You will be able to list the costs and risks of investing CPF savings and how they differ from investing cash.
Kelvin's uncle bought shares with his OA in his thirties and talks about them at every Chinese New Year. One stock tripled. What he mentions less is that the tripled value is still sitting in his CPF, that he paid a service charge on it every quarter for twenty years, and that two other counters fell by half the year he needed OA money for his flat.
Investing CPF has costs and risks that investing cash doesn't, and a few that are the same but bite harder. This lesson lists them so you can add them to your hurdle.
Every cost comes off your return, so each one raises the return you need before you are better off than leaving the money in CPF.
The first group is fund costs. A unit trust or ETF charges a yearly expense ratio, taken from the fund's assets, so you never see a bill. Some funds also carry a sales charge when you buy, and some platforms add a yearly platform or wrap fee. The CPF Board sets limits on some of these for funds included under CPFIS and publishes them.
The second group is the agent bank. If you hold shares, bonds or ETFs in a CPF Investment Account, the agent bank charges for running it, typically a service charge for each counter you hold and a fee for each transaction. These are small per item, but they are charged every period, so a long-held portfolio pays them many times.
The third group is the cost of trading: brokerage commission each time you buy or sell, and the gap between buying and selling prices. Insurance products under CPFIS have their own charges, including distribution costs built into the premium.
To add these to a hurdle, put them on the same footing. Yearly costs go in as they are. One-off costs, like a sales charge or a commission, can be spread across the years you plan to hold. With made-up figures for one option Kelvin looked at: a 0.45% yearly fund cost, agent bank charges of S$8 a year on S$10,000, which is 0.08%, a 0.1% platform fee, and a 0.2% commission spread over ten years, which is 0.02% a year. Together that is 0.65% a year. Added to an example OA rate of 3%, his hurdle for that option is about 3.65%.
Market risk is the obvious one. The value can fall, and it can stay down for years. With CPF money, the timing problem is worse, because the OA is often needed on a date you don't choose: a downpayment, a lump sum to cut a loan, or monthly instalments after a job loss. If the investment is down on that date, you sell low or find cash elsewhere. Kelvin's uncle sold two counters at a loss for exactly that reason.
Losses come straight out of savings meant for housing and retirement. There is no separate pot that absorbs them. A loss in your OA means less for your home or less moving to your Retirement Account at 55.
Concentration is the quieter risk. Your job, your home and your CPF are already tied to Singapore. Buying a handful of local shares with your OA adds more of the same. That isn't automatically wrong, but notice it.
When a CPFIS investment rises, the gain goes back into your CPF account when you sell, and it follows the same rules as the rest of your CPF. You can use it for your home or keep it for retirement. You can't spend it on a holiday or put it in a bank account. Kelvin's uncle's tripled stock is real money, but it is CPF money, and at 55 it will help form his Retirement Account rather than land in his bank.
Investing cash works differently. Gains on your own cash investments are yours to use whenever you like, and IRAS does not generally tax capital gains for individual investors. So the same return is more useful to you in cash than in CPF, and the same loss is more dangerous in CPF than in cash.
If you invest both cash and CPF, treat them as one portfolio with one allocation, and use each account for what it does best. Build and run an ETF portfolio covers that in module 7, especially lesson 7.2, CPFIS: what you can buy and what it costs you, and lesson 7.3, Which money goes in which account. This course stays with whether investing your CPF clears the hurdle at all.
Pick one CPFIS option you could actually use, such as a fund on the included list or an ETF through an agent bank. Find every cost it carries in its fee documents and the agent bank's charges, and turn each one into a yearly percentage so you can add it to your hurdle from lesson 4.2.
List every cost of one CPFIS option you could use and add them to the hurdle rate from lesson 4.2.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).