SMSF - Investment Strategy Requirements

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Dacxi

Feb 1, 2022

5 MIN

According to the Australian Taxation Office (ATO), every Self Managed Super Fund is required to have an investment strategy that complies with the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR).

The SISA and the SISR require SMSF trustees to produce, regularly review and follow an investment strategy. This strategy must take all of the encompassing circumstances within the fund into consideration. These include:

Risks & Objectives - The risk involved with making, holding and realising the fund’s investments, while strongly taking into consideration the funds objectives and cash flow requirements;

Investments & Diversification - the actual investments within the fund, while taking into account diversification 

Liquidity & Cash Flow - the liquidity of the fund’s investments while considering cash flow requirements

Liabilities - the ability of the fund to alleviate existing and prospective liabilities

Insurance - the trustees must take into consideration whether the fund should hold a contract of insurance that provides cover for one or more members depending on their circumstances

 

Investment Strategy Objectives 

A crucial component of the investment strategy is establishing the fund’s investment objectives and the means to which those objectives will be achieved. The objective should be clear, measurable and include a benchmark. For example, to achieve an average yield from the entire investment portfolio of 3% above inflation. When establishing these objectives, trustees should take the needs of each member (e.g. time to retirement, risk profile, growth targets) into account. Consideration must also be given to whether the members of the SMSF are in accumulation or pension phase. If the risk levels of members with the SMSF differ, trustees can also consider separating member accounts and having varying investment strategies for each of the SMSFs members. 

 

Risk & return 

Risk refers to the degree of uncertainty and/or potential financial loss that is inherent to an investment decision. Risk and return are strongly correlated. Within an investment strategy, trustees must evaluate and determine an acceptable level of risk and volatility of returns according to the fund’s circumstances. Risks can include things such as market volatility, operational risk, legislative risk, liquidity risk and credit risk. The investment strategy must include procedures to recognise, review and manage these risks. 

 

Diversification 

Diversification refers to the practice of spreading your investments into various asset classes so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of a portfolio over time. Diversification within a portfolio can be achieved in a number of ways. These include::

• investing across multiple asset classes (e.g. stocks, crypto assets & property)

• investing in varying assets within a single asset class 

• investing in both Australia and overseas 

• investing in various funds with different management styles.

 

Liquidity & cash flow 

SMSFs should have sufficient liquidity to make sure that liabilities can be paid as they arise. Such liabilities can include tax or pension payments, administration expenses and any other fund expenses. Strategies that trustees can use to increase their fund’s liquidity include holding a cash reserve or highly liquid investments that can be sold quickly i.e. Crypto assets could be one of these?. The investment strategy should also specify whether borrowing is allowed and restrictions on any investments that can be held. 

 

Insurance 

As part of their investment strategy, trustees should also consider the death and disability insurance needs of each member and the level of cover that they may require. The types of insurance that should be considered and can be held through an SMSF structure include life, total and permanent disability (TPD) and income protection. The outcomes of these considerations should be documented in minutes as well as the reasons for the decision, even if this decision is to not hold any insurance for members. 

 

What are the best ways to invest in bitcoin or cryptocurrencies for an SMSF? 

When looking to include crypto assets in a SMSF, it’s important to recognise that they are an asset class that can add diversity to a portfolio. They are an asset class where investment returns come from making capital returns on buying and selling coins, tokens and as a result of volatility, add differently to a portfolio than traditional investments like shares and property. It’s also important to know that you're not alone in wanting to diversify your Self Managed Super Fund investments this way. About 2 million Australians have invested in crypto assets, SMSFs have also collectively allocated $228 million to cryptocurrencies last year, according to the Australian Taxation Office. 

 

Selecting a Cryptocurrency Exchange for SMSF

Points to consider:

Ensure the cryptocurrency exchange is based in Australia with Australian based staff.

Ensure the cryptocurrency exchange complies with Anti-Money Laundering (AML) laws and conducts detailed Know-Your-Client (KYC) verification procedures.

The cryptocurrency exchange is registered with AUSTRAC as a Digital Currency Exchange Provider.

The cryptocurrency exchange provides insurance on the digital assets held in custody.

The business has online and phone customer support.

*Set up your SMSF on Dacxi to start investing in cryptocurrencies

With Dacxi, your SMSF can invest in blue chip cryptocurrencies including Bitcoin, Ethereum, Litecoin and many more. Dacxi also offers the world’s three leading precious metals (Gold, Silver & Platinum) in tokenised form.

 

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At Dacxi, we offer our members an easy, secure and multifaceted way of diversifying a portion of their SMSF portfolios into crypto assets. Whether you are looking to invest a small or large portion of your portfolio, we can cater to any of your requests. With over 6,000 clients in Australia alone and an internationally recognised A+ security rating, Daxci is a leading edge digital currency exchange. Visit www.dacxi.com/au for more information.