SMSF Investment Strategy

All investment decisions must be made in accordance with the fund’s investment strategy, and the strategy must comply with the SIS Act.

Under the SIS Act, the investment strategy provides a defence for trustees against an action by a member for loss or damages suffered as a result of the trustee making an investment. This is on the condition that the trustees have acted in good faith in accordance with the funds investment strategy. The investment strategy must be in writing and should consider the fund’s objectives; diversification; risk; yield and liquidity.

The fund’s objectives will guide the investment strategy, and they need to be in accordance with the sole purpose test. Objectives may be to attain a certain level of return, or if the members are approaching retirement age the objectives may be merely to preserve accumulated benefits.

The investment strategy will also consider diversification and investment risk. Diversification allows the fund to spread risk across various classes of assets, such as shares; cash; collectibles and real estate. The diversification approach will be affected by the level of risk that the trustees consider acceptable. The sole purpose test requires the fund to invest its assets in order to provide benefits to members on their retirement, and so the age of the members will affect the level of acceptable risk. Clearly, a member who is about to retire would seek an investment strategy that will conserve their benefits rather than try to grow them.

For smsf’s with younger members, the trustees may consider that yield is important and will subsequently accept a higher level of investment risk in the investment strategy. Most often an investment strategy will refer to yield in relation to CPI. If the fund grows at the same rate as CPI,  the funds assets are only being preserved. If the fund grows faster than CPI, then it will growing in real terms.

The liquidity of the asset classes will also be an important aspect of the investment strategy. The fund must have enough cash to pay out retirement benefits, as well as pay for compliance and administration. This could become a problem if the super fund is heavily invested in real estate or collectibles.

The trustees must review the investment strategy at regular intervals and make any necessary changes in the best interests of all members. The trustees must also keep proper records to verify the existence of these investment assets and how they are valued. The investment strategy must be presented as part of the smsf audit, where fund’s asset holdings will be examined against the investment strategy that is in place.

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