If you’re a gainfully employed person, you’d be familiar with the Employees Provident Fund (EPF)…or at least familiar enough to know that there’s a portion that your employer contributes, and a portion deducted from your salary. Your employer is required to make a minimum contribution amounting to 13% of your pay, whilst you are required to contribute 11% (which your employer would have conveniently done for you). If you’re curious to know more about the EPF, click here.
The EPF is simply, savings for your retirement. You start contributing from your first paycheck, up until you retire at age 60. What the folks at the fund will do is take your contribution, and invest it for growth. In the past 10 years (2017 – 2007), the average annual return you’d get on your EPF is at about 6%. This is awesome, considering that the average annual inflation in the same period is at about 2.5%. What this means is that your retirement money is growing at a faster rate than inflation. This is a good thing!
If you’re feeling a bit more adventurous, the EPF also allows you to invest a part of your deposits elsewhere. Under the Members’ Investment Scheme, contributors are allowed to invest no more than 30% of their account 1 (after deducting minimum deposit requirement) through approved Fund Management Institutions (FMIs).
There are a few requirements that you should be aware of before deciding to invest your savings elsewhere, but the main ones are:
- You must not be above 55 years old.
- You can only invest 30% of the balance in your account 1, after deducting the minimum required amount.
- Your minimum available investable amount must be RM1,000
Cool? Let’s see how that works.
Imagine Annie, a 28 year old professional, and she’s thinking about investing some of the money in her EPF account 1. She’s less than 55 years old, so that part is sorted. Next she has to figure out how much of her balance she can invest. So she logs on to the EPF’s member’s portal here to check out her balance. If you haven’t set up your online account, visit your nearest EPF branch to get that done.
OK, now Annie discovers that she has RM26 thousand in her account 1. She looks through the table here:
Alright, so at the age of 28, she needs to maintain a minimum balance of RM23,000 in her account. To figure out how much Annie can invest, she takes RM23,000 from her current balance of RM26,000 and has RM3,000 left. Then out of that RM3,000 she can only invest a maximum of 30%, meaning that out of RM3,000, she’s allowed to invest RM900.
Oh no! It seems like Annie isn’t able to take part in the Members’ Investment Scheme because she doesn’t meet condition number 3. In order to be able to invest, the minimum amount she must have left after all that calculation is RM1,000.
Take a look at that table above, now figure out if you have enough to invest some of your EPF account 1 savings.
Should you invest some of your EPF savings elsewhere?
The answer to that is always, “it depends”. Even if you have enough to do so, how you decide depends on your risk appetite. Your EPF is your savings for your retirement. So it makes some sense to be a little bit more cautious if you want to invest it somewhere else. The EPF has a list of approved funds that you can invest in. In that list there are many funds to suit all kinds of temperament, from the risk averse to the more aggressive investors. But just a tip, if you want to make the most out of your investment, look for funds that have consistently delivered above the EPF’s own dividends. Or else, you’d be wasting your time.
Many of the approved funds is transacted based on net asset value (NAV). What this means is that when you want to invest your EPF money, you would need to purchase units based on the current fund price. To illustrate, say you took out RM1,000 from your EPF account to invest and the fund of your choice has a quoted price of 98 sen per unit today. With RM1,000, you will be able to purchase 1,020 fund units (excluding other transaction costs). This is different from your EPF savings where your RM1,000 ringgit will remain at RM1,000 and does not change. Later on, when you want to redeem your units you will have to sell at its current market value, hence you open yourself to potential loss of capital. Hence these kinds of funds are prone to short term fluctuations, so if you’re looking to invest with a short horizon they may not be suitable. On the other hand, if you’re intent on investing for the long haul, then these funds may provide you with the potential returns you’re looking for. Markets do tend to go up in the long run so there is a possibility that the fund NAV has also increased and you would make a capital gain. Since a lot of these funds are benchmarked against certain indexes, you can roughly assess how your fund is expected to perform.
Here’s an example of how Malaysia’s index has performed in the long term (I must stress though that this is not an indication of future performance). So if you’ve held onto a fund linked to the index, during this period, you’d be doing pretty well. As I’ve mentioned earlier, there is a real possibility that the value of your investment could fall below your initial capital. Someone who began investing mid 2014 might be feeling that now.
If you think you’ll get a little anxious at seeing the value of your investment go up and down, it would probably be best for you to keep your money with the EPF. At least by doing so you’re guaranteed a minimum 2.5% dividend a year, and your capital is pretty much safe. If you’re okay with a little bit of volatility, and are in it for the long term, the Members’ Investment Scheme should be something you’d want to consider.
An alternative to withdrawing your EPF savings to invest, would be to sign up for a Private Retirement Scheme. It’s pretty much like the EPF, but you have an additional portion of your monthly income deducted, and invested into an investment fund. We’ll talk more about this in another post.
So that’s the low down on diversifying your EPF deposits into other funds.
Have you had any experience in investing your EPF money? Share with us your thoughts!
To read more about the Members’ Investment Scheme, click here.
To know which funds are approved for the scheme, click here.