When it comes to growing your superannuation, most people think about standard retail or industry super funds. You invest your money, dollar-for-dollar, and what you put in is what you get out, more or less. But what if there was a way to potentially amplify your investment without needing extra cash upfront? That’s where an Internally Geared Managed Fund (IGMF) comes into play.
What Exactly Is an IGMF?
An Internally Geared Managed Fund is a type of investment fund that uses internal borrowing to increase the amount of money that’s invested. In simpler terms, it means that for every dollar you invest, the fund borrows additional money to invest more than your initial contribution. This leveraging can significantly boost your returns compared to a standard investment.
For example, let’s say you have $100,000 to invest. In a standard superannuation fund, that $100,000 is what gets invested. With an IGMF, however, the fund might leverage that amount, meaning your $100,000 could be treated as if it were $130,000 (which is our standard approach at Glasshouse Wealth), $150,000, or even up to $200,000, depending on the level of gearing involved. This kind of leverage is what makes IGMFs so appealing, particularly for those looking to accelerate their superannuation growth.
How Does It Work?
Internally geared managed funds work by borrowing money at a low cost, typically using the assets of the fund as collateral. The fund then invests this borrowed money along with your initial contribution into various assets like shares, property, or other income-generating investments. The idea is that the returns from these investments will be greater than the cost of borrowing, thus increasing your overall returns.
For instance, if the fund borrows enough to double your investment, you’re potentially reaping the rewards of up to $200,000 investment while only putting up $100,000 yourself. This can significantly enhance your superannuation balance over time, especially when compounded over the years.
The Upside and the Risks
The primary benefit of an IGMF is the potential for higher returns. With more money in the market, your gains can be much larger compared to a standard investment. This can be especially attractive if you’re in the accumulation phase of your superannuation and have a long investment horizon.
However, it’s crucial to understand the risks involved. Just as leveraging can magnify your gains, it can also magnify your losses. If the investments don’t perform well, you could end up losing more than you would in a non-leveraged fund. Hence at Glasshouse Wealth we very rarely increase your leveraged component above 30% unless there is extremely favourable market conditions (such as a COVID or GFC style crash).
Additionally, the cost of borrowing within the fund can eat into your returns if not managed properly.
Is an IGMF Right for You?
IGMFs aren’t for everyone. They’re typically suited for investors with a higher risk tolerance and a long-term investment horizon. If you’re a millennial looking to supercharge your superannuation and are comfortable with the associated risks, an IGMF could be a powerful tool in your financial planning strategy.
At Glasshouse Wealth, we often recommend considering IGMFs as part of a diversified portfolio, particularly if you’re looking to maximise your superannuation growth. However, it’s essential to get personalised advice based on your unique situation, risk tolerance, and investment goals.
Conclusion
An Internally Geared Managed Fund can be a game-changer for your superannuation, offering the potential to significantly enhance your retirement savings. By leveraging your initial investment, an IGMF can put you on a faster track to achieving your financial goals. However, like all investments, it comes with risks, and it’s crucial to fully understand these before diving in.
If you’re interested in learning more about how an IGMF could fit into your financial plan, feel free to reach out to us at Glasshouse Wealth. We’re here to help you navigate the complexities of investing and ensure your superannuation works as hard as you do.
