Five steps to choosing MPF funds
The Hong Kong working population makes MPF contributions every month, which form part of our retirement savings. How much do we actually know about our MPF investment?
Some people are confused about MPF fund choices and some may simply give up making a choice. However, your decisions will have an important impact on your savings outcome. Selecting MPF funds isn't as difficult and complicated as you think. Consider the below five steps to choosing MPF funds:
Step 1 - Understand the types of funds
Currently, there are five major types of MPF funds for scheme members to choose from, i.e. equity funds, mixed assets funds, bond funds, guaranteed funds and MPF conservative funds. Understanding their features and risk levels is the first step in choosing MPF funds. In general, the higher the expected return of the fund, the higher the potential risk.
|Type of MPF funds||Investment objective||Risk level||Annualised rate of return (December 2000 to December 2017)*|
|Equity fund||Aim to have capital appreciation and a return higher than inflation over the long term||Relatively high||5.5%|
|Mixed assets fund||Achieve capital appreciation over the long term by investing in a combination of stocks and bonds||Medium to high||4.6%|
|Bond fund||Earn a stable income from interest or bond coupon rates, and make a profit from bond trading||Low to medium||2.7%|
|Guaranteed fund||Seek a guarantee on capital invested, or get a guaranteed rate of return (subject to conditions, such as a minimum investment period and withdrawal requirement)||Relatively low||1.2%|
|MPF conservative fund||Target a rate of return similar to the Hong Kong dollar savings rate||Relatively low||0.7%|
*The annualised inflation rate for the same period was 1.8%.
Step 2 - Decide the proportion of equities, bonds and other assets in your portfolio
Generally speaking, MPF benefits will be withdrawn when you reach the age of 65. If you are young, your investment term may be up to 30-40 years which gives you more time to mitigate the impact of short-term market fluctuations. Therefore, you can consider taking a greater risk. As such, putting a larger share of your money into equities may help to achieve capital gain and counter the risk of inflation. On the contrary, if you are in the middle-age group, you should lower the risk by reducing the portion of equities and holding more bonds or other low-risk assets in the investment portfolio. In addition, diversification across regions or asset classes tends to lower investment risk.
Your MPF investment portfolio can comprise one fund or a number of funds. The proportion of equities, bonds and money market instruments in the portfolio (so called asset allocation) is critical for balancing the risks and returns of long-term investment.
There is no absolute standard for asset allocation in any portfolio. The key is to choose a portfolio that matches your risk tolerance level. Generally speaking, the longer the investment period, the higher the risk tolerance. Besides, it depends on your investment appetite which means how much risk you are willing to take. It is decided by your personal status, personality and investment experience, among other factors.
There are some simple formulas in the market, such as the "100-minus-age rule", which are used to assess how much equity content in a portfolio would be appropriate. This formula suggests that if, say, you are 20 years old, 100 minus 20 equals 80, so equities should make up 80% of your investment portfolio and the remaining goes to bonds or other low-risk assets. If you are 40 years old, 100 minus 40 equals 60, so you can have 60% of your assets invested in equities. This, however, should only be used as a rough guideline.
After deciding the asset allocation, you can start to choose MPF funds. The risk level of the funds, fees and performance are the key aspects that you can consider.
Step 3 – Look at the risk level of the funds
Some funds have a higher level of risk as compared with others even if they belong to the same asset class. Using equity funds as an example, sector equity funds are generally riskier than other types of equity funds. Also, putting all your money into a single market equity fund (for example Hong Kong equity fund) will involve higher risk compared with a global equity fund which spreads the investments across different markets. You can refer to the Risk Indicator in the Fund Fact Sheet to choose funds that suit your risk tolerance level.
Step 4 - Check the fees of the funds
The level of fees will have significant impact on the net investment return, in particular that MPF is a long term investment. For example, the Fund Expense Ratio of equity funds ranged from 0.65% to 2.64% (as of Dec-end 2017). In general, the fees of passively managed funds (like index funds) will be lower than actively managed ones.
Detailed information on fees can be found in the Fund Fact Sheet of each MPF fund. You can also make use of the MPFA's Fee Comparative Platform to compare the fees of different funds. In addition, you can refer to the Low Fee Fund List(Fund Expense Ratio ≦1.3% or current management fees ≦1%) compiled by the MPFA. When you make comparisons, you should compare funds of the same type.
Step 5 – Examine the performance of the funds
Past performance of a fund is not an indication of its future performance. But it is still useful to understand how the fund performed in the past, in particular, whether it performed consistently well in a long period of time. You can find the performance information in the Fund Fact Sheet.
You can make use of the MPFA’s Fund Performance Platform which provides short/medium/long term fund performance data, Risk Indicator and Fund Expense Ratio to facilitate easy comparison of different MPF funds.
Bear in mind that fund performance can only serve as a reference and you should never choose a fund solely based on its past performance. Refer to the Fund Fact Sheet to understand the fund's features, objective, risk level, fees etc to make sure the fund is suitable for you.
Having chosen the funds that meet your needs does not mean that you no longer need to monitor your MPF account. You should regularly review your fund choices, say once every six months or once a year and make adjustments when necessary.
Default Investment Strategy
Scheme members who do not make their own choice of MPF funds, will be invested according to the Default Investment Strategy (DIS) of their respective scheme. Scheme members can also actively select the DIS if they wish. Check our article MPF Default Investment Strategy at a glance to learn more.