Recently, a friend asked me about the CPF Investment Scheme (CPFIS) and wanted to know how I use it personally. Having shared my general views with him, I thought I’ll write a more comprehensive article on it to share my personal thinking on this topic.
The CPFIS is a scheme that gives CPF members a chance to lose all their CPF monies super-charge the returns on their CPF monies beyond the guaranteed CPF interest rates of 2.5% and 4%. This a achieved by allowing you to use CPF OA and SA funds to invest in various instruments like unit trusts, ILPs, ETFs, stocks and bonds.
To qualify for the CPFIS Scheme, you need to be:
- At least 18 years old;
- not a undischarged bankrupt;
- have more than $20,000 in your OA; and/or
- have more than $40,000 in your SA
Self-Awareness Questionnaire (SAQ)
The SAQ includes 2 PDFs and associated videos on Understanding Investments and Understanding The Investment Products Under CPFIS. The PDFs can be found here and here.
I was actually quite impressed by the 2 PDFs as they dive into the basics of investing and the associated risks and costs for each investment product. I especially love the part where they show the one-time cost and recurring cost of investing in each investment product, something a lot of amateur investors don’t consider.
The CPF Board has been beefing up their outreach and public education recently. This is yet another good example of that.
The SAQ itself is a 20 MCQ test conducted online through the CPF portal. The difficulty level was not too bad. I got 18/20 because I second guessed myself on 2 of the questions 🤣
What products can you invest in?
For OA funds, you can pretty much invest all the possible investment instruments – Stocks, REITs, Gold, Unit Trusts, ETFs, Bonds, Insurance Products, Government Bonds and Fixed Deposits. That said, there are no approved instruments for Government Bonds and Fixed Deposits at the moment.
For SA funds, you cannot invest in Shares, REITs, Gold and higher risk Unit trusts / ETFs / Bonds. Perusing through the approved list of ETFs and Unit Trusts, “higher risk” generally means equity ETFs and Unit Trusts with bond ETFs and Unit Trusts still available options for SA funds.
For a full list of specific instruments you can invest in, check out this link and click through to the list of instruments for each asset type.
Limits to investing
Generally, the amount you can use to invest is any amount in excess of $20,000 for your OA and $40,000 for your SA. Additionally, for Stocks, REITs and Corporate bonds, you can only invest up to 35% of your investible savings. For Gold, you can only invest up to 10% of your investible savings.
Investible savings is defined as the sum of your OA balance, the amount withdrawn for investments and the amount withdrawn for education. Amounts withdrawn for investments is the net amount withdrawn taking into account refunds from sales / dividends / interests.
You can refer to this worked example by the CPF Board to understand how the limits are calculated..
How do I get started?
In order to invest using your CPF OA funds, you need to open an account with an agent bank. This can be done online with any one of the 3 local banks. There are generally little difference between the banks with fees being similar. The only difference I see is if you are looking to invest in Gold as OCBC and UOB has more options other than Gold ETFs.
If you wish to invest using CPF SA funds, you can approach each individual service provider without a need to open an account with the agent bank.
For more information about opening a CPFIS account, check out the DBS website, OCBC website and UOB website.
What are the related costs?
There are additional costs associated with using CPF funds to invest, beyond what you would have paid using cash. These costs generally relate to agent bank fees, from additional transaction costs to additional $2 custody fees that are charged per counter per quarter.
You read that right, per counter per quarter. Yikes.
My thought process
I developed my own personal strategy by first asking myself 2 key questions.
- Should I use my OA and SA Funds?
- What products are viable options given the account choice?
Should I use my OA and SA Funds?
There is a real opportunity cost to using OA and SA funds. Just by not doing anything and leaving your funds in the CPF account, you are guaranteed a 2.5% or 4% return on those funds annually.
As such, when selecting an investment to park your CPF funds in, you have to make sure that the expected rate of return, after taking into account cost considerations, is greater than 2.5% or 4%. If not, it would not make sense to invest in the first place.
The thought process is similar to deciding whether an investment is worth investing using debt or margin. Each investment would need to clear a expected hurdle rate.
Based on the need to clear the 2.5% and 4% hurdle rate, I personally feel that SA funds should be left alone due to the following reasons:
- 4% risk free returns are hard to beat in an average market.
- There is a lack of equity investment options for SA funds, making it even harder for investors to beat the 4% return hurdle rate.
What products are viable options?
Now that I’ve established that I would consider investing using CPF OA, I have to consider the possible investment options. This is where things get tricky and potentially opinionated. The following views are my personal opinion and financial advisors/insurance agents, please don’t slam me if you disagree.
Based on the above paragraph, you can probably guess where I am going with this Let’s quickly run through the various products to discuss their viability as well as my thoughts on them.
You guys know I love stock picking so this is definitely an option. SGX is a dividend investor’s haven, so it is relatively easy to find investments that beat the 2.5% hurdle rate. You just need to find good stable dividend companies to buy.
Similar to shares, this is also an option. The additional consideration though is that REITs tend to have Rights Issues and Equity fund raising. As such, you should not go ham and invest all your available quota into REITs. Keep some powder dry.
I personally feel that Gold is not a good option. Gold is seen as a store of value and a hedge against inflation. This objective is pretty much covered by the 2.5% CPF OA interest rate, unless we enter a hyper-inflationary environment. However, if you do choose to invest in Gold, use the Gold ETF option rather than Physical Gold or the other options due to the relative cost.
Unit Trusts / Insurance Products
You guys know my disdain for actively managed financial products due to the costs involved. The cost table presented earlier gives you a good idea of the high costs involved. Additionally, I perused the list of available unit trusts and their 3 year financial performance here. Not surprisingly, the returns were unimpressive. Personally, I would avoid.
Of all the ETF options available, do only consider the SPDR STI ETF or Nikko-AM STI ETF. I personally don’t really like the STI ETF as an ETF due to focus on property and financials. But if you’re looking for a low cost and easy way to gain exposure and diversification to the Singapore market, the SPDR STI ETF is the way to go as they have a lower expense ratio.
As for ABF Bond Index Fund, just don’t bother as they invest in SG Government bonds and the returns are not superior to the 2.5% CPF interest rate.
While I personally don’t really like bonds, if you insist on buying bonds, I can bless good investment grade corporate bonds like the Temasek 2.7% Bond. However, there are very few CPF approved corporate bonds. Those that are approved yield so close to the 2.5% CPF interest rate that perhaps you shouldn’t bother as well.
My personal strategy
Having thought through these questions, I set out the broad framework for my own strategy:
- I cannot afford to take large losses on my CPF funds as it will defeat the purpose
- I will only invest in instruments with income and dividends exceeding 2.5% to replace the lost CPF OA interest.
- I will only invest in stocks that are relatively safe and not struggling as a going concern.
- I must minimise the impact of transaction and recurring cost
- I should only use CPF Funds as a last resort
Invest mainly in dividend paying Blue Chips
These companies are less likely to have going concern issues and the dividends help to cushion the impact of the lost interest. Examples of instances where I deployed OA Funds were Keppel Corporation during the Oil Price crash of 2015 and more recently SingTel on price competition fears.
Try not to invest in REITs
I generally do not invest in REITs using my CPF due to potential equity fund raisings. But if a blue chip REIT that has little history of rights issues (like CMT) is trading at depressed valuations, I will definitely consider investing in it.
Invest in SPDR STI ETF in crisis situations only
I mentioned earlier that I dislike the STI ETF due to the STI’s composition. The ETF also does not yield highly enough (currently 3+%) to cover for the loss of CPF interest. However, ETFs have a less stringent limit than shares.
These characteristics make it great for crisis situations as valuations would be depressed, yields are high enough, the ETF provides diversification and you would have more firepower due to the more relaxed limit.
Invest only at historical lows / depressed valuations
This helps to limit my downside risk and allow me to sleep more comfortably at night.
Take concentrated positions
This point is rather controversial as people always talk about diversification to reduce risk. Unfortunately, the CPFIS recurring cost structure punishes diversification. 10 counters would mean $80 per annum of fees plus GST and commissions.
As such, I feel that taking concentrated positions is necessary to reduce transaction and recurring costs. Also, if you had carefully considered the other principles before investing, you should have a stock pick that you can safely take up larger positions in.
Lastly, if you take your CPFIS investments as part of a larger portfolio including your cash investments (stocks, bonds, property, etc), you should still be considered diversified.
Use of the CPFIS has to be judicious and carefully considered. There is a real opportunity cost to every move you make. Avoid costly actively managed products. Invest only at historical low valuations and in a concentrated way to minimise your downside and costs.
Utilise the scheme in a conservative fashion and you should be able to achieve your goal of outperforming the 2.5% CPF OA interest rate.
Do you invest with your CPF funds? Do let me know your thoughts and strategies!
Other CPF related articles
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Personal Tax planning using voluntary CPF top-ups
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