Getting leveraged exposure to the share market doesn't always mean you'll be burdened with loans, interest payments and ongoing financial commitments.
This case study shows that for a one-off upfront payment, your SMSF can get leveraged exposure to the ASX200 with the potential to multiply returns.
Case study
George is 65 years old and has recently retired. His share portfolio was quite significant until he sold the bulk of it two years ago. The volatility in the share market unnerved George who was concerned he would not have enough funds to retire on. Since the sale of his share portfolio, George has held his $500,000 in a term deposit paying 5.00% p.a.
George's cash strategy has given him certainty around his retirement nest-egg, but he knows that his funds will not stretch into his 80's.
Having invested in the share market for most of his life, George is aware that there are always opportunities to generate capital growth, especially when markets are low. He also recognises that to generate enough capital growth in his required timeframe, he will need to implement a geared strategy.
George is comfortable with investing a small amount of his cash into a geared investment which will give him the potential for greater returns than a direct share or index investment.
The strategy
George invests $22,000 into a leveraged investment called CBA Vantage+ Series 2.
Implementing this strategy will give George a $100,000 exposure to the Australian share market without him having to pay any more money than the upfront amount of $22,000 over the five year term. George will be 70 when his investment matures and he will pay no capital gains tax on any growth.
The table below shows George's potential growth over the five year term. Due to the effect of leverage his returns are based on the $100,000 exposure and not George's $22,000 upfront investment. Any gains will be magnified as a percentage of the initial investment. If the sharemarket return is lower than 4.1% p.a. (the break-even level), George will lose some or all of his $22,000 investment.
| Analysis | Break-even level | |||||
|---|---|---|---|---|---|---|
| Capital growth p.a. (S&P/ASX 200) | -5% | +2% | 4.1% | +7% | +12% | +15% |
| CBA Vantage + Maturity Value | $0 | $10,408 | $22,000 | $40,255 | $76,234 | $101,136 |
| Return on investment | -100% | -52.7% | 0% | 83.0% | 246.5% | 359.7% |
Conclusion
George has invested a small portion of his retirement funds into a leveraged investment. He is comfortable with the risk that if the market has a zero or negative return over the period, he will lose his $22,000 investment.
George can benefit from any potential rally in the equity market whilst at the same time limiting the downside associated with investing in equities to the upfront amount of $22,000 he invested. This strategy has given George certainty over a 'worse case' scenario, with unlimited upside potential.
