Aside from the legal requirement to have one, an investment strategy sets out the “how” of the SMSF’s primary purpose: to provide retirement benefits to members or their dependents or legal representatives after their death.
The objective is the driving factor. It gives direction to all investment decisions made by trustees, first regarding each asset class they will invest in and then the specific investments they make.
Each fund’s investment objectives will be different. The ATO is clear that they are not looking for a document that matches the words of the legislation. They want something that is tailored for the circumstances of each SMSF.
And this is primarily determined by the personal circumstances and personal objectives of the fund’s members.
The trustee must ensure that the investment objective is suitable/matches the requirements of the members.
To give a practical example:
If the main focus is the preservation of capital, then long-term returns are a secondary consideration.
On the other hand, if the objective is capital growth, the trustees may decide that the fund will invest predominantly in residential property, as they believe this provides the greatest scope for growth over the next 5 to 10 years.
They must then consider the risks of investing in property – for example, lack of diversification or illiquidity.
It may even be reasonable not to have an appropriate mix of investments or to be predominantly illiquid if that suits the investment objective and characteristics of the members.
Once trustees get to the point of implementing their strategy – i.e., investing in a specific asset and managing it – they must be careful to comply with SMSF legislation and regulations. This would include, for example, the rule that funds cannot provide pre-retirement benefits to members or their associates.