Every investment involves some risk. However, the level and type of risk will vary depending on the fund your savings are invested in.
General investment risks
Here are some factors that may cause a fund’s value to move up and down:
Risk that the market value of an asset or asset class may change due to factors such as changes in the economy, the performance of individual entities, the regulatory environment, investor sentiment, political events, inflation, and interest and currency rates.
The level of market risk a fund is exposed to depends on the asset classes it invests in. For example, equities and listed property assets are considered to be more risky than cash and cash equivalents and fixed interest assets.
Risk of changes in currency exchange rates. Assets denominated in foreign currencies face currency risk.
This can be seen with a fund that has foreign currency exposure. If the New Zealand dollar increases in value against a foreign currency, all else being equal, the New Zealand dollar value of that fund will fall.
Risk that an asset cannot be sold at the desired time (and at recent market value). Illiquid assets may affect your ability to withdraw, transfer or switch your investment.
Active management risk
Risk that arises from the active management of investments (or the active management of external fund managers). For example, if the chosen investments underperform, or the timing on market changes weren’t as expected, returns may be lower.
Risk that arises from the use of derivatives where the value is derived from the performance of another asset, an index (such as a share market index or a commodity index), an interest or an exchange rate. For example, investment losses could be caused by the other party to the derivatives contract failing to meet its contract obligations.
To understand the risks, it’s important to understand how the funds invest. More details on how the funds invest can be found in the statement of investment policy and objectives, which is available on the scheme register at companiesoffice.govt.nz/disclose (click on ‘Search schemes’ and search SIL Employer Scheme).
It’s also important to understand your own attitude to risk. For more information, talk to your financial adviser or work out your risk profile at the Sorted website.