How should the regulators respond to this disturbing bit of news then? 

Ultimately, it should be market forces, and not legislation that dictates whether the mutual funds can continue to see EPF monies coming their way.

The fact is that the quantum of annual EPF withdrawals for investment purpose has doubled in a very short period, from RM1 billion in 2001 to over RM 2 billion last year. Likewise, the number of actual withdrawals has also doubled from 108,000 to 223,000 over the same period of time (Source: EPF 2005 Annual Report).

This says that there are a growing number of EPF members out there who are taking advantage of the flexibility given to them by the government to decide how their retirement funds are invested. If the majority are losing money, would we be seeing this kind of growth in investment withdrawals?

As long as we EPF members see ourselves getting a higher return than what the EPF will give us over the medium to long term, we will continue to take our funds out to invest in mutual funds. If we’ve lost money, we may blame the mutual funds or the EPF but at the end of the day, we have to live with our decision. Unless the mutual fund agent has misled us by saying we will not make any losses, or behaved unethically in some other way, there is no one to blame but ourselves.

On the part of the EPF, there should be a more detailed investigation done, in consultation with the unit trust companies, to provide a breakdown of the loss amount, time frame involved and contributing factors before jumping the gun. It seems there is still some question as to whether their loss figure of RM600 million is accurate.

For the mutual funds, they should strive to improve the professionalism of their sales people and to sell according to the investor’s profile and needs. Perhaps they could also provide investor education through talks and seminars, so that we know how to better monitor our investments, and to ask our agents the right questions.

The media in general and regulatory bodies also play a very important role to educate the public in the areas of financial planning, investments and concepts such as diversification, dollar cost averaging and asset allocation.

Investor education and increasing awareness should be a long-term and ongoing process involving all parties, which should not be derailed by some emotional investors who may have suffered losses.

Lastly, out of the RM 9.76 billion EPF withdrawals for investment purposes since 1996, around two-third or RM6.5 billion were made between 2002-2005 inclusive. In other words, the bulk of the EPF monies were withdrawn over the past 4 years, which also means that they have been invested in mutual funds over a relatively short period only. Since mutual funds are a medium to long term investment instrument, I believe the inclusion of these recent withdrawals may have distorted the results somewhat.

It’s great that the issue has been brought to the fore. Hopefully this has created greater awareness amongst the general public about the risks involved in mutual fund investing, which will lead to greater accountability by the mutual funds and perhaps, also provide encouragement for the EPF to strive harder to increase their dividends to stave off the competition.