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Retirement,Self Managed Super Funds (SMSF),Superannuation

Start An SMSF With The Right Intentions

27 Feb , 2016  

Nikhil (Nik) Sreedhar
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Nikhil (Nik) Sreedhar

Founder at ProAdviser
Nikhil's dream job is to be an exotic car salesman. His favourite colour is orange and it shows as he is the 23 year old entrepreneur behind ProAdviser. You should follow him, he gets lonely.
Nikhil (Nik) Sreedhar
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Many people believe that starting their own SMSF will grant them greater returns in the long run, yet they have many questions. Questions range from how to start a SMSF, what balance you need to start with, how do you administer the fund, and how much administration for the fund costs. However, the most pertinent question to be asked is if returns from an individual SMSF would be better than an incredibly competent industry super fund.

People are often put off by a super fund because of the fees, yet fees are not always a bad thing if a super fund is able to provide higher returns. For example, if a fund manager charges you a 3% fee, but generates an 18% return in a given year, it is better than a fund manager who charges 0.4% and generates a return of 4%. When comparing the net returns, the former fund manager offers a rate of 15%, while the latter offers a rate of 3.6%. In the end, the fund manager of the superior super fund will give you better returns, even if their initial fees are greater than the one that had a lower fee.

If you go down the route of having a SMSF, you are now in charge of your own fund and its management, which entails massive responsibility, not only for yourself but for your associate members as well. It might be beneficial to ask yourself if you could make better investment decisions than a trained fund manager in similar market conditions, or if perhaps your expertise could not compare to theirs. It will also be helpful if you decide to start a SMSF to consider your investment strategy, and how you can make the most money in a competitive market, and potentially outperform other funds. However, do consider all the work, time, and money that needs to be put into a SMSF, especially if you are working full-time, or if you have other commitments that absorb a lot of your free time.

Setting up a fund is only a small percentage of the work, and that is often accomplished by professionals, which include lawyers, accountants, and auditors who generate much of the initial paperwork. Most of the work boils down to finding and managing investments that will generate the best returns, and this requires consistent research as the market is changing constantly. There are not many free resources to aid you in your decision-making, so be aware of the fees that can be generated by delegating work to other professionals.

However, there is any alternative to starting your own SMSF and staying with your current fund. You can instead change to another super fund that is achieving better results and higher returns. Some analysis websites that can aid you in comparing different super funds are Superatings and Selecting Super. From there, you can see that some of the best super funds offer a 7% net return after fees over 5 years, which may be better than starting a SMSF or holding funds in a bank (holding funds in a bank will offer you smaller interest rates, but may be beneficial for those that have n time to invest). Yet it is good to consider that some of the best super funds will have a relatively low return in the first year, the average being -10%. Ultimately it is your decision, as investing is always a risk, regardless of if you are starting a SMSF, or if your super fund is controlled by another company.

Financial education is imperative, and is especially important to prepare yourself now while you’re working, as mistakes will not harm you too much, but will do so more if you put off investing, as in retirement years you are living off of your investments (or whatever money you have saved). Now is the time to pursue investments as you still have your income to rely on, and while doing so, you will be learning incredibly valuable skills concerning finance, budgeting, and investing in a variety of things that will give you different returns in different cycles of the market. However, the practice of investing takes time, so have patience with the process. Yet the playing with the process is much better than the alternative, which is living on a tight budget in retirement years, not being able to enjoy the fruits of your labour from your working years. So don’t be afraid to take risks with investing, but also don’t be afraid to seek advice. Advice-seeking is an important component to learning about the markets and becoming a better investor overall. This can be done through talking to professionals or even embarking on a finance course that can help you become connected with other individuals who are also seeking knowledge of the same topic.

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