You will be able to decide whether investing CPF savings through CPFIS is worth giving up the CPF interest rate.
Grace's CPF statement shows S$90,000 across her accounts, and a colleague tells her she is wasting it. "CPF pays you a few percent," he says. "Put it in the market through CPFIS and you'll do much better." He sounds sure of himself, yet his pitch skips the most important number in the decision, which is the rate CPF already pays her for doing nothing.
This lesson covers what the CPF Investment Scheme lets you buy, what it costs you, and the test to apply before moving any CPF money into it.
The CPF Investment Scheme, or CPFIS, lets you invest part of your CPF savings in approved products. For most readers, the relevant part is the Ordinary Account. You can invest only the OA savings above an amount that must stay in the account, and there are rules on how much of your investible savings can go into certain product types, such as shares. CPF Board sets these amounts and limits and publishes them on its website. Check them there, because they are the kind of figures that change.
CPFIS has a separate route for Special Account savings, with its own rules and a narrower product list, and changes to CPF accounts at age 55 affect what can be held. If that applies to you, read CPF Board's current rules rather than relying on anything general.
To invest your OA savings in ETFs or shares, you need a CPF Investment Account with one of the banks appointed as agent banks, and you buy through a broker that supports it. For unit trusts, platforms that accept CPF money handle the arrangements.
You cannot buy anything you like with CPF money. Only products included under CPFIS qualify, and CPF Board publishes the list. To get on the list, a fund has to meet admission criteria set by CPF Board, and those criteria cap its costs. A number of SGX-listed ETFs are eligible as well. Many of the funds you compared in module 3, especially those listed overseas, will not be.
There are also charges. The agent bank may charge fees for holding and transacting, and these sit on top of your broker's commission and the fund's own TER. CPF Board and the agent banks publish what applies. Add them to your all-in cost from lesson 3.1, Expense ratio and the costs it leaves out, because they eat into exactly the margin you are hoping to earn.
Money left in your OA and SA earns interest at rates set by CPF Board, and there are extra interest arrangements on the first part of your balances. Check the current rates and rules on the CPF Board website. The point to grasp here is simple: money you invest through CPFIS stops earning CPF interest. Whatever you invest in has to beat that interest after all costs, or you are worse off than if you had done nothing.
CPF interest comes with no market risk. Your OA balance never falls because shares had a bad year. An investment can, and lesson 1.1 showed how deep a bad year can be. So beating the CPF rate on average is not enough. You need to expect to beat it by a margin that pays you for the risk you are taking on, and you need to be able to wait out a bad stretch.
Start from the current OA interest rate on CPF Board's website. Add the costs: the fund's TER, agent bank charges and trading costs, all expressed as a yearly percentage of what you would invest. That sum is the return you need just to break even with leaving the money alone.
Made-up example: suppose the OA rate is 3%, the fund's TER is 0.3% and agent bank and trading charges come to about 0.2% a year on the amount invested. Your break-even return is about 3.5% a year. Below that, you lose against the OA. Only the return above 3.5% is your reward for taking market risk. Write that number down, then ask honestly whether the investments you are allowed to buy give you a good enough chance of clearing it, over a period long enough to ride out a crash.
There is one more condition, and for many readers it decides the matter. OA savings are what most Singaporeans use to pay for a flat. Lesson 7.1 of The Singapore personal finance system, How a home is paid for: cash, CPF and a loan, explains how. If you might need your OA for a down payment or monthly loan instalments, investing it ties your housing plans to what the market does. An investment that is down 30% the year you sign for a flat is a serious problem. Invest CPF only with money you are confident you will not need for housing.
Grace runs the test. Her OA pays her monthly mortgage, and her colleague's "much better" assumes a return she cannot count on. She leaves her CPF where it is. Farhan, who has no property plans for at least ten years, is less sure. The activity asks you to find the current figures for yourself and write down the break-even number your own CPF money would have to beat.
Look up the current CPF OA interest rate and the CPFIS rules on the CPF Board website, and write the return you would need to beat after costs.
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