SMSF Investment Strategy Legal Requirements
One of the benefits of having your own Self Managed Super Fund is giving yourself control of how your own funds for retirement are being invested.
You may be aware that as a trustee of your own SMSF, you are required by law, to prepare an investment strategy. You have the freedom to choose which asset classes your SMSF invests into, or how you want to diversify these fund’s investment, as long as your strategy complies to regulation.
Your SMSF investment strategy is then the detailed and documented financial plan created by the trustee(s) of the fund.
NB : According to the Superannuation Industry Supervision (SIS) Act here the trustee of the SMSF has a duty to select which assets are invested into for the SMSF. The trustee is also responsible for monitoring the performance of any investments and also to review the strategy on a regular basis to ensure the fund is meeting its objectives. The trustee is also accountable for the ongoing management of the funds invested for an on behalf of the SMSF.
Costs : When considering an investment strategy the trustee must project and take into consideration the cash flow requirements of the fund. Your SMSF will need to have sufficient cash flow to cover any anticipated costs arising such as : Administration fees, Tax payments, Legal fees, Accountants and Auditor Fees, Insurance, Fee for advice / service etc.
Audit : Every SMSF is required to undergo an independent annual audit, which is designed to review the investments within the fund.
The audit will check that any investments chosen are in line with the investment strategy that was created and also ensure whether the management and administration of the SMSF remains compliant with the regulations set out under section 35C of the Superannuation Industry Supervisory Act 1993 here
Diversification of SMSF Assets
Before deciding on an investment into any particular asset class, it’s important to take into account, the risk involved and the likely return that can be anticipated from any planned investments. Your financial planner should provide advice on diversification of the assets type and level of risk the varying asset class could pose in minimising the exposure of risk to your SMSF. (your problem is that most financial planners are not licensed to give advice on property! They will often try ensure you keep your funds under their management.)
Diversification means spreading the fund’s investments across a range of different asset classes and types in an effort to reduce the potential volatility of returns on investments. Depending on how many years to retirement, how much money is in the fund and a range of other elements taken into consideration whilst strategising the most prudent ways to ensuring a successful retirement.
Funds can be apportioned to include investments into: Residential Property, Commercial Property, Shares, Equities, Managed Funds, Cash, Jewellery, Art, Term Deposits etc.
Re-visit your SMSF investment strategy on a regular basis to ensure performance is being achieved as you expected and make adjustments where necessary.
Buying Property in SMSF
NB: in general, very few properties lend themselves to being Investment Grade, and in a SMSF even fewer. Ensure you get your investment choice correct from the outset!
You can purchase an investment property (Residential or Commercial) in your Self-Manged Super Fund.
Purchase outright using cash or invest the required deposit for your investment and maximise your potential through leverage by borrowing the remainder of the funds through a limited recourse loan.
Trustee Responsibility : Your SMSF investment strategy needs to ensure the ability of the SMSF to discharge any of the fund’s liabilities, including repaying limited resource loans for property investment. As Trustee you can enter into a Principal + Interest Loan or an Interest Only Loan, discuss with your financial planner which strategy best suits your overall investment strategy for the SMSF.
The loan is then funded through Rental Income and any shortfall through members contributions to the SMSF. It is thus imperative that an appropriate Investment Property is selected, meaning one which stacks up by the numbers and not your emotion.
A property with a higher rental yield will thus make sound investment sense over a property with a lower rent + ongoing maintenance issues etc.
Where there are borrowings on residential :
- a separate entity is set up usually referred to as a Bare Trust in which the property is held for as long as there is a loan over that property
- if a residential property you are not able to renovate the property (aside from minor repairs)
- cannot enter into two separate contracts such as one on the Land and another on the Build of the house
- can buy Off the Plan
- ask your financial planner about other areas to be aware of
Tip : A prudent investment strategy might be utilising the power of Leverage where you invest your 20% or 30% deposit and secure a loan on the balance. This way you are getting the bank to do a large part of your heavy lifting for you, and you now have only 20% of your SMSF funds invested, whilst the opportunity of Capital Growth is on 100% of the asset value.
Example Property Value $650k, invest $100k but Capital Growth is on full $650k (where in non leveraged situations only the money you have invested is working for you).