Saturday, March 21, 2015

Is it wise to take money from EPF and invest in Stock Market?

On of the email query from a client, "Since EPF (Employee Penson Fund, or know as KWSP) only gave us about 5%+ dividend per year, is it wise to take out some money and invest into stock market?" I told him, if you can consistently earn more than 25% of return in stock market, why not? He seem quite happy with it and think that he may do better than EPF.

Few years ago, I have the similar thinking as well when an agent approached me to withdraw EPF fund and invest into stock market. Initially, I followed his advice, withdraw the money every 6 months, invest in stock market and just ignore about market cycle. After 2 to 3 years, I noticed something very important, which the agent not really telling the whole story, it's the charges that eat up the profit.

Very first time, when we withdraw fund from EPF, the company will deduct 2%, the withdrawal of RM10,000, end up only RM9,800 in your investment account. Also, on quarterly basic, they will charge custodian fee, custodian charges and management fee, which cost another 2% per year. Every time, when you buy a stock, they will charge another brokerage and custodian fee again. Net net, you will pay them nearly 4% of your total amount as fee to them on yearly basic.

If your make a profit of 10% return that year, after deducted all the charges, the return become 6%. What's the point to do all these unnecessary, since the money park in EPF will earn dividend of about 5 to 6% per year. However, someone may say he can earn 25% profit in stock market, then why bother the 4% charges?

It is easier say than done, especially when you experience the market cycle, up and down. When one receive quarterly statement, if you notice the money invested now decrease by 30%, you may wonder if your decision is right or not... as compare to if you do nothing and let the money park in EPF, you will earn the 5% interest compare to having the losing holding in your investment account. Especially when we say for retirement purpose, how many time you dare to withdraw more fund out from your EPF and invest in stock market when compare both side? This is a psychological problem we may have to face before making any decision, though we know market is buy low and sell high.

Due to all the above "problems", after 5 years, I decided to close the account and transfer back the money into EPF. Guess what, they deducted another 2% of fee again before release the money into your EPF. Net net I earn about 15% of profit, but divided by 5 years, it's was about 3% per year! At least, I have tried the option and know that it can not meet my objectives.

EPF is risk free and volatility free investment, one can earn 5% to 6% per year but the downside is that is not near money. That's why I have decided to park the money every year in EPF to take advantage of tax deduction without worry about monitoring. If the opportunities arise, I will use cash on hand to invest in stocks, that would be more comfortable for me.