An SMSF (Self-Managed Superannuation Fund) is an investment option that gives you greater control over your retirement savings and comes with greater responsibility.
If you’re looking to set up an SMSF, it’s crucial to have a clear investment strategy in place from the outset, and this will help ensure your fund is on track for success and meets all legal requirements.
SMSFs are required by law to have an investment strategy, but what goes into a successful SMSF investment strategy? To help you get started, we’ve put together a quick guide of things you should consider when creating an SMSF investment strategy.
An SMSF investment strategy will need to take into account :
– The legal requirements for SMSFs
– The intended return and risks of the fund
– Diversity of the fund’s investments
– The SMSF liquidity requirements (i.e. how much money needs to be available for immediate withdrawal)
– SMSF insurance requirements
The Legal Requirements for SMSFs
The legal requirements of an SMSF can be complex, and you must understand them fully before setting up your fund.
There are two SMSF structures available: corporate trustee SMSFs, where the SMSF is a company, and it has directors who are members of the SMSF or individual trustees SMSFs, where each SMSF member is also a trustee.
An SMSF can have a maximum of 6 members and must comply with Superannuation Industry (Supervision) Act 1993. SMSF trustees must always act in the best interests of their members and are responsible for the investment decisions made on behalf of the fund. They are required to create, implement, and review the investment strategy regularly (at least annually).
Risk and return
SMSF investment strategy should state the expected rate of return of the fund, over what period this is to be achieved, and what risk the SMSF is willing to take on.
Consideration must be given to whether the members are in the accumulation or pension phase, their time to retirement, the SMSF member’s risk profile and any special needs or circumstances. These factors will drive whether the SMSF will be investing in growth or defensive assets.
Any investment involves risk, and SMSF trustees must assess the risk of individual assets within their fund and the overall risk of SMSF itself. Trustees will also need to factor in short and long-term risks and consider how much risk is appropriate to achieve the fund’s goals.
For example, investing in cryptocurrency may have a high return potential; however, it is also very risky, so SMSF trustees need to carefully weigh up whether this is an appropriate level of risk to meet the objectives of the SMSF before making a decision.
Diversify Your Portfolio
A diversified SMSF investment strategy is one of the critical factors in ensuring long-term success.
When investing, it’s essential to spread your money across a range of different asset classes and sectors, which will help minimise risk and maximise returns. Generally, SMSF investments can be made into cash, term deposits, bonds, shares, listed property trusts and managed funds, residential or commercial real estate (including land and buildings) or alternative assets such as art or wine collections.
It’s essential to have liquidity in your SMSF investment portfolio, allowing access to money when needed. The trust will need some liquid assets to fund the SMSF expenses, such as administration costs, audit fees, tax expenses, and may also need to fund pension payments. This means investing in some assets that are easy to sell, such as shares or maintaining cash reserves.
Insurance for SMSFs
It is not a requirement to have insurance, but having adequate insurance coverage can be important for any SMSF investment strategy. Trustees can choose to have insurance in place to protect their funds against any potential losses, including death, disability and illness. Regardless of whether or not the fund decides to take out insurance, the decision will need to be documented in the investment strategy.
Get Professional Help
The SMSF investment landscape is complex, and it’s often best to seek professional advice when setting up your fund. This will ensure you have all the right processes in place to meet your SMSF legal requirements.
At Accario, we specialise in SMSF administration and audits and can help with tailored solutions to meet your specific SMSF needs.
Get in touch with Accario today to find out how we can help you.