In Hong Kong, both employees and employers are required to make regular mandatory contributions calculated at 5% (to a maximum of $1,500) of the employee’s relevant income to the Mandatory Provident Fund (MPF) scheme.
|Monthly Relevant Income||Amount of Mandatory Contributions Payable by Employer||Amount of Mandatory Contributions Payable by Employee|
|Less than $7,100||Relevant income x 5%||No contributions required|
|$7,100 to $30,000||Relevant income x 5%||Relevant income x 5%|
|More than $30,000||$1,500||$1,500|
Assume you contribute $1,000 per month, or $12,000 per year, throughout a 40-year career life, how much can you accumulate at your retirement? Remember the miracle of compounded returns from step 1! And in this case, you get double your investment right away, because of your employer matches your contributions.
Take Risks When You Are Still Young
If you are young, don’t be conservative – invest in an equity fund! Young people should aim for capital appreciation when retirement is a long way off. Stocks have long been the best asset class to fulfill that purpose. A long investment term and adollar-cost averaging strategy, in which you make and invest MPF contributions on a regular basis, can help smooth out the market’s short-term volatility.
In Hong Kong, there has been inflation over the past few decades (excepting a few years of deflation). If your investments offer returns lower than the inflation rate, your purchasing power will decrease. Therefore, if you are overallocated to conservative funds, they may not help you to counter the risk of inflation.
On the contrary, as you get older or approach retirement, you can consider gradually lowering your risk by reducing the portion of equity funds in the investment portfolio.
Don’t Trade MPF
The MPF is a long-term investment; hence, you should not switch funds on a short-term basis. Since the best-performing investment in one year can often turn out to be the worst-performing investment the next year, you may end up buying high and selling low if you guess wrong, losing more than you earn. Besides, MPF funds, just like any other funds, are dealt on a “forward” pricing basis, i.e. your subscription/redemption will be based on the fund’s net asset value, calculated when the market closes each day. As such, you cannot buy or sell funds at any specified prices during the course of the day, like you can when trading stocks.
Fees Matter in The Long Run
The level of fees your investments charge will have a significant impact on your net investment return. That’s particularly true for the MPF, since it is a long-term investment. The higher your fees in the present, the lower your returns in the future. For example, the Fund Expense Ratio of active managed equity funds are around 2%, while the passive ones (like index funds) are generally lower than 1%. Based on the ugly truth that most active managed funds underperform the index benchmark, we highly recommend that investors choose low-cost index funds.
A new initiative – Default Investment Strategy
A legislative amendment has been passed by the Legislative Council mandating all MPF trustees to provide, in each MPF scheme, a Default Investment Strategy (DIS). The DIS is a highly standardized and fee-controlled MPF investment strategy designed to be consistent with the objective of building up long-term retirement savings. Scheme members who do not make their own choice of MPF funds will be invested according to the DIS of their respective scheme. This approach has been implemented since 2017.