CPFIS: Is there a better way to invest your CPF Contribution?
The Central Provident Fund (CPF), a compulsory saving scheme for Singaporean workers, pays a guaranteed rate of interest on the sums that members have accumulated in their accounts. Currently, the CPF-Ordinary Account earns 2.5% per year and the Special and Medisave Accounts receive a return of 4%.
The Central Provident Fund Board (CPF Board) pays an additional 1% for each of the three accounts on a maximum combined balance of S$60,000. These returns can compare favourably with the interest that an investor can earn elsewhere in the financial markets. However, CPF members looking for higher returns have the option of investing the sums in their Ordinary Accounts and their Special Accounts in the CPF Investment Scheme (CPFIS).
The CPFIS can enhance your returns, but it is not risk-free. Under this facility, a member may see the principal amount that is invested, fluctuate in value. It is also quite possible to lose some or even all of the amount that has been deployed in the CPFIS.
Not everybody is permitted to invest in the CPFIS. In addition to being over 18 years of age, you should have a minimum of S$20,000 in your CPF Ordinary Account and S$40,000 in your CPF Special Account.
Is the CPFIS for you?
The CPFIS has been specifically designed for those investors who have a high risk tolerance.
What exactly does that mean? While you can expect to earn 2.5% per year on the sum in an ordinary account, your CPFIS balance may actually decline by 10% or even more in a year depending on market conditions.
If you have invested in a gold ETF and the price of the precious metal falls, you may register a large loss. Similarly, if the stock market declines, the amount that you have invested through the CPFIS in a unit trust may also see a reduction in value.
As an investor, do you have the financial capacity to bear losses? A young person without family commitments may be able to absorb a decline in the value of the sum that has been allocated to the CPFIS. But an individual who is approaching the age of 60 and who has a housing loan and is planning to retire in some years will have a lower risk tolerance.
The CPF Board has developed a useful tool to gauge the level of your risk tolerance. It takes only a few minutes to complete this exercise and it can give you a fair idea about whether you should divert your money into the CPFIS.
Investment options under CPFIS
There are a wide variety of equity and bond funds that are approved under the CPFIS. You can see a list of these funds here. Each fund that is approved is required to undergo a due diligence by an investment consultant retained by the CPF Board.
How does the consultant decide whether a particular fund should be included in the permitted list? There are four main conditions that an investment option must meet.
- Is the fund likely to out-perform its benchmark?
- The expense ratio of a fund should be below the limit specified by the CPF Board.
- Sales charges incurred by the fund should not exceed 3%.
- The fund should have a good track record for the last three years.
How have those who have invested in the CPFIS fared?
Speaking at a dinner organised by the Economic Society of Singapore in September last year, Deputy Prime Minister Tharman Shanmugaratnam said that the CPFIS is “not fit for purpose.”
What did he mean by this? He explained that over the last 10 years, 80% of CPF members who had invested in the CPFIS would have earned a higher return if they had simply left their money in the CPF Ordinary Account.
The fact that 45% of investors had actually made losses through the CPFIS illustrates that this investment option should only be considered by those who fully understand its risks.
Government plans for amending the CPFIS
The CPF is an important part of the nation’s social security system. Keeping this point in mind, the Singapore government intends to revamp the CPFIS with the intention of making it less risky.
What are the proposed changes and by when will they be implemented? Manpower Minister Lim Swee Say announced in October last year that Singaporeans can expect to see updates to the scheme in the next 12 months.
The amended scheme will address the issue of costs associated with CPFIS investments. An attempt will be made to keep the expense ratio as low as possible so that the impact on the value of the investment is kept to a minimum.
Investors can also expect CPFIS conditions to stipulate that they will be required to lock in their funds for an extended period of time. This is necessary if the benefits that accrue to long-term investors are to be reaped.
Regardless of the changes that are made to the CPFIS, every individual should remember that if an investment offers a high rate of return it will also carry a greater level of risk.
For a large number of investors, the most prudent course to follow may be to just keep their funds in their Ordinary and Special CPF accounts. This will earn them a reasonable return while keeping their money absolutely safe.