Hedge Fund - A Time Bomb? (Part I)

What Is A Hedge Fund?

One of my investment principles is never to be greedy and fear of market sentiment (market downturn). In other words, overcoming greed and fear. Another important closely related principle is never invests in anything that you don’t really understand. Why closely related? If you were not greedy, why would you want to jump into an investment product that you don’t understand? If you were not greedy, why would you believe in a letter that tells you that you have won a car for doing absolutely nothing? If you were not greedy, why would you still believe in “free lunch”?

Hedge fund is another investment products which is relatively new to most Singaporeans. A few years ago, local authority allows hedge fund to be set up here but limit to high net-worth individuals. If I remember correctly, it started to appear on the headline somewhere after year 2000. In my own words, hedge funds are funds that undertake risky investments. The funds can go long or short; it can speculate on an M&A news or short the forex during a crisis, or long or short on options or any derivatives, take up arbitrage opportunities, or anything that can generated high return. The funds may borrow more money to speculate and have complex strategies to make money. It’s like Chow Yun Fat having a secret method to get royal flush most of the time. Perhaps many gamblers don't know (or refuse to know) that the owner of a casino doesn't gamble; he invest. He never gamble as he knows one simple truth; banker always win. This winning chance/probability has been incorporated into every game. So he just invest his money in creating those games.

Hedge funds seldom market its products, or to put it correctly, they are quite secretive in nature. Less the big funds, some of the smaller ones may collapse without appearing on the paper. What is a “hedge of hedge fund”? As the name implied, it is a fund buying into a basket of hedge funds. In my opinion, that’s really extra spray (多此一举) (khey jua – hokkein). Can you imagine yourself diversifying risk by spreading your fund into more of the same types of product at the expense of returns?

Banker: “Sir, managed by our experts, our hedge fund can generate exceptional high return.”
You: “Ya but a bit risky for me”.
Banker: “Sir, we also can diversify you risk by spreading them into various hedge funds.”
You: “Oh, I know diversification from my study. It reduces systematically risk. Ok, I’ll buy.”
Me: “………….”

People buy this kind of product, or worst still, they buy capital guarantee hedge fund. In my opinion, this is an insult to intelligence! No offence to those who believe in it.

I never or never will invest in hedge fund for two reasons – I’m still a poor chap and even if I get to the high net-worth group, I will never buy hedge fund. The reason is simple – I don’t gamble. Since the day I learned my lesson, I never gamble….. ok, maybe just $20 on ToTo. Generally speaking, Chinese like to gamble and I am a Chinese. But after a few lessons, I make it very clear to myself - never gamble and never invest in anything that I don’t fully understand.

My Personal Experiences

1) Warrants. When I started to learn stock trading in the 90s, the warrants were very buoyant then and they offer good rate of returns. What is a warrant? Recently I visit a colleague in NUH as she gave birth to her second girl; she asked me what is a warrant. I thought usually such visit would end up talking about babies, weight or delivery time, diapers, one month curfew, blah… blah... blah. But we spent most of the time talking about stocks. Warrant is a call option, literally a piece of paper that is cheaper than its underlying asset and generally people use it to speculate. A Warrantholder does not enjoy the rights like an ordinary shareholder. A warrant has an expiry date after which the paper will be worthless. I don’t think I want to go into the detail as it may take up another half a page.

So I traded warrants in the 90s until Asia Finance Crisis when I returned everything back to the market. When the global economy started to recover from recession at around 2003, I thought that might be the right time to buy cheap warrants. I made some money. But market doesn’t go up in a linear fashion. There was also down periods here and there. As some of my warrants were in red and as time gets closer to its expiry date, exit would not be possible unless a bull sets in. And I was praying for that. Subsequently, I shredded all these papers (I mean the contract statement from my broking house) away. And then finally I establish my own rules in stock investments, NO MORE WARRANTS (or no gambling is allowed).

2) Gems. About three years ago, my friend and I decided to go for a short holiday at Bangkok. We just wanted to go shopping and get out of this busy city for a while. I swear, only shopping, and nothing else. On the second day, we were on a boat (can’t remember the name of that river) to visit the palace. It was drizzling then. When we were near the palace, a man about 40 - 50 years ago approach and greeted us.

Thai man: “Good morning, are you going to the palace?”
My friend: “Yes”
Thai man: “You can’t go there because you are wearing sandals and shorts.”
Me: “See lah, at least I wear my Nike and bermudas. Nevermind lah, let’s get back to hotel”

(Then my friend was still mingling with that Thai man and I was getting impatient. I am always defensive to strangers).

Me: “eh, let’s go lah, it’s still drizzling.”
My friend: “He say can help us hail a tuk-tuk and book it until we finish our sight-seeing for a cheap price.”
Thai man: “really, you can’t go to palace but can still go other places for sight-seeing. I am the security guard of a bank nearby”.

(So the Thai man hail a tuk-tuk for us, gave instructions to the driver and briefed us on the places of interest).

Thai man: “So you go here, go there and then here….. The driver will wait for you at very stop. Then you will bypass this jewelry shop you can take a look. The products right from factory and very cheap for visitor. It is a place not to missed”

(I was still annoyed but gave in…wrong move!)

Me: ‘ok lah, ok lah”.

(So we follow that tuk-tuk and visited about two temples which bored me to death. And then we bump into a devoted Buddhist. He approached us).

Devoted Buddhist: “Are you from Singapore?”
My friend: “Yes”
Devoted Buddhist: “Oh I love Singapore. I had import/export business over there. I like Orchard road.”

(blah… blah… blah and he led us into the temple with a big Buddha statue and explained the meaning and religious practice. He removed his shoes and lie down flat with arms and legs straightened. I know that’s the highest form of worship. Then he asked where we are heading.

My friend or me: “oh, the tuk-tuk driver is driving us around”.
Devoted Buddhist: “Did anyone tell you about a shop with beautiful and cheap gems?”
My friend or me: “Yes, someone told us that, a security guard.”
Devoted Buddhist: “Oh yes, he is telling you the truth. As tourist, you get tax-free and gem’s value can appreciate. This big sapphire I’m wearing now, its price has gone up. Just a few years only. But I don’t sell. I wear for good luck.”

(And he also teaches us the way to manage the salesman so that he will not inflate the price. For example, by telling the salesman that we buy to wear for blessing, and not for trading. After he departed, we were discussing whether we should go.)

Me: “I usually don’t invest in things that I don’t know. That’s my investment principles.”
My friend: “You decide lor.”
Me: “Sigh… ok lah, just take a look.”

(Then the tuk-tuk brought us there. The door was small but it was huge inside and well decorated. Cut the long story short, we bought a blue sapphire at around S$1,500. When we were back to the hotel, and from that moment onwards, until we were on the plane, I kept having weird feeling about the gems. The rest is history.)

To know more about all these scams, go Yahoo search and you will find many similar stories like mine. Subsequently, I gave that sapphire ring away free. I couldn’t get over the fact that some Thai scumbags cheated me. Why such lengthy grandmother story? To remind myself and anyone reading that no matter how smart you are, no matter how many MBAs you have been awarded, so long there is a greed in you, any Tom-Dick and Harry can cheat money out of your pocket. Since then, I firmly established an investment principle; never invest in anything that I don’t really understand.

To be continue……..

STI Movement - Aug 07

How To Evaluate A Company's Business (Part II)

In Dec 2006, I was flipping an investment journal searching for investment opportunity and I saw information on Breadtalk. Merely by glancing through some figure, I felt that something has changed and I decided to re-study Breadtalk’s business again. I downloaded Breadtalk’s annual reports and punched those figures into my calculator. I highlighted all the growth factors and focus especially on it’s franchise business. Without putting it together into a nice report, I concluded that Breadtalk’s fundamental has changed!!!

In 2004, I have a few reasons why we should avoid Breadtalk. But now, I have even more reasons to invest in this company. I shared with a few colleagues and friends including Mr. Philip Comd (the one who says “by the time their franchise business become successful, the share price would have gone up”) to buy Breadtalk. Its share was quite illiquid then trading around $0.23 a share. But it doesn’t matter to me. Why? Because I am not trading, I am investing! That’s why! And after Breadtalk released its annual report for 2006 in Feb 2007, it just confirmed that my analysis is correct.

I like all my readers to remember this. Sometime Mr. Market overlooked a growth company. Here we have one good example. I am not suggesting that Breadtalk will definitely grow for the next five years, but its growth for the last few years has been impressive. Most importantly, Breadtalk now has attributes that Warren Buffett always look out for – growth, intrinsic value, strong brand, necessity, business that is simple to understand etc. Enough of talking, let’s go into Breadtalk’s financial statements.

I have a spreadsheet with formulated cells for ratio analysis. By punching in figures from a company’s annual reports, ratio computation will be done automatically. I also have my own rating system but it is classified. The followings are my interpretation of Breadtalk’s financial performance:

- Its liquidity is acceptable although it is below the ratio of 2:1. We need to understand that Breadtalk’s business is mostly in cash term and with low inventory. One thing for sure, they can’t and they won’t keep their bread overnight.

- NP margin has improved steadily, though still not impressive enough. If you asked me “how would I be impressed”, personally I would love 15% - 20% sustainable NP margin. Previously it has high GP margin but extremely thin NP margin. This goes to explain that it has high operational expenses such as labour and rental. However, I am sure that the management is aware of these problems and has controlled its bakery outlet expansion locally. Instead, they expanded their bakery outlet outside Singapore, particularly in China.

- Returns on equity (ROE) shows marked improvement indicates that company has deployed resources effectively thus generating shareholder value.

- Though gearing has increased, but by my personal yardstick, Breadtalk’s gearing is still healthy.

- PE was about 12 times in Dec 2006 and considered attractive then. It is about 22 times in Aug 2007.

- Price-to-book (PTB) ratio is definitely above 1 considers that Breadtalk does not need to invest heavily in assets. That’s why it has low NTA. Perfectly sensible to me. But in Aug 2007, the PTB is rather high due to higher share price.

- Dividend sucks. But for a growth company, it is perfectly ok not to distribute dividends. By the way, Warren Buffett doesn’t believe in giving out dividends. This is because he knows that if he gives out dividends, shareholders might put it in other lousy investments. In the hands of Warren Buffett, it will be compounded at around 25% a year.

- Breadtalk’s share issue is quite thin. Based on my experience, average small/mid cap companies tend to have around 500 million issued shares. For the year ended 31 Dec 2006, Breadtalk’s issued share is only approximately 200 million. You know what that means? That means when Mr. Market finds out what I discovered, Breadtalk’s share price will surge (and it did in mid-2007).

- The revenue growth from Bakery and food court are impressive. Its franchise business increased tremendously but we are still waiting for it to translate into wonderful revenue contribution.

Breadtalk’s fundamental has changed. Besides franchise business, I am also excited on its food court business. In Jul 2007, I saw Breadtalk’s new food court “大食代” (Food Republic) below Suntec Conventional Hall. That food court, oh my god, it is fantastic. It is not just a food court, it’s a classy food court. It’s like back to old times, or as if you are dining in a library. Go visit that outlet but don’t go during weekends or peak hours.

3) Consensus reports

Have you forgotten that I am still touching on how to evaluate a business? This is part 2 of a previous article. Don’t get too carried away with Breadtalk. In fact, I am not suppose to cover financial analysis here. It is suppose to be just qualitative analysis. Anyway, what the hack! Now, there are tonnes of analysts writing their reports everyday but only handful are really, really good. The rest of them…. I better don’t comment else I might get beaten up. If you have friends working in broking/fund houses, go ask them how analysts rush their reports. They are trained no doubt, but take these analysts’ reports with a pinch of salt. In any case, their forecast figures for the next 3 years will change frequently after a company releases its financial report.

So now you realised that I didn’t forecast Breadtalk’s financial statement for next three years. I don’t forecast profit or losses; only God can see the future. I hope you are not disappointed. Notwithstanding all that I said above, there are also good analysts such as Ms Teh Hooi Ling, BT Senior Correspondent which I had introduced to many of my friends. Professional analysts have sources, huge database and connections to get latest information. They are also able to interview top management of a listed company easily. So by collating and studying the analysts’ reports, I can see if it concurs with my findings. If the answer is yes, then it is even highly probable that my analysis is correct. You want living example? Here’s one but you might think that it’s all bullshit. Nonetheless, I’ll still share with you. About two years ago, I was very interested in Ausgroup. I believed that it is a growth company which has been largely overlooked. Its share was rather illiquid until Ms the Hooi Ling issue a report in Business Times. Most of us bought it at around $0.25 - $0.30. Supported with growing profit, its share price skyrocketed to $2 in mid-2007. But we have already locked in our profit.

This article is a bit long; I have to end it here. In conclusion, open your eyes and ears especially when you are in a group or in shopping mall, and take note of things happening around you can help you to make correct investment decision. In this way, it mitigates our shortcomings as a retail investor.

Investment Based On The Character Of Those At The Helm

Dear readers, I found it! I done a search on Fundsupermart.com website and I found that article of a success story that I shared in my write-up “How to evaluate a company’s business (part I)” dated 30 Aug 2007. The following is an extract from the article, credit goes to Fundsupermart.com. Before we go on with the wonderful story, I like to declare that I have an investment account with Fundsupermart.com. But I do not have any business relationship with Fundsupermart.com.

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December 26, 2002

This Cabbie's Worth A Million Bucks

G.K. Singam came to Singapore over 30 years ago with just $7 in his pocket. Today, he has an investment portfolio worth $1.1 million. He tells Fundsupermart Magazine where he has put his money to work and what he plans to invest in.

by Bharathi Rajan

Fundsupermart
Jan/Feb 2003 issue

Sim Wong Hoo Was His Regular Customer

In his 20 years as a taxi driver, "Singam" (as he's known to his colleagues) has driven possibly thousands of passengers. So over the years he has accumulated a wealth of knowledge from the conversations he has had with his customers who come from all walks of life. One of his most memorable encounters was with Creative Technology's Chairman Sim Wong Hoo. "Creative's boss was my regular customer 20 years ago, when he had a small office at Ayer Rajah Crescent. I learnt a lot from him. He was very humble and never had a chip on his shoulder. He would treat his staff very well and his character is good. I don't believe he'd ever do any hanky-panky." It was this regard for the character of Sim that led him to buy stocks of the local tech behemoth.

"I purchased Creative's stock at around $7. When it went up to $38, I sold it off. Then when it went down to $17, I bought some more; those shares I have kept," says Singam, who has an investment portfolio worth $1.1 million. That is quite an achievement for someone who left Malaysia 37 years ago, and arrived in Singapore with just $7 in his pocket………

………Not one to rely on charts, graphs, and price-to-earnings ratios, Singam has a different approach to stock picking. He places a premium on the character of those at the helm, the relative financial stability of the company, and the kind of environment it operates in. And he has a bias for government-linked firms. "I don't like stocks that aren't government backed. Think about how many people depend on the government." Elaborating on some stocks, which he owns, that fit the bill, he says: "Take Comfort Group, for example. They gave me 25,000 shares first and then topped it up to 50,000. When the share price hit $1.32, I sold the shares. And when the price dropped to $0.62, I bought the shares back. I like the company because I work for the company and I know what is going on inside. And Comfort Group has more than 11,000 cab drivers. This is not a company that the government will allow to go bust. How many other companies have this many staff? It's the same with SIA. Look at how many people it employs. And it has paid up for its planes. Very few airline companies can do that."………..

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So I hope that you will be inspired by this success story. This is not a success story of a man far away in America, but a simple man who is here right on this little island. He probably didn’t realise that what he has been doing (or his approach) is exactly the teaching of Warren Buffett.

How To Evaluate A Company's Business (Part I)

Correct Mindset of Stock Investment

If you ask around the meaning of buying stocks, most of the people will tell you that it is about buying stock at a cheap price and sell when the price gone up. And don’t be surprised that such answer may also come out from those so-called “financial consultants”.

Now, please, the answer is not wrong, but indicates that these people are treating stock investments like “buying a piece of paper (or record since we are scripless now) and sell it when the price of that paper went up”. If you use this approach or having such mindset, you are not a value investor and you are largely affected by market sentiment. You are just another player.

This is certainly not the Warren Buffett or Peter Lynch’s way. So what is the Warren Buffett or Peter Lynch’s approach? When you buy a company’s shares, you are effectively investing in that company’s business. And you should behave likewise. It is not uncommon to find share price of a company moves (appreciates/depreciates in paper value) in opposite direction against its business. If you focus on the paper, you may cut loss. But if you focus on the business, assuming good fundamental, you will pump in more funds. If you really follow market sentiment and dump a company's share even when it has wonderful business, I felt sorry for you.

So how does a person behave if he/she is considering a partnership business? Let’s say someone invites you to invest in his business. Perhaps the business needs more fund to expand. I am very sure you will do at least all of the followings (list not exhaustive):

- Visit the company, talk to the employees.
- Observe the crowd and look at company’s customers’ record to identify repeated customers.
- Ascertain the company’s SWOP (strength, weakness, opportunity and threat). E.g. customers’ loyalty, strategic location, brand name, market share, cost structure, market competition etc.
- Obtain a copy of business profile.
- Review the company's P&L for last few years. Of course, if the report is not audited, then you have to take with a pinch of salt.

- Have a discussion with the founder. Get him to reveal SWOP and ascertain his integrity. If you found out that he is trying to avoid or covering up something, you should pack up.

I am never a businessman, but I would do at least all of the above. It's really common sense, although my lecturer used to say that "common sense is the least common human attribute". Anyway, if you just want to “trade the paper”, then this article will be irrelevant to you. Now, Warren Buffett and Peter Lynch are real expert when it comes to evaluating a company’s business and its management team. Even though we may just buy only 0.01% of the company’s shares, it should not stop us from using their approach. If time is what you don’t have, then I have a suggestion - pay me and I’ll do it for you.

A True Testimony – Creative Technology

If I remember correctly, a few years ago, an article appeared in the Fundsupermart.com about a Singapore taxi-driver whose investment turned him into a millionaire. If I can find that article again, I will put it on my blog. What happened was one day, this taxi-driver pick up Mr Sim (COE, Creative Technology). Singaporeans should know this man, a poly-grad who turned a company into one with large global market share and dual listing in Nasdaq (likely to be delisted from Nasdaq this month) and SGX. Both of them had a wonderful conversation during the rides and this tax-driver was deeply impressed with his humble customer. One thing for sure, the tax-driver is not an investment analyst, and most probably not a CFA charterholder. But he based on one simply principle that have been highlighted by Warren Buffett over and over again – you invest in a company that is run by a CEO of a such character that you want to marry your daughter to him. The taxi-driver and Mr. Sim's chit-chat session was not long, and the investment decision may look hasty, but that’s not my point.

For those who have been active in local stock market for last 10 years should know that Creative Technology’s share went up from about US$5 a share to nearly US$70 a share in late 90s. That taxi-driver must have invested more than S$100,000 in Creative Technology based on one man’s character. One more highlight, Creative Technology's share price has dropped to near all time low right now due to continuous disappointed earnings. But again, that's not my point.

How To Evaluate A Business?

Firstly, we must accept that our evaluation will be much simpler as compared to Warren Buffett or fund managers. If you tried to do exactly what they are doing, I am afraid that is not going to be possible. You don’t believe? Ok, try to make an appointment with a listed company’s investment relation manager and tell him that you intended to buy 10 lots but you like to interview him first. There are a few reasons why we (retail investors) just can’t be as complete or receive as much information as we want compare to fund managers. For example:

- Warren Buffett buys a controlling stake in a company. Fund managers may not buy controlling stake but the size would be large. Retailers? Ten lots, may be twenty or more. Therefore, you will receive different treatment from the company’s management.
- Information that a company is willing to reveal is likely to be different between meeting Warren Buffett, a fund manager or investing public.
- You can be sure that warren Buffett and fund managers have sophisticated systems/sources to assist them in their evaluation. Retailers? We can’t even afford wirenews at home.

The good news is that there are other things we can do to compensate our shortcomings:

1) Be vigilant

Keep an open eye when you go shopping. Don’t just get entertained, you may make big bucks just by being observance. Let me share a living example. A few years ago, Jurong Point (JP) was not as big as it is today. When JP officially opened for business, I thought the shopping mall will not be impressive. This is because its customers will make up of mainly factory workers, and may probably damage its image. Subsequently, I witnessed how JP grew and expanded its floor area by enlarging the shopping mall. Today, even with its expanded underground carpark, finding a parking lot requires huge amount of luck. Besides the parking lot, finding a seat at the food court “Kopitiam” also requires luck and patience most of the time. There was never an empty space/shop inside JP. Without talking to the management, what I seen with my own eyes is more than enough for me (and my friends) to call a buy on JP (jointly owned by Lee Kim Tah and Guthrie). And true enough, both Lee Kim Tah and Guthrie reported continued rental growth from JP. We made some profit out of it.

2) Take note of aunties’ and uncles’ gossips.

How many times have you heard friends and colleagues commenting or cursing a product or a company vigorously? So what do you do with it? You join in the fun and then you forget about it? Well I don’t. If a few persons said it, it may not be true. But what if you heard again and again from different mix or locations? Then there could be some truth in it. When Breadtalk was listed in 2003, its share price surged more than 50%. Their business concept was quite innovative and fashionable, and many people like it. And I heard the following gossips frequently:

“wah, Breadtalk employ many young girls….”
“eh, that spicy bah hoo (flosss) bread is really nice…..”

I patronized a few of their outlets. I found that the above two statements were true. The bread is nice to eat, but every outlet is heavily staffed. Labour costs would be big problem in a competitive market where you can find many other popular confectioneries such as Bangawan Solo, Four Leaves, Prima Deli etc. In addition, most outlets are located at pime areas, so rental expense will be scary. And after we monitored and study their progress, we decided that Breadtalk should be avoided. Why were we interested in Breadtalk then? Answer - their franchise business. A franchise business model is a wonderful model which had created empires such as MacDonald and 7-11. I knew this long ago but Breadtalk’s progress was not exciting at all. Thus I was unable to differentiate Breadtalk’s business as compared to the rest. There was no reason at all to invest in Breadtalk then. One of my friend (Mr Philip Comd) said this to me:

“By the time their franchise business become successful, the share price would have gone up”.

I replied that it may, but still the important question is whether that “gone up” price is under or over-valued relative to its growth! Price by itself means nothing. It has to be compared against something else. This means that I will invest if my analysis shows a change in Breadtalk's fundamental, and Mr. Market might missed it. It happens many times. We cannot invest base on hope or luck just like visiting a casino.

In Dec 2006.....

To be continue……...

Financial Planning With SRS

Investment Management & Financial Planning

My objective of creating this blog is to share knowledge on investment management and financial planning. What’s the difference? Investment management covers mainly on investment in shares, bonds, unit trust etc. But financial planning covers even wider areas and longer periods. I think investment management is part of financial planning.

Let’s try this, can you tell me the ultimate objective of buying stocks, bonds or any investment products?

“extra money to spend around….”
“banks give peanuts mah, so no choice invest lor….”
“I need more money for my family…..”

Gentlemen, in my opinion, the above remarks are not “ultimate" enough. The true purpose of investment is to prepare us for a comfortable life after retirement age. Many Singaporeans take this topic lightly. And our Government has been worried about ageing problems (and my first stock analysis will be on Pacific Healthcare, soon).

Among my friends and colleagues, I think about less than 20% are really actively monitor and explore ways to enhance retirement savings. One thing I must really tell my countrymen who are reading my blog - our government has created many avenues to prepare for comfortable retirement life. But many just don’t get it. I am not affiliated to any political organizations directly or indirectly but you think about it, do you find this kind of government everywhere?

Financial planning is a huge topic and is impossible to cover most of the things in one page. Moreover, I am still learning. There are lots of wonderful tips I like to share on financial planning but for a start, I will share on how we can, through tax planning, reduce taxes and create wealth for retirement.

Please read carefully, it’s tax planning, not tax evasion. Do you know what's the two things that nobody on the surface of the earth can escape? Answer - death and tax. In fact, you may still have to pay tax after you die. Anyway, whatever I shared here, it's legitimate and those double-MBA guys sitting in IRAS or CPF are in control. They are the gatekeepers.

Supplementary Retirement Scheme

The Supplementary Retirement Scheme (SRS) was launched in 2001 by the authorities and operated by the big 3 banks. It is quite similar to CPF special account but with different characteristics.

So what is it in short? It is a scheme whereby you transfer your CASH (only) into SRS account with a bank and enjoy tax savings. You can use the savings in the account for investment. The ultimate purpose is for retirement planning, although you can withdraw the money anytime. The benefits of SRS:

- Tax relief. A dollar contributed to SRS will reduce your chargeable income by a dollar.
- Investment returns are accumulated tax-free except for Singapore investment where tax had been deducted from the payer company.
- At retirement, only 50% of withdrawal from SRS is taxable. However, the chargeable income can still be massage by spreading up the withdrawal from SRS account. Most probably, you still won’t be taxed at retirement.

What if you withdraw it before retirement?

- 100% of the sum withdraw will be subject to tax.
- A 5% prematured penalty will be imposed, except in the event of death, TPD or bankruptcy. (So if you die, the amount withdrew is still taxable, see what I mean?).

If you want to read in detail, please check this link. Firstly, let’s get focus, I’m still talking about retirement planning. Opening a SRS account is voluntary but it is a way to force yourself to save more for retirement while enjoying tax savings. Remember the one ultimate objective for investment – comfortable retirement.

So by forecasting your tax payable next year, you can decide how much to put into this account. Perhaps at year end, you happened to dispose a fund and thus with more cash holdings. You wanted to invest it again but there is another better option. Based on your forecast, you are going to pay some money to the IRAS next year. By transferring cash into SRS account, you can reduce your tax payable and continue your investment activities. It may not be significant, but I don’t mind that few hundred bucks of savings from you.

When you reached retirement age, you should withdraw the money over 10 years so that your tax payable is either negligible or none. For this, you need to sit down and work out your needs and how it ties in with your other retirement income. I think such tax planning benefits especially those in middle-income group. Almost all of my friends belong to this income group. Unfortunately, I am still far away from it. Don’t ask me why.

Case Study

I created a spreadsheet to forecast tax payable. Its use is quite limited at this stage but enough for someone with simple tax assessment (Singaporean & tax as residence). Firstly, my spreadsheet has an “idiot-proof” Q&A worksheet. By answering those questions with regards to your income and relief status, the calculation will be done automatically.

So let’s assumed that Mr Anderson’s wife is not working. He has a kid, his mother still kicking but not staying with him and he attended his ICT. Based on the estimates, his tax payable for the basis period should be (around) S$1,367.50. If Mr Anderson transfers S$4,000 into his SRS account before 31 Dec, the tax payable will reduced to S$1,027.50. Tax computation is based on calendar year and so your decision for a transfer can and should be made at the end of the year. Mr Anderson effectively saved S$340 (or 8.5% immediate returns) by transferring cash into SRS account.

Other Options To Reduce Tax Further?

Yes. I had deliberately left “CPF cash top-up” empty in my illustration. Now, we all give monthly allowance to our parents. After all, we are still Asians. Let’s say Mr Anderson’s mum is quite independent with personal savings. Mr Anderson can choose to give his mum a CPF top-up instead of giving her cash to sit in the bank earning pathetic interest. And then, he is entitled a further relief!

Assuming he did a CPF top-up of S$4,000 into his mum’s retirement account, his tax payable will reduce further to S$762.50 (now total savings of S$605). And Mr Anderson’s mum will enjoy 4% returns on her retirement account. So change the way you managed your cash holdings, or give the money to IRAS for being ignorant. You decide.

“Are all these planning stuff legal and welcome by our government?”

Yes of course! By taking care of yourself and your family, they got one less social problem. They should nominate me for NDP award. So deploy our money sensibly till the day we retired. Make sure your money work hard for you. You do it, you will be wealthier compare to another person who do nothing about it, all else remains constant. Remember that our ultimate objective is still retirement planning. The old concept of 养儿防老 (yang er fang lao - invest in children as an annuity) doesn’t work anymore. That doesn’t mean that we leave our parents to rot. But it certainly means that everyone must be FINANCIALLY INDEPENDENT right from the day we stepped into the society.

Lastly, if you like to explore my spreadsheet, give me your email address. Take note that it excludes complex tax issues and only meant for Singaporean taxed as residence. At this stage it’s still F.O.C. because I am still developing it (by adding more complex tax situations). So get yourself “unplugged” like Mr. Anderson.