In 2019, 22% of Singaporeans who made use of the CPF Investment Scheme ended up with less than or just equal to the risk-free rate of 2.5% provided by the CPF Ordinary Account.
Even more worrying is the fact that nearly one-third made losses on their investments.
Added together, more than half of those who invested their CPF funds did worse than those who just left it idle in their Ordinary Accounts.
The statistics are not promising.
But with more Singaporeans taking the bold step of managing their own CPF money, it is vital that we educate ourselves on all the investment options available to us.
The last thing we want is to take active steps to manage our CPF but end up earning less than if we did nothing.
Or worse still, end up losing our hard-earned money.
The first two parts of this series looked at government bonds, annuities, investment-linked products and unit trusts.
In this article, we will focus on another two available options: endowment policies and exchange-traded funds.
An endowment policy is a life insurance contract that pays a lump sum at the end of a predefined period or upon death.
These contracts usually include a smaller insurance component than traditional insurance plans.
The remaining part of the premium goes to investments.
However, it is important to note that, unlike regular savings deposits, the cash returned upon maturity of the contract may occasionally be less than the amount you have paid.
This is because the insurance component of the payment is treated as an expense while the investment component is subject to investment risk (i.e. its value can fluctuate).
Some insurers may promise either a 3% or 4% annualised return upon maturity, but investors should note that these are based on projections.
Investors who sign up for these policies should monitor the performance of the investment component to have a better grasp of how much you will be paid when the policy matures.
Exchange-traded funds (ETFs)
The CPF Investment Scheme in Singapore also gives investors the option to invest in different exchange-traded funds (ETF), which range from bond ETFs to ETFs that track the performance of gold.
Bond ETFs tracks the performance of high-quality bonds issued by the Singapore government and quasi-government entities.
This type of investment is usually considered low risk. However, it typically comes with low returns as well.
The performance of the bond fund is also dependent on external stimuli such as interest rate changes.
Also available are two ETFs that track the performance of the Straits Times Index (SGX: ^STI). An index ETF provides investors with an option to diversify their portfolio with lower management fees compared to traditional unit trusts.
Lastly, the gold ETF tracks the performance of bullion gold. Gold is considered inflation-proof and theoretically allows investors to store their wealth better than cash.
Get Smart: Selecting from a wide range of options
Investors hoping to achieve better returns than the “risk-free” rate of 2.5% provided in the CPF Ordinary Account should familiarise themselves with all the investment options available to them through the CPF Investment Scheme.
In my final article, I will have a look at the last two investment options – CPFIS-approved Singapore stocks and property funds.
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Disclaimer: Royston Yang does not own any of the stocks mentioned.