Should You Buy Shares With Your CPF?

The Central Provident Fund (CPF) is a compulsory savings scheme for Singaporeans and Permanent Residents. Most people, who have a CPF, make monthly contributions to their CPF account; yet have little idea of what is the best way to manage their CPF.

Many of us, simply let our CPF accrue interest of just 2.5% in the Ordinary Account and 4% in the Special Account. In reality, there are actually many options that we can to make this money work harder for us.

For instance, the CPF Investment Scheme (CPFIS) allows investors to invest a part of their CPF in approved investment products. These range from government bonds to riskier assets, such as unit trusts and individual stocks.

In this two-part series, I will look into the reasons for and against using CPF money to invest in stocks. This first article will focus on the reasons why I think savvy investors should invest their CPF account in stocks.

Better returns

At just 4% interest rate in your CPF Special Account and 2.5% interest rate in your Ordinary Account, it is no wonder some investors are willing to take on additional risks to beat these returns.

Potentially, stocks offer an investor a much better return, over the long-term. The overall return of the Straits Times Index (SGX: ^STI) was almost double that of the interest given in the Special Account. At that rate, your investments will double about every nine years.

Comparatively, transferring your CPF money to your CPF Special Account will only get you 4% interest. This equates to doubling your money every 18 years.

Long-term savings plan

One of the complaints that Singaporeans have about the CPF scheme is that they are unable to withdraw the money until they reach retirement age. However, like a double-edged sword, this can actually be good for investors who are looking to invest for the long-term.

The fact that you cannot use the money until retirement means that investments can accrue and compound over time. It also means that it makes more sense for you to try and maximise your returns for your retirement.

The Foolish bottom line

Investors who wish to find better ways to make their CPF money work harder for them can look into buying stocks. However, there are also other investment products to consider before making your decision. In the next article, I will look at some reasons not to use CPF money to invest in stocks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.