One of the ways to grow your retirement funds over the long-term is to invest your CPF. CPF members can invest their CPF Ordinary Account (OA) and Special Account (SA) balances in various investment products such as stocks, bonds, unit trusts (mutual funds), in order to earn a higher return than the guaranteed interest rates, which may not be enough to beat inflation and grow your wealth to retire comfortably.
But before you proceed to invest your CPF savings, you should first understand a few important things about the CPF Investment Scheme (CPFIS).
How much can you invest?
Since 1 October 2018, new investors need to take the Self-Awareness Questionnaire (SAQ) before you can even start investing via CPFIS,
Next, you can only invest through the CPFIS if you have more than $20,000 in your CPF-OA to start investing your OA funds. You must also be at least 18 years of age and not an undischarged bankrupt.
After setting aside the minimum amount, you can invest 100% of your investible savings in unit trusts, up to 35% in stocks and up to 10% in gold. If you want to check your investable amount, you can login to your CPF account here and go to My Statement > Section C to check.
Can you beat the hurdle rate of 2.5%?
CPF currently pays 2.5% interest on savings in your CPF-OA. There is an extra 1% interest paid on the first S$60,000 of your combined balance (including up to S$20,000 from your CPF-OA). These are essentially risk-free returns guaranteed by the government, so if capital preservation is your primary concern we encourage you to keep your money in your CPF account. However, we believe in the power of the markets and long-term investing, and that over a long time period your investment portfolio has a high probability of performing better than the guaranteed interest rates in your CPF account. But you should only invest your CPF funds if you are able to stick to your investment plan throughout your investment life-cycle and through market ups and downs.
What asset classes can you invest in?
Through the CPFIS, CPF members can use their CPF monies to invest in stocks, bonds, unit trusts/mutual funds, fixed deposits and even investment-linked products (ILPs).
As an investor, it’s important that you consider the risk-return trade-off that you are taking on. Since interest earned in your CPF accounts are essentially risk-free and guaranteed by the government, one should expect higher returns when investing elsewhere. At the same time, you should carefully consider how much additional risk you are taking on in order to earn this higher return elsewhere.
Investing in securities such as individual stocks, bonds, ETFs and unit trusts come with a higher level of risk and volatility compared to leaving your money in cash. So make sure you do your own due diligence, before you invest your CPF funds, and choose an investment portfolio that is appropriate for your risk tolerance and investment goals.
Remember, the risk-return trade-off is something which you should be comfortable accepting before you invest.
Your investment gains are returned to your CPF account, after fees.
The final thing to know is that any gains you make in your investments using funds from your CPF accounts will be returned to your CPF accounts. For example, if you invest $10,000 into a stock today using your OA funds and sell it for $12,000 a year later, the entire amount, inclusive of profits, will be returned to your CPF account. This means that every investment which is made from your CPF account is really for your future-self.
Similarly, any dividends or interest you receive on your CPFIS investments will be channelled to your CPF accounts rather than be paid out to you. These funds can then be used to make further investments if you wish.
Watch out for investment fees as well. Most investment instruments you can invest in will charge some form of fees. These include sales charges, management fees, wrap fees and brokerage fees. As mentioned in a previous article we wrote, even a 1% difference in fee can amount to a significant cost over the long-run. This is in contrast with keeping your funds in your CPF account, which incurs no additional fees.
When investing through the CPFIS, it makes sense to take a long-term approach. This is because you can’t withdraw your earnings, even if you make a profit in a short period of time. Over time, markets display efficient characteristics and investors are rewarded commensurately for the risks that they take. We believe it’s time in the markets that will give you the highest probability of success in growing your wealth over the long-term.