10 August 2005

Money Matters

ST Aug 10, 2005
S'poreans reluctant to park CPF monies in unit trusts
More choose to use cash for such investments instead: Report
By Grace Ng

SINGAPOREANS have turned hesitant about investing their Central Provident Fund (CPF) savings in unit trusts in the past two years, but were more willing to fork out cash for these investments, statistics show.

Over the past two years, total CPF funds invested in unit trusts hardly budged at $3.15 billion, according to a Cerulli Associates report released today. This means that the proportion of CPF funds invested in unit trusts is a paltry 4.5 per cent of the estimated $70 billion of CPF Investment Scheme (CPFIS) funds available for investments.

In contrast, the amount of cash put into unit trusts has been rising. At end-2002, Singaporeans had parked $11 billion of cash in unit trusts. This amount climbed to $16 billion in 2003 and about $16.6 billion last year.

These strong cash flows helped the mutual fund industry's retail assets under management to almost double to $19.2 billion in the two years ended December 2003.

But last year, the growth plateaued. Total retail assets - both cash and CPF contributions - remained flat at $19.8 billion, compared with $19.2 billion in 2003, according to Monetary Authority of Singapore statistics.

The stalled growth in the overall mutual fund industry and the small percentage of CPF funds invested in unit trusts prompted Cerulli Associates director Shiv Taneja to comment that 'not enough use is being made of the CPFIS, a key catalyst for the future growth of the retail fund industry in Singapore'.

Industry players blame high front-end fees charged by banks - which distributed 77 per cent of mutual fund assets last year - for the flat growth. In addition, market volatility over the past few years has made investors more wary.

'Investors have to pay initial sales charges ranging from 3 to 5 per cent upfront, even before the investment makes money. This expensive fee structure creates negative impact on the acceptance of mutual funds,' noted Mr Aaron Koh, the chief operating officer of independent financial advisory firm Providend.

A unit trust manager here also acknowledged that Singaporeans are disappointed with the patchy performance of CPF-approved unit trusts.

Standard and Poor's data showed that over a one-year period to March 31, just under 58 per cent of them beat the CPF Ordinary Account interest rate of 2.5 per cent a year.

Indeed, the 'relatively attractive' risk-free rate for CPF funds is one reason cited by Mr Vasu Menon, chief editor of unit trust distributor finatiQ, for the preference of Singaporeans to put cash rather than CPF funds into unit trusts.

'The deposit rates had been very low in past years, hovering at times way below 0.5 per cent, so it made sense for Singaporeans to leave their CPF funds alone while putting their free cash into unit trusts - which are less risky than individual stocks,' he said.

Another reason was the 'economic uncertainty' in 2002 and 2003, which prompted many Singaporeans to 'keep their idle cash in the CPF so that they could still pay up their property loans in the event that they got retrenched', he added.

Mr Wang will play financial guru again. Here are some little tips, tricks and bits of advice for his readers to think about:

1. A well-diversified financial portfolio should be split between different asset classes, for example, equities, bonds and cash. In planning your portfolio, you can treat your CPF funds as the "bond" component of your portfolio. The return (2.5% for Ordinary Account and 4% for Special Account) is relatively lower but it's also practically risk-free.

2. To get a higher return on your CPF money and still enjoy the risk-free aspects, don't forget that you can shift your Ordinary Account funds (2.5% interest rate) into your Special Account funds (4% interest rate). With a Singpass, you can do it completely online. Do bear in mind that when money in your Special Account is more strictly meant for your retirement and you wouldn't, for example, be able to withdraw it for your downpayment if you wanted to buy a new property next week.

3. Aaron Koh says: "'Investors have to pay initial sales charges ranging from 3 to 5 per cent upfront, even before the investment makes money." Mr Wang suggests that you invest in unit trusts online (using Fundsupermart, DollarDex or Finatiq) where sales charges are typically lower at 1.5% to 2.5%.

4. Vasu Menon says: "... economic uncertainty in 2002 and 2003 ... prompted many Singaporeans to 'keep their idle cash in the CPF so that they could still pay up their property loans in the event that they got retrenched'." This is a valid and important consideration. If you're a homeowner with a mortgage to pay off, do keep a buffer of extra cash in your CPF Ordinary Account to meet such contingencies.

5. Vasu Menon also says: "'The deposit rates had been very low in past years, hovering at times way below 0.5 per cent." Mr Wang says: "Bah." Forget your deposit rates. Keep an operating account for administrative convenience for paying your water bills, Singnet bills, electricity bills etc. Take the rest of your money and park it elsewhere. Even if you're a real kiasi investor, there are better options such as OCBC Money Market.

Fun manager at work. Such a dangerous clown.

2 comments:

Rite Brain Studio said...

There is also Philips Securities, Citibank money market beside OCBC.

Mr Wang Says So said...

Yes, DBS also offers something, I do believe.