Investment risks involved with mutual funds
Risk and return
Any investment involves an element of risk. Investment risk is the risk that you won’t earn as much from your investment as you expected, or that you may even make a loss. In general, the higher the returns you expect from your investment, the higher the investment risks are. Before you buy into a mutual fund, your fund provider will assess how much risk you are willing to take, and will take that into account when recommending funds.
As a very general rule, funds that invest primarily in equities carry more risk than those investing mostly in bonds.
Between these two there are mixed asset funds of varying risk and return profiles.
How much risk are you happy to take?
- Your risk tolerance is based on your own financial goals. Some investors are comfortable with higher investment risk because they want to aim for higher returns in the long term. Others may prefer more stable investments with lower returns.
- If you are not sure what your risk tolerance is, check out our risk assessment questionnaire, designed to help you understand yourself better as an investor.
- A score of 1 indicates that you have a very low tolerance for risk. Your choice of investments might be limited to a list of government bonds and other instruments with very low risks.
- At the other end of the scale, a score of 5 indicates that you can accept a very high level of risk to your capital. In this case, your choice of investment includes a much wider set of securities with higher risks, such as emerging market equities.
Download the risk assessment questionnaire
Managing investment risk
Diversification is a simple way to manage your risk. By spreading your investments across different asset classes, industries and geographic regions, your portfolio would tend to be less risky than investing in just a single type of asset. However, diversification cannot completely remove risk, and there is still a chance that you suffer losses.