How to Invest the Money in Your SRS Account

It is coming to the year end and many people are topping up their SRS accounts to reduce income tax. Regarding the key points about SRS, I had an introduction in this video. After topping up their SRS accounts, my clients and friends usually ask me what they can invest to and what is suitable for them. This article is to answer these questions in a layman way.

The money in SRS account can invest to fixed deposits, bonds, endowment plans, unit trusts, ETFs, listed stocks and REITs, which covers most investment vehicles for retail investors in Singapore. Looking at so many different investment vehicles, it is difficult to decide which is more suitable for a person who just started to learn investment. During the decision-making process, we can start from the mechanism of SRS itself. For avoid penalty, most of the SRS account holders will start to withdraw money from the SRS account at or after statutory retirement age (which is 62 at the moment), and the money will supplement one’s retirement income. In this case, the period from now till the year when you start to withdraw money from the SRS account is your investment horizon. For example, if you are 30 this year, and you intend to withdraw money from your SRS account from age 62, your investment horizon is 32 years. For retail investors, knowing the investment horizon is usually the first step on investment process. After this, let’s ask ourselves few questions, then we can short list the investment vehicle(s) that we need.

Question 1: How long is my investment horizon?

If your investment horizon is more than 10 years, your ability to absorb market risk is relatively higher, so endowment plans, unit trusts, ETFs, listed stocks and REITs are more suitable. If your investment horizon is less than 10 years, your ability to absorb market risk is relatively lower, then fixed deposits and bonds are more suitable.

Question 2: Do I need an investment vehicle that can protect my capital?

In the SRS investment vehicle list, fixed deposits, bonds (usually Singapore Savings Bonds) and endowment plans (specific category) are able to protect the capital. However, the vehicle itself being able to protect the capital doesn’t meant that there is no risk. There would still be a loss on the capital if the institution (such as banks, insurance companies and government institutions etc.) issuing this investment vehicle bankrupts, though the probability is very low. For a detailed comparison among these low risk investment vehicles in Singapore, please refer to this article for details. I believe it will help you make a proper decision.

Question 3: If I don’t need an investment vehicle that can protect my capital, what is suitable for me?

In the SRS investment vehicle list, unit trusts, ETFs, listed stocks and REITs can be your options. Their risks are relatively higher, but it also means better upside potential on returns. When selecting among these investment vehicles, my principle is only to invest in something that you are familiar with. At first, we can have an overview of these investment vehicles and see which type we are more interested in. And then we can study this specific vehicle and only start to invest when we are familiar with it. Here is an overview of these investment vehicles and what we should focus on during our study. When we invest in unit trusts, we engage fund mangers to invest our money, so we need to study the fund manager’s investment capability and strategy. Investing in ETFs is following an asset allocation of an index in the market (e.g. STI), so the study should focus on the asset allocation rules of this index and its market outlook. In terms of listed stocks, a long-term investor usually spending more efforts on fundamental analysis, which includes the company’s financial statements, ratios and the trend of its market share. REITs are investment vehicles allowing a small amount of asset allocated to real estates, so the analysis focus is the rental income and appreciation potential of the real estates behind the trusts.

After reading this article, you should have an overall conclusion about where to invest the money in your SRS account. If you have more questions, welcome contact me for a discussion.