For any contributions, that are made into your super fund (be that Super Guarantee contributions or any additional and voluntary contributions), your superannuation fund provider will typically invest your super savings over the course of your working life, so you can hopefully retire comfortably.
But how do they ensure that your funds do not simply stagnate once they are in the account? How do they maximise the profit from those contributions into your retirement funding?
In general, your superannuation providers invest the money that you place into your super fund into a number of investment options.
These options may vary depending on your provider’s preferences but could include options that are known as high growth, diversified, balanced or cash, or a mix of these investment options.
Growth options deemed as high-growth investments aim for higher returns over the long term. This may however incur more significant losses when market conditions are volatile.
High-growth assets that may be invested in in these options may include shares, such as those in the Australian and international markets, which have a higher risk but a potentially greater return.
Balanced options don’t aim to perform as well as high-growth options over the long turn – however, the losses that may be incurred through their investments are more likely to be smaller when the market falters or becomes volatile .
Typically, investments in balanced options might look like:
- 50% or thereabouts in growth assets (such as shares)
- 50% or so in more defensive assets (which include investments such as bonds and cash)
(It is important when comparing returns that you compare apples with apples – some balanced funds may have more in growth assets and less in defensive assets – say 70%/30%. This is a more risky portfolio but you would also expect higher long term returns)
Conservative investment options have a primary aim of reducing the risk of market volatility and therefore may generate lower returns as the invested assets are generally more stable.
Typical investments into assets for conservative options may look like:
- 35% in growth assets
- 65% or so in defensive assets.
Conservative options generally aim to reduce the risk of market volatility and therefore may generate lower returns. They typically invest around 35% in growth assets like shares, with the rest in more defensive assets like bonds and cash.
Cash investment options aim to generate relatively lower but more stable returns to safeguard the money that has been accumulated in your account. These options may include investing exclusively in deposit-taking institutions (such as banks, building societies and credit unions) or in other short-dated government or bank-issued securities.
These asset allocations in your super fund may differ according to your provider and the options available to your account type. It’s important to consider critical factors, such as the stage in your life that you’re currently at, your future plans and financial goals before choosing the investment option that’s the right fit for you and your fund.
If you’re young, you may have more time to ride out market highs and lows and therefore be willing to take on more risk in the hope of achieving greater returns. If you’re approaching retirement or getting closer to the age that you can access your super, you may be looking at more of a conservative approach.
Doing your research and understanding the risks that might be involved in changing or altering how your assets are located could make a difference to the returns that you generate and what your final super balance may be.
Regardless, if you are unsure where to invest your super please make sure you speak to a licensed financial adviser. We can certainly help you in that area.