Growing Risks of Self Managed Super Funds & How To Manage Them
A fund based on a
group of three to four people solely designed for giving retirement funds are
known as self-managed super funds. Over past 20 years, the growth in these
funds has been exceptional. As in 2015, 1 million SMSF members have been noted
which marks 50% growth since 1994. Self-Managed Super Funds in Australia has
been very much popular with its feature of having control over money, flexibility
and ability for avoiding larger funds.
But, risk is one
factor that is difficult to assess throughout SMSF sector just like when
comparing an SMSF with industry-fund portfolios, they have a higher percentage
of Australian shares, cash and property with a little fixed interest. This high
weightage of shares was indeed a benediction particularly during 2003-2007
marked as period of Australian equity bloom. But, certain risk currently associated
with SMSF should be considered.
Associated
Risks
1). Home Country Bias Risk: Australian
shares compared to global shares have been facing a downfall since 2010 because
of which many trustees have missed out their returns. It has been further
magnified by decline in Australian dollars. However, investing overseas
minimize the risk to Australian companies including resources and financials
that comprise up to 50% Australian market.
2). Bank Risk: Banks in particular have relished
extraordinary performance for SMSF’s with increasing dividends and decreasing interest
rates. But, that can be reversed too if there is an increase in interest rates.
In case of prominent fall in property prices banks may also be subjected to big
loans. These risks make Self-Managed Super Funds Australia questionable.
3). Cash Exposure Risk: In
Australia and round the globe, cash rates have been cut down to extraordinary
levels due to which SMSF’s with high cash have been suffering along returns
near about 2-3%. Hence, in an environment of low interest, all SMSF’s should
consider other assets such as bonds (fixed interest). Diversification into
other aspects such as bonds can help to minimize the risk.
Hence, for Self-Managed Super Funds Australia one should diversify their
portfolios. Only by amalgamating assets and investing in the right manner
trustees can reduce the basic risks associated.
