Readers of heartlandboy.com would have been aware that both Heartland Boy and Heartland Girl had opened SRS Accounts in 2015 as part of their retirement plans. Heartland Boy and Heartland Girl’s SRS Accounts are with DBS and OCBC respectively. While SRS is a great way to reduce income tax, Heartland Boy also views it as a complementary pillar to his retirement funds. The SRS Account in Singapore offers plenty of investment products that provide the option to invest using the SRS Account. The approved investment products range from complicated annuities and insurance policies to simple options such as fixed deposits and ETFs. For a hassle-free way to manage his investments under the SRS Account, Heartland Boy has chosen to invest his SRS in ETF in order to grow his retirement funds.
Why Invest Your SRS Funds?
Your money in SRS Account earns an interest rate of 0.05% per annum. Therefore, if you contribute to the maximum annual limit of S$15,300, it earns a grand total of $7.65. That is probably sufficient for you to buy one Extra Value Meal at MacDonalds in a single year. Of course, an interest rate of 0.05% pales significantly to OCBC’s 360 Account and UOB One Account. In other words, your funds in SRS is left idling around earning a negligible return. Readers would know that Heartland Boy wants his cash to work as hard as him, and therefore advocates every SRS account holder to explore SRS investment products.
Why Invest SRS in ETF?
Having explained the low interest rate levied on your SRS Accounts and hence the low opportunity cost in investing your SRS funds, Heartland Boy’s strategy is to invest his SRS in ETF. (Exchange Traded Funds) Basically, an ETF is listed on the stock exchange just like any other stock and it aims to replicate the performance of a specific stock or commodity index. MoneySense does a very detailed explanation of ETF here. Given that there are plenty of instruments to choose from, you may wonder why Heartland Boy particularly chose to invest his SRS in ETF? To be specific, Heartland Boy has used his SRS funds to purchase STI (Straits Times Index) ETF at $2.53, $2.79 and $2.87 since the beginning of 2016. So here are 5 great reasons why STI ETF is the perfect instrument for your SRS funds.
1. STI ETF’s Superior Historical Performance
STI ETF has generated 8.4% annualized returns over past 10 years (2003-2013). Applying the Rule of 72, it means that your investment will double in value in 8.5 years. Therefore, if you had invested STI ETF in 2003 with your SRS Account and did nothing, your money would have already doubled by 2011! Moreover, the 5% penalty charge levied for premature SRS withdrawal encourages the SRS Account holder to adopt a long-term view. The STI ETF, with its 8.4% annual return, seems like one of the best stocks to have in your SRS investment portfolio. Therefore, the nature of the SRS setup forces you to adopt a very long horizon and the STI ETF is a wonderful stock to buy and hold for the long term given its superior historical performance.
2. STI ETF Picks The Best Blue-Chip Stocks For You
Many of you may be concerned that investing in stocks with your SRS funds is too risky, especially since you are depending on it to become a supplementary pillar of your retirement funds. Heartland Boy wholeheartedly agrees, and in fact he is even more risk averse than the average retail investor. It is why he chooses to invest his SRS funds in STI ETF. The STI ETF picks the bwest performing 30 blue chip stocks in Singapore. Moreover, it adopts a Darwinian approach where the weakest performing stocks are weeded out of the STI on an annual basis. It is like the English Premier League, where the weakest 3 teams are relegated annually. So, you can simply buy, do nothing, and be guaranteed that you will be holding the shares of the 30 best companies in Singapore at any one time.
3. STI ETF Has No Rights Issue
It is only prudent that you invest your SRS in stocks that have no history of calling for rights issue. A rights issue is where a company issues extra shares at a discount to entice shareholders to place more money with the company. Since SRS has an annual $15,300 contribution limit, you may find that you are unable to participate in a rights issue if you have already reached the maximum limit. For this reason, the STI ETF, due to its investment structure, will not be calling for a rights issue, and you need not fear that you will lose out from not participating in a rights issue.
4. Dollar Cost Average With STI ETF
While Heartland Boy did not strictly adopt a dollar-cost averaging approach when investing SRS in STI ETF, he did buy whenever the STI ETF dips 10% more than his original purchase price. Today, he is very glad that he is still in the money with this augmented approach. Readers will be pleased to learn that there is a simpler and more disciplined way to invest SRS in ETF. For instance, those with an SRS Account opened with OCBC Bank can participate in a regular savings scheme operated by the bank to buy the Nikko AM Singapore STI ETF.
Known as the Blue Chip Investment Plan, the investment quantum starts from only $100 per month.
5. You Can Withdraw Your SRS In The Form Of Investments
When the statutory age for withdrawal is reached, those who have invested their SRS in STI ETF need not worry that they must liquidate their investments. Withdrawal is no longer confined only to cash withdrawal. Since July 2015, SRS Account holders are able to apply to their SRS bank operators to withdraw investments from their SRS Account into their Central Depository (‘CDP’) accounts. This method of transfer will also qualify for the 50% tax concession if the conditions are met.
Compelling To Invest SRS in ETF
The above are 5 great reasons why you should invest your SRS funds in STI ETF. It is one of the simplest and best investments for your SRS Account. [Note: If you are curious on how Heartland Boy’s portfolio has done thus far, you can refer to this stock investment review.] Moreover, compared to CPF’s Ordinary Account (2.5%) and Special Account (4%), SRS’s 0.05% interest rate means that the opportunity cost of using the funds to invest is lower. Oh you may consider that to be reason number 6 as well.