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Do you really know what you are investing in? Or are you just putting your money into something that someone recommended? Being an informed investor helps secure your retirement, so plan well.
Here are three steps to becoming an informed investor. | |
| Step 1 : Know your investment basics |
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Any investment will involve some risks because the future value of an investment is never certain. By understanding the risks associated with various investment options, you can choose investments that best match your personal risk tolerance and time horizon.
Spread your overall investment risk by diversifying your portfolio. Spread your investment funds into the various investment classes such as cash, bonds, unit trusts and shares through asset allocation. |
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| Step 2 : Understand the cost of investing |
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Investment is also associated with cost. The higher the cost of investing, the lower your net return. Don’t just look at the possible returns or profits from your investments when you invest, look at the possible costs too. High cost of investing not only erodes your profit but should the cost of investing be more than your gross profit, you might even end up with a net loss.
If you are investing your CPF savings, you should be aware of:
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CPF Interest Rate |
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Remember that savings in your Ordinary Account and your Special Account earn a minimum interest of 2.5% and 4% per annum respectively. This is both guaranteed and risk-free.
Thus, before investing your CPF savings, do ask yourself: Can the expected net returns come close to or exceed the interest that you are getting? |
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Commissions, Service and Transaction Charges |
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Don’t forget to take into account transaction fees that your service providers such as your brokers, agent banks or insurers charge you for their services upfront. What about recurring fees such as management fees or quarterly bank service charges? These costs will affect your eventual net investment return. | |
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| Step 3 : Monitor your investment |
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Once you have taken the first step to invest, it is wise to keep track of how your investments are faring. Want to know how your unit trusts or investment-linked insurance products are performing? Check out the Performance and Risk Monitoring Report at our website.
Monitoring your investment should continue irrespective of how the market is faring. This could mean reviewing your portfolio at least once a year, and whenever your personal or financial circumstances change. |
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Do you know that cost and expense severely impact your long-term returns? Unit trusts and investment-linked insurance products typically charge an ongoing fee for managing the investment over and above the transaction fees when you buy and sell the investments.
Expense ratio is the total ongoing fees of an investment expressed as a percentage of the investment’s assets. At first glance, a difference of one or two percentage points in expense ratio may appear insignificant. But over the long term, even a small difference of 2% in expenses can result in significant differences in the outcomes.
For more information on expense ratios and other investment basics, visit the Investor Education Site at www.cpf.gov.sg. Here is a snapshot of the highest/lowest cost funds under CPFIS available at the Investor Education Site. |
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| Notes: |
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Closed-end funds are excluded from the computation as the management fees are generally charged upfront. |
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These are wholly/partially passively managed funds which tend to have lower management fees than actively managed funds. |
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Funds in the Lower Risk Category are not featured as there are only 5 funds in that risk classification. |
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These funds charge performance fees; please refer to the fund's prospectus for details. | |
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If you invest $10,000 of your CPF Ordinary Account in a unit trust which grows 5% per annum. Over 20 years, your investment will grow to $21,911 (1% expense ratio) versus $14,859 (3% expense ratio). The difference in returns works out to $7,051 or 70% of your initial investment.
Your $10,000 will grow to at least $16,386* over 20 years if you leave it with CPF. You will be better off leaving your savings in your CPF accounts instead of investing in investments with high expense ratio. To optimize your investment return in the long run, go for investment with lower expense ratio. |
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| Higher Expense Ratio Erodes Investment Returns |
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| * Minimum CPF Interest Rate is 2.5% per annum (Ordinary Account) |
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