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    Diversification requirements for SMSFs

    By admin • 6 September 2019 • Super

    The ATO has identified approximately 17,700 SMSFs where investment strategies may not meet the requirements under regulation 4.09 of the Superannuation Industry Supervision Act (SISA). Records show these SMSFs may hold 90% or more of funds in one asset, or a single asset class.

    Diversification aims to maximise an individual’s return by investing in different asset classes that react differently to the same event. Although it does not guarantee avoiding a loss, diversification is an important component of reaching long-term financial goals while minimising risk. This can help to control a super fund’s risk, as the better performing asset classes will help offset the others that aren’t performing very well. Diversification also provides the super fund with the opportunity for long-term growth, as the portfolio is exposed to asset classes with strong growth potential.

    SMSF trustees that don’t have the appropriate blend of different asset classes in their fund risk their portfolio experiencing increased and unnecessary volatility. Well-diversified SMSFs include all the major asset classes including cash, fixed interest, shares and property.

    To help ensure an SMSF is properly diversified, consider the exposures the fund currently has to the major asset classes and assess how diversified the fund is. Trustees must then engage in the process of working out which asset classes the fund requires to be properly diversified.

    SMSF investment strategies must provide evidence on the following requirements to comply with SISA:

    • Adequate diversification of fund assets.
    • Identification of risks of inadequate diversification within the context of the SMSF investment portfolio.
    • The making, holding, realising, and the likely return from the fund investments relating to retirement objectives and expected cash flow requirements.
    • Liquidity of investments, allowing the fund to meet costs and pay benefits as members retire.
    • Whether insurance cover should be held for one or more members.
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