ARE T-BILLS WORTH THE INVESTMENT WITH CPF FUNDS?
While the need to go to a bank makes it less convenient, financial experts say it can be worth it with yields on Treasury bills exceeding the 2.5% base interest rate offered by the account. ordinary CPF.
“I think it’s a good idea to consider putting the funds from your CPF ordinary account into treasury bills since the rates are now higher,” said Tan Chin Yu, senior client advisor at providend.
As they are backed by the Singapore government, treasury bills can be considered a safe investment option, he added.
That said, there are other factors to consider before investors make the jump.
As with all investments, the key is to understand your time horizon or how many years before you need the funds for other purposes. Also consider the liquidity of the investment, i.e. how quickly the invested capital can be accessed if needed.
“Although treasury bills are short-lived instruments, investors should still expect not to touch silver in the next six to 12 months,” Tan said.
“If they need funds in the short term – either to buy a property or to withdraw for people over 55 – it is better to keep the funds in their ordinary CPF accounts, instead of investing. “
Indeed, although treasury bills are negotiable debt securities and there are no penalties for liquidating before maturity, there is always interest rate risk.
In general, bond prices and interest rates move in opposite directions, so if interest rates go up, bond prices go down and vice versa. This means that in a rising interest rate environment, investors may not be able to recover the full amount they invested if they sell their Treasury bills before maturity.
Besides market risk, liquidity could also be an issue if there are few interested buyers, experts said.
Another consideration is the additional interest offered to CPF members until the end of the year, as part of the government’s efforts to improve the retirement savings of Singaporeans.
Individuals under the age of 55 can earn an additional 1% on the first S$60,000 of their combined balances, with a cap of S$20,000 for Ordinary Account funds.
For seniors over the age of 55, an additional 2% interest will be paid on the first S$30,000 of their combined balances, with ordinary account funds capped at S$20,000.
Investors should ensure they have these minimum balances in their CPF accounts before investing, said Mr. Victor Wong, Director of Wealth Management at Financial Alliance.
There are also opportunity costs that come with investing CPF regular account funds, such as the loss of CPF interest earned.
In the case of an investment in a six-month treasury bill, one could lose more than six months of CPF interest on the funds invested, since no interest would be earned in the months when there are withdrawals or contributions, Mr. Wong said.
Take for example the treasury bill auction at the end of October, an investor should have submitted a bid before the October 27 auction date. The Treasury note was issued on November 1 and will mature on May 2, 2023 – a total of 8 months from demand to maturity.
There are also fees to pay.
Banking agents charge a one-time fee of S$2.50 for each transaction, as well as a quarterly service fee of S$2 per ATM. This means that investing in treasury bills using his regular CPF account will incur a total fee of S$6.50, including goods and services tax.
Using the same October treasury bill as an example, an investor who invests S$10,000 will earn a return of S$208.90 based on the yield limit of 4.19%. On the other hand, the same investor forfeits about S$166.67 in interest if the funds were left in the ordinary CPF account.
“Add in the transaction fee of S$6.50, the excess interest earned is S$35.73 for every S$10,000,” Wong said.
“Therefore, you also have to (decide) whether that extra S$35.73 per S$10,000 is worth (going to a bank) to apply in person. Of course, the additional interest earned will increase if the Treasury yield continues to climb,” he added.
Mr. Aaron Chwee, Head of Wealth Management Advisory at OCBC Bank, flagged the possibility of oversubscription at upcoming treasury bill auctions as higher yields are likely to attract more investors.
“Investors should be prepared for such disappointments,” he said.