade and says it beats the OA. Kelvin isn't sure. The 3.5% is before fees, the OA rate is guaranteed, and OA money earns interest every year whatever the fund does. To compare the two properly, Kelvin needs one more number, a hurdle rate.
Every dollar you invest through CPFIS stops earning CPF interest. That interest is guaranteed and is paid regardless of how markets perform, and the SA and MediSave rates have a floor. So when you judge a CPF investment, the starting point is the CPF rate the money would have earned by staying in CPF, and any gain is measured from there.
This is the main difference between investing CPF money and investing cash. Cash in a bank account earns very little, so almost any sensible investment clears a low bar. CPF money already earns a guaranteed rate, so 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 investment's yearly costs. For a quick estimate, add the two together.
Take Jun Hao's fund. Say the OA rate is 3% (an example figure, not the current rate) and the fund's costs come to 0.7% a year in total, also an example. The OA hurdle is 3% + 0.7% = about 3.7% a year. The fund's 3.5% falls short of it.
For SA money, start from the SA rate. With an example SA rate of 5% and the same 0.7% costs, the SA hurdle is 5% + 0.7% = about 5.7% a year. That has to be met every year, with no guarantee that it will be. It is a high bar for the lower-risk products the SA list allows, so the SA side of CPFIS is used far less than the OA side.
Current OA and SA rates are published on cpf.gov.sg. A fund's costs are in its product highlights sheet and in the CPFIS fees published by the CPF Board. Lesson 4.3, Costs, risks and what happens to gains and losses, lists the costs to look for.
Put S$10,000 of OA money into the fund for ten years. Left in the OA at 3%, it grows to about S$13,439.16. The fund's net return is 3.5% - 0.7% = 2.8% a year, so the same S$10,000 grows to about S$13,180.48. The fund ends about S$258.68 behind the OA (S$13,439.16 - S$13,180.48).
The fund made money on average every year. It still finished behind the OA, and it carried market risk the whole time. An investment can make money and leave you worse off than leaving the money in CPF, so asking whether it made money gives you the wrong answer. Ask whether it beat the hurdle. A return below the hurdle is a loss compared with doing nothing, even when your statement shows a gain.
Extra interest is paid on the first part of your combined CPF 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. If your balances are arranged so that investing would reduce the amount qualifying for extra interest, add the extra interest rate to your hurdle. Check the current rules against your own balances before you assume extra interest doesn't apply.
Put together, working out a hurdle for any CPFIS investment goes like this:
Look up the current interest rate for the account (OA or SA) on cpf.gov.sg. Find the investment's total yearly costs in its product highlights sheet and the CPF Board's published CPFIS fees. Add the CPF rate and the yearly costs for a quick estimate of the hurdle. Check whether investing would reduce the balance qualifying for extra interest, and if it would, add the extra interest rate. Compare the investment's return before costs with the hurdle. A return below it is a loss relative to leaving the money in CPF.
The hurdle doesn't tell you whether to invest. It tells you what you are betting on. Investing OA money is a bet that the investment beats the OA rate plus costs over the time you hold it. Investing SA money is a bet that it beats the higher SA rate plus costs. Either way you are taking market risk with money meant for your home and retirement, and your reward is only the part of the return above the hurdle.
People land in different places on this. Some invest OA money they won't need for decades, use 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.
Before then, 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.
Using current CPF rates and a typical fund cost, write down the hurdle rate for OA money and for SA money.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).