SMSF – Invest in Cash or Capital Assets?

Whether you have an industry fund, an employer fund, a retail fund or a self-managed super fund (SMSF), everyone working in Australia now has a super fund. However, those invested in an employer, industry or retail fund have far less say on the types of return their fund can generate and most members fail to exercise their right of member choice. 

By contrast, a SMSF member is far more engaged with their super and has a more invested interest on the types of return that the fund will generate as the member also acts as the trustee and holds the responsibility for generating returns.

With all the uncertainty and volatility in the value of shares and property since 2007 it can be hard deciding what investments a SMSF should make for future returns. A fund grows best with not only the income it generates, assuming it saves all income and reinvests it, but with the growth in its capital asset which then generate growing amounts of income over time.

However, a large number of trustees have potentially created future problems by withdrawing funds from growth investments over the last few years and moving their money to cash instead. Recent ATO figures suggest 31% of SMSF assets are now in cash compared to 23% in 2004. Trustees seem to believe it is safer to hold cash as their funds won't lose value this way

In fact, investing in non-growth assets, or income assets, means you are effectively losing money after the effects of inflation, although it may not feel as though you are at the time. Trustees really should bear in mind that just because you can't see the value of your fund going down on statements doesn't mean it isn't in reality.

In this current economically challenging time there is a high likelihood of further cuts in interest rates to stimulate the economy. This will, however, disadvantage fund trustees relying heavily on cash in their investment strategy, as their fund assets will not grow and investment returns will put under an even greater strain with lower rates. With cash rates at 3% at the end of 2012 and expected to fall further next year, along with inflation around 2.5%, there is a real risk that money in the bank starts losing value next year in ‘real terms’ which means after counting for the effect of inflation.

To achieve a good investment return over time a steady income stream and a growth in value are both needed. Remembering that cash does not have any growth mechanism, money invested in cash raises the threat of a reducing income stream in future as a fund makes withdrawals to make pension payments. So investing in cash may not be as good as many investors think it is.

If we are going to see the fastest-growing part of the superannuation world, the SMSF sector, continue to outperform the rest of the super funds, SMSF member-trustees will have to start moving back into growth investment markets.

If you would like to discuss this subject in more detail or perhaps get more information on self-managed super - whether you’re running your own fund or thinking about setting one up, please don’t hesitate to call Michael, our Partner – Wealth Consulting at Lockwood & Ward on (02) 9299 7044.

Please note that we can also help you make better decisions as a member of an industry, employer or retail fund if self-managed super isn’t yet for you.

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