A sound MPF investment attitude starts with risk management

This article is a rewrite of a report from September 2012.

Many people expose themselves to high risk without realising it. Hong Kong’s MPF system, however, guards the first gate for them. So what does a sound MPF investment attitude look like?

What is MPF risk management?

The MPF system is designed around prudent risk management. It bars fund managers from investing in high-risk structured products or using excessive leverage, dampening the impact of market swings. The MPFA also established a fund risk-marker system so members can gauge the risk level of the funds they choose.

Prudent risk management means three things: avoiding over-concentration, controlling high-risk or leveraged investments, and understanding the potential risks of each holding. Today’s MPF spans five main fund categories — beyond equities, members can access bonds, money-market and short-term fixed-income instruments, assets once reserved for professional or high-net-worth investors — achieving diversification.

Why are high-leverage investments so dangerous?

High-risk or leveraged investments can double profits, but they can also unleash almost unlimited risk. As retirement savings, MPF is managed with strict controls on such exposures to protect members. Every MPF scheme is vetted by the MPFA and the SFC before launch, and investment managers must follow investment guidelines and limits in daily operations to keep potential risk to a minimum.

How can you tell how risky your chosen fund is?

Check the fund’s risk marker — the bigger the number, the higher the risk. It lets members compare risk across funds, with data available in fund fact sheets and on the MPFA’s fee comparison platform.

Everyone’s risk tolerance differs: those nearing retirement should be more conservative; younger workers can afford to be bolder. The key is to assess your own capacity first, then pick suitable funds — not simply follow the crowd.