Understanding how a super fund invests your money can help you keep track of their performance more easily, and make better decisions about where you want them to invest.
What is a product / investment option?
A typical fund will invest your money across three areas, known as asset classes. These are: cash and fixed interest, shares, and property. Usually property and shares are able to provide higher returns than cash and fixed interest, but there's a catch – they are also higher risk.
Do you get to choose how your super is invested? Yes! Super funds will usually offer a range of options starting with conservative ones, where the majority of your money is invested in cash and fixed interest, through to growth options, which invest a greater proportion of your money in property or shares. As the proportion of asset classes change and there is less cash and fixed interest, the investment option's risk profile will increase, as will its expected return.
It’s important to understand that for the most part, your money is managed through investment options. When your super fund says that your super is performing well, what they really mean is that your investment option is performing well.
Different funds may be better at managing different types of options, which is why it's important to look at the performance of individual options.
Which investment option should I choose?
Well, that depends on you. The best choice of investment option will depend on your financial situation. That includes how much money you might have, your age and whether you have any family or dependents. It also includes your ability to handle the fluctuations that come with high risk investments.
Understanding those factors determines your 'risk profile’ which gives you some guidance to finding an appropriate investment option for you. For example, if you have a low risk profile, then you may want to select options that are lower in risk. This is why super funds have different investment options - to suit people with different risk profiles.
Your super fund or licensed financial adviser can help you determine your risk profile. You can also find Risk Profile Questionnaires on the internet. It's a good idea to take a fresh look at your risk profile regularly, and especially when your life circumstances change.
What is a ‘default’ or MySuper investment option?
When you start a new job, if you don't select a super fund and an investment option, two things happen. First, your employer will put your super in a default fund of their choosing. Second, your super fund will then place your savings into a 'default' option. This default option is offered by all super funds. You may know these as MySuper options. MySuper options typically invest about 60% of your money in high risk assets, and 40% in low risk.
This is why it's important for you to understand your risk profile, as MySuper options may not be for everyone. If the MySuper option doesn't suit your risk profile, you should consider changing your option. You can do this by contacting your super fund.
Let’s recap
To recap, it's important to understand two things: One, how much your super grows is a result of your investment option's performance, not your fund's performance. Two, you have a choice. Many super funds offer multiple investment options from low to high risk.
At the end of the day, you want to maximise your super savings. Remember, while you can't control the return from your investment option, you can choose how much risk you want to take on by choosing the option that best suits you.
So what else can super funds do?
But wait! There's more! Choosing the right option is one of the more important decisions you can make, however there are other perks offered by different funds. In the next unit, we look at some of the extra benefits provided by super funds.
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