Why I am forced to buy Unit Trusts

As a Singaporean, a large part of our cash (about 37%) from income will be locked away in the CPF.
Most of the money in the Ordinary Account (OA) will be earning a guaranteed and meagre 2.5% interest rate which barely beats inflation. The first $60,000 in aggregate across your CPF sub accounts also earns an extra 1%.

The first $20,000 in your OA and $40,000 in your Special Account (SA) are NOT investible. (Source: https://www.cpf.gov.sg/Members/Schemes/schemes/optimising-my-cpf/cpf-investment-schemes )

According to https://www.cpf.gov.sg/Assets/members/Documents/CPFISInvestmentProducts.pdf , CPF-OA money can be used to invest in :

1. Insurance (e.g. ILPs, Annuities, Endowments)
2. Government bonds and T-bills
3. Fixed deposits 
• I can't be bothered to find out which banks offer this
4. "Safe" ETFs with limited choices
• Straits Times Index (SPDR and Nikko)
• SPDR Gold ETF (GLD) 
• ABF Singapore Bond Fund (A35)
5. Stocks and other ETFs 
• listed in SGX mainboard and traded in SGD only
6. Unit Trusts with limited choices
7. HDB flat 
8. ...and others

and CPF-SA:

1. Insurance (e.g. ILPs, Annuities, Endowments)
2. Government bonds and T-bills
3. Unit trusts with even more limited choices

At one glance, the CPF Investment Scheme (CPFIS) seems to be designed to lock our money away in the local markets.

100% of the investible amount can be used for Unit Trusts and the 4 "safe" ETFs.  However, only 35% of the investible amount can be used for stocks and other ETFs.

I think it is very weird that high-risk Unit Trusts are considered "safe" (as 100% can be invested in them), when other local stocks are not. Perhaps they think unit trusts are actively managed by professionals hence "safe" and yet often they cannot beat the benchmark despite being paid hefty fees. 

Of course, to beat the 2.5%, I would like to invest in instruments with the highest potential gains. Only equities can yield the highest returns (which come along with the highest risk as well).

We all know about the high management fees of Unit Trusts. In fact, on average, the total expense ratio for many high-performing Unit Trusts is about 1.7% (based on my observation from Fundsupermart's fund selector) which eats into your returns.

Even though there are Unit Trusts with high returns of at least 10% per annum,  I want to avoid them due to the high expense ratio.

Unfortunately, the 4 ETFs are not exactly good alternatives since they will probably yield less returns than Unit Trusts even after taking into account the high expenses, based on the ETFs' historical performance.

In summary, constrained by CPF policies and the lack of better alternatives, I have to reluctantly put 65% of the investible amount in Unit Trusts.

I also invest in Unit Trusts using cash ($300 / month) via Maybank as I want to get the 3% p.a. interest rate under its SaveUp programme. Again, I am compelled to do so as I do not have any better way to fulfill the SaveUp programme criteria. Much of the criteria involve taking up loans (i.e. spending more money rather than saving)

How I choose the Unit Trusts to invest in?

Due to their high-cost nature, I'd want to buy those with the highest potential returns (often comes with the highest risk). I use Fundsupermart's fund selector (for free even though I am not its customer), to find funds with the following in mind: 

1. Consistency: check the 3-yr, 5-yr and 10-yr returns for consistency. I generally ignore funds with very high 1 or 3-yr returns but low 10-yr return. 
2. Underlying portfolio: look at the equity holdings to ensure the fund is investing in trustworthy and high-growth companies preferably ones which control a large market share of their respective industries.
• avoid those so-called "high-yield bonds" as those are usually non-investment-grade bonds. I think only our CPF-SA is an exception.
3. Fees: check that there is no redemption charge so you can sell without any sale charge. 
• There is a risk that the redemption charge may change anytime at the fund manager's discretion.

Many people lost money because they entered at the wrong time, chose the wrong funds or their so-called advisors recommended the wrong funds (usually to line their pockets).

I wonder why there are people buying crappy funds that have been going sideways for years. Such funds still exist today probably because many people are gullible, not financial savvy, and/or they lack the courage to sell to realise their losses. 

Regular Savings Plan?

Many platforms offer some form of regular investment plan that I have since terminated and will avoid for now as I prefer to have more control over the price to buy and sell at (not 100% control though).

Downside

The biggest disadvantages of unit trusts are they don't offer limit orders and the settlement is extremely slow compared to instantaneous buying and selling over exchanges.

Avoiding more fees

I use POEMS as there is no sale charge, no platform fee and no switching cost. It is also a CPFIS administrator meaning you won't incur the $2 / counter / quarter fee from the CPFIS agent bank. FSMOne is also a good alternative with a better user interface and same offering as POEMS.

CPF-SA

I do not invest the SA money as I consider it a 30-year almost-risk-free high-yield "bond". The only risk comes from any CPF policy changes and economy instability.

Anyway there's nothing good to invest in. The only way to beat a guaranteed 4% is to buy unit trusts as CPF-SA cannot be used for stocks and ETFs. There is a limited set of unit trusts for CPF-SA that is different from that for CPF-OA. In this set, there are very few unit trusts with consistent performance over 4%. The best performing, First State Bridge, only had a 5.4% p.a. ROI for the past 10 years. I think the risk-reward ratio is not worth it.