28 December 2011

Things to take note when Investing in Shares using CPF monies

For those who are working in Singapore and with citizen/PR status, you will probably have to contribute at least 20% of your salary income to CPF (equivalent to EPF in Malaysia). Once your CPF-OA (Ordinary Account) reach more than S$20K, then you are eligible to use the excess money to invest in various financial products such as Unit Trust, Shares, Gold and others.

To invest in Singapore Listed Shares using CPF monies, you can only take out up to 30% of the CPF OA. Let us do the simple calculation here:

Scenario 1: Let's say you have S$15K in CPF-OA.

The maximum % to invest in Shares is 35%, so 35% * S15K = $5.25K. But because you got only $15K in CPF-OA and does not meet the minimum S$20K, so you cannot invest in shares.

Scenario 2: Let's say you have S$30K in CPF-OA.

Maximum Investment Amount is 35% * S$30K = $10.5K, but because you need to keep aside S$20K in your CPF-OA, so the amount that you can invest in shares is $10K.

Scenario 3: Let's say you have $100K in CPF-OA

Maximum Investment amount is 35% * S$100K = $35K, so you can invest S$35K in shares fully as you fulfill the requirement to keep first S$20K in CPF.


So once you decided to invest in financial products, you can go to any of the 3 Singapore Local Banks (UOB, OCBC, DBS/POSB) to open an CPF investment account. Things to take note when you invest using CPF monies:

1. Agent Bank Charges - Normally there is transaction/admin fees per lot per trade done for each shares. For example, if you buy 5 lots of Singtel shares, then you have to pay 5 * per lot per trade fees.  There is a cap of approcimately S$20 per transaction there. Another agent bank charges is custodian fees which is per lot per shares. So if you are using CPF monies to purchase shares, make sure that your portfolio return is better than those agent bank charges + 2.5% CPF OA return. 

2. Processing Time - Normally it takes about 1 week to open the CPF Investment Account. You can contact the stock broking firm to update your CPF investment account with them.

3. Shares that can be transacted - Please take note that only certain Singapore Listed shares can be transacted using CPF monies. Make sure that you select the CPF approved Shares before you buy, else the transaction would be settled by using cash.

I have a lot of friends who are using CPF monies to purchase financial products in the bid of beating the 2.5% returns in long run. However, I think CPF monies can only be invested in long term basis, as you cannot take out the profit immediately even if you make the profit from the stock market. So my suggestion is to use the CPF money to purchase stock when there is really a market crash. Then you would probably earn better than 2.5% after deducting all the transaction/admin fees involved in your shares investment.

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