MPF schemes: Types and Risks

December 26th, 2018. 03:52 pm

Under the MPF system, a trustee is required to provide one or more schemes for members’ considerations. In turn, each scheme has different investment allocations. How is one to choose between them?


According to a report published by MPFA in 2016, A 15-year Investment Performance Review for the MPF System (1 December 2000 – 30 November 2015), all six types of funds added value to MPF contributions in the review period.  Of these, Equity Fund reports the highest return and Money Market Fund & others the lowest.

(Sourse: MPFA)


Other than the amount of the return, however, one should also pay attention to the risk associated with each fund.  The diagram below indicates that growth funds (such as Equity and Mixed Assets) undergo a larger fluctuation in their return than funds that are more conservative (such as MPF Conservative).

(Source: MPFA)


From the angle of standard deviation, one can also see that the risk of Equity Fund is the highest and that of MPF Conservative Fund is lowest (See diagram below)


(Source: MPFA)


When it is clear the return figures and the risk level have to be taken into consideration, how does a contributor pick a scheme that suits his need?

Below, briefly, are the major types of funds and their risk levels:


  1. Money Market Fund

The law requires that all MPF schemes to provide at least one conservative fund.  Money Market Fund is a conservative fund that invests exclusively in Hong Kong dollar assets.  Ordinarily, Money Market Fund invests in high-quality short-term interest-bearing securities with a return rate higher than that of bank saving deposits. Conservative funds, by nature, are low-risk investment products. However, in situations such as high inflation, the returns of a conservative fund could even be negative.


The MPF Conservative Fund reports a return of 0.8% in the last fifteen years, lower than the Composite Consumer Price Index (1.8%) , but higher than the annualized Hong Kong Dollar Deposit Rates represented in the Prescribed Savings Rate for MPF Conservative Fund (0.6%)


(Source: Census and Statistics Department and MPFA)

Risk level: Low

Return: Low


  1. Guaranteed Fund

A Guaranteed Fund provides some degree of guarantee to contributors to the fund, such as on the capital invested or a minimum rate of return. For providing such a guarantee, the guarantor charges a fee. At present, most guaranteed funds are conditional guarantees, a point that members should be aware. If the scheme members fail to fulfill the terms of the guarantee and all the qualifying conditions, they will not be entitled to the guarantee. Besides, even though Guaranteed Funds are considered to be low-risk, there are times when the guarantor is not able to guarantee the return of the investment.


Risk level:Low

Return: Low


  1. Bond Fund

A Bond Fund invests in bonds or debt instruments issued by governments, public organizations, banks, commercial organizations or supranational agencies such as the World Bank. Its returns come mainly from interest or the profit from the trading of bonds in the market. Bond Funds are considered to be low-risk, but fund prices and returns are under the influence of the fluctuations in interest rates, exchange rates and credit ratings of a bond.


The return of Bond Fund over the last 15 years is 2.8%, placing it into the third place of performance among the funds. The return of Global Bond Funds (3.3%) is higher than Hong Kong Bond Funds (2.2%) by 1.1%

(Source: MPFA)

Risk: Low to Medium

Return: Low to Medium


  1. Mixed Assets Fund

A Mixed Assets Fund invests primarily in a mixture of bonds and equities. Depending on the allocation between bonds and equities, the risk level of a Mixed Assets Fund varies. The greater amount of money invested in stock is, the higher the risk tends to be. A Target Date Fund is a special form of Mixed Assets Fund, in which the bonds-equities mix changes as the target date approaches.

The return of Mixed Assets Fund is 3.9% over a period of fifteen years. Of the six types of MPF funds, its performance is second only to Equity Fund.  Mixed Assets Funds fall into four categories by the bonds-equities mix.  Of these, the category with a >60-80% Equity performs the best, with an annualized return of 4%.




In terms of risk, the higher the equity component is, the high the risk is the fund. In the diagram below, one can see that when the equity component of a fund is higher than 80% (standard deviation 4.10 %), the risk is noticeably higher than one with an equity component of less than40% (standard deviation: 1.91 %)


(Source: MPFA)

Risk: Medium to High

Return: Medium to High


  1. Equity Fund

An Equity Fund invests primarily in stocks or shares that are traded in approved stock exchanges, and seeks to derive a higher rate of return from the rise in the value of the stocks. As it comes under the influence of a wide variety of factors, the risk level of an Equity Fund is higher than other kinds of funds.  In the 15-year review period, the annualized return is 4.1%, with the performance closely linked to the asset and geographic allocation.  Asian Equity Funds perform the best compared to other funds from other areas.


(Sources: MPFA)

The report also finds that funds that are focused on a particular region, with the exception of North America Equity Funds, have a higher risk than Global Equity Funds.


(Source: MPFA)


Risk: High

Return: High


  1. Others

Index Funds


The objective of an Index Fund is to track the performance of a market index. The performance of such a fund is, therefore, by and large aligned with the market index. Index Funds typically trade less frequently than other actively managed funds, with the result that the administrative and management fees are lower.


Risk: High

Return: Medium to High


The report, A 15-year Investment Performance Review for the MPF System (1 December 2000 – 30 November 2015), indicates that one should take a long-term view on the MPF returns and recognize the close relationship between the risk and the return of a fund. Typically, young people (age 20-55) have a longer contributing period.  If they find the fluctuations in the return acceptable, they can consider putting more of their contributions to Equity Funds or Mixed Assets Funds for a higher potential return.  At the same time, by mixing and diversifying their MPF assets, they can better lower the risk of their investments and reach their investment goals