Decide whether investing your CPF savings through CPFIS is worth giving up the CPF interest rate.
Your CPF savings earn interest whether or not you pay any attention to them. Now and then someone will tell you that you could do better by investing that money. Sometimes they are right. But the comparison usually leaves out what CPF already pays you and what investing costs. Before you move any CPF money, work out the return an investment would have to earn just to match leaving the money where it is.
The CPF Investment Scheme (CPFIS) lets you invest part of your CPF savings in approved products. For most people the account that matters is the Ordinary Account (OA). You can only invest OA savings above a required retained amount. There are also limits on how much of your investible savings can go into certain types of product, such as shares. CPF Board sets these amounts and limits and publishes them on its website. The figures change, so check the retained amount, the limits and the list of eligible products there before you start.
Special Account (SA) savings have a separate CPFIS route, with its own rules and a narrower list of products. Changes to your CPF accounts at age 55 also affect what you can hold. If the SA route or the age-55 changes apply to you, read CPF Board's current rules and don't rely on general guidance.
To invest OA savings in ETFs or shares, you need a CPF Investment Account with one of the appointed agent banks. You then buy through a broker that supports it. For unit trusts, the platforms that accept CPF money handle the arrangements.
Only products included under CPFIS qualify, and CPF Board publishes the list. A fund has to meet CPF Board's admission criteria to be listed, and those criteria cap what the fund can cost. A number of SGX-listed ETFs are eligible. Many of the funds you compared in Module 3 will not be, especially those listed overseas.
Agent banks may charge fees for holding your investments and for transactions. These fees are on top of your broker's commission and the fund's TER. CPF Board and the agent banks publish which charges apply. Add them to the all-in cost you worked out in lesson 3.1, "Expense ratio and the costs it leaves out". Every cost you add comes out of the margin you are hoping to earn.
CPF Board sets the interest rates on OA and SA money, and it pays extra interest on the first part of your CPF balances. Check the current rates and rules on CPF Board's website. Money you invest through CPFIS stops earning CPF interest. So an investment has to beat CPF interest after all its costs, or you end up worse off than if you had left the money alone.
CPF interest also carries no market risk. Your OA balance does not fall because shares had a bad year. An investment can fall, and lesson 1.1 showed how deep a bad year can be. So beating the CPF rate on average is not enough. Your expected return has to exceed it by a margin that pays you for the risk you are taking, and you have to be able to wait out a bad stretch.
Your break-even return is the current OA interest rate plus the fund's TER, agent bank charges and trading costs, each written as a yearly percentage of the amount invested. Any return above the break-even is the only part that pays you for taking on market risk. To work it out:
Find the current OA interest rate on CPF Board's website. Add the fund's TER as a yearly percentage. Add the agent bank charges as a yearly percentage of the amount invested. Add the trading costs as a yearly percentage of the amount invested. Write down the total. That is your break-even return. Ask yourself honestly whether the investments you are allowed to buy give you a good enough chance of beating it, over a period long enough to ride out a crash.
Grace has S$90,000 across her CPF accounts (an invented example). A colleague tells her she is wasting her CPF. He says it pays "a few percent" and that she could do much better through CPFIS. He sounds confident, but he has skipped the rate CPF already pays her for doing nothing.
Grace runs the break-even test. She takes the OA interest rate as 3% (an assumed rate for the example). The fund she is considering has a TER of 0.3%, and agent bank and trading charges come to 0.2% a year on the amount invested (both example figures). Her break-even is 3% + 0.3% + 0.2% = about 3.5% a year. If the fund returns below 3.5%, she does worse than if she had left the money in her OA. Only the return above 3.5% pays her for the market risk.
The last step is the housing check. Most Singaporeans use their OA savings for a flat, both for the down payment and for the monthly loan instalments. Lesson 7.1 of the course The Singapore personal finance system, "How a home is paid for: cash, CPF and a loan", explains how this works. If you invest OA money you may need for housing, your housing plans depend on how the market does. Suppose your investment fell 30% in the year you signed for a flat (an illustrative figure). You would have less to put towards the flat at the point you needed it.
If your OA money might be needed for a down payment or monthly instalments, do not invest it. Only invest CPF money you are confident you will not need for housing. For many people, this check settles the question.
It settles it for Grace. Her OA pays her monthly mortgage. Her colleague's "much better" assumes a return she cannot count on, so she leaves her CPF where it is.
Farhan has no property plans for at least ten years. The housing check does not rule Farhan out, and the answer is less clear than it was for Grace. Farhan's decision depends on the break-even number and on whether Farhan could wait out a bad stretch.
Now find the current figures for yourself. Look up today's OA interest rate on CPF Board's website. Then find the TER of a fund you are allowed to buy under CPFIS, the agent bank charges and your trading costs, each as a yearly percentage of the amount invested. Add them up and write down the break-even number your own CPF money would have to beat. Then do the housing check on that money.
Find the current CPF OA interest rate and the CPFIS rules on the CPF Board website. Write down the return you would need, after costs, to beat it.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).