Friday, February 27, 2009

Investing your CPF savings

Dear Mr. Tan,
Like many young Singapore couple, my wife and I plan to retrieve an amount of 20K from my CPF account for other investment before all our money in the CPF is wiped out by HDB for our HDB flat. Basically, the reason for doing this is to save our money for rainy day in case anything happen (i.e. retrenchment).

As we are not a high risk taker, we decided to just invest our money into unit trust. We met up with our insurance agent from AIA and he introduced us to these few AIA funds.

1) AIA Greater China Equity Fund 30%
2) AIA Regional Equity Fund 20%
3) AIA Regional Fixed Income Fund 50%

As such, we will appreciate your expert advice on the following:

1) Is this the right time for us to invest our money into unit trust?
2) Is unit trust the best option for us?
3) Is it advisable for us to invest onto AIA Company in view that they may be took over by other company soon.
4) Please advise if the three funds that our agent introduced to us is suitable for us?

REPLY
I normally advise people to invest in the STI ETF due to low charges. You can get most of the returns. Read the FAQ in my website.

If you buy an investment linked product from an insurance company, you should ask about the charges that are taken away from your investments. This is also explained in the FAQ.

7 comments:

zhummmeng said...

If you compare to an allocation like 30% global equity +20% asia and 30% global bond and 20% singapore bond the risk is lower . You can say it is more balanced but with higher weitgthing in asia.
Why more in asia. Reason is obvious, it is the growth region.
Your AIA allocation may give higher return but comes with hgiher risk.

David said...

It seems the STI and hence the STI ETF can fluctuate lower. Now it is almost the 52 week low. Hence it may pay to wait a while to see if they go even lower.

Remember the worst for the economy is yet to come, so is the STI.

Zhong said...

One Chief Investment Officer of a big bank predicted STI will hit bottom at around August/Sept 2009.
So plse be patient.

Concerned said...

These funds are managed by AIA. Did the agent tell you

1) How much is the sales commission he and AIA earns
2) How much is the management fees
per annum charged by AIA

It is better to go for ETF as the management fees are much lower and there is more transparency and liquidity

Unknown said...

First and foremost, I Am Not A Financial Adviser, and I'm not your financial adviser. I'm just an average guy who's had it up to here with the junk that's foisted on Singaporean investors in the guise of "sound investments", and is ready to go full-on Howard Beale.

But now that's out of the way - wow. Wow. Your insurance agent has given you atrocious advice.

Let's clear up one misconception: unit trusts, in and of themselves, are not "low risk". It's what's in the unit trusts that makes them low risk - you could have a bond or cash unit trust that's low risk, or an emerging-market equity unit trust that's incredibly high risk, but they're both still unit trusts.

Now, to your four questions.
1) If this is your rainy day fund, it should be in a bank account. No stocks, no bonds, no structured products, and absolutely no unit trusts. You need it somewhere completely safe where you can get to it at a moment's notice and where it's guaranteed to not lose money - and that's a bank account. Pick a high-interest bank account - Stanchart's eSaver, Maybank's iSavvy, HSBC's multicurrency account, whatever - then put the money in there and don't touch it.

The rule of thumb: Money you don't need to touch for seven years can go into stocks. Money you don't need to touch for three years can go into bonds. Money you need in three years or less should stay in the bank.

2) Unit trusts are never ever the best option. See #4.

3) This is the one thing you don't need to worry about. If AIA is sold, the new company will continue managing their funds - there might be some name changes, but that'll be it. Even if the funds are wound up, you'll have a claim on the assets of the fund.

4) The only thing these unit trusts are suitable for is lining your agent's pockets.

You want a low risk investment, right?

Your agent is trying to stick you into some exceptionally high-risk funds.

Firstly, Chinese equities? Why is he putting your emergency fund in something that's dropped 55% in the last year? Would you be happy if 55% of your emergency fund suddenly disappeared?

Same with the "regional equities" fund. (Have a look at its pitch sheet, as well - why does an Asian regional equities fund have exposure in the Cayman Islands?)

And between the two of them, there's an awful lot of overlap - you're going to end up owning quite a lot of China Mobile shares, for example.

And this "fixed income fund". This is hilarious. It sells itself as a low-risk fixed income fund, but it's lost 12% in the last year, while its benchmark went up 7%!

And if you look at the pitch sheet you'll see why: the fund is heavily invested in stuff that isn't fixed income at all. 6% of the fund is in real estate investment trusts, which are taking it in the neck right now as real estate prices plunge - and more importantly, they're not bonds. Why are they in a fixed income fund?

Another 11% of the fund is in mysterious assets labeled "other". The manager of this fund is going well outside his benchmark, and doesn't deserve his management fee.

And on that note - wow, the management fees are huge!

If you started a brokerage account and bought some ETFs, you'd pay 0.3% brokerage and about 0.3% management fees on these funds. But if you buy unit trusts, you'll pay 5% sales charge(!) and 1% p.a. management fees. (Don't believe me? It says it right there on the pitch sheets.)

If you invest $20,000, that means you'll pay about $120 in fees in the first year by buying ETFs, or $1,200 - ten times as much! - if you buy unit trusts.

And look what you're getting for your $1,200 fees. Two equity funds that could demolish your emergency fund, and a "bond fund" that isn't really a bond fund (and that's underperformed its benchmark by 15% in the last year).

This guy has given you bad advice. You can do a lot better by yourself.

Summary
Mr. Tan is right that you want ETFs instead of unit trusts, but given that this is your rainy day fund, you're better off just sticking it in a bank account. If you really must invest some of it, take a look at the ABF Singapore Bond Index Fund (I think its exchange code is SBIF).

It only invests in Singapore government-backed and supranational bonds, so it's more secure - and the expense ratio is only 0.2%, rather than the 0.85% that the AIA fixed income fund charges. But still, if it's your rainy day fund - CASH IS KING.

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