As SMSF funds play such a key role in a person’s life, its investment strategy must be planned with future expectations and aspirations in mind.
SMSFs trustees must develop and implement an investment strategy to assist them in achieving their investment and retirement objectives. The investment strategy is not intended to be a “set and forget” document but one that you check on a regular basis to ensure that you are on track to accomplish your retirement goals.
SMSF Investment Strategy
The SMSF investment strategy is a framework for acquiring, holding, and liquidating assets in accordance with your investment and retirement objectives. It should explain why and how you selected to invest your retirement funds to achieve your objectives ensuring that the sole purpose test for funds investments is not breached.
You must design and implement an investment strategy for your SMSF fund, which you must then put into effect and review on a regular basis, according to superannuation legislation.
In addition, rather than a document that just repeats the terms in the statute, it should be adapted, and changes should be made as per the relevant conditions of your fund.
Relevant conditions include, but are not limited to, the member’s personal circumstances, such as their age, job position, and retirement demands, all of which influence risk appetite.
Investment strategy should detail how your investments will help each member achieve their retirement goals. Investment strategy, particularly under the super rules, must consider the following criteria in relation to the overall conditions of your fund:
- The risks of creating, holding, and realising investments, as well as the expected return on your fund’s investments in terms of its objectives and cash flow requirements.
- The diversification of your fund’s investments, such as investing in a variety of assets and asset classes, as well as the hazards of insufficient diversification.
- The fund’s assets liquidity refers to how easily they may be converted into cash to cover fund expenses such as management fees and income tax liabilities.
- The fund’s ability to provide benefits, such as when members retire and need a lump sum payout or regular pension payments, as well as other expenses.
- Whether or not each SMSF member should be covered by insurance, such as life, permanent disability, or temporary incapacity insurance.
Beware, it is not a clever idea to establish investment ranges of 0 to 100% for each kind of investment when developing your SMSF investment strategy.
Asset concentration is one of the most common circumstances, which becomes very risky when coupled with a limited recourse borrowing arrangement. It may expose members to loss a major chuck of their retirement savings if the asset loses value or asset is forced sale due to loan covenants breached. It is something that ATO is targeting recently. It doesn’t mean that SMSFs shouldn’t invest solely in property, but it means to satisfy the investment strategy criteria, trustees must demonstrate that they have considered the fund’s objectives, diversification, and liquidity risks as a part of their SMSF investment strategy.
How To Review SMSF Investment Strategy
Because markets change and your SMSF’s circumstances vary, you should examine your plan on a regular basis. The following are examples of when you should examine your investment strategy:
- A market correction has taken place
- A new member has joined or left the fund
- A member has begun to receive a pension. This is to ensure that the fund has enough liquid assets and cash flow to cover the fund’s minimal pension obligations before the deadline.
It is also notable that you can invest in any type of assets if allowed by your funds’ trust deed, not prohibited by super laws, and meet the sole purpose test.
Also, remember your SMSF auditor will check to see if you have met the investment strategy requirements under the super laws.