The self managed superannuation fund (SMSF) has a structure that is similar to trust that mainly focuses on providing financial benefits to members on their retirement and beneficiaries upon death. This helps members of funds to develop strategies for their retirement, enjoy tax benefits by investing in various assets, and helping in long-term financial growth.
The difference between SMSF and other funds is that SMSF members are also guardians of the funds who control how the funds are strategically invested to meet the individual needs of members.
To manage funds well and form a good SMSF investment strategy, you can obtain advice from experienced financial advisors. According to the law, the investment strategy must be written and periodically reviewed. So, let’s check the key-factor factor that needs to be considered when making it:
Consideration for fund investment strategies
The trustee needs to create, implement, and review (at least once a year) investment strategies that consider the following things:
Investment objectives for these funds.
Diversification to invest in a number of asset classes.
Risk and return of fund investment, including the need for cash flow funds.
Liquidity funds include the ability to pay for members’ benefits and other expenses.
Will it hold insurance for members or not.
The life cycle of the member including age, income needs and retirement plans.
Whether the funds can fulfill their obligations or not.
If the investment strategy is basically not reviewed and updated once a year, then legally, the Australian Tax Office (ATO) has the power to punish the trustee. The SMSF auditor also examines compliance with the SMSF investment strategy every year as part of the annual return of the fund.
Risk and Return
The risk involves possible losses in an investment. Different investments include different risks, which range from low to high.The trustee must determine the level of risk to be accepted in accordance with the rules of the fund.
Risks include market volatility, credit risk, liquidity risk, legislative risk and operational risk. The investment strategy must include a method for identifying, evaluating, and managing this risk. The optimized SMSF investment strategy is to separate funds to some low risk, some moderate risks and some high risk investments.
Diversification of Funds
What needs to be done is to diversify funds. This is a risk management strategy in which funds need to be diversified to reduce refund volatility and reduce investment risk. Funds can be diversified by:
Investing in a number of asset classes.
Investing in a number of assets in one asset class.
Investing in Australia and abroad.
Investing in a lot of funds with different management styles.
Funds must have sufficient liquidity to pay fees and obligations such as audit fees, tax payments, pension payments, administrative costs and other funds costs.
It is best to have enough cash reserves and investments that can be sold quickly to meet the requirements. Unequal assets are like real estate investments, which need a lot of time for sale. The investment strategy must consider whether the funds have enough liquidity to pay for their obligations.
The investment strategy must include the need for death insurance and disability insurance from each member and the level of protection that might be appropriate. The type of insurance that must be considered that can be held through a pension structure is life, total and permanent disability and income protection.
The results of each consideration need to be documented and the reason if it is decided not to hold insurance for members. Also, it should be noted that trauma insurance should not be held by an SMSF.
SMSF is a significant way to invest your superannuation money and an investment strategy is a necessary requirement of running an SMSF. The SMSF also provides security for investment recipients who will receive financial assistance upon the death of members.
Nobel Thomas is an accounting company in Melbourne that offers SMSF services including to guide you when preparing your SMSF investment strategy. If you plan to invest your funds through an SMSF, it is advisable to consult with experts who can assist with SMSF compliance, investment strategies, diversification of funds and queries related to taxes.