Your SMSF investment strategy
Managing a Self-Managed Super Fund (SMSF) requires a well-structured investment strategy to ensure that retirement goals are met and the fund meets the ‘sole purpose test’.
This test requires the fund to be maintained solely for the purpose of providing retirement benefits to members or their dependants if the member dies before retirement.
All investment decisions need to be made in the members’ best interests and also to meet the sole purpose test. The decisions regarding how the funds are invested need to be documented in the investment strategy.
As per Australian superannuation laws, trustees must develop, implement and regularly review the SMSF investment strategy, ensuring it aligns with the fund’s objectives and its members’ circumstances:
- Reflect Member Needs: Circumstances change; make sure the strategy still fits members’ retirement goals and risk profiles
- Adapt to Market Changes: Markets shift; adjust the strategy to reflect current economic conditions and protect fund performance
- Audit Readiness: Avoid potential audit issues by ensuring the strategy matches actual investments, preventing any compliance breaches
- Fund Future-Proofing: Use this review to plan for the next financial year, adjusting for diversification, liquidity and evolving fund goals.
An SMSF investment strategy must consider crucial factors, including risks, diversification, liquidity and insurance coverage for members. It should address how the fund will make, hold and realise assets in a way that meets members’ retirement needs, factoring in their age, employment status and risk appetite. The strategy must be tailored to the fund’s unique circumstances and must go beyond simply restating legislative requirements.
Trustees are free to choose their investment types, provided they comply with superannuation laws. However, placing all investments in one asset class can lead to concentration risk, especially if the asset is leveraged. To mitigate such risks, trustees should outline how the strategy addresses the lack of diversification and ensures the fund’s long-term stability.
Regular reviews of the investment strategy are essential
Significant events like market changes or members transitioning to pension phase should prompt a review to ensure liquidity and cash flow needs are met. Additionally, trustees must demonstrate that these reviews have taken place, with documented evidence available for auditors.
Auditors will assess whether the SMSF has a compliant investment strategy and if it was adhered to throughout the year. In case of breaches, trustees must rectify the situation promptly to avoid penalties or disqualification.
For expert advice on creating or reviewing an SMSF investment strategy, trustees should consult a licensed financial adviser to ensure the strategy’s effectiveness in meeting retirement goals.
The fund’s accountant is generally not able to provide this but can assist trustees to complete a compliant template to create a suitable investment strategy for the fund.