There has been excited, if not heated, discussions by Singaporeans online and offline after news broke that CPF members who invested their CPF monies made higher returns than the CPF interest rate.
In the past, it’s widely known that the majority of CPF members who invested under the CPF Investment Scheme (CPFIS) made less money than they would have received had they simply left their CPF monies alone and earned the prevailing CPF interest rate.
Recent good performance of CPFIS investors notwithstanding, here are five good reasons why you not be dazzled by the possibility of higher returns and rush to jump on the CPFIS bandwagon just yet.
#1 Additional Risks
Hindsight is always 20-20. While CPFIS investors did indeed make more money in the last reporting period, it is foolish to ignore the additional risks they took on to achieve those returns.
Couple this with the fact that CPF interest returns are risk-free, you really should ask yourself if you are willing to accept the higher level of risk that CPFIS investments entails. More importantly, you should also consider how much risk you had to add to your portfolio to achieve the higher return.
There is useful a risk assessment questionnaire on the CPF website that you can use to better understand yourself and the amount of risk you can afford to take.
#2 Transaction Costs
Depending on the type of investment product you choose to buy under CPFIS, there are varying costs associated with them, including management fees, sales charges, and other costs, all of which will eat into your investment earnings. You have to also note that these costs will continue to eat into your earnings for as long as you hold the investment whether you make good returns or losses.
In contrast, CPF does not charge any fees. Thus, any projected investment gains to be had from making CPFIS investments need to be offset with the fees and charges that will be incurred.
For example, the first product on the CPFIS mutual fund list is the Aberdeen Asian Smaller Companies Fund. It has an annual management fee of 1.5% and a front sales load of 3%. Even if it made a healthy 5% return in the first year, your returns would actually be just 0.5%, which pales in comparison to the 2.5% CPF OA interest.
#3 Historical Track Record
In good years, large portions of the market do really well, leading to better than expected returns.
However, when you are investing for your future and retirement, you are going to have exposure in the market over a long period – multiple years, if not several decades. Over this time periods, there are sure to be years where markets perform exceptionally well, perform exceptionally poorly or deliver an average performance.
This means that when markets do exceptionally well, you can expect your returns to beat CPF returns. However, if things are not going well, your investment return will be correspondingly diminished.
Thus, it pays to take a longer-term view of how the investment product fared over a longer time period, and whether it still beats the compounded interest would accrue from CPF instead.
#4 How Well Do You Know The Investments?
There are quite a few types of investment products available under the CPFIS. These include unit trusts, investment-linked products, annuities, endowment plans, and exchange-traded funds. Before you jump in, its important you understand how a particular product generates returns, what would cause your investments to lose money, whether it is something you are interested to invest in and perhaps most importantly, how much more risk the investment will potentially add to your portfolio.
#5 Opportunity Cost
Using your CPF monies, especially those from your Ordinary Account, means that they will not be available to you for home, education or simply generating the CPF interest rate for you. That would mean you will need to cough up cash or take up additional loans.
At the end of the day, rather than be influenced by financial advisors or friends who tell you that you are leaving money on the table by not investing your CPF monies, you should consider carefully the costs of switching away from a pretty good “product” you are already enrolled in – your CPF OA and SA.