Types of SMSF investments
SMSFs allow you to have full involvement in the operation of your fund and to make decisions on how your super fund is managed. SMSF trustees are able to decide the fund’s investment strategy and choose the individual investments to implement that strategy.
Investments are normally divided into asset classes. The main asset classes are:
- Fixed interest
- Other assets
Cash is a low risk but also a low return asset. The simplest form of cash is a bank account, but it can also include term deposits.
The fixed interest asset class includes government and corporate bonds and interest rate securities. These may pay a fixed or a floating rate of interest and are issued over various terms. A number of interest rate securities are also listed on the ASX.
The risk profile of fixed interest securities depends on the issuer. Securities issued by the Commonwealth government are effectively risk free whereas securities issued by corporations will have higher levels of risk. Fixed interest securities generally provide a dependable income stream.
In addition to investing directly in these securities, they can also be accessed through managed funds where a professional manager puts together a portfolio of securities. These managed funds include exchange traded funds as well as unlisted funds. Both Australian and global securities are accessible.
Equity securities denote an ownership stake in the business. They are commonly referred to as shares or stocks. Equity securities can be considered in a variety of ways:
- Australian vs global
- Direct vs indirect
- Large cap vs small cap
- Resource stocks vs industrials
Direct investment involves purchasing shares through a broker on an exchange. This gives the investor direct ownership of the business.
Indirect investment is where a professional manager manages a portfolio of stocks. These could be managed using a passive or an active strategy. Passive strategies involve replicating an index. Active funds are where the manager tries to use their skill to outperform the index. Both strategies are available via listed and unlisted vehicles.
Property investments can be direct or indirect. Indirect property investments include listed real estate investment trusts (REIT) as well as unlisted vehicles. The advantages of indirect property investment include accessing the skills of professional managers and being able to diversify across a portfolio of properties with a relatively small investment. Investors can also gain access to property types that may otherwise be out of reach, such as shopping malls. There is also very little administration required by the investor.
Direct property investment involves buying the asset directly. This can mean that a large proportion of an SMSFs assets are tied up in one asset. SMSFs can access loans to buy property, subject to certain requirements. The SMSF will also be required to look after the management of the property.
There is a very wide variety of other assets that SMSFs can access. These can include:
- Hedge funds