You will be able to list the costs and risks of investing CPF savings and say how they differ from investing cash.
Find the fee documents for one CPFIS option you could use and note its yearly expense ratio. It is the first of several costs that decide whether investing your CPF money does better than leaving it where it is. Each cost lowers your return, so each one raises your hurdle, the return an investment must beat before it does better than leaving the money in CPF.
Investing CPF money has costs and risks that investing cash does not. Some risks you would also face with cash hit harder when the money is CPF.
CPFIS costs fall into three groups. Fund costs come with unit trusts and ETFs, which charge a yearly expense ratio taken from the fund's assets, so you never see a bill. Some funds also have a sales charge, a one-off charge when you buy, and some platforms add a yearly platform or wrap fee. The CPF Board sets limits on some of these costs for funds included under CPFIS and publishes those limits.
Shares, bonds or ETFs held in a CPF Investment Account incur agent bank charges for running the account. These are typically a service charge for each counter you hold plus a fee for each transaction. Each charge is small, but it recurs every period, so a portfolio held for many years pays it many times. Kelvin's uncle bought shares with OA money in their thirties and paid a service charge on them every quarter for twenty years.
Trading costs are the brokerage commission on every buy and sell, plus the spread, the gap between the buying and selling price. Insurance products under CPFIS have their own charges, including distribution costs built into the premium.
First list every cost the option carries:
fund expense ratio sales charge platform or wrap fee agent bank service charge per counter and fee per transaction brokerage commission buy-sell spread for insurance products, premium charges including distribution costs
Then put them on the same footing. Yearly costs go in as they are. Agent bank charges quoted in dollars are divided by the value of your holding. One-off costs such as a sales charge or commission can be spread across the years you plan to hold. Add the yearly percentages to get your total yearly cost, and add that to the OA rate to get the hurdle for that option.
Kelvin looked at a CPFIS option with these costs, all example figures: a 0.45% yearly fund cost; S$8 a year in agent bank charges on S$10,000, which is 0.08%; a 0.1% platform fee; and 0.2% commission, which spread over ten years is 0.02% a year. The total is 0.45% + 0.08% + 0.1% + 0.02% = 0.65% a year. With an example OA rate of 3%, the hurdle is 3% + 0.65%, about 3.65%. The option has to return about 3.65% a year to do better than leaving the money in the OA.
Any investment can fall in value and stay down for years. With CPF, timing risk is worse, because OA money is often needed on a date you don't choose: a downpayment, a lump sum to reduce your loan, or monthly instalments after a job loss. If the investment is down on that date, you have to sell low or find cash elsewhere. Kelvin's uncle had two counters that fell by half in the year they needed OA money for a flat, and sold both at a loss because the money was needed on that date.
Losses come straight out of savings meant for housing and retirement, and there is no separate pot to absorb them. A loss in the OA means less for your home or less moving to the Retirement Account at 55.
Your job, your home and your CPF are already tied to Singapore. Buying a few local shares with OA money adds more Singapore exposure, which is concentration risk. It is not automatically wrong, but it is worth noticing when you choose what to buy.
When you sell a CPFIS investment, the sale proceeds, gains included, are paid into your CPF Investment Account, not your bank. If you don't reinvest them, they go back to your Ordinary Account at the end of the second month. For when and how OA savings can be withdrawn, check the current rules with the CPF Board. At 55, your CPFIS investments are not used to make up your Full Retirement Sum.
Kelvin's uncle talks about the shares at every Chinese New Year because one stock tripled. Its value is still in CPF. While the uncle holds the shares, they will not count toward the uncle's Full Retirement Sum at 55, and if the uncle sells, the proceeds go back into CPF rather than to their bank.
Gains on cash investments can be used whenever you like, and IRAS does not generally tax capital gains for individual investors. So the same return is more useful in cash than in CPF, and the same loss is more dangerous in CPF than in cash.
If you invest with both cash and CPF, treat them as one portfolio with one allocation and use each account for what it does best. Module 7 of the course "Build and run an ETF portfolio" covers this, in particular 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 looks only at whether investing 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.
Pick one CPFIS option you could use, list every cost it carries, and add them to your hurdle rate from lesson 4.2.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).