“This can deliver more attractive yields than property or term deposits and is far less volatile than shares,” Keith said.

“An allocation to fixed income can offer diversification and serve as a hedge against volatility due to the generally low or negative correlation with shares, particularly in times of economic uncertainty or volatility, such as we are currently seeing in global markets with fears of war in the Middle East growing by the day.”

Keith said new data from the ATO reveals SMSFs invested a record amount of assets in cash and property in the June 2024 quarter and very little in fixed income. This highlights an overreliance on the first two classes for income and exposes retirement funds to any correction in the property market.

“Overall SMSFs assets reached almost $1 trillion in the June quarter, rising to $990.4 billion from $985.2 billion in the March 2024 quarter and funds invested an all-time high of $162.4 billion in cash and term deposits, or around 16.4 per cent of total assets,” he said.

“SMSFs allocated another $157.8 billion to direct property investments, representing 16 per cent of their total net assets. Another $293.9 billion was invested in Australian and overseas shares, or around 29.6 per cent of total SMSF assets.”

He added that SMSFs still largely ignore fixed-income investments, with just $12.1 billion invested in debt securities and another $6.3 billion in loans.

“These are tiny amounts given that SMSFs have almost a trillion dollars in assets under management,” Keith said.

“Additionally, official data from the central bank reveals that term deposit rates are falling in Australia. The average interest rate on one-year term deposits fell to 4.3 per cent in August from 4.5 per cent in July, while the average advertised rate on three-year term deposits fell to 3.8 per cent from 3.95 per cent.”

Keith said while higher interest rates had been good news for term deposit savers, that is being wound back now as banks have started to reduce interest rates on term deposits.

“For this reason alone, it may pay SMSFs to wind back their record levels of investment in cash and term deposits and instead allocate some of that funding to private credit,” he said.

“Private credit is a form of fixed income linked to property and corporate lending, and it provides investors with attractive yields and much lower volatility. The interest rates on loans are typically floating rate, allowing investors to take advantage of interest rates in a higher for longer scenario. This is important because ultimately, it is income-yielding assets that will support investors in everyday living and retirement.”

Furthermore, Keith said for income-seeking investors who are willing to take on more risk than that involved with cash or term deposit, private credit investments can deliver investors yields close to 10 per cent per annum, almost double typical yields on cash and on residential properties, which typically fall below 5 per cent.

“Private credit funds also typically pay a premium to returns on Australian investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned 8.7 per cent over the year to 2 October 2024,” he added.

“A key factor for investors is to ensure their fund manager invests their capital well and protects it through security over the loans, including mortgages over property and general security agreements over the business assets in which the fund invests.

“Investors in private credit also need to fully consider their liquidity needs and capital protection offered by the fund before investing in private credit, as the investment class is not as liquid as cash.”