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Breaking Down The CPF Investment Scheme: Part III

In 2016, more than 20% of Singaporeans who made use of the CPF Investment Scheme ended up with less than the risk-free rate of 2.5% provided by the CPF Ordinary Account. Even more worrying is the fact that 12% made losses on their investments.

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.

As such, I thought it might be a good time to dig through some of the investment options available on the CPF Investment Scheme. This is the third part of the series. In my first two articles here and here, I looked at government bonds, annuities, investment-linked products and unit trusts.

Endowment policies

An endowment policy is a life insurance contract that pays a lump sum at the end of a pre-defined 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 of the insurance component of the payment and the investment component is also subject to its own investment risk.

Investors who sign up for these policies should monitor the performance of the investment to have a better grasp of how much you will be paid when the policy matures.

Exchange-traded funds

The CPF Investment Scheme in Singapore also gives investors the option to invest in four different exchange-traded funds (ETF), which range from a bond ETF to an ETF that tracks the performance of gold.

The bond ETF tracks the performance of high-quality bonds issued by the Singapore government and quasi-government entities. This type of investment is usually considered a low risk but low return investment. The performance of the fund is also dependent on external stimuli like 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 portfolio diversity and lower management fees than 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.

The Foolish bottom line

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 next and final article, I will have a look at the two more investment options – CPFIS-approved Singapore stocks and property funds.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.