SMSF Investing Strategy
03 Jan 13
Self-managed super funds (SMSFs) are required to prepare and implement an investment strategy for the operation of the fund. The strategy must have regard to the whole of the circumstances of the fund. Consideration needs to be given but not limited to the following areas:
- Risk associated with making, holding and realizing an investment
- Returns from investments
- Diversification including risks associated with lack of diversification
- Liquidity of investments particularly in light of expected cash flow requirements
- Ability of the fund to discharge liabilities
- Consideration of insurance for fund members (SMSFs only).
Trustees of SMSFs need to be aware of the two new changes regarding the investment strategy:
- Amended wording in SISR now requires trustees to ‘review regularly’ their investment strategy
- Consider whether or not a contract of insurance that provides insurance cover for a member or members of the fund is appropriate.
While trustees are required to consider diversification on an Investment Strategy, the laws do not state that a fund must be diversified. As long as the trustees have given due thought as to whether the fund should be diversified and the risks associated with lack of diversification, they will have complied with their legal obligations in this respect, regardless of their final decision.
An investment strategy will discuss the areas that were considered during formulation: risk, return and liquidity. It would also include a table of possible asset classes that trustees may invest in and provide an acceptable percentage range that the trustees are prepared to invest in each asset type.
In this way, the strategy will allow for movement in and out of an asset class at points throughout the year which might otherwise cause a trustee to fall outside of the parameters of their strategy. This might occur due to market value movements or proceeds from purchase and sale of assets that will cause cash levels at a particular point in time to fluctuate.
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