Should You Invest Your EPF Savings During This Recession?

Are you looking to invest your savings? You’re not alone. Thanks to relatively cheap stocks and low interest rates, Malaysian investors have been flocking to the stock market since the March decline.

To help investors diversify their portfolios, the Employee Provident Fund (EPF) recently announced a one-year contribution reduction for members who wish to invest their EPF savings. With this discount, there are currently no upfront fees for transactions made through i-Invest.

EPF’s I-Invest is an online platform that allows members to invest part of their EPF savings in qualifying unit trust funds. Transactions can be carried out online without going through an agent of the fund management institution (IMF).

Considering the current economic climate and the reduction in costs, should you consider investing your EPF savings through i-Invest?

Lower fees can mean higher returns

The fee reduction takes place from May 1, 2020 to April 31, 2021. It applies to transactions made through i-Invest and FMI agents:

  • Invest via i-Invest: maximum of 0.5% to 0%
  • Investment via an agent (IMF): maximum of 3% to maximum of 1.5%

This makes it much more profitable to invest in unit trust funds. In contrast, the initial fees for unit trust fund transactions (for non-EPF savings) can be up to 5.5%. If you invest RM 10,000, an upfront charge of 5% means you will pay RM 500 in fees – and you would actually only invest RM 9,500.

Over many years, the impact of fees is even greater:

Impact of upfront fees on a portfolio

Initial investment of 10,000 RM and contribution of 200 RM per month *
Year5% upfront fee0.5% initial chargeDifference
112,307 RM12,890 RMRM583
ten44,803 RM46,929 RMRM2 126
20RM 102,309107,155 RMRM4,846
30RM195 980RM205,263RM9,283

* Based on an annual return of 5%; not including annual charges

In the example above, the difference between an upfront charge of 5% and 0.5% over decades can mean having a few thousand ringgit more in your wallet. As an investor, lower fees allow you to maximize the return on your investments.

The opportunity to diversify your savings

The i-Invest platform allows you to diversify your portfolio with unit trust funds that invest globally. This means being able to spread your investment risk geographically. For example, if you invest primarily in Malaysian stocks, you will lose out if the local stock market does not fare well. But if you also invest in other better performing countries, you may be able to offset these losses.

Diversifying part of your portfolio overseas could potentially offer better returns than investing primarily locally. Over the past decade, many major global markets have outperformed Malaysia – the US S&P 500 rose 248%, while Malaysia’s FBM KLCI rose 26.8%. In fact, overseas investments were the main driver of EPF’s income in 2018, when they only accounted for around a quarter of its assets.

i-Invest is not only aimed at those looking to diversify abroad. There are 280 different unit trust funds qualified to be offered by 20 MFIs on the platform – you can choose funds that focus on specific sectors (eg real estate), commodities (eg precious metals) , financial securities (for example, Sharia-compliant bonds) and many more. This makes i-Invest a good platform for those who want more control over their EPF savings and who want to invest for potentially better returns.

Don’t invest if you are risk averse

While this can be a good way to diversify your portfolio, you should be more careful with your investment if you are nearing retirement or if you don’t feel comfortable taking on more risk. When you invest in unit trust funds, there is no guarantee that your investments will outperform the EPF, or even provide positive returns.

As i-Invest gives you back control, you should also make sure that you have done your due diligence before you start investing. If you are not comfortable making your own investment decisions, it is best to seek professional advice, for example by contacting a financial advisor or an MFI agent.

Otherwise, leaving your savings in EPF is a safe option. EPF has an excellent performance history, with historic dividend rates of around 6% over the past decade. It also guarantees a minimum dividend of 2.5% for conventional accounts, while unit trust funds do not guarantee a minimum return.

Consider the long term

“Should I invest during a recession?” is a question that is often asked during an economic downturn.

Sometimes this can work to your advantage – when a recession occurs, the stock market may sell for a reduced price. It might be a good time to buy stocks when they are relatively cheap. This gives you more returns when the economy recovers and stock prices rise again.

But if you’re a newbie investor, it doesn’t matter if we are in a recession or booming economically.

This is because timing the market – that is, investing based on whether you think the stock market is going to rise or fall – is incredibly difficult, even for professionals. If you only invest when the stock market is doing well, you will invest in stocks when they are more expensive. And if you wait for the stock market to drop before investing, you could miss out on the stock gains in the meantime.

When it comes to your EPF savings, investors are advised to focus on the long term and avoid timing the market. Consider investing a fixed amount of money on a fixed schedule (for example, monthly or quarterly) whether the stock market is doing well or not. This allows you to capture both the ups and downs of the stock market. When you do this for many years, you will be able to weather short-term volatility in the stock market.

So… should you invest your savings through i-Invest?

Ultimately, i-Invest is a good platform to diversify your savings. Consider using the platform if you want more control over how your EPF savings are invested – and can bear the higher risk involved. By April 2021, you will take advantage of reduced fees to maximize portfolio returns.

However, you shouldn’t invest if you can’t take more investment risk. And if you’re new to investing, consider speaking with a financial advisor or MFI agent to help you make an investment decision.

Finally, as we are currently in a recession, novice investors should avoid investing (or not) based on short-term stock market movements. Instead, focus on the long term to overcome these volatilities.

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