The Mandatory Provident Fund (MPF) is a compulsory pension fund designed by the Hong Kong government as a major protection scheme for the aged and retired residents. Most employees and their employers are required to contribute monthly.
MPF funds: a chooser's guide
Making the right MPF choices is even harder if you don't know the jargon. Nicky Burridge offers a guide for novices
New rules enabling members of Hong Kong's Mandatory Provident Fund (MPF) to transfer their contributions to a provider of their choice have increased the range of funds.
But with more than 460 from which to choose, you could be forgiven for feeling overwhelmed. Matters are not helped by jargon used to describe the funds.
Money Post has assembled a concise guide for investors who don't know their dynamic allocation funds from their capital stable ones, to navigate through the fund maze.
Choosing a fund
Kelvin Lee, head of institutional business at Schroder Investment Management in Hong Kong, says: "The first thing people must decide in choosing a fund is their investment objective."
A key part is knowing how much risk you want to take with your money. For example, if you are 30 years from retirement, you may feel comfortable with a lot of investment volatility if it means you get a higher return over the medium to long term.
But if you are five years from retirement, you may prefer not to risk the value of your investment falling. As a result, you are likely to adopt a more conservative investment strategy, even with potentially lower returns.
As a general rule, Lee suggests those who want capital appreciation should opt for a more high-risk asset class, such as equities. Those who want to preserve their capital but prevent inflation devaluing it should favour bonds.
Once you have determined your risk level, identify the fund type that best suits your needs.
The Mandatory Provident Funds Schemes Authority divides funds into several core types, and ranks them according to risk levels.
Also known as growth funds, equity funds have the highest level of risk. At least 70 per cent of the fund's assets are invested in shares, either in a single, regional or global market.
For example, AIA's Japan Equity Fund focuses on Japan, while the group's World Equity Fund offers a spread of global investments.
There are also green funds which only invest in companies deemed socially responsible.
MPF providers collectively offer 190 different equity funds, under names such as dynamic equity funds, global diversification funds and equity portfolios.
The higher level of investment risk taken by equity funds lets them produce higher long-term returns.
But volatility in these funds means they are best suited to those far from retirement, as well as those with a high tolerance of risk seeking an aggressive investment strategy.
Robert Flux, director of Simmonds (International) Financial Associates, says that buying into equity funds on a regular monthly basis reduces the risk due to dollar cost averaging.
This strategy means that members benefit even if the unit prices are depressed, as they are able to buy more units for their money, enabling them to benefit more when prices rebound.
Having a fund with greater diversity in its investments, whether geographical or by sector, also helps spread investment risk.
Index funds, also called tracking funds, are a variation on equity funds. These aim to replicate the performance of particular indices, such as the Hang Seng.
In the past, equity funds have made middle to high single-digit percentage returns over the long term, although the current investment market is challenging.
Charges range from 0.51 per cent to 3.88 per cent, with an average of 1.81 per cent, on a fund expense ratio (FER) basis, which measures a fund's total expenses as a percentage of its size.
Mixed asset funds are a good bet for people who still maintain a high tolerance of risk, but are not comfortable with volatility by having all their money in equities.
The funds invest at least 70 per cent of their assets in a combination of equities and bonds, with individual funds specifying the maximum amount that will be held in equities.
Funds with names such as "balanced funds", "stable funds", "life-cycle funds", "target retirement funds" and "absolute return funds" usually fall into this category.
Flux says: " The majority of MPF members with a reasonably sized capital sum already in their schemes, would be better off looking at multi-asset funds where the manager has the flexibility to make asset allocation calls and position the fund according to the economic situation and how they see fit."
Most providers offer different funds with different ratios of shares and bonds, giving investors the chance to reduce the level of risk they take as they near retirement.
MPF members have a total of 212 mixed asset funds to choose from. Charges average about 1.91 per cent on an FER basis.
As with equity funds, some mixed asset funds are also known as growth funds and dynamic funds, making it important for individuals to check exactly what type of fund they are dealing with.
Bond funds, also known as fixed-income funds, aim to earn a stable income by investing at least 70 per cent of their assets in bonds.
They are seen as being medium-to-low risk, with the main risks caused by fluctuations in interest and exchange rates, and changes to the credit rating of bonds.
The funds suit those with a low risk appetite who want stable returns over the medium to long term. Like equities, they often focus on a geographical region, such as Asia, while some stick to investments made in Hong Kong dollars to eliminate the risk of exchange rate fluctuations.
MPF providers offer a total of 44 bond funds.
Returns tend to be lower than for equity and mixed asset funds, and charges are lower, too, at an average 1.64 per cent.
These are funds that guarantee either the value of the capital invested or the rate of return.
Their risk level is relatively low, but the MPFA warns workers that the guaranteed rate of return may be modified or cancelled without prior notice.
Investors also typically have to keep to strict conditions to qualify for the guarantee, such as a minimum investment period and restrictions on moving their money. Those who opt for this type of fund must be confident that they can keep to the conditions.
Charges average 2.24 per cent.
Money market funds aim to produce a better return than a deposit account, while still being relatively low risk.
Also known as capital preservation funds, they invest in short-term interest bearing money market instruments, such as bank deposits, government bills or commercial papers issued by large companies.
These are best suited to people close to retirement or the risk averse.
Wyman Leung, director of investment services at Altruist Financial Group, says: "When approaching retirement you should have a lower risk investment portfolio."
Fund names include "cash funds", "Hong Kong dollar funds" and "renminbi funds". Charges average 1.13 per cent.
As the name suggests, these take a restrained approach, investing in short-term bank deposits and short-term bonds. All investments are made in Hong Kong dollars, so there is no risk from currency fluctuations.
They are good for those about to retire, or the highly risk averse, but low risk is matched by lower returns.
Returns are similar to the Hong Kong dollar savings rate and may be lower than inflation, meaning the value of your money is actually depreciating.
Workers with money in such funds can expect an annual return of about 0.8 per cent after charges. The FER is lower, averaging 0.52 per cent, and charges can only be levied when the return on the fund exceeds the minimum monthly savings rate set by the MPFA.
All MPF providers have to offer an MPF Conservative Fund.
As a general rule, workers should regularly review the type of fund they are in, because a fund that fits their investment objectives now may not in five to 10 years' time.
But there is good news for those who find the fund-selection process overwhelming.
Most schemes offer so-called lifestyle funds, in which the asset allocation of a fund is automatically changed over time to reflect how close the individual is to retirement.
The funds have names such as "Target 2048 Retirement Fund" or "SaveEasy 2035 Fund".
Lee says: "It is relatively easy for members to choose the fund to invest in, they just calculate which year they are going to retire. "The fund manager will automatically 'de-risk' the fund as you approach retirement age."
But he adds that people who feel more confident could do this themselves.
"You could start with a growth fund, then five or 10 years later switch to a fund that is less aggressive, such as a balanced fund," he says.
"As you get closer to retirement, shift into bonds and cash."
As with all financial products, it is important to compare different funds.
The MPFA website (mpfa.org.hk) has two comparison platforms, one to compare the varying FERs of different funds, and one to compare service levels of different providers.
BestServe, a sister company of MPF provider Sun Life Financial Hong Kong, and one of the city's major retirement scheme administrators, has produced a website, MyMPFchoice.com, which enables people to compare the past performance of different funds, based on both regular and lump sum contributions. BestServe manages more than 700,000 retirement scheme customers with total assets of HK$48.9 billion under administration.
Flux says: "People should choose funds where the manager has demonstrated over a decent period of time that they have the asset allocating skills to protect value in bad times but add decent growth during good."