Time to rethink SMSFs’ cash and shares allocations

Self-managed super fund (SMSF) holders should reconsider their significant allocations in cash investments and equities holdings, says Australian wealth industry veteran Simon Arraj, with concerns over the continuing slide in deposit interest rates and volatility in global stock markets.

Three-year term bank deposits interest rates are down to 3.25% p.a. in February 2025 – considerably below the 4.0% p.a. recorded a year earlier, notes Arraj, citing newly released data from the Reserve Bank of Australia (RBA).

Worse still for cash holders, online savings accounts returned just 1.70% to savers, down from 1.85%.

Real returns on cash are being steadily eroded, with underlying inflation remaining above the RBA’s target rate.

“Compared to inflation at around 2.5% in December 2024, real returns on bank online savings accounts are now well below zero and the bottom line for cash investors is that savings rates could fall further this year if official rates fall again,” Arraj, the founder and responsible manager at Vado Private, said.

Despite the downward slide in interest rates, SMSF cash investments have held steady over the September quarter, seeing a modest increase to $161.4 billion (as at 31 December), up from $160.7 billion three months earlier.

Cash makes up around 16.0% of SMSF holders’ total assets.

Equities holdings are offering scant reprieve for investors, taking a significant hit over recent months and adding “to investor insecurity”, Arraj said. Australia’s share market has dropped around 4% in the year to 17 March 2025; in the US, equity markets have slipped further, led by tech share sell-off, with the Nasdaq Composite Index down around 7.8% over the year to date and the S&P 500 down 3.3%.

Despite equity market volatility, SMSFs invested a significant portfolio of their assets in Australian shares, or $277.6 billion, in the December quarter, representing 27.2% of all SMSF assets. That was down from $281.7 billion in the September 2025 quarter.

Total assets under management (AUM) for the SMSF sector stands at $1.02 trillion in the December quarter, representing around a quarter of the entire super sector.

Opportunities in private credit

With increasing uncertainty around the US administration’s policy pronouncements, particularly with regard to an escalating trade war, Arraj has advised SMSF holders to seek more balance in their asset allocations to account for this increased volatility.

In the middle of a global economic storm, private credit, a form of fixed income linked to property and corporate lending, “can provide much calmer waters for investors than share markets” Arraj said.

He added: “These investments have historically offered attractive yields, which is very important to all investors, particularly as equity markets fall.”

Currently, fixed income investments account for just $11.7 billion of SMSF assets with another $7.1 billion invested in loans, representing just 1.8% of total SMSF assets.

“Private credit returns up robust at a time when falling term deposit and savings account rates are eroding the real return investors get on investments.

“For SMSF investors seeking higher yield, now is the time to consider reallocating some of their assets to private credit investments,” Arraj said.

According to Vado, private credit investments can deliver yields close to 10% per annum, significantly higher than typical yields on cash or residential properties.