Buy now, pay later (BNPL) shares have stolen the limelight from the ASX tech sector. BNPL shares have become increasingly challenging to buy as valuations continue to be stretched. With reporting season around the corner, here are 4 ASX tech shares with reasonable valuations and strong growth portfolios. 

1. Data#3 Ltd (ASX: DTL) 

Data3 delivers an integrated array of solutions spanning cloud, modern workplace, security, data and analytics, and connectivity. These technology solutions are delivered by combining its services across consulting, project services and support services.

On 16 July, the company advised that, subject to finalisation of its group year-end audit, its consolidated net profit before tax for FY20 is estimated to be approximately $34 million. This represents an increase of 28% compared to its previous record FY19 result. 

2. Bigtincan Holdings Ltd (ASX: BTH) 

Bigtincan is a global leader in sales enablement software, which allows organisations to increase sales win rates, reduce expenditure and improve customer satisfaction. In its equity capital raising presentation back in May, the company cited that its customer cash receipts increased 178% to $14.9 million from the March 2019 quarter of $5.4 million. This growth was driven by significant new wins with a number of Fortune 500 companies.

I believe Bigtincan represents a more volatile opportunity that could deliver some explosive growth in the medium-long term. For investors looking for a slightly speculative opportunity, this could be the ASX tech share to add to your watchlist. 

3. Rhipe Ltd (ASX: RHP) 

Rhipe provides licensing, business development and knowledge services that support its customers’ adoption of cloud technologies. Its vendors – such as Microsoft, VMWare and Citrix – all rely on Rhipe’s platform to build, grow and support the consumption of their cloud license programs.

On 17 April, the company provided a trading update highlighting its unaudited trading results for the nine months to 31 March 2020. During this period, the company delivered a 32% increase in sales and 19% increase in revenue. Following this announcement, Rhipe initiated a $34 million capital raising to allow it to pursue acquisitions that are complementary to its existing cloud software subscription business. I believe Rhipe has demonstrated fair growth and is now in a strong cash position to explore opportunities to accelerate its growth moving forward. 

4. Dicker Data Ltd (ASX: DDR) 

Dicker Data is a value added distributor of hardware, software, cloud and emerging technologies in Australia. In the company’s market update announced on 23 July, it outlined the recent surge in remote work has seen a strong demand for remote and virtual working solutions across its hardware and software portfolios.

The company provided unaudited half year results that saw its total revenue increase 18.1% and net profit after tax up 23.5%. Dicker is one of the few ASX tech shares that do not trade at an outrageous valuation. At today’s prices, its price-to-earnings ratio is just 21. I believe the company represents good value and further sales tailwinds can be expected.

More reading

• Replace your term deposit with these ASX dividend shares
• 3 exciting small cap ASX shares to watch in FY 2021
• Buy NAB and this ASX dividend share for income
• ASX 200 rises 0.3%, investors bet on Tabcorp
• Dicker Data share price surges 6% on strong half year update

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends BIGTINCAN FPO. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited. The Motley Fool Australia has recommended BIGTINCAN FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re looking to add some tech shares to your portfolio in August, then I think the three listed below could be ones to consider buying.

Here’s why I think these ASX tech shares could be destined for big things:

Nearmap Ltd (ASX: NEA)

Nearmap is a leading aerial imagery technology and location data company. Its software allows its users to move location analysis out of the field and into the office. It gives businesses instant access to high resolution aerial imagery, city-scale 3D datasets, and integrated geospatial tools. I think Nearmap could have a bright future ahead of it thanks to its high quality solutions and its lucrative opportunity in a highly fragmented market. All in all, I believe the Nearmap share price could be a market beater over the 2020s.

Xero Limited (ASX: XRO)

Another ASX tech share to consider buying is Xero. It is one of the world’s leading cloud-based business and accounting software providers. Thanks to the ongoing shift to cloud accounting, Xero has been growing at a rapid rate in recent years. This continued in FY 2020 with Xero reporting a 29% lift in annualised monthly recurring revenue (AMRR) to NZ$820.6 million. This was driven by strong customer growth and its sky high retention rate. I believe the latter demonstrates the quality and stickiness of its accounting platform. Looking ahead, I believe the company has a long runway for growth. Particularly in the North America market where it currently has just 241,000 subscribers. This compares to 914,000 subscribers in a materially smaller ANZ market.

Zip Co Ltd (ASX: Z1P)

A final tech share to consider buying is Zip Co. It is one of the ANZ region’s leading buy now pay later providers. While its shares have been on fire this year, I believe they could still be a great long term option for investors. Especially given its recent expansion into the massive United States market via the acquisition of QuadPay. If the company can make a success of this expansion, it could be destined for further explosive growth over the coming years.

More reading

• These BNPL shares have blown up since their IPOs
• What to do if your ASX shares hit a record high
• Got $10,000 to invest? I would buy these ASX shares
• Why the Zip share price is a better buy than Afterpay
• Why Audinate, Nearmap, Resolute, & TechnologyOne shares are tumbling lower

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd., Xero, and ZIPCOLTD FPO. The Motley Fool Australia has recommended Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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A second stock market crash could realistically occur over the coming months. Numerous risks face the world economy that could derail its growth prospects and cause investor sentiment to weaken.

Furthermore, the stock market has a long track record of high volatility. This means that always being ready for a sudden fall in share prices could be a sound move.

Of course, many stocks currently offer wide margins of safety, and may therefore be worth buying today despite the risk of a further drop in the price levels of indexes such as the S&P 500 and FTSE 100.

A second stock market crash

The second half of 2020 could include a second market crash after the initial decline and subsequent rebound recorded in the first half of the year. Risks such as an increase in coronavirus cases, as well as geopolitical uncertainty in the US and Europe, may contribute to more challenging operating conditions across many sectors. This may cause investor sentiment to weaken, which could disrupt the share price growth prospects for many businesses.

Of course, the stock market has a long history of high volatility. Even if a further decline in share prices does not occur over the near term, the next bear market is almost certain to take place in the coming years. No stock market index has ever risen without experiencing downturns and bear markets, which means that investors should always be ready to react to attractive stock prices that may only be available for a short time period.

Having some cash available to invest whenever a market crash occurs could be a potential solution to the prospect of a decline in share prices. It may act as a drag on your portfolio’s performance in the short run due to the low returns on savings accounts, but could allow you to capitalise on undervalued opportunities.

Buying shares today

Of course, another market crash may not occur for many years. Investor sentiment has improved in recent months, and the risks facing the world economy may already be priced in to market valuations.

As such, now could be the right time to buy high-quality businesses at low prices. Certainly, some sectors have risen significantly in value over recent months, and may now offer unfavourable risk/reward opportunities. However, other sectors still appear to be undervalued based on their long-term recovery prospects and the financial positions of their incumbents.

Therefore, investors who can adopt a long-term time horizon and look beyond short-term risks of a second market crash may wish to add stocks to their portfolios. This may not lead to high returns in the coming months, but may significantly improve your portfolio’s value as the world economy and stock prices gradually recover from an extremely challenging period.

More reading

• 3 stellar ASX tech shares I would buy in August
• My 5-minute bull case for the Bubs share price
• Is now the time to sell your ASX shares?
• 3 reasons why the Macquarie share price could be a buy
• You should watch this key metric during the reporting season that others often overlook

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I think that the Bubs Australia Ltd (ASX: BUB) share price is a buy. I’m going to outline my bull case for it in this article.

A quick overview of what Bubs does

Bubs was founded in 2006 by Kristy Carr. The company sells a variety of products with a focus on infant formula products and baby food, particularly goat milk products. It also sells other goat milk products and Jersey milk products.

Here are the main reasons why I think, at this share price, Bubs is a great business to buy:

Strong growth with international earnings

The biggest point about the company is that it’s delivering strong results.

Each result that Bubs releases shows strong revenue growth by the company. In the FY20 half year result it showed revenue growth of 37% to $28.75 million. In the quarter ending 31 March 2020, its revenue jumped by 67% to $19.7 million – up 36% on the previous quarter.

Whilst the current revenue numbers it’s reporting aren’t big in absolute terms, compound growth could mean the company quickly becomes much larger if it keeps growing strongly at a high double digit rate.

It’s the international growth that particularly excites me about the revenue growth. In the FY20 third quarter, Chinese revenue went up 104% and represented about a quarter of total sales. ‘Other markets’ revenue went up almost 20 times, with large growth into Vietnam – this segment now represents 12% of gross sales.

Ultimately, a business with ‘potential’ needs to deliver the growth to grow its value and lead to a sustainable increase in the Bubs share price over time.

I’m going to try to explain some of the points of why the Bubs revenue and the Bubs share price are growing so strongly.

Expanding distribution network

A key part of success for a consumer product business is to get its products in front of more potential consumers. That means into more stores, more websites and more countries.

In terms of exports, its products are going to China, South East Asia and the Middle East. The ‘other market’ regions are a big addressable market for Bubs.

Bubs has made a number of deals to expand its distribution network. For example, it has distribution agreements with Alibaba’s Tmall and Beingmate.

In Australia, Bubs products are sold across hundreds of stores with major distribution agreements with Chemist Warehouse, Woolworths Group Ltd (ASX: WOW), Coles Group Limited (ASX: COL) and Baby Bunting Group Ltd (ASX: BBN).

Bubs recently signed a new deal to expand its distribution of organic grass fed infant formula with Coles and Woolworths. That announcement sent the Bubs share price higher by 10%.

High level of control of its supply chain

Bubs boasts of being Australia’s only vertically integrated producer of goat milk formula, with exclusive milk supply from Australia’s largest milking goat herd after the acquisition of NuLac Foods.

Last year the company announced the acquisition of the Deloraine manufacturing facility for $35 million. It was a key acquisition because, at the time, it was only one of 15 licenced canning facilities in Australia authorised by the certification and accreditation administration of China (CNCA) for physical importation into China under regulatory requirements administered by state administration for market regulation (SAMR). These approved manufacturers are key for getting product into China. 

At the time of the acquisition, the company also raised $31.4 million at a share price for Bubs of $0.65. It’s up 57% since then.

Rising gross profit margin

One of the main factors for a market-beating ASX share is rising profit margins. Economies of scale are important.

Bubs has reported a steadily growing gross profit margin over the past four results. In June 2018 the gross margin was 14%, in December 2018 it had a 19% gross margin, in June 2019 it had a gross margin of 21% and in December 2019 it had a gross margin of 24%.

Bubs said it is doing effective cost management on a fixed milk price and more of the products sold are the higher margin infant formula products. In the December 2019 result the infant formula gross margin was 41%.

As the business gets bigger, Bubs will become more profitable for each extra dollar of revenue generated.

Cashflow positive

An important stage for every fast-growth company is reaching cashflow status. The company has had to do a number of capital raisings at a lower Bubs share price to reach its current size and strength. When a business becomes cashflow positive it can start funding its own growth.

In the three months to 31 March 2020, Bubs saw positive operating cashflow of $2.3 million. That’s not a lot, but the fact it’s now positive is a big plus. Bubs also had $36.4 million of cash on the balance sheet at 31 March 2020. It’s in a strong financial position. 

Good strategy and focused management

I’ve been very impressed by the partnerships, acquisitions and expansion that Bubs has done since it listed on the ASX.

Kristy Carr and the team around her have done a great job of building the business into what it is today.

It’s a good sign when the founder of the business has stayed with the business since it was founded. Mrs Carr’s holding is now 2.43% of the issued share capital. That’s not a large position, but it’s still worth over $13 million at the current Bubs share price.

Foolish takeaway

I think Bubs is one of the most promising ASX shares around. In five years I think Bubs could be a much larger business, making good profit with a strong international presence. At the current Bubs share price I’d be happy to start with a sizeable position for the long-term.

More reading

• How to become a millionaire with ASX shares starting with $0
• Why Alcidion, Bubs, IGO, & Next Science shares are pushing higher
• Where I’d invest $9,000 in ASX shares
• Got $1,000? You should buy 1 of these 6 ASX shares
• 3 of the best mid cap ASX shares you can buy right now

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO. The Motley Fool Australia owns shares of COLESGROUP DEF SET. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The ASX has had a tremendous run over the past few months. Since its lows in late-March the S&P/ASX200 Index (ASX:XJO) has surged nearly 37%. However, in my opinion there are a few headwinds that could be facing investors in the near future. Here are some factors to take into consideration when deciding whether or not to sell your ASX shares.  

Have ASX shares run too far?

Around 4 months ago during the height of market volatility, many investors were unsure how companies would ever recover, let alone ever trade at all time highs again. What has transpired over the last few months has been astounding, with some ASX shares making once in a lifetime moves.

A great example of this is Afterpay Ltd (ASX: APT), which hit a low of $8.90 in late March. Many investors questioned how buy now, pay later users would be able to meet their repayment obligations. Despite the pessimism, government income support and the rush to online and cashless retail has fuelled demand for the company’s services.

These moves have not been limited to technology companies, with online retailers like Kogan.com Ltd (ASX: KGN) and meal-kit provider Marley Spoon AG (ASX: MMM) also harnessing the change in consumer behaviour.

Despite government stimulus and certain companies buoying the overall market, many investors might be looking to take profits after such a miraculous run. A gloomy budget deficit, high unemployment forecasts and the looming reporting season could also serve as catalyst for a pullback.

Be wary of the upcoming reporting season

The upcoming reporting season in August is set to be one of the most complex and volatile seasons in recent history. The United States reporting season, which is currently underway, has provided a glimpse of the uncertainty and volatility Australian investors can expect.

Heading into reporting season, many investors would be relatively optimistic given there have not been a significant number of earnings downgrades. However, like all reporting seasons, there are bound to be some surprises.

What to watch this reporting season

It will be interesting to see how companies disclose the impact of the pandemic to investors and how the market will react. Furthermore, with many ASX companies implementing cost-cutting strategies to protect their balance sheets, it will also be fascinating to see how dividend payout ratios are impacted. Shares in the travel sector are already expected to report badly whereas there is more optimism for shares in the health sector. Reporting season will provide an opportunity to find out exactly how the pandemic has impacted the bottom line of companies in the tech sector. Meanwhile, the results for ASX bank shares are also likely to provide good insight into the country’s recovery prognosis.

Foolish takeaway

As a long-term investor I would usually advocate for shareholders to stay invested through the regular troughs and peaks of the sharemarket. However, the share price moves and general market volatility we have seen during the pandemic are an anomaly. Rather than selling the lot, another prudent strategy investors could adopt would be to sell a portion of their holdings to lock in profits. This would keep them invested whilst also freeing up some capital to take advantage of more opportunities that could arise during the August reporting season. 

More reading

• 5 steps to start investing in ASX shares
• Where to invest $100,000 into ASX shares
• 5 simple steps to financial independence
• These BNPL shares have blown up since their IPOs
• 2 ASX shares leveraged to the eCommerce shift

Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In this article I’m going to tell you about three reasons why the Macquarie share price could be a buy.

Macquarie is an investment bank that can trace its history back to 1969. It’s now one of Australia’s largest businesses with a market capitalisation of around $45 billion according to the ASX.

The business boasts of a record of 51 years of unbroken profitability. That’s a very solid record for a financial business in my opinion.

The Macquarie share price has recovered strongly since March 2020 – it’s up almost 75% since 23 March 2020 after the 52.5% drop to $72.

But is it a still a buy? I think there are three reasons why I’d consider the Macquarie share price over other ASX blue chip shares:

International earnings

Plenty of the biggest businesses on the ASX are mostly focused on the domestic economy like the banks, Telstra Corporation Ltd (ASX: TLS), Coles Group Limited (ASX: COL) and Wesfarmers Ltd (ASX: WES).

Macquarie only generates a third of its income from Australia and New Zealand. Meaning that international income account for two thirds of the business. The Americas accounted for a quarter of income in FY20, Asia made up 13% of total income and EMEA (Europe, the Middle East and Africa) accounted for 29% of total income. Macquarie’s share price would be nowhere near as high today without the international earnings. 

I think that’s very important. The economies of Australia and New Zealand are sizeable, but obviously the entire world’s economy is much larger. So it’s better to be able to service the entire globe. It means Macquarie can invest into any region it wants to, wherever it thinks will produce the best return for its money.

Diversified divisions

Macquarie is probably one of the most diverse businesses among the ASX 20. It has four main segments: Macquarie Asset Management (MAM), banking and financial services, Macquarie Capital and commodities and global markets. The earnings diversification has been helpful for the recovery of the Macquarie share price this year in my opinion. For example, IPOs have dropped off but ASX capital raisings have been frequent. 

Plenty of ASX shares are reliant on just one or two main sections to generate profit. But Macquarie makes good profit from each of its divisions. 

Macquarie describes half of its business as ‘annuity style’, meaning it’s defensive and generates consistent income. That refers to MAM and the banking divisions. I’m not sure banking is particularly annuity-like – particularly during COVID-19 – but managing assets is a great earnings stream. Macquarie’s assets under management had grown to $606.9 billion at 31 March 2020. That’s a great benefit to Macquarie.

The best bank

I think Macquarie is by far the best large bank on the ASX.

The big four ASX banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) are not terrible businesses – they just don’t offer much growth or earnings diversification. Loans are not a high-growth area and not very defensive. The Macquarie share price has recovered better than the big four ASX banks’.

I wouldn’t want to diversify my portfolio by buying one of the big four because I believe it would lower my long-term investment returns. But Macquarie has proven it can be a good performer through the economic cycle.

I think Macquarie also showed its quality through the Hayne royal commission. It barely featured whereas the big ASX banks had their reputations tarnished and had to repay large sums of money. 

At this share price, is Macquarie a buy?

I’d much rather buy Macquarie than most other blue chips due to its ability to grow anywhere. At the current Macquarie share price it’s trading at 16x FY22’s estimated earnings. I think that’s a reasonable price to pay for Macquarie shares considering a good amount of dividend income should be paid over the long-term as well, though the dividend is a bit uncertain due to COVID-19 at the moment. 

More reading

• Emergency funds: Are they still important?
• Top fund manager names favourite ASX growth shares
• Why the BlueScope share price is outperforming today
• Why CBA and Macquarie shares could be in the buy zone
• ASX 200 Weekly Wrap: Blue chip shares pull ASX 200 back over 6,000 points

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The upcoming profit reporting season will keep investors on the edge of their seats and you shouldn’t forget to scrutinise one often overlooked detail in the results.

This is the cash conversion ratio, which most investors either do not know about or brush aside for earnings multiples and growth figures.

Don’t get me wrong, price-earnings (P/E) ratios and sales and earnings growth are still important details this time round, as they are for every reporting season.

Cash ratio as important as profit ratio

But the cash conversion ratio (CCR) is particularly relevant in this COVID-19-stricken market. You’ll see why after I explain what this ratio is.

The CCR measures the amount of cash a company collects as a percentage of earnings. Just because an ASX stock reports a $100 profit, it doesn’t mean it receives $100 in cash.

Calculating the CCR is easy although few companies will do it for you when highlighting their profit and sales performance for the year.

How to calculate the cash conversion ratio

To get the ratio, you take the net operating cash flow (from the cash flow statement) and divide that by the reported earnings before interest, tax, depreciation and amortisation (EBITDA).

Don’t get confused by the cash flow statement as it is broken into three sections – operations, investing and financing. Cash flow from operations reflects the cash a company gets from its ordinary business and what it pays to provide the service or products, and that’s the net figure you want.

Some calculate the CCR by dividing the cash flow with net profits instead. I prefer to use the EBITDA number as amortisation and depreciation charges do not impact on cash and it produces a “cleaner” ratio.

Why cash doesn’t match profit

In the vast majority of cases, you will find that the net cash from operations falls short of EBITDA. This shortfall can be significant too and will vary from sector to sector.

The general rule of thumb is that a company with a CCR of 80% or better is good. If the ratio falls below this, you should investigate why as it could be an early indication of a problem.

So why does a company’s reported EBITDA not match the cash it receives? There are a few reasons for this. It could be a timing issue where a company recognises the profit from a sale before it gets paid by the customer.

Another common reason is an expansion in the company’s working capital, perhaps to fund a build-up in inventory.

Early warning sign

That could be a bullish sign if management is expecting a big ramp up in near-term sales or is gearing up for the start of a big project.

But in this coronavirus recessionary environment, a material increase in working capital could be a warning sign instead as most businesses will be experiencing declining sales.

Further, many ASX companies are probably feeling a cash crunch from the COVID-19 fallout. Booking decent profits isn’t enough to stave-off a capital raising if the cash isn’t coming in fast enough.

Final thoughts

As I’ve written last week, capital raisings are one of the key features I am expecting during the reporting season. Paying attention to the CCR could provide an early clue of a company in need of fresh capital.

As a final thought, the CCR is more relevant to S&P/ASX 200 Index (Index:^AXJO) companies than small caps.

Market minnows often don’t have earnings and are still making losses. You can’t use the ratio if the EBIDTA number is negative.

More reading

• Should fixed-interest investments be part of your ASX share portfolio?
• These were the worst performing ASX 200 shares last week
• ASX 200 drops more than 1%, IAG falls 7.5%
• Escalating US-China tensions are sending these ASX stocks jumping higher today
• Brokers name 3 ASX 200 shares to buy right now

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s the age-old question: should I be investing in super?

The Aussie superannuation system can be divisive. Many, particularly the younger cohort, are reluctant to invest additional cash into their super funds.

However, I’m a big believer in the power that super funds can have to turbocharge retirement plans.

Here are a few reasons why investing more money in super can be a great idea for investors of all ages.

Concessional contributions are taxed at 15%

This is a really big factor in favour of investing in super. Concessional contributions up to $25,000 per year are taxed at just 15% by super funds.

For reference, every dollar earned between $18,200 and $37,000 is taxed at 19%. Beyond that, Aussies are taxed progressively at 32.5%, 37% and up to 45% per dollar above $180,000 per year.

That means investing in super as concessional contributions can generate a significant tax break. As a long-term investor myself, that seems like a no-brainer.

I plan on using that money at 65+ anyway, so I might as well save some tax along the way.

Investing in super means less tax on capital gains

This is another big consideration but one that is often overlooked.

A capital gains event generally occurs when an asset is sold. If that is outside of super and the asset has been held for over 12 months, the investor would get taxed at their marginal tax rate.

However, capital gains within super get another handy tax break. During the accumulation phase, super funds typically receive a one-third discount on any capital gains made.

Given super funds are taxed at the flat 15% rate, that means the capital gain would be taxed at effectively 10%.

That’s compared to anywhere between 19% to 45% for investing outside of super if you earn upwards of $18,200 per year.

Super funds can invest big and long-term

Super funds have large pools of capital to invest across their various strategies. That means investing in super can get you access to investments that would otherwise not be possible.

This includes allocations to private equity, hedge funds and infrastructure assets. These investments can generate liquidity premiums and boost overall returns.

Investing in super is just one part of your strategy

The good news is, it doesn’t have to be all or nothing when it comes to investing in your superannuation. You can still keep your investments outside of super, but you may need less of them.

For instance, you could build up a sizeable portfolio of ASX shares or hold a broad market ETF like BetaShares Australia 200 ETF (ASX: A200) alongside your growing superannuation fund.

If you retire early, you simply draw down your ETF holdings outside of super down to zero until preservation age.

From there, your super investment kicks in and you can have a happy retirement.

But… there are drawbacks

Of course, if it was all good news, everyone would be investing more in super with no questions asked.

The reality is that there is an opportunity cost of contributing more to your superannuation.

That money is locked away for a long time and could be otherwise deployed elsewhere. For instance, you could buy ASX shares outside of super, pay down debt or save for a home deposit.

The First Home Super Saver (FHSS) scheme does help to alleviate this in some sense, but not completely.

There’s also a significant regulatory risk. Many investors worry that the preservation age will change by the time they retire.

The government could also view super as a convenient way to pay back deficits through higher taxes.

Foolish takeaway

In the end, investing additional money in super is a personal choice. However, I think the benefits outweigh the potential risks for me as it currently stands.

More reading

• Are you ready to invest in ASX shares?
• Is the ANZ, APA or CSL share price a strong buy?

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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