There are now roughly 600,000
self-managed super
funds in Australia.
There are now roughly 600,000 SMSFs in Australia, each investing on average $1,000,000 within their fund.
These numbers continue to rise each year as more people elect to invest their own savings in order to have more control over their money, and to provide an appropriate level of income in their retirement.
With the stakes so high and with large amounts of money involved, it is vital for SMSF members to have a dedicated SMSF investment strategy to make the most out of their funds from tax-effective investments.
Your SMSF Investment Strategy
According to the Australian Taxation Office (ATO), your SMSF investment strategy must consider the following factors under super laws:
- The objectives of the super fund (risk and return on investments and cash flow requirements)
- The diversity of the fund investments (to reduce potential risks)
- How liquid your fund’s assets are (how easy or efficient an asset/security can be converted into cash)
- The ability of the fund to provide benefits (such as insurance and pensions) for its members and other potential costs it incurs
- Whether or not to hold insurance cover for your SMSF members
Your SMSF investment strategy should be in writing and tailored to the needs and circumstances of your fund. You should also review your investment strategy annually or when circumstances change, such as new legislation or adding and removing members.
Below is a more detailed look at some of the earlier SMSF investment strategy points. If you require more information, consult with our experts for a more thorough understanding of comprehensive SMSF investment strategies and tax-effective investments.
Fund Objectives
The objectives of your SMSF will vary depending on your members and circumstances, but having these objectives written out will create a baseline from which you can dictate your investment strategies and ensures your members agree to the investment direction of the SMSF.
Investment Diversity
Diversifying your investment assets acts as a form of risk management and can help to improve overall fund performance. Having various investment options in your portfolio (be it in shares, hybrids, bonds, or properties, global or otherwise) reduces the risk of one poorly performing investment derailing the entirety of your SMSF.
Asset Liquidity
Having enough asset liquidity is essential to pay for the expenses and liabilities of the SMSF. Your SMSF investment strategy should thus consider whether you have enough liquid assets to meet potential costs.
Insurance
As an SMSF can provide certain types of insurance (life, permanent or temporary disablement), it’s crucial to discuss with the fund’s members the terms of said insurance. Even if the decision is not to provide member insurance at all, the SMSF’s insurance policy should be recorded directly into your SMSF investment strategy.
Types Of SMSF Investments
From shares to self-managed super fund property investments, each investment comes with its own nuances and not every type of investment may be appropriate for you. Below are a few investment types commonly made by SMSFs.
Shares
The ability to become a shareholder or part owner of a company is a staple of superannuation investments. If the company you have chosen is successful, you will likely benefit from an increased value to your shares and/or an income stream in the form of dividends from the company’s profits. In contrast, if the company is struggling, you may see the value of your investment decline with no dividends paid out at all.
In your SMSF, a focus on quality companies that deliver consistent dividends are often highly sought after to increase the value of your fund or replace the funds you are withdrawing if you’re lucky enough to be enjoying your retirement. In Australia, companies like Telstra and Wesfarmers are currently offering attractive fully franked dividends to contribute to your cash flow.
One of the benefits of modern technology is the ability to have investments in global companies with your SMSF as well. Are your daily commutes filled with people on their phone or tablet? Might tech giants such as Apple, Google, or Facebook continue to be profitable companies in the future?
Do you believe that the growing middle class in Asia will lead to more disposable income and more motor vehicle and life insurance policies being required? There are companies that stand to benefit from nearly every scenario or trend around the world, and fortunately, there are investment options that you can take advantage of also.
Hybrids
Hybrid investments are essentially a method for companies to borrow money from investors in exchange for coupon payments. The term “hybrid” is due to the investment’s ability to contain characteristics of both debt and equity investments, and is generally regarded as a more conservative investment than directly investing in company shares.
Like an investment in debt, there is typically a promise to pay a rate of return until a specific date. There can also be features that resemble equities, however often, a future ‘call’ date where capital is offered back to the investor at a pre-determined rate. Endorphin Wealth has found a select few Hybrid securities to be worth investing in, including some offered by Australian banks and Health Care providers that can offer franking credits as a bonus.
Property
Australia’s most favoured asset class is most commonly referred to as ‘bricks and mortar’. A self-managed super fund property investment has its own specific risks and challenges that will need to be considered before you dedicate resources to invest in it.
Unsurprisingly, since the government has allowed for SMSFs to own property directly, investors have been looking for opportunities to take advantage of the preferential tax treatment compared to owning the property in their own name.
Bonds
Bonds are a small step up the risk curve from Term Deposits and are utilised in portfolios to reduce the overall volatility of your SMSF funds. Governments and companies from all around the world are regularly seeking additional cash to fund expansion projects, and bonds allow investors to loan them money in exchange for regular interest payments.
It should be noted that not all bonds are created equal, with some global governments and companies being riskier than others. Whilst past performance is not a reliable indicator of future performance, some bond fund managers have been returning as much as 8.34% per year to their clients over the last 10 years after fees. Bonds are a good way to stabilise.
SMSF investors will need to consider a few important factors when it comes to self-managed super fund property investment:
- Does the property match my attitude towards risk?
- Do I have the cashflow within the fund to cover any repairs,
council rates, water rates or unforeseen expenses? - Do I understand that I need to hold the property for the long term to allow for downturns and large expenses such as stamp duty
and agent’s commission? - Can I achieve adequate diversification within the fund?
- Is my SMSF actually able to borrow the money needed to purchase
the property? - As with all investments, it requires careful thought and consideration into the potential benefits and risks involved.
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