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Guaranteed funds may not provide positive investment returns

Retirement
MPF

By Elaine Hwang | July 18, 2022

Investment markets have been very volatile recently and members have been commenting on their shrinking MPF account balances.

Some members have transferred all or part of their MPF assets to Guaranteed funds to preserve the capital built up within the MPF system.

However, it is important to note that some Guaranteed funds do not provide a 100% guarantee. Therefore, members should clearly understand the guarantee conditions before investing in these funds.

Guaranteed funds account for a reasonable proportion of the total MPF assets

Although some MPF providers do not offer a Guaranteed fund, the fund category accounts for a reasonable proportion of the total assets held in the MPF system. Currently, there are a total of 16 Guaranteed Funds across different schemes, which accounts for 4% of the total number of funds.

As at 31 December 2021, the net asset value of all the Guaranteed funds was HK$7.81 billion, accounting for 6% - 7% of the total MPF assets. This shows that even though Guaranteed funds are not as popular as equity or mixed-asset funds, there are still quite a number of members who select this type of fund.

Redemption of hard Guaranteed funds

Members should be aware of the difference between "soft" and "hard" Guaranteed funds.

Hard Guaranteed funds have a relatively simple structure. These are Guaranteed funds without any conditions. The fund usually declares the rate of return every year. Members who redeem or invest in the fund will enjoy the declared rate of return. However, to continuously provide guaranteed returns in the long run, the investment strategy of the fund will, by necessity, be conservative. Hard Guaranteed funds usually invest in short-term fixed income, thus the investment returns are relatively low.

This type of fund can be used as a safe harbor for MPF assets when market conditions are volatile. Members can switch their assets temporarily to these funds and wait for the desired time to reinvest into other investment funds. Note that it is difficult to keep up with inflation by investing in Guaranteed funds for a long time.

Soft Guaranteed funds have pre-set conditions

A "soft" Guaranteed fund requires that certain conditions must be fulfilled to obtain the guaranteed return, such as: reaching the age of 65 or withdrawing under other specified circumstances. Some funds also impose other conditions for the guarantee to take effect, such as meeting a minimum investment period, or investing into the fund before a certain age, etc.

If a member fails to meet the guarantee conditions, the fund's return will be determined by actual performance. Note that as the fund's price can go up or down, it is possible that the member may experience a negative return. However, if a member redeems after meeting the guarantee conditions, the return of the fund will be the guaranteed return or the actual performance of the fund, whichever is greater.

Soft Guaranteed funds invest in longer-duration assets

Given the guarantee conditions of the Soft Guaranteed funds, members’ assets are “locked” in the fund for a certain period, and fund managers are subject to fewer investment restrictions and can invest in longer-term fixed income or riskier stocks to obtain higher returns. If members are confident that they can fulfill all the guarantee conditions, and are looking for higher returns, the soft Guaranteed funds could be a good choice.

Soft Guaranteed funds have higher returns

Currently, among the top 10 Guaranteed funds based on the amount of assets, 3 funds are hard guaranteed and 7 funds are soft guaranteed. As at 31 March 2022, the 5-year annualized investment return of the hard Guaranteed funds are all less than 0.5%. In general, the investment performance of soft Guaranteed funds is better than that of hard Guaranteed funds. No matter if it is a “soft” or “hard” Guaranteed fund, the fund return may be lower than inflation.

Understand the guarantee conditions before investing

Transferring all or part of your MPF assets to a Guaranteed Fund can be a stopgap measure during times of high market volatility. However, from the perspective of long-term retirement savings, the investment portfolio should be determined by reference to a member’s longer-term appetite for risk. When members decide to invest in Guaranteed funds, they must first understand the guarantee conditions and make appropriate choices based on their investment objectives and risk tolerance.

This article in English and Chinese is available for download.

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Head of Retirement, Hong Kong & Macau

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