5 Things You Need to Know When Investing Your CPF

1. Investing your CPF should be seen as a medium to long term investment. In that way, better returns can be expected. Successful investment is not purely luck. It's about consistency and staying invested.
   

   
   Do you know that contrary to public perception, investing in unit trusts has been more profitable than leaving your money in CPF accounts? (source: Straits Times, Year 2005)
   
   Over the past seven to 10 years, nearly 75 per cent of all unit trusts have outperformed CPF returns. The average annual return on equity and bond funds was 6 per cent, compared with CPF interest earned of 2.5% to 4%.

   
   
2. Preferably, you should set aside part of your CPF for your house loans or your kids education loan. That way, you will not worry unnecessarily about your investment in the short-term.
   
   
3. The fund management fee. Usually equities funds charge a higher management fee, however you may wish to check if the management fee is justified. If the performance of the fund is so-so only, you may wish to look for another alternative.
   
   
4. The funds performance. Find out how the funds have performed over the last 3 to 5 years. Although past performance is not indicative of future perfomance, it can still serve as a benchmark.
   
   
5. Ultimately, the fund(s) that you choose should be based on your:

• Time Horizon;
• Asset Allocation;
• Diversification;
  
• Expectations (of returns and inflation)

Policy Loans

Taking a loan from your existing policies may be a good idea when you need cash urgently. This usually applies to traditional policies, also known as Whole Life policies. And the interest rate is definitely much lower compared to credit cards at 24% per annum. Normal policy loan interest rates ranges from 6% to 8%.

At the same time, you enjoy the coverage provided by your policies. However, your policy must have certain cash value before you can take out a policy loan; and subjected to the conditions set by the insurance company. Do note that when you take out a loan, your return on investment will be reduced, depending on the amount you cash out.

On the other hand, if you own a ILP (Investment-Linked Policy), you need not take out a loan. You simply cash-out the amount you need. This is one of the beauty of an ILP. An ILP is a combination of investments (Unit Trusts) and life insurance in one plan. Insurance charges are deducted from the investment component of the ILP.

You can even go for premium holidays, which means you don't have to any premiums, and yet enjoy continuous coverage.* I believe this is useful, especially when the individual is in a temporary financial difficulty and unemployment. In the case of a traditional policy, to stop paying premium may impact the return rates severely, and in worse cases, the policy may even lapse.



* terms and conditions varies with different companies. For all plans, needs and concerns must be taken care of, before determining whether the plan is suitable for the individual. Feel free to drop me an email to discuss further.

The Cost of Waiting

Many people hesitate when it comes to investments or savings, hoping and waiting for the best deal.

What they don't realise is that by waiting, there's a cost involved too - The Cost of Waiting

Imagine one day you see a Fix Deposit (or investment) advertisement, giving an interest rate of 3% every year. The plan is to start from Year 2005 to Year 2010. By putting $50,000 with the financial institution for 5 years, you will get $57,963.70 at the end of the term. You can earn a total interest of $7,963.70 if you invest now.

But something is pulling you back, you are wondering is there any better opportunities or higher interest rates. You decide to wait.

1 year later ...

Indeed, there's a higher interest rate being offered this time -

3.2% interest rate!

And this offer is sweeten even further, only 4 years required. You decided to take up the offer. It's year 2006 now.

Four years later. Year 2010 ...

Your $50,000 became $56,713.81. Total interest earned is $6,713.81.

Cost of Waiting?

$7,963.70 - $6,713.81 = $1,249.89

Given a fixed time frame (until year 2010), the cost of waiting is $1,249.89

What are you waiting for? :)

PS: To obtain the same amount of interest (i.e. $7,963.70), an interest rate of 3.764% per annum is required.

Bank Interest Rates for the Last 10 Years

Bank Interest Rates from Jan 1995 to Jan 2005*

Bank Saving Deposits*

• Jan 1995 - 2.93%
• Peak from Jan to Aug 1998 - 3.49%
• Lowest at - 0.23%
  
• Dec 2005 - 0.30%

Bank Fixed Deposits (12 months)*

• Jan 1995 - 4.23%
• Peak from Jan to Aug 1998 - 5.38%
• Lowest at - 0.72%
• Dec 2005 - 0.86%

As reflected on MAS website, generally interest rates had fallen pretty much. For bank saving deposits, it had dropped from 2.93% to only 0.3%. Which means that for every $1,000 you have in your saving accout, you get an interest of only $3. Gone were the days where you get $29.30 for every $1,000 you save in the bank.

However, interest rate is not the only element that had dropped. The value of money has also fallen. This is due to inflation, whereby prices of goods and services increases. As a result of this, you can buy lesser stuff with the same amount of money. Take a look around you, among many things, petrol prices has risen, utilities bills and transport costs have increased over the years.

Things are not so bad after all, with banks and insurance companies offering numerous financial plans to achieve higher and better interest rates. To name a few, plans include fixed deposits, regular saving plans (RSPs) and investments. However, please be advised that different plans cater to differnt needs and appetities. At the end of day, the plan chosen or recommended must suit the individual's lifestyle or expectations.

*Figures refer to average rates compiled from that quoted by 10 leading banks and finance companies.
(Source: Monetary Authoriy of Singapore, www.mas.gov.sg)

Spending VS Saving

Do you owe a credit card?

Most likely you do.

As always, banks and credit card companies are eager and aggressive to increase their database credit card members. They offer free gifts and free annual fees. People sign them up.

Credit card is a convenience, a prestige for some. But it can cut people as well. It can result in big spending, and in some cases overspending. With the usual credit card interest rate at 24% annually, some people wound up in debt. Others end up bankrupted.

I guess it's human nature to love good food, good entertainment. How many people really thought about what's going to happen to them 20 years later? They can't see it. Most people care about now only. What they have now and what can they do with the money now.

Some says we can always plan later, let us enjoy now.
Some says let's live for today.
Some says I just don't have enough.

Planning should start now. Planning should be for the long term, not just for the short term. When you start planning financially, you feel that you have more control over your life. You know where you are heading. At least you have a direction.

Starting early also means that you can set aside a smaller amount of savings, and let it accumulate over the years. IF you start later, you will need to set aside a bigger amount of savings periodically in order to reach your desired amount of savings.

Your savings will come in handy in rainy days, when you retire, or even business opportunities.

Nobody regretted saving, only regretted spending.

Start saving today.