Self Managed Super Funds or SMSF Investment Strategy

 

Self Managed Super Funds or SMSF Investment Strategy

One of the most common types of retirement plans are through your own super these are called a SMSF investment strategy.

Retirement plans are an important part of investment and future savings and can often save one from the heartache from bad investment decisions on the run. It also ensures that the members will into their retirement will live a lifestyle which he/she desires.

The main difference between super funds and other funds the members run the SMSF for their own benefit and are also responsible for the taxes and the members and the trustees can the same person or a corporate trustee.

When it comes to Successful retirement plans = require successful strategies and SMSF are no different.

Remember if you fail to plan, you plan to fail.

Can I do it myself?
An investment strategy decides the kind of investments you can makes with your SMSF. Under the current laws you can write your own SMSF investment strategy. When you decide to opt for a SMSF, the company issuing the fund/trust can provide an investment strategy template which you can use to choose your investments or you may wish to seek professional guidance from a financial planner.
A good SMSF investment strategy will give a wide range of options. SMSF options include shares, property or cash and other assets. In some cases the SMSF can purchase the assets either locally or from an overseas location.

One of the best things about SMSF investment strategies is that it considers many factors before indicating the amount of returns which can be derived from it. For example, risk is an important part of any investment strategy and SMSF strategies should it very seriously. SMSFs also require members and trustees to follow certain guidelines and meet legal requirements for the investments to take place.

Legal Requirements
Under the Act that governs funds, a trustee of the SMSF is responsible for the management of accounts which consider members’ benefits. It is the trustees responsibility to ensure that any investment decisions carried out by him is documented ensuring the investment of assets is planned according to the SMSF Investment Strategy. He must also monitor the performance of the assets carefully and implement an investing strategy will be benefit every member.
One of the highlights of a SMSF is control. Many fund members are part of a SMSF because of the same reason. SMSF Members/Trustees in control of a SMSF must be ready to implement their plan and review the progress from time to time. This rule has been made mandatory by law.

Some of the important factors which must be present in the SMSF investment strategy are:
1. The risks involved with making and holding SMSF investments and the returns that will come from these investments.
2. Ensuring that the cash flow requirements and SMSF objectives are followed.
3. The liquidity of the total investments in regard to the expected cash flow requirements.
4. The composition of the investments as a whole which also includes the diversification of the investments.
5. The ability of the SMSF to maintain its compliance to the sole purpose test.

What are the Investment objectives?
The overall objectives which the trustees need to keep in mind is that the assets must be invested in such a way that the retirement benefits are protected and increased. It could also enhance the death benefits of the members involved with the SMSF.
There should be a benchmark for reaching the objectives on time i.e. for retirement. As an example, an objective could be obtaining an average withdrawal of 6% from all investments in the SMSF on retirement as a pension.

Some of the things that investors need to keep in mind while are:
1. The needs and also the profile of every member.
2. The retirement age for each member.
3. The assets and whether they are suitable or legal to be part of the SMSF investment or not.
4. The other assets which members might have outside the SMSF. Often, it helps in determining how much of one asset the members need maintaining diversification as a whole for each member.

What is the risk profile of the members?
Often, as a trustee member of SMSF, one must ask whether the other members have similar risk profiles or not? If the risk profiles are different, should asset segregation take place for each individual member or should it be kept as a whole?

Also, it is important to ask what kinds of capital growths do the members seek from their investments. Do they want smaller yields for shorter times or higher yields for longer times?
The SMSF created should exist as an income provider to the members involved with it and passing the sole purpose teast.
Risks

The risk and risk tolerance will very from member to member and each member’s personal circumstances will be different and so the asset allocation is also likely to vary.
The main risk involved is the risk of making loss on investments. Investment profits are often measured by the amount of returns an individual receives after the investment. If, the returns are less compared to the initial investment, it can be considered a loss. The trustee must have the capability to identify and measure such loses accurately. Risk calculation is an important part of SMSF investment.
Risk factors includes interest rates, market change, political stability and changes of legislation affect risk. It is the trustee’s job to keep a constant check on the investment strategy and performance of the SMSF investments.

Understanding the correlation between risk and return is important and the trustee must determine a risk which is of acceptable level. This must be made after the SMSF circumstances have been taken into consideration. Risk tolerance is often used to determine the nature of the fund’s investments.

Diversification vs. Investment in one class of assets
Diversification of investments is a desirable thing but it should be done carefully and should be a key component of the SMSF Investment Strategy. One of the important advantages of diversification is that it reduces risks. However, for each diversification, separate risk calculations must be made and it must be ensured that the returns on the investment are secured.
Diversification of investments can be achieved by spreading it over different classes of assets, individual assets and investment managers. It can also be spread over different countries.
Also diversification can exist in one asset class such as shares i.e. instead of having say $100,00.00 in one company it could be spread across several companies in various industries
However, in the beginning, if the amount of money invested is small, diversification can be hard to achieve. Therefore, diversification can largely depends on the size and financial circumstances of SMSF.
The investment strategy should contain the diversification of the assets in question and should be able to mention the places where the investments have been diversified.
Paying expenses

A certain amount of liquidity must be maintained by trustees for tax payments and other payments as well. Other payments include broker fees, legal fees and administration expenses including accounting and annual audits. The payments must be done on time because they are liable for penalty and late fees if delayed.
Cost of investing

The trustees must consider the cost of making investments for the SMSF. Investments often involve additional costs and trustees must be aware of that. For instance investing in real estate comes with other cost such as rates and insurances ongoing maintenance. The cost of investing should be taken into account as a means of maximizing the profits.
Insurance

Death is a natural phenomenon and can strike anyone at any point in time. Strategy plans should consider the death and disability needs to every member. It has become a requirement for every trustee to consider each member in the SMSF insurance needs on an regular basis.
Investment name
SMSF investments must be made in the name of the SMSF. The fund has the right to have the funds under its own name. An SMSF asset can never be in an individual’s name.
Audits

Audit is also an important part of the SMSF strategy. The auditor will review the investments and ensure that the investments are in line with the mentioned strategy. If any discrepancy is found, the auditor will make it a point to mention that to the trustees to make the appropriate changes.
Keep your strategy up-to-date

Every strategy should follow the latest rules and regulations. It is important to update or at least review the strategy plan very year. When reviewed the necessary changes must be made. A review must consider the following changes:
1. The fund acquiring a new type of asset.
2. A new member joining or leaving the fund.
3. A loan being taken out of the fund.
4. The fund buying a major asset

Strategies should also be reviewed if the trustee thinks the circumstances have changed or if there is sudden change in the number of members.

Conclusion
Retirement plans are important and must be done by every individual. A SMSF Investment Strategy ensures that finances are secured for the future. While the market is flooded with different retirement plans, not all are flexible and allow for maximum returns. Moreover, investment plans involve a lot of risk as in some cases the loss can be greater than the amount of investment. SMSF is an excellent way to build money as the investment options and allow lots of flexibility.

SMSF investments can be done through cash or other properties and other allowable assets. The SMSF strategy includes other factors as well which must either be met or considered by the trustee and the members of the SMSF. Since, it is expected that the investment amount will be a considerable sum, the requirement by trustees should be to go through the plan thoroughly.

One of the important highlights of the strategy is that it includes risk management as an important factor. Investment risks include losses which can be faced during investments and also low returns which again will result in losses. Other risks include market rates and political instability. Even the death of a member can be looked upon as a risk.

SMSFs have set guidelines which are mandatory for the trustee to follow. There should be a background information of every member involved with the SMSF and also the different types of investment that they want to make. The guidelines include the ability of the SMSF to exclude liabilities which means that it can release anything which blocks the returns from maximizing. There are other legal requirements which trustees must comply to while making the SMSF and drawing plans for it.

The SMSF must have clear objectives which clearly define the needs and requirements of each member and also whether the investments they make are suitable for the funds or not.
Diversification another important part of the SMSF and allows members to diversify their investment options. Diversification can be done over a variety of different assets in different parts of the country. However, members must state the reason and the assets they want to diversify.

Other important things about the SMSF Investment Strategy are paying expenses, insurance, the investment name and audits. All these factors must be kept in mind and they must comply with the latest legal requirements. The strategy should be reviewed every year to ensure that the investments are done in a legit manner and that the returns on the investment are the right side of profitable or in line with the investment strategy.

In short the SMSF investment strategy is best for individuals who want to retire with minimum financial risk with a healthy pension.

This information should be treated as general information only and not financial advice we encourage anyone who is thinking of starting their own Super fund is to seek out professional advice.

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