The number one reason why so many people choose SMSFs as their retirement plan is that they can exert control over their investments. However, investments cannot be made whenever and however a member chooses. There are certain rules and regulations applying to the whole process of SMSF investment.
The law requires that the trustees must agree upon a mutual financial plan and later detail it in a written document called an investment strategy. The investment strategy clearly states all the rules that govern how investments are made. While coming up with a self managed super fund investment strategy, trustees must take into account the present or future financial situation of each member and all the risk factors for different investments. The overall objective should be to invest assets in a way that will protect and further advance the retirement benefits and the death benefits of each fund member. To be extra sure you are doing everything right, consider asking an expert to help you with your self managed super fund investment strategy.
The investment strategy should not be something that is final, but instead, it should be reviewed on a regular basis, so check whether it meets the members’ current needs and the financial market. The investment strategy should be changed in cases when:
- a new member is added to the fund
- there’s a death or change in the health of a member
- marriage breakdown of spouses that are co-members
- a member commences their pension
- there’s a change of risk tolerance for certain investments
As with every investment, there’s a risk of losing your money. How high the risk for a particular investment is can be measured by the volatility of its returns. The political stability, changes in legislation, market changes and interest rates are all factors that affect how high the risk will be. All of these factors are variables and that means that the trustee must constantly observe and asses the current situation, so that he can adjust the investment strategy accordingly.
The best way to reduce the investment risk, you should consider a diversification in investments. This basically means spreading your investment money across a number of different assets such as property, stocks and art, countries and investment managers. For a small fund in its early years of development, this can be difficult to achieve due to having a limited amount of finances. How wide the diversification of investments will be depends on the size and circumstances of the SMSF.
The trustees should not get carried away with investing too much in property and objects, but should keep in mind that a good amount of the finances should remain liquid. Sufficient liquidity is necessary for timely payment of the required taxes, administration expanses, broker fees, stamps and legal fees. This will keep the fund safe and without any penalties or interests.
Whatever you and your co-trustees decide to invest in, you need to adhere to all the rules and regulations concerning SMSFs. Keep in mind that the law prevents certain investments like:
- giving loans to members or their relatives
- investments that are not within an arm’s length basis
- investments beaching the in-house asset rules
- not following the restrictions on acquiring assets from related parties.
