How can you select MPF investment fund choice?

How can you select MPF investment fund choice?

One of the most frequently asked questions when someone enrolls in a MPF plan is how to make investment selections.  Beside the default investment strategy (DIS) which is a ready-made investment solution consisted of the Core Accumulation Fund and the Age 65 Plus Fund, each MPF trustee offers a number of equity, bonds, mixed asset, conversative and/or guaranteed funds and you can consider the following factors when selecting your investment choice:

Investment Goal and Horizon

MPF is established to help members build a reserve for retirement and the mandatory and tax-deductible voluntary contributions (TVC) can only be withdrawn upon age 65. Special Voluntary Contribution (SVC) provides more flexibilities for investment goals as it allows for members to contribute and withdraw before age 65.  

Generally the longer your investment horizon, the more aggressive your investment choice can be as you will more time to recover from market downturns.

Risk tolerance

Even if you have a long-term investment mindset, you can still be more conservative or aggressive than others.  You cannot enjoy long-term returns if you cannot withstand short-term market turbulence and sell out.  Staying invested allows you to enjoy long-term returns of risk asset classes so it is paramount that you select funds that you are comfortable with. 

Each MPF fund has a risk class which is standardized across all trustees with reference to a seven-point risk classification scale to indicate the risk level of the fund.  Generally, a fund in a higher risk class has a higher level of risk.

Diversification

This might be the most important factor determining the investment returns.  According to MPFA data as of 31 March 2022, around 56% of MPF assets are invested Hong Kong assets and around 33% of MPF assets are invested in Hong Kong equities.  This home bias behaviour is similar with retirement plans across the globe. 

While the performance Hong Kong equities funds is relatively lagging other regions the past few years, it is impossible to predict the performance of different asset types and regions year-to-year.   One can consider the DIS funds, mixed assets or global equity/bond funds to achieve more diversification across regions (Greater China, Asia, Global) and asset types (bonds, mixed asset, equity).

Fund Fees

Each MPF fund only charges an annual fund expense ratio (FER) and does not have other fees such as subscription, redemption, switching, platform, administration and bid-ask charges.   However, while high fees do not necessarily mean high returns, they will definitely eat into your asset in good or bad times, so you might want to minimize fees as much as possible. 

All DIS funds have FER of less than 1% and many providers offer additional low-fee funds with less than 1% FER due to market competition. 

Past Performance

Past performance is not indicative of future returns.  One can look at performance data across different time frames (1-year, 5-year, 10-year and since launch) and find out that performance of funds across the same asset class generally will revert to means over long term.  Since we do not know when a certain MPF trustee will outperform at a specific time, the only one thing we can control is to choose funds with lower fees to keep more of the assets to work for us.

Please contact us if you want more information about the fund choices from various MPF trustees.

Last update: 18th August 2022