If you’re planning to manage a self-managed super fund (SMSF), it is essential to create an investment strategy. Discover what SMSF investment strategies are and what is required of you.
Australians who want greater control over their retirement savings can opt to use a self-managed super fund. Once you’ve set up your SMSF, you then need to put a clear strategy in place. This guide will explain everything you need to know about designing your own SMSF strategy.
What is an SMSF investment strategy?
An SMSF investment strategy is a detailed plan relating to what assets you will buy and hold in your self-managed super fund. The ATO requires you to keep a written record outlining the reasons behind your decision making and how the strategy’s aims might change over time.
Tip: Investments held in an SMSF can receive beneficial tax treatment, but there are additional administrative hurdles associated with the scheme.
The circumstances of the individual members of your SMSF will affect the final document. Factors which need to be considered include the age and job status of beneficiaries, and how much money members anticipate needing in retirement.
Your SMSF strategy must explain how you intend to use the fund to achieve your financial goals. That includes detailing what assets you intend to buy, and outlining what the overall composition of the portfolio will look like.
Why do you need a self-managed super fund investment strategy?
The simple answer is that having an SMSF investment strategy is a necessary part of your responsibilities as an SMSF member. Details of it need to be recorded as part of your annual SMSF audit which is part of the ATO’s regulatory requirements.
However, it is more nuanced than that. If you are in an SMSF with multiple members then there are additional factors to consider. In that instance, the strategy must outline who is responsible for making investment decisions and how those decisions will meet the needs of all members.
What needs to be included in my SMSF investment strategy?
At least once a year, you need to ensure that your SMSF’s trustee creates or reviews an investment strategy that considers the following legal requirements:
- What are the risk and return of the self-managed super fund’s investments relative to its objectives?
- How diversified are the fund’s investments, and what are the risks of poor diversification?
- How liquid are the investments, and how quickly can they be “cashed out” if the fund needs to boost cash flow?
- Are members of the SMSF covered by insurance held in the fund (e.g., life, permanent or temporary disability insurance)?
- How is the fund managing cash flow to ensure it is able to pay benefits (e.g., lump sums when a member retires) and other costs it may incur?
Tip: Where SMSFs have multiple members the strategy needs to explain how it is designed to meet the objectives of all parties.
How much diversification is required for my SMSF investment strategy?
The levels of diversification of your SMSF investment strategy will depend on your — and your members’ — particular needs, however, you may want to consider:
- Investing across multiple asset classes.
- Investing in various assets within a single asset class.
- Investing in global assets, as well as Australian investments.
- Investing in funds with different styles of how they are managed.
Diversifying your portfolio is considered good practice, but SMSF investors have an additional incentive to adopt the approach. If you don’t diversify your SMSF investment portfolio, you will need to document this as an associated risk in your strategy.
Tip: An SMSF is required to have sufficient liquid assets and cash flow to meet minimum pension payments to any retired members.
What should I invest my SMSF in?
The assets held in an SMSF should be selected according to the likelihood that they will help meet the investment aims of all of its members. That involves considering each member’s investment time horizon and risk-profile.
Once the needs of members have been established, trustees of an SMSF can invest in a wide range of different types of assets. Although not an exhaustive, here are some of the assets you may choose to invest in with your SMSF:
- Australian and international shares
- Real estate / REITS (commercial and residential)
- Commodities
- Cryptoassets
- Global investments
- Cash / currencies
- Term deposits
- Collectables and personal use assets
Getting started with SMSF investing on eToro
Managing your SMSF investments with eToro is easier than you might think. If you don’t already have a self-managed super fund, but want to get started, then a user-friendly guide on how to set one up can be found here.
Tip: Setting up a SMSF offers long-term benefits but does require an upfront investment in terms of time and money.
How often do I need to review my SMSF investment strategy?
It is important that you review and update your strategy regularly to tailor it to market conditions and any changes to the needs of the fund’s members. Reviewing it once a year is the bare minimum, as an SMSF auditor will check the investment strategy annually to make sure it is still legally compliant.
Some of the most common scenarios that may warrant an interim review of your SMSF strategy include:
- A market correction occuring
- A member joining or leaving the fund
- A member starting to receive a pension.
Tip: Any changes made to your SMSF investment strategy must be recorded and provided to your SMSF auditor.
Final Thoughts
The strategy element of an SMSF fund is about more than just picking assets which go up in value. The risk profile of those assets and their projected returns need to be specifically tailored to the fund’s members.
There is also a need to keep records and report on how the strategy develops. That extra level of admin might at first appear to be a downside of SMSFs, but in reality, instilling some discipline into any form of strategy planning is rarely a bad idea.
Join eToro today and learn more about SMSFs.
FAQs
- Who regulates SMSFs?
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Both the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC) are joint regulators of self-managed super funds.
- Are SMSFs a good idea?
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If you have the time, energy and money to start your own self-managed super fund, it can help you to make more appropriate investment decisions for your retirement savings. However, it is not for everyone, so make sure you understand the requirements of running an SMSF.
- How many trustees can an SMSF have?
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For individual trustee SMSFs, there must be two trustees, with at least one of them being a member of the fund.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
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