SMSF Investment Strategy: How to Build and Maintain a Compliant Plan

A self-managed superannuation fund (SMSF) offers trustees greater control and flexibility over how retirement savings are invested. Unlike industry or retail super funds, an SMSF allows members to tailor investments to suit their goals, risk profile, and retirement objectives. But with this control comes a significant responsibility: creating and maintaining a compliant SMSF investment strategy.

The Australian Taxation Office (ATO) requires every SMSF to have a written investment strategy that is reviewed regularly and reflects the specific circumstances of the fund and its members. Failing to comply can lead to penalties and even jeopardise the fund’s complying status.

In this guide, we’ll explain what an SMSF investment strategy is, why it matters, how to build one that meets the ATO’s requirements, and how to maintain compliance over time.

What is an SMSF Investment Strategy?

An SMSF investment strategy is a formal plan outlining how the fund’s assets will be invested to achieve its members’ retirement goals. It considers the fund’s objectives, investment mix, risk tolerance, and liquidity needs.

According to the Superannuation Industry (Supervision) Act 1993 (SIS Act), trustees must create and follow an investment strategy that:

• Is tailored to the personal circumstances of members
• Reflects diversification and risk considerations
• Provides for liquidity and cash flow needs
• Considers insurance for members

It’s not a set-and-forget document. The ATO requires that the investment strategy be reviewed at least annually and updated when members’ circumstances or market conditions change.

Why an SMSF Investment Strategy is Essential

Your investment strategy isn’t just a formality—it’s the foundation of your fund’s financial direction.

A compliant SMSF investment strategy ensures:

1. ATO Compliance – Without a written and regularly reviewed plan, your fund risks breaching super laws.
2. Risk Management – A clear strategy helps reduce overexposure to a single asset or sector.
3. Member Alignment – It ensures all members agree on the fund’s investment direction.
4. Efficient Decision-Making – Investment decisions are easier when guided by a documented framework.

If the ATO or an ASIC-registered SMSF auditor reviews your fund, they’ll expect to see documented evidence of your investment strategy and any updates.

Key Components of a Compliant SMSF Investment Strategy

When building an SMSF investment strategy, trustees must address specific factors outlined by the ATO.

1. Risk and Return Objectives

Trustees must document the fund’s risk tolerance and expected return. For example:

• A fund close to retirement may opt for a low-risk, income-focused portfolio.
• A fund with younger members may target higher growth assets and accept more volatility.

The ATO’s investment strategy guidelines recommend specifying:

• Asset classes (shares, property, cash, fixed interest)
• Target returns relative to risk
• How risk will be managed

2. Diversification

Diversification spreads investment risk across different asset classes. The SIS Act doesn’t mandate diversification, but the ATO will scrutinise strategies with heavy concentration in a single asset (e.g., a single property).

If your strategy lacks diversification, you must document why it’s appropriate and the risks involved.

3. Liquidity and Cash Flow Needs

SMSFs need enough liquid assets to:

• Pay member benefits (pensions, lump sums)
• Cover tax obligations and expenses
• Meet unexpected costs

For funds in pension phase, liquidity becomes even more critical to meet minimum pension drawdowns.

4. Ability to Pay Benefits

Trustees must ensure the fund can meet benefit payments when members retire or reach a condition of release. This may involve holding cash or easily tradable investments.

5. Insurance Considerations

Since 2012, SMSF trustees must consider whether members should have insurance cover (life, total and permanent disability, income protection). This doesn’t mean insurance is mandatory, but the decision and reasoning must be documented.

You can learn more about insurance in SMSFs from Moneysmart.

6. Valuation of Assets

All SMSF assets must be valued at market value each financial year in accordance with the ATO’s valuation guidelines. This ensures accurate reporting and compliance.

Steps to Build a Compliant SMSF Investment Strategy

Step 1: Define Member Objectives

Start by documenting each member’s:

• Age and investment time horizon
• Retirement goals
• Risk appetite
• Current super balance and expected contributions

This ensures the investment strategy aligns with members’ long-term objectives.

Step 2: Choose Asset Allocation

Determine how the fund’s assets will be spread across:

• Growth assets – Shares, property, infrastructure
• Defensive assets – Cash, term deposits, bonds

Your chosen allocation should align with your risk and return objectives.

Step 3: Address the ATO’s Compliance Factors

Your written strategy must explicitly address the five core elements:

1. Risk and return
2. Diversification
3. Liquidity
4. Ability to pay benefits
5. Insurance for members

Failing to address any of these can result in compliance breaches.

Step 4: Document and Approve the Strategy

Record your investment strategy in writing and have all trustees approve it. This approval should be documented in meeting minutes and kept for at least 10 years (ATO record-keeping rules).

Step 5: Implement the Strategy

Begin investing in accordance with the agreed plan. Keep records of all investment decisions, including purchase contracts, valuations, and transaction details.

Maintaining and Reviewing Your SMSF Investment Strategy

The ATO requires trustees to review the investment strategy at least once a year. However, reviews should also occur when:

• A new member joins or a member leaves the fund
• There’s a major market shift (e.g., economic downturn)
• Members’ retirement goals change

All reviews and updates must be documented, even if no changes are made.

Annual Review Checklist

• Confirm asset allocation still matches member objectives
• Check investment performance against expectations
• Update insurance considerations
• Assess liquidity for upcoming benefit payments
• Document the review and trustee agreement

Common Mistakes in SMSF Investment Strategies

• Lack of Documentation – Not recording the strategy or reviews in writing.
• Overconcentration – Investing most of the fund in a single asset class without documenting the risks.
• Ignoring Liquidity Needs – Holding illiquid assets and struggling to meet pension payments.
• Failure to Review – Not updating the strategy annually or after major changes.

Avoiding these mistakes is crucial for maintaining compliance and protecting members’ retirement savings.

Example SMSF Investment Strategy Structure

A simple compliant strategy may include:

1. Fund Objectives – “To provide retirement benefits for members through a diversified investment portfolio aiming for a 6% annual return.”
2. Risk Tolerance – “Moderate risk tolerance, accepting short-term volatility for long-term growth.”
3. Asset Allocation –
   • Australian shares: 30%
   • International shares: 20%
   • Property: 30%
   • Fixed interest: 15%
   • Cash: 5%
4. Liquidity Plan – “Maintain at least $50,000 in cash or term deposits to meet expenses and benefit payments.”
5. Insurance – “Reviewed annually; currently no insurance as members have cover outside the fund.”

When to Seek Professional Advice

Given the complexity of compliance requirements, many trustees seek advice from:

• Licensed financial advisers for tailored investment planning
• SMSF administrators for record-keeping and compliance
• Accountants and tax agents for annual reporting

The ASIC Financial Adviser Register is a good place to find licensed professionals.

FAQ: SMSF Investment Strategy

1. Is an SMSF investment strategy mandatory?
Yes. The ATO requires every SMSF to have a documented investment strategy.

2. How often must the investment strategy be reviewed?
At least annually, and whenever members’ circumstances change.

3. Can an SMSF invest entirely in property?
Yes, but risks must be documented, and the strategy must explain why lack of diversification is appropriate.

4. Do I need to include insurance in the strategy?
You must consider insurance for members and document your decision, even if you choose not to take out cover.

5. What happens if my SMSF investment strategy is non-compliant?
The ATO can impose penalties, require corrective action, and in serious cases, remove the fund’s complying status.

6. Can I change my SMSF investment strategy mid-year?
Yes, you can update it anytime, but changes must be documented and approved by all trustees.

7. Are there restrictions on SMSF investments?
Yes. Investments must comply with the SIS Act rules including in-house asset limits and related-party restrictions.

8. How should SMSF assets be valued?
At market value each year, following the ATO’s valuation guidelines.

9. Can an SMSF borrow to invest?
Yes, under a limited recourse borrowing arrangement (LRBA) that meets strict conditions.

10. Do I need professional help to prepare an SMSF investment strategy?
Not legally, but professional advice can help ensure compliance and optimise returns.