I’m in my 20s, should I add to my super or save for a home?

I am in my mid-20s, living at home, and not sure where to put my savings. Should I pay off my HECS debt, add to my super, or save for a home?

Congratulations on thinking about sensible things to do with your savings. Any of these three options will point you in the right direction of having a greater range of choices later in life.

I would lean away from extra super contributions at your age because the funds are locked up for a very long time, and you have a lot of living to do between now and retirement.

I’d also be inclined to leave your HECS debt to be repaid via the normal schedule. It did have a large step-up this past year, which picked up a lot of media attention, but that was unusual, and inflation has gone down since. HECS debts continue to be low-cost borrowings.

This leaves saving for your first home. Australia’s tax and financial system is very much biased towards home ownership, so the sooner you can get onto this ladder, likely the better off you will be eventually.

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I’m in my 40s and with one of the large super funds. I’m currently in their high-growth option, with a fee of 0.78 per cent. They’ve recently introduced an indexed high-growth option with a 0.1 per cent fee. Any thoughts on whether the active strategy is worth it after fees? I believe it includes property and private equity whereas the indexed option invests in equities only.

This is a great question. When it comes to investing in large-cap equities, the evidence is quite conclusive that index investing is the way to go. After fees, active managers struggle to outperform, with the probability being that your chosen active manager will do worse than the market average over the long term.

Armed with this piece of information, it’s easy to conclude that the index investment option would be the way to go, particularly given its lower fee.

However, you’ve identified a very pertinent point. While an index approach appears to be the appropriate approach for exposure to large-cap equities, the investment universe is far wider than just this asset class.

In the equity space, you also have small and mid-caps, plus potential index tilts such as value or quality filters. Outside of equities, you have assets like infrastructure. Australian Super, for instance, recently announced a significant investment in data centres, a bet on the rise of AI and an increased need for computer processing power. Investments like this won’t get picked up in an index fund.

While it’s always the case that past returns may bear no relationship to future outcomes, we do have a reference point for your question in Hostplus, which has run an Indexed Balanced option for many years.

Its active balanced fund has returned 8.68 per cent after fees over the 10 years to 31 August, whereas the indexed balanced fund has returned 7.59 per cent over the same time after fees. As with your fund, the index option has negligible fees, but as an investor, you’d have been better off paying more for the active management.

I have to admit, I’ve been surprised by this outcome. Had you asked me this question five years ago, I would have leaned towards the index option. But this Hostplus example, plus several others, has led me to take a more nuanced approach when it comes to index investment options within super funds.