EPF Funds Potentially give Higher Return than your EPF

[Yong Chu Eu]

February 22, 2010

EPF Funds Potentially give Higher Return than your EPF
Over the past five years, Employment Provident Fund (EPF) distributed an average of 5.0% of dividend annually. Average real dividend rate for the past five years was 1.7% after reflecting an average inflation rate of 3.4%. In this article, we explained why EPF distributions are generally lower in nature and how EPF approved funds can be an option for investors who are willing to take higher risk for higher yields.

by iFAST Research Team

Chart 1: Chart 2:   EPF – Lower Yield, Safe Investment In the past five years, the Employment Provident Fund (EPF) has distributed an average dividend rate of 5.0%. The average inflation rate for the past five years is 3.4%. The average real dividend rate for the past five year was 1.7%. As a national provident fund, the EPF’s primary investment objective is to seek a balance between profitability and prudence. Investments are made only at acceptable levels of risk and to ensure positive real rates of return in the long term. Key considerations in investment decisions include criteria on safety, stability, liquidity, and risk-adjusted returns. In order to meet its investment obligations, the EPF adheres to a disciplined investment procedure and guidelines. The EPF Fund Act 1991 is an act to enact the law relating to provident fund. It includes the monthly compulsory contribution from employers and employees. It also regulates the power and duties of the EPF board and investment panel in handling EPF monies on behalf of their members. All monies belonging to the fund are invested in accordance with the EPF Act 1991. In order to achieve its objective, the EPF has designed a long-term strategy based on a prudent strategic asset allocation as follow: Table 1: EPF Strategic Asset Allocation Asset Class Strategic Asset Allocation (%) Variation (%) Malaysian Government Securities 25 15 to 35 Loans & Bonds 25 15 to 35 Money Market Instruments 15 5 to 25 Equities 20 10 to 30 Property 5 0 to 10 International Investments 10 0 to 20 Source: EPF, iFAST Compilations Historically, EPF had invested at least 70% into bond markets. As illustrated in Chart 2, EPF invested about 74% into bond market in 2008, with equity investment made up for only about 26%. With EPF’s rather conservative investments – mainly invested into safer asset classes, the return that investors are able to obtain would be lower. EPF is considered as risk-free investment. Under the EPF Act 1991, EPF is required to pay at least a minimum interest payment of 2.5% per year to its member. Hence, regardless of any economic circumstance, EPF members are eligible for at least 2.5% dividend payment per year. For conservative investors, leaving your monies in EPF accounts might be a good option. For aggressive investors who are willing to take higher risk, investing into EPF approved funds can be a good option for potentially higher return. EPF Funds Performance – Higher Risk, Higher Return Table 2: Selected EPF Funds Performance Annualised Return (%) 1-year 2-year 3-year 4-year 5-year Annualised Volatility OSK-UOB Smart Treasure Fund 32.8 -5.7 21.7 22.0 16.6 25.4 Kenanga Growth Fund 33.3 0.2 11.5 14.0 11.3 12.0 OSK-UOB Emerging Opportunity Unit Trust 23.6 -8.3 14.1 17.5 10.4 17.6 OSK-UOB Growth And Income Focus Trust 13.6 -4.7 13.1 21.4 NA 14.5 OSK-UOB Smart Balanced Fund 22.1 -3.7 11.0 19.9 15.0 12.8 Source: iFAST Compilations, data as at 31 Dec 2009 Table 2 illustrated the annualised return for selected EPF approved equity and balanced funds. OSK-UOB Smart Treasure Fund and Kenanga Growth Fund are funds mainly invest into Malaysia equity market, while OSK-UOB Emerging Opportunity Unit Trust is Malaysia equity fund which focuses on small to medium companies. OSK-UOB Growth And Income Focus Trust and OSK-UOB Smart Balanced Fund are balanced funds which invest into Malaysia equity and bond markets. For 5-year annualised return, all funds recorded annualised return of above 10%, higher than the average dividend distribution of 5% for the past five years. During a market bull-run, which happened in 2009 (Referring to 1-year performance comparison), Malaysia equity funds were able to deliver return of above 20%. Malaysia balanced funds delivered returns ranging from 13.6% to 22.1% within the same period. However, investors should take note that investing into equity or balanced unit trusts involves high volatility. Annualised volatility for the five funds was ranging from 12.0% to 25.4%. Higher volatility reflected higher risk exposure. In 2008 (Referring to 2-year performance comparison), when Malaysia equity market collapsed (with FBMKLCI contracted by 39.3%), except for Kenanga Growth Fund which registered an annualised return of 0.2%, the four other funds were posting negative annualised return ranging from -3.7% to -8.3%. Unit Trust Investment via EPF EPF members are eligible to withdraw their EPF savings to make their own investment for potentially higher returns. Effective from 1 February 2008, EPF members are able to withdraw a maximum of 20% of their credit in excess of Basic Savings in Account 1 to invest into the approved fund managers. The required Basis Savings in Account 1 is a compulsory minimum savings available in Account 1. EPF members at different age profiles are required to have various minimum savings deposited in their Account 1 as follow: Age  (Years) Basic Savings (RM) Age (Years) Basic Saving  (RM) 18 1,000 37 34,000 19 2,000 38 37,000 20 3,000 39 41,000 21 4,000 40 44,000 22 5,000 41 48,000 23 7,000 42 51,000 24 8,000 43 55,000 25 9,000 44 59,000 26 11,000 45 64,000 27 12,000 46 68,000 28 14,000 47 73,000 29 16,000 48 78,000 30 18,000 49 84,000 31 20,000 50 90,000 32 22,000 51 96,000 33 24,000 52 102,000 34 26,000 53 109,000 35 29,000 54 116,000 36 32,000 55 120,000 Source: EPF, iFAST Compilations For example, a 30-year old EPF member who has RM30,000 in his EPF account. The excess of Basic Savings in Account 1 would be RM12,000. The allowable withdrawal for member’s investment will be (RM12,000 * 20%) RM2,400. The minimum amount of savings that can be withdrawn is RM1,000 and can be made at intervals of three months from the last transfer, subject to the availability of the Basic Savings requirement in Account 1. For more information on investment via EPF account, please click here. Best Regard, Yong Chu Eu   杨子佑                           Choong Hui Chuang  庄惠妆 B.Sc, M.Sc (UPM), AFPM, CFP              B.Sc, (UMS), AFPM 012-4142695                                          012-5082695 cey...@yahoo.com                            hui_c...@hotmail.com Registered Representative of Standard Financial Planner