Property
Property investment is an Australian Staple and has been the leading choice for years. Investing in property is a popular choice for SMSFs, with almost 20% of SMSF assets invested in this asset class. Property can provide regular rental income, and capital growth over the long term. SMSFs can invest in residential or commercial property, including direct property or through managed property trusts. One advantage of investing in property through an SMSF is the potential tax benefits, including the ability to claim deductions on interest payments and depreciation.
However, investing in property through an SMSF also comes with risks. Property can be a high-cost asset to manage, including property maintenance, repairs, and renovations. Property markets can also be volatile, with sudden changes in supply and demand, and economic factors affecting property values.
“Property is the most popular asset class for SMSFs, with 24% of funds investing in residential or commercial property.” – SMSF Association, Investing in Property through an SMSF
“One of the benefits of investing in property through an SMSF is that the fund can borrow money to purchase the property, known as a limited recourse borrowing arrangement (LRBA).” – ATO, Investing in Property
Shares
Investing in shares is another popular choice for SMSFs, with around 30% of SMSF assets invested in this asset class. Shares can provide capital growth and income through dividends. SMSFs can invest in Australian or international shares, including direct shares or through managed funds. One advantage of investing in shares through an SMSF is the ability to access the franking credit system, which can reduce the amount of tax paid on dividends.
However, investing in shares comes with risks, including market volatility and company-specific risks such as poor management or financial performance. SMSF members must also ensure that their investment strategy is well diversified to minimize the risk of a single share or sector underperforming.
“Shares are a popular investment option for SMSFs, with 33% of funds investing in Australian listed shares and 28% in international listed shares.” – ATO, SMSF Statistical Overview 2018-19
“Investing in shares through an SMSF can provide diversification and potential capital growth, but it also involves risk and requires active management.” – ASIC, SMSF Investing
Cash and Term Deposits
Investing in cash and term deposits is a low-risk investment option for SMSFs, with around 20% of SMSF assets invested in this asset class. Cash and term deposits provide regular interest income, with minimal volatility. SMSFs can invest in these assets through banks, credit unions, or other financial institutions.
One advantage of investing in cash and term deposits through an SMSF is the high level of security provided by these assets. However, the downside is the low return on investment, with interest rates typically below inflation. SMSF members must also ensure that they have sufficient liquidity to meet their obligations, such as paying benefits to members when they retire.
“Cash and term deposits are a low-risk investment option that can provide regular income and preserve capital.” – SMSF Association, Investing in Cash
“SMSFs can invest in term deposits through a bank or financial institution, and they may offer higher interest rates than regular savings accounts.” – ATO, Cash and Term Deposits
Managed Funds
Investing in managed funds is a popular choice for SMSFs, with around 25% of SMSF assets invested in this asset class. Managed funds offer the advantage of diversification, reducing the risk of a single investment underperforming. Managed funds can invest in a range of assets, including shares, property, and fixed interest securities.
One advantage of investing in managed funds through an SMSF is the professional management provided by the fund manager. However, managed funds also come with management fees, which can eat into the returns generated by the fund. SMSF members must also ensure that the fund’s investment strategy is consistent with their objectives and risk profile.
“Managed funds can provide diversification across asset classes and sectors, and they are a popular option for SMSFs, with 55% of funds investing in Australian managed funds and 24% in international managed funds.” – ATO, SMSF Statistical Overview 2018-19
“Managed funds involve active management by a fund manager, which can lead to higher fees and potential underperformance compared to passive index funds.” – ASIC, Managed Funds
International Investments
Investing in international assets is an emerging trend for SMSFs, with around 10% of SMSF assets invested in this asset class. International investments can provide exposure to different markets, diversifying the SMSF’s portfolio. SMSFs can invest in international shares, property, or managed funds.
One advantage of investing in international assets through an SMSF is the potential for higher returns in foreign markets. However, investing in international assets also comes with risks, including currency fluctuations and geopolitical events affecting markets.
“International investments can provide diversification across markets and currencies, and they are a growing option for SMSFs, with 28% of funds investing in international listed shares and 24% in international managed funds.” – ATO, SMSF Statistical Overview 2018-19
“Investing in international markets involves additional risks, such as political instability, currency fluctuations, and regulatory differences.” – AFR, Investing in International Markets
SMSFs offer Australians greater control over their retirement savings and investment strategy. The top 5 investments made by SMSFs include property, shares, cash and term deposits, managed funds, and international investments. Each of these investment options comes with advantages and risks that SMSF members need to consider before making investment decisions.
Ultimately, the choice of investments for an SMSF should align with the member’s investment objectives, risk appetite, and financial situation. SMSF members must also ensure that their investment strategy complies with regulatory requirements, including diversification and investing for the sole purpose of providing retirement benefits to members.
As with any investment, it is important to seek professional advice before making any investment decisions. A financial advisor or accountant can provide guidance on investment options, risks, and regulatory compliance for SMSFs. By making informed investment decisions, SMSF members can maximize their retirement savings and achieve their financial goals.
Disclaimer: This article is provided for informational purposes only and is not intended to provide financial or investment advice. The information in this article is based on publicly available sources and may not be suitable for your specific financial situation or needs. Before making any investment decisions, you should consult a licensed financial advisor or accountant who can provide you with personalised advice tailored to your individual needs and circumstances. The author and publisher of this article are not responsible for any investment decisions made based on the information provided in this article.
