A Self-Managed Superannuation Fund (SMSF) has a similar structure to a trust which primarily focuses on providing financial benefits to members on retirement and their beneficiaries on death. It helps the members of the fund to strategize for their retirement, enjoy tax benefits by investing in different assets, and help in long-term financial growth.
The difference between SMSFs and other funds is that an SMSF member is also the trustee of the fund and that way has control of how the fund needs to be strategically invested in meeting the fund members’ individual needs.
To manage the funds well and form a good SMSF investment strategy, you can get advice from experienced financial advisors. According to the law, the investment strategy should be a written one and be reviewed regularly. So, let’s check the key factors that need to be considered while making one:
Considerations For A Fund’s Investment Strategy
The trustee of the fund needs to legally create, implement and review (at least once a year) an investment strategy that considers the following:
- Investment objectives for the fund.
- Diversification and the perks of investing in a number of asset classes.
- Risks and return of fund investments, including the cash flow needs of the fund.
- The liquidity of the fund including the ability to pay member benefits and other expenses.
- Whether or not to hold insurance cover for the members.
- Circumstances of the members including their age, income needs and retirement plans.
- Whether or not the fund can meet its liabilities.
If the investment strategy is not essentially reviewed and updated once a year, then by law, the Australian Taxation Office (ATO) has the power to penalize the trustee. The SMSF auditor also checks the compliance of the SMSF’s investment strategy every year as part of the fund’s annual return.
Risks And Returns
Risk involves the possible loss on an investment. Different investments include different risks, which range from low to high. The fund trustees should determine the level of risks involved in the volatility of returns according to the circumstances of the fund.
Risks include market volatility, credit risk, liquidity risk, legislative risk and operational risk. The investment strategy should include methods to identify, evaluate and manage these risks. An optimized SMSF investment strategy is to segregate the fund into multiple low risks, some moderate risks and a few high risks investments.
Diversification Of The Fund
There is no single best SMSF setup option. All one needs to do is diversify the funds. It is a risk management strategy where the fund needs to be diversified to reduce the volatility of returns and reduce the risks on investments. The funds can be diversified by:
- Investing across a number of asset classes.
- Making investments in a number of assets within a single asset class.
- Investing in Australia and overseas.
- Investing in multiple funds with different management styles.
So, it is best to disperse your funds and put them into multiple investments so that in case one of the investments performs poorly, the others will make up for it.
Enough Liquidity
The fund must have enough liquidity to pay for the expenses and liabilities such as audit fees, tax payments, pension payments, administration expenses and other fund expenses.
It is best to have enough cash reserves and investments that can be sold quickly to meet the requirements. The illiquid assets are such as real estate investments, which take a significant amount of time to get sold. The investment strategy must consider whether or not the fund has enough liquidity to pay for its liabilities.
Decision On The Insurance
The investment strategy must include the death and disability insurance needs of each member as well as the level of cover that might be appropriate. The types of insurance that must be considered that can be held through a superannuation structure are life, total and permanent disability and income protection.
The outcomes of each of the considerations need to be documented and the reasons if it is decided not to hold any insurance for the members. Also, it should be noted that trauma insurance cannot be held in an SMSF.
Takeaways
An SMSF is a significant way to invest your super funds and make investment strategies so that you don’t have to worry about financial matters on your retirement. It also provides security for the beneficiaries of the investment who shall receive financial aid from the investment on the member’s death.
The GW Capital Group is a firm that offers SMSF services to help people with the best SMSF investment strategies and guide them in achieving retirement goals, tax benefits and financial growth. If you are planning to invest your funds in SMSF, then it is advised to consult experts on SMSF compliance, investment strategy, fund diversification and tax-related queries.