Friday, 25 November 2016

4 Steps to Start Investing with CPF Investment Scheme (CPFIS)

The CPFIS provides an option to invest your CPF monies to enhance your retirement nest. For most of us who are still paying off our mortgage loan, it might not be a good idea to lock up too much of your CPF monies in investments. It is always good to save up a few months of your mortgage payments in case of rainy days. However, if you are confident you would not be needing your CPF monies for whatever purposes and would like to generate more returns than the prevailing interest rates, this post is here to assist you!


Step 1: Apply for a CPFIS account with either DBS, UOB or OCBC. 


This is rather straightforward, but I took a long time to get started due to procrastination (don't be like me, just do it). Visit any of the bank branches to request to open a CPFIS account (I created mine with UOB). You have to fill in a few application forms and apply for a trading account with UOB Kay Hian (read my previous post on tips to select an online broker) in order to transact with CPF monies. If my memory served me well, the whole process took around 2 weeks. Once I was assigned a broker, several more documents were sent to my address for full completion (as I did not complete all the information required at the branch). Thereafter, you will be notified by both email and post that your CPFIS and trading account are ready.  

Presuming you already have a trading account with the bank's brokerage, then you can skip the application form for a new trading account. Anyway, if you are in doubt for any of the account opening procedures, your assigned broker should be able to assist you. 

Step 2: Ensure you have more than $20,000 in your CPF Ordinary Account (OA). 


The CPF board allows amount above the first $20,000 in your CPF OA and $40,000 in CPF Special Account (SA) to be invested. In my opinion, invest monies in the CPF OA and leave the CPF SA alone. The CPF OA generates 2.5% interest per annum for anything above $20,000. As such, your job here is to beat 2.5% pa with your investments over the long term.

I do not think it is difficult to beat 2.5% pa as long as you have done your due diligence. Of course, you have a choice to purchase other less risky instruments like bonds and ETFs. You have to make sure you are able to earn a better returns with your choices, otherwise you might as well enjoy 2.5% pa risk free!

To beat the CPF SA returns, is a fairly challenging tasks for most. The CPF SA generates 4% interest pa (I am assuming you have combined balance over $60,000 since you have $40,000 in SA). The financial instruments you can invest with CPF SA are quite limited, as compared to investing monies in your OA. Therefore, unless you very very sure you can beat 4% pa compounding interest with almost no downside risks to your capital, don't touch it. 

Step 3: Purchase any eligible instruments (e.g. stocks) as you normally would through your broker.

The first time I invested with my CPFIS account, I had many burning questions like how is the stock limit calculated and have I exceeded my limit. I will do a simple illustration here for better clarity. 

Amount in CPF OA: $30,000 , Investment Limit: $10,000 

The investment limit is determined by the lower of the following: 35% of OA amount or $X above $20,000. In the case of $30,000, the stock limit is $10,500. However, only $10,000 is above the minimum sum of $20,000 in OA. Therefore, you are only allowed to invest $10,000.

Stocks Purchased + Brokerage Fees + Commissions: Must be less than $10,000

Your investments must be less than $10,000 including any brokerage fees and commission. Honestly, I do not know if you have to take into account the commission for selling the stocks. Personally, I would not buy too close to the investment limit as you would probably have to top up cash into your CPF to make up for any shortfalls. 

Do note that contra is not allowed for CPF trades. 

Step 4: Sell your holdings as you normally would through your broker. 

When you sell your investment holdings, it will take approximately 2-3 working days for the funds to be deposited in your CPFIS account. For those interested to know, your purchasing power is not updated immediately. As such, you cannot use the incoming funds until it is reflected in your CPFIS account.

Summary

Although it is great we are able to invest our CPF monies, always keep in mind that the CPF is for your retirement. Some of the stocks that you could invest with CPF monies might not be suitable for retirement portfolio as they are rather high risks. Always go for lower risks stocks with good business fundamentals if you are looking to invest for the long term. For those that are still saving up capital, maybe you could check out this post on how to invest with limited capital in Singapore.

Best, 
AT

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Financial freedom = Passive Income > Expenses. Always remember that there are two sides to the equation of financial freedom. Beside working on how to improve our passive income through investing, we should never neglect the expenses portion. By striving to improve both side of the equation, we can achieve our financial goals and win in the game of money.

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