Understanding investment risk

All investing has risks attached to any potential reward, but this can vary from investment to investment. You need to ensure you're happy with the risks involved with whatever you choose to invest in.

The higher the risk of an investment the higher the potential returns it will make, however you increase the potential to lose some or all of your money and the investment will most likely be more volatile.

The funds we offer contain different asset types and the variance in those asset types influences the amount of risk the fund has. For example a fund with greater proportion of its investment in company shares compared to cash or company bonds will have a higher level of risk than the other way around.

Below we explain the different factors you need to consider to evaluate how much risk you are willing to take and how to evaluate the risk of each fund. We also explain the assets used and how to find the proportion of those in each fund.

 

How to approach risk

Time horizon
Investing is best when you think long-term for five years or more. It means your investments may be able to recover any short-term losses, as well as benefit from compound returns essentially returns on any investment returns you make.

 

Diversification
Owning different types of investments through something like an investment fund (or having multiple investment funds) means if one doesn't perform well, you could still receive the potential returns of others.
 
Combining different asset classes
Multi-asset funds essentially blend different types of investments together. This is so you’re not putting all your eggs in one basket and can benefit from the performance of different asset classes at once. Spreading your money across a variety of investments is known as diversification and is one way of managing risk.
 

Asset types

The main investment asset types are:

  • Cash
    Usually, cash is considered the lowest-risk asset type as it provides modest and relatively stable return
  • Company shares
    Shares are essentially parts or a stake in a company. Funds can invest in individual company shares or they can track an index of companies, such as the FTSE 100 (the UK’s largest companies publicly listed on the stock market). With an index tracker you don't just invest in one company, you invest in all the companies that make up the index. This means you have broad exposure to all the companies that make up the index. Company shares are also known as Equities.
  • Bonds
    Bonds are a sort of loan. Investors give their money to the bond issuer, such as a company or government, and then they should paid a fixed amount in return for investing their money. As well as investing in funds that pick bonds to invest in, you can also track bond indices.
  • Property
    Property can vary from residential property and commercial buildings to infrastructure like roads or wind turbines.

If you’re a cautious investor, you may only want to take a small amount of risk to try and achieve a modest and relatively stable return. If so, funds with a lower risk profile could be right for you.

If you’re comfortable taking a larger amount of risk with your money, you might want to go for funds that have a higher volatility to give you the potential for higher returns. If so, funds with a higher risk profile could be more suitable for you.

It's essential you read the Key Investor Information Document (KIID) of the specific fund to understand more about its risk profile before you invest.