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In Singapore, all Singaporeans and Permanent Residents (PRs) are required to contribute a portion of their salary to their CPF accounts when working. On top of that, they also receive an employer contribution to their CPF accounts each month.
Our CPF funds are for important things such as our housing, retirement and medical costs. To facilitate this, monthly contributions are split into three different accounts; Ordinary Account (OA), Special Account (SA) and MediSave.
You Can Invest Your CPF OA and SA
Unknown to some, CPF members are allowed to invest their OA and SA savings in eligible investment products through the CPF Investment Scheme – Ordinary Account (CPFIS-OA) and CPF Investment Scheme – Special Account (CPFIS-SA).
To invest under the CPFIS, you first need to meet the following eligibility criteria.
– Be at least 18 years of age;
– Not be an undischarged bankrupt;
– Have a minimum of $20,000 in your OA and $40,000 in your SA respectively before you can start using funds from either accounts to invest.
In addition to the above, investors new to CPFIS are required to take the Self-Awareness Questionnaire (SAQ) before they can start making any investments.
To Invest Or Not To Invest? That’s The Question
Many people will advise members not to invest their CPF and for good reasons.
Unlike the savings we hold in our bank account, funds in our CPF already earn us a risk-free interest of at least 2.5% (OA) or 4.0% (SA) per annum (p.a.) So even if we choose to do nothing and leave our CPF monies untouched, we will still be earning a reasonable risk-free return on it.
This makes perfect sense for CPF members who are not confident of investing or unwilling to take on investment risk for funds that are already earning them a decent interest return. However, for those willing to take greater risks, and with a long-time horizon to ride out market ups and downs, investing your CPF funds can boost your retirement plan.
The Case For Investing Your CPF
In general, investors with a longer-term investment horizon can take on a higher level of risk in exchange for higher expected returns. For example, if you have a 30-year investment horizon, you can invest in riskier asset classes such as equities, knowing that you have enough time to ride out market downturns.
With this in mind, it does make sense for those who wish to take on higher investment risk and have a long investment horizon (e.g. 20 years or more) to invest some of their CPF savings in the financial markets for higher returns.
If we wish to invest our CPF monies, it makes sense to invest our OA savings first. This is because our OA savings earn us an interest of 2.5% p.a. as compared to 4.0% for our SA. While we can simply transfer our OA savings to SA to earn an additional return of 1.5% p.a., the goal with investing is to earn more than 4% p.a.
Furthermore, transferring your OA funds to SA is irreversible, while in certain circumstances, you can sell off your OA investments to fund your housing needs.
Some Key Considerations Before You Commit To Investing Your CPF Monies
Before you invest your CPF, you need to remember two important rules first.
Hurdle Rate: Your hurdle rate is the minimum rate of return you should be expecting from your CPF investments. Remember, your CPF OA already pays you a base interest rate of 2.5% p.a. So, investing your OA monies elsewhere does come with an opportunity cost. Also, when you invest, you will incur some transaction costs. It’s important to remember that these transaction costs eat into your returns and thus increase your hurdle rate.
Diversification & Asset Allocation: When investing, you need to remember to hold on to a well-diversified portfolio. Going all-in on a single stock is likely a terrible plan for your retirement. One possible choice is to invest in the Straits Times Index (STI) Exchange Traded Funds (ETF) for local exposure. You also want to ensure that your investments are allocated across both stocks and bonds.
How Endowus Can Help You Invest Your CPF Monies
Endowus is a Fintech platform that aims to help people in Singapore grow their wealth by investing systemically. An independently run platform, Endowus focuses on providing its investors with access to best-in-class funds at the lowest possible cost.
Essentially, what Endowus does to help you identify the right best-in-class funds offered by fund management companies that it works with. Endowus is also the only digital advisor for CPF currently.
For the CPF portfolio, Endowus has exclusive access to the Lionglobal Vanguard S&P500 fund as part of its globally diversified advised portfolio.
Endowus allocates your CPF money into each of these funds based on your investment objective, risk appetite and investment horizon.
How Endowus Charges CPF Investors
Investors pay Endowus an all-in access fee, which is a percentage of the total portfolio value under management. This all-in access fee includes advice, portfolio creation, rebalancing and brokerage.
Endowus does not have any other sales charges nor accepts any commission or any other kind of fees from the funds it distributes. If it receives any trailer fees from the fund management houses, it is rebated to clients. By having no sales charges and rebating 100% of any trailer fees received, Endowus can help its clientsreduce their cost of investing. It also keeps their advice conflict-free, since they are only paid by their clients, and never the fund management companies.
Endowus charges a flat 0.40% p.a. fee to help you manage your CPF investments. So, if you invest $10,000 of your CPF monies through Endowus, you will pay endowus $40 each year for managing your portfolio. Do note that Endowus charges a different fee structure for managing cash and SRS funds.
Similar to all mutual funds, a fee will also be charged by the fund manager out of the underlying fund Net Asset Value (NAV). This is where Endowus chooses funds that already charge a low fund management fee in order to minimise cost to its investors, and even within those funds, they are able to invest at the share class that charges the lowest fees. Typically, many retail investors will have to invest at the share class charging higher fund management fees.
If you are willing to take on more risks with your CPF monies, you can consider investing it. At the same time, if you want a professional to help you manage your CPF investments in global funds at a minimal cost, Endowus is definitely a platform you should consider.
However, if you are unwilling to take on any investment risk with your CPF monies, it’s perfectly okay leaving it at where it is, or even consider transferring your OA funds to your SA.