Another institution!

Following on from my recent post about the EPF’s investment performance in 2005, I should talk a little bit more about whether it is a good move to withdraw one’s money for investments and if so, how one can go about to do this.

The EPF is the retirement scheme set up by the government for all Malaysians, particularly those who are employed (it is not compulsory to contribute if you are self-employed). Under the scheme, the employer contributes 12% of the employee’s gross monthly salary and the employee contributes 11% into the fund monthly. Of this contribution, 60% goes into Account 1 which is funds for retirement, 30% into Account 2 which is for home purchase and education and 10% into Account 3 which is for medical expenses.

Generally speaking, other than the purposes mentioned above, one is not allowed to withdraw one’s EPF until attainment of age 55 (or age 50 if withdrawing from account 2 only). However, one is allowed the choice of investing the funds in account 1 in mutual funds, instead of leaving them in the EPF

The amount that can be withdrawn is 20% of the amount above RM50,000 in account 1, subject to a minimum withdrawal of RM1,000.

For example, if A has RM70,000 in account 1, the amount eligible for withdrawal would be 20% of (RM70,000 less RM50,000) which is: RM4,000.

Withdrawals are allowed every 3 months.

Should you or shouldn’t you invest your EPF into unit trusts?

It depends. If we compare the returns of the two options, dividends declared by the EPF between 2003-2005 were 4.5%, 4.75% and 5% whereas unit trust funds returns can range from the negative to double digits depending on the type of fund.

However it is not just a simple case of comparing returns.

As with any investment decision, one should consider one’s investment goals and objectives, risk profile, time horizon and the makeup of one’s total portfolio before determining the appropriate mix of asset classes to invest in (asset allocation).

Given that close to 80% of the EPF’s investments are in fixed income securities like MGS and bonds, it may be more suited either for an investor who is close to retirement age or someone who may have a longer time horizon (40-something) but who is a conservative investor. For a 20-something or 30-something investor, they may feel that they can “afford” to take more risk by investing into an equity or global/regional fund.

However, the above are very general examples, and whether you choose to withdraw or not for investment in mutual funds really depends on your unique individual circumstances.