Self Managed Super Funds and Low Cost Diversification

Self managed super funds are becoming more popular with those who wish to take a more active role in the management of their superannuation funds. There are advantages and disadvantages to self managed super and they suit those who fit the following criteria. You need a large amount of money in the fund to make the set-up and running costs worthwhile in comparison to the industry super funds; at least five hundred thousand dollars. A SMSF can have from one to four members and each member is a trustee, or a director if there is a corporate trustee. You need to be able to budget for accounting, tax, auditing, financial and legal services. Plus, you will want to be able to allocate the time for research into investments and have the financial skills to carry this out. In addition, you will need to factor in life insurance, income protection insurance and total disability cover. One of the disadvantages of SMSFs are the fact that you are not covered for theft or fraud by any of the special compensation schemes set-up to protect industry super funds in this regard; worst case scenario you will need to fight it out in the courts.

The advantages for those with enough money to meet these requirements, is that they can diversify their portfolio into a broader range of investments. Things like artwork, antiques, jewellery, rare coins, vintage cars, wine and stamps can be included. However, these things must be insured and they cannot be benefitting the members in the present day. This means that members cannot display artwork or antiques in their homes or businesses, drive their vintage cars, and/or wear the jewellery. Choosing which shares are to be invested in is another attraction for those considering a SMSF, but again, unless they have a great deal of money to invest it will be difficult for them to achieve the diversification that fund managers are able to.

Property investment is another option for those with SMSFs, but there are currently strict guidelines governing this kind of investment. Mainly, these have to do with meeting a ‘sole purpose test’ and the investment not benefitting anyone else but the members. Fund members and relatives cannot live there, rent the property, and it cannot be acquired from a member or related party. The Australian Government is currently looking into the validity of limited recourse borrowing through SMSFs, as this may be contributing to property market booms; which are making housing prices more and more unaffordable for ordinary Australians.

Self managed super funds and low cost diversification can be achieved by investing in Exchange Traded Funds (ETFs), which are proving popular around the globe. These are traded just like shared but are, mainly, index trackers, meaning that they mirror particular markets; like the US or Australian sharemarket. If the market goes up so does the ETF by a comparable margin.

 

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