If you are a trustee of a Self Managed Superannuation Fund (SMSF) you are required by law to ensure your fund has an investment strategy. In 2019 the ATO issued letters to SMSF trustees to make them aware of their investment obligations.

The highlighted concern was to ensure trustees considered the diversification and liquidity of their assets when writing their investment strategy. There are significant events which should prompt you to review your trust deed, including new members, start of a pension or market correction.

What is an Investment Strategy?

You should consider your investment strategy as your blueprint when dealing with your fund’s assets to ensure your investment objectives and goals are met.

 What to consider

You will need to take into consideration the following when completing your investment strategy:

  • The risk involved when making, holding and realising your SMSF’s investments. What are the expected returns from your investments and will they cover the cash flow requirements of your SMSF?
  • Do you have a diverse investment portfolio or would you prefer to invest only in one area? What is your reasoning for your investments?
  • Will the liquidity of your investments cover your expected cash flow requirements?
  • What is the SMSF’s ability to pay current or future liabilities, including benefits to your members?
  • Do you hold insurance within or outside the SMSF?

It is common for SMSF’s with lower member balances to struggle with diversification as there is limited money to invest. Your investment strategy should reflect that you understand and have considered this issue.

Consult your Trust Deed

There are some investments you will need to ensure your funds Trust Deed allows, such as international investments or if you are considering a limited recourse borrowing arrangement.

 Common issues with Investment Strategies

  1. Deviation from the fund’s investment strategy – regularly review your investment strategy to ensure you are meeting the objectives and the investments are in line with the risk profile.
  2. Broad Investment Ranges – market volatility has brought on higher scrutiny of investment strategies by the ATO. Under the guidelines, a broad investment range of 0 to 100 per cent is no longer acceptable.
  3. Lack of diversification – if your fund has 90 percent or more in a single asset class you will need to explain how investing in the single asset class aligns with the member’s needs, age and risk profile.

 

If would like assistance with your SMSF investments strategy or would like assistance with managing your investment strategy contact us