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How to understand which investment option is right for your super

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Around 80% of Australians haven't actively chosen an investment option for their super, so their money is put into their fund's default option. This is often a diversified balanced option, with a medium to high level of risk.

For many people, a balanced option may be best, as they are typically designed to try and maximise returns without taking on too high a level of risk.

But did you know that many super providers offer a range of other investment options that will invest your money in different ways?

how to choose the best investment option for your super

The decisions you make now can make a big difference to how your super grows, so taking the time to check that your super is invested in line with your personal financial objectives is an important step everyone can take.

The good news is, once you understand the basics of how your fund's investment options work, it's a lot easier to choose an option that's right for you.

Here are three tips to get you started.

1. Know your risk appetite

Investment options are normally categorised as either low, medium or high risk. This is one of the most important factors to consider when choosing an option, because with investments, risk and returns are related.

In general, the lower an investment's risk - or likelihood of losses - the lower the expected return, and vice versa. If you're comfortable with the possibility of fluctuating, or potentially negative, returns in the short term, you may prefer a higher risk investment option, as it has the potential to deliver higher returns over the long term.

Learn more about your risk appetite here.

2. Understand the different asset classes

The next thing to consider is the types, or classes, of assets an investment option invests in. For example, common asset classes include cash, fixed interest, credit, equity (shares), property, infrastructure and alternatives.

Each asset class has its own level of risk and expected return; generally, cash and fixed interest are low risk/return, while shares are higher risk/return.

One way to get a good spread across different asset classes is to consider investing in a pre-mixed (or diversified) option. Most funds offer a balanced option, which is a good example; these balanced options will have a certain amount of "growth" and "defensive" assets in them. Other pre-mixed options, such as "high growth" or "conservative", offer a higher allocation to shares or to cash and fixed interest, respectively.

Most super funds also offer options that invest entirely in one type of asset class, sometimes called "single sector" options.

For instance, you might be a long way from retirement and have a higher risk appetite, so you may prefer to invest just in shares. Or, if you're closer to retirement, or generally more risk-averse, a cash or fixed interest option may appeal more to you.

You might even choose to select multiple single sector options and pick how much you want to invest in each, effectively creating your own "mixed" option.

3. Consider the ethical options

Many super providers, including Hostplus, also offer investment options with an emphasis on ethical investing. These are often labelled as SRI (socially responsible investing) or ESG (environmental, social and governance) options.

These investment options typically avoid certain types of investments - like fossil fuel companies or weapons manufacturers - and/or seek to invest in areas considered to make a positive impact, like "green" energy projects. Sometimes they focus on one specific issue, such as climate change.

If you're considering specifically themed options as part of your investment choices, such as an SRI option, it pays to seek out more detailed information from your fund to understand the investment approaches taken by these options.

Ready to make a choice?

Visit your super fund's website to learn more about the investment options they offer. You can usually switch between investment options for free online.

Your super fund may also provide access to one of their financial planners. They can help you determine your personal risk profile, check your insurance cover and other objectives, and help you select the investment options that are right for you. They may also provide financial advice on issues outside of superannuation.

Issued by Host-Plus Pty Limited ABN 79 008 634 704, AFSL 244392 as trustee for the Hostplus Superannuation Fund (the Fund) ABN 68 657 495 890, MySuper No 68 657 495 890 198.

This information is general advice only and does not take into account your personal objectives, financial situation or needs. You should consider if this information is appropriate for you in light of your circumstances before acting on it. Please read the relevant Hostplus Product Disclosure Statement (PDS), available at www.hostplus.com.au before making a decision about Hostplus. 

Hostplus has engaged Industry Fund Services Limited (IFS) ABN 54 007 016 195, AFSL 232514 to facilitate the provision of personal financial advice to members of Hostplus. Advice is provided by financial planners who are Authorised Representatives of IFS. Fees may apply. Further information about the cost of advice is set out in the relevant IFS Financial Services Guide, a copy of which is available from your financial planner.

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Bahar McLeod is a certified financial planner with Hostplus. She holds a Bachelor of Business in Financial Planning and has more than 16 years' experience in the financial services industry.
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