I get asked this question all the time: how do I choose the best fund to manage your super? Should I get a self-managed super fund (SMSF)? If not, who should I choose?
This is never an easy question. But one thing is clear – the GFC changed the world as we knew it. The funds that were meant to give a safe and secure retirement for our baby boomers failed them. They didn’t accumulate what they needed.
As a result, many are now looking at SMSFs to build a greater retirement wealth.
Deciding where to put your super, and how to change super funds, can be daunting. In fact it can be very scary. Most people have no idea where to start.
Here are a few tips that can help you to choose a good super fund or whether a SMSF is for you:
1. Fees. Always look closely at the hidden fees. The type of super fund you invest in makes a big difference as to how much fees you pay. Where possible, find funds where the fees have some relationship with performance of the fund. It gives more incentive. A SMSF has annual accounting and audit fees. All this has to be weighed up.
2. Type of Fund. Managed funds are more stable, but you may not get the returns you want. We saw this in the GFC. Having a self-managed super fund (SMSF) can improve returns, and give you control over you’re investing. However, here’s the deal. Unless you pay active attention to managing your investments, and have a significant balance, having a SMSF is NOT a good idea. So you have to weigh these things up. As a rule, you want a minimum of $100,000 to even consider a SMSF, and in fact, ASIC recommends a balance of $200,000.
3. Time and Effort. The time and effort you are willing to put into managing your super will determine whether a SMSF is good for you. If you just want to sit and watch, you are better off to find a good fund manager who has proven returns.
4. Fees aren’t everything. There have been many TV ads about lower fees charged by Industry Funds. But don’t be fooled. Lower fees don’t necessarily equate to higher returns. In fact, it can be quite the opposite. You get what you pay for. Remember that. So look beyond the fees.
5. Risk Profile: Growth v Safe Funds. If you have a managed fund, work out your risk tolerance and what you want. There are many financial advisors who will assist you with a questionnaire to work out your risk profile. Some funds give you opportunities for high growth, but have more risk in a market crash, whereas some are more conservative in their returns, but less likely to suffer big losses in a market crash. So work out what is important to you. Even with a SMSF, you need to pick investments that work for your risk profile.
6. Ability to switch. If you have a managed fund, some funds allow you to switch your investments without fees, and others won’t. This is critical. There are times when it makes sense to move from high growth investments like shares to conservative investments in cash or bonds. You need to ensure you have that flexibility if you see the tides turning.
7. Proximity to retirement. Your age and how close you are to retirement will heavily influence what you invest in. For example, if you have only 5 years to go, you will be aiming towards a growth strategy. Whereas if you have a good balance, and 20 years to go, a more conservative approach may be more warranted with your investing.
8. Government regulation and changes. Governments have been tightening up on regulations around SMSFs. If they continue to do this, it may encourage people to go back into managed funds, where there are less headaches and rules and restrictions. By contrast, if governments lighten up on rules, people are more likely to get back into SMSFs.
9. Returns. The returns you are seeking is very important. For example, if you have a growth tendency, you would be inclined towards International or Australian growth shares, or even artwork, whereas if you are more conservative, you would gear towards cash or bond type investments, where the returns are more stable but lower.
In conclusion, work out whether a SMSF is for you, or whether you need to look at a better fund manager.
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