The importance of having a diversification strategy for your Self-Managed Superannuation Fund

Finance

The Australian Tax Office recently sent out letters to thousands of SMSF trustees asking them to explain their diversification strategies. These were mailed to trustees with investors that have out more than 90 % of their money into a single asset class. 

Some media implied that investing in one asset class or having as much as 90% interest in one investment was somehow in breach of the ATO regulations. 

This is of course, not true and it turns out the whole thing was blown out of proportion. One good thing came out of this – SMSF trustees have looked at the diversification of their portfolios.

The subject of diversification is one that a lot of people gloss over, mostly because financial experts tend to make it sound big and calculated. However, if you are in an SMSF, it would be in your best interest to look at the structure of your fund and to ensure that you won’t fall victim to the problems of putting all the eggs you have into one basket. 

You have to look at which investments are likely to generate the most returns but as you do that find those that can provide a buffer against risk and losses. You will need a diversification strategy and this is where gold comes in. 

An investment strategy acts like a blueprint for dealing with the assets in your SMSF to ensure that the core objectives of the SMSF are met. Effectively, an SMSF investment strategy lets you put down in writing what your goals are and what you intend to do to ensure that they are fulfilled. You should have a strategy document and not be caught out when the tax office comes asking for it. 

There are some key requirements that your SMSF investment strategy should fulfill: 

  • Details of possible risks that come with holding certain assets like gold SMSF investments. You need to have an idea of your investment’s long term returns.
  • The diversity and composition of your investment strategy.
  • The liquidity of your investment assets
  • The fund’s ability to pay any current and future liabilities.  
  • Insurance cover for the fund or for individual members. 

As a trustee of an SMSF, it is important to have an objective that you are working towards and to also have a strategy; and gold SMSF is a strategy that can work both in the short term and in the long term. 

Your strategy should also be flexible enough to allow you to change course or direction. It should not limit you. 

You will also need to look at the risks associated with any strategy you decide on and have a plan on how you can mitigate them. 

Self-managed superannuation funds are required to have investment strategies according to ATO’s superannuation laws. Funds that don’t comply might be subjected to Australian Tax Office (ATO) administrative penalties. Investment and diversification strategies have to be reviewed annually and approved by an SMSF auditor. To be on the right side of the law, SMSF trustees need to meet specific ATO obligations and keep updated and relevant records of what is going on with the fund. 

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