How to use the money in your super fund to buy shares and ETFs

Would you like more control of your super? A number of funds offer a direct investment strategy and here are some of the issues you need to consider.

Plenty of Australians are keen to take a more active role in their retirement savings – it’s one of the key drivers for setting up a self-managed super fund (SMSF).

But an SMSF is not the only option if you want to have more of a say in the way your super is invested.

A number of retail and industry funds offer a direct investment option that lets you call the shots when it comes to how part of your nest egg is invested. For example, this could let you decide how to invest some of your super in various listed shares, term deposits or exchange traded funds (ETFs).

The table below shows some of the direct investment options available from various superannuation funds on Canstar’s database.

Super funds with member direct investment options

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Source: www.canstar.com.au – 6/6/2023. Based on superannuation funds on Canstar’s database that allow direct investing in selected Shares, ETFs or term deposits. List may not be comprehensive, other funds may offer a direct investment option.

How direct investment options work

To begin with, you usually need a minimum level of super savings to get started – this can be as little as $10,000.

In many cases, you still need to hold at least part of your super in a professionally managed option but it doesn’t necessarily have to be a lot – with some funds the minimum is $3,000. This is something worth checking with your fund.

From here, you open a separate cash account within your fund using money from your super. The minimum amount varies between funds. For example, it is $500 with CareSuper.

This cash account is used to buy investments and pay costs, such as any brokerage. On the flipside, any returns or proceeds from the sale of investments flow into this account. Once the account is set up, you’re ready to choose your preferred investments from the line-up of options provided by your fund.

Remember, all this is done within the confines of your super fund. Even though you have more control over the investments you buy and sell, the money remains within your fund until you meet the conditions of release.

Plenty of tools at my disposal

Any direct investment platform within your super fund is likely to come with a wealth of tools to help you decide where and when to invest. At a minimum, expect to see access to real-time trading, the latest market information and research.

One thing that’s likely not included is tailored financial advice. This is available through most funds as a separate service.

The selection of investments varies

The selection of direct investments on offer varies between super funds. This is something to look into if you have a particular asset in mind.

According to Canstar Research (table, above) some, such as AMP’s SignatureSuper, only offer term deposits. Others, such as ING’s Living Super, offer an extensive menu of individual shares within the ASX 300 index, plus listed investment companies and ETFs.

Restrictions can also apply around the make-up of your direct portfolio. Most funds place limits on how much of your super can be held in any particular security. Looking again at ING’s Living Super, up to 20% of your balance can be invested in any one share.

These limits make sense as they encourage fund members to grow a diversified portfolio (more on this later). The drawback is that your investment weightings are likely to change over time as the market value of a share or ETF rises or falls.

For example, a share investment that initially comprised 15% of your portfolio could climb in value to account for 21% of the balance. If this exceeds the maximum limits set by your fund, you may be restricted from purchasing additional investments until you rebalance the portfolio. That’s likely to mean selling some stocks to bring the proportions of your portfolio back in line with allowable limits.

The upshot is that a more hands-on approach may be required to manage your super. That’s quite different from having all your super professionally managed, which requires very little engagement.

Watch for additional costs

A key downside to watch for is the potential to rack up significant costs with a direct investment option. When your super is entrusted to the fund manager, expenses such as brokerage are spread across a vast number of members. So the cost to the individual may be very low.

That’s not the case with direct investment. It’s very much a user-pays system, where the cost of trades comes straight out of your account. There can be quite a line-up of fees to contend with.

Bear in mind, selecting ETFs as part of your direct super portfolio generally means paying additional ETF fees.

The variety of fees can make it challenging to determine how much direct investing will cost, though a key decider is how frequently you trade. What’s more certain is that fees will reduce the net (after-costs) returns your super earns, and if you have limited super to invest it could work out cheaper to leave your nest egg in the hands of the fund manager.

→Related article: What fees do Australian super funds charge?

Will my super still be diversified?

An issue that shouldn’t be overlooked is diversification – spreading your investments across a number of different assets – something that’s good for your super, but not generally well understood.

The Australian Government’s Moneysmart website says diversification helps to lower your risk when investing.

“Having a variety of investments with different risks will balance out the overall risk of a portfolio,” it says.

One of the strengths of professionally managed super funds is their ability to spread members’ money across a broad array of underlying investments. This diversification goes a long way to explaining the success of the top performing super funds on Canstar’s database.

Sure, the investments you select could outperform the market. But if you plan to invest in individual shares, it can be hard to achieve the level of diversification your broader super fund offers without racking up big brokerage costs.

Invest to a plan

It’s worth giving some thought to how you will handle your direct investments options during any share market jitters.

The Australian Shareholders’ Association’s Chief Executive Officer, Rachel Waterhouse, says on average the Australian equities market has increased over recent years, but not without the occasional shock.

“In volatile times you may feel that your portfolio is shrinking, but history shows that markets tend to recover,” she says in an article published on the Australian Securities Exchange (ASX) website.

The key, she says, is not to panic but to “focus on the destination, not the road”.

Working towards a long-term plan, and having the discipline to stick to it, may help you stay on track through a variety of market conditions. If that doesn’t sound like you, leaving your super to the professionals could be a sensible strategy.

Is direct investment right for me?

Direct investing can offer the best of both worlds – the ability to have more control of your super without the cost and administrative burden of a self-managed super fund. But it’s not for everyone.

The potential for higher costs can make this an uneconomic choice unless you have a decent chunk of super to invest. You also need to be prepared to keep an eye on your investments to be sure you’re staying within the investment proportions set by your fund.

While you may have a hunch about how a particular share will perform, if it’s part of the ASX 300, chances are, your super is already exposed to it – along with a wide variety of other assets. Put simply, it can be hard for an individual investor to beat the level of diversification your fund provides.

Directly investing at least part of your super can encourage a greater interest in superannuation, and that’s a plus. Just be sure to think carefully about whether you have the time, the volume of super savings and the commitment to a long-term plan, to make it worthwhile.

Original reporting by Nicola Field.

Image source: RomanR/Shutterstock.com