Introduction to investing

Investing in your SMSF - What you need to know and getting started

Providing for retirement via a Self-Managed Superannuation Fund (SMSF) has many benefits. 

These include the flexibility to choose how your SMSF is invested providing trustees (those with the responsibility for running the fund and ensuring it meets its obligations) with the ability to select the nature, size and number of investments the fund holds and how these are managed and change over time.

Choosing the investments within an SMSF, for many is often thought of as being the ‘fun-part’, however before the fun there are a number of rules that need to be understood and steps that need to be undertaken. For example, you must always ensure that you invest within the parameters of your investment strategy. 

Even if you are part of an existing SMSF, it is useful to reconsider how your fund continues to measure up against the rules and if you are considering establishing a SMSF or inviting new members to join an existing one, it is important that you and any new members understand the rules and their obligations under those rules. You can find more information on the investment rules and your obligations here.

Some important considerations are listed below – The why, what and how

Sole Purpose Test - The 'Why'

The sole purpose test is the ‘why’ you have established, are establishing or are asking new members to join a SMSF.

To be eligible for tax concessions your SMSF needs to be maintained for the sole purpose of providing benefits to members upon retirement or to beneficiaries if a member dies.

The fund’s investments need to be able to meet these obligations as and when these events arise for each member or their beneficiaries.

Trust Deed - The 'What'

The trust deed is the ‘what’ trustees can and cannot do.

The type of and even the extent to which some investment asset classes and/or investment products can be used is described within the trust deed. For example, ‘the fund cannot use derivatives’.

It’s important that the fund’s trust deed be regularly reviewed to ensure that it adequately reflects the intent of the trustees regarding the nature of the fund’s investments and that it keeps pace with emerging asset classes and investment products that are currently not contemplated in the trust deed which may be relevant.

Investment Strategy - The 'How'

The investment strategy is the ‘how’ you are planning to make investments. 

There is an obligation on trustees to prepare and implement an investment strategy that takes into account the needs of each of the fund’s members. These needs may differ based on, but not limited to age, time to retirement or the risk appetite of individual members.

The investment strategy must be written and acknowledged by trustees. It should be referred to on a regular basis to ensure that the strategy is being fulfilled or if it needs to be amended. It needs to consider the performance of the fund measured against risk and to give consideration to the diversification and liquidity of the fund.

Typically, an investment strategy will describe the proportion of the fund’s capital which will be invested in which asset class. Trustees should give due consideration to the range in which the fund will invest in each asset class – for example, 5%-10% cash, 15%-30% Australian equities and so forth. A strategy allowing for 0%-100% for every asset class would not show that due consideration has been given to the investment strategy.

It may be appropriate for the investment strategy to reflect the differing needs of individual members and while it needs to be reviewed regularly, it should take a longer-term view, possibly 3-5 years over a rolling timeframe.

Need help?

With so many investment options available it’s important that consideration be given to making the right investment decisions for the fund and its members. As always research and education regarding investment products is essential and trustees should devote appropriate time to assemble as much information as they can to assist in making well informed decisions.

Remember: You must always ensure that you invest within the parameters of your investment strategy. 

If you need help you should consider seeking advice from an SMSF specialist. A qualified specialist can help with strategic and structural advice for your fund. If you plan to rely on a SMSF specialist to provide investment advice, please ensure that they are appropriately licenced to do so.