If an investor is willing to accept a higher level of risk, this often means that he or she can achieve a greater potential return on his or her investments. By contrast, investment funds that invest in less risky assets can be expected deliver lower returns.
Equity funds that invest in shares with high growth potential may also carry the risk of substantial losses. As a rule, the potential return and risk is lower for shares of established companies that deliver a consistent growth rate and returns. It should be noted that the overall risk of an investment fund is carefully monitored. Fund managers operate within established risk limits to ensure that the risk and return targets correspond with the profile of the investment fund – although there is never a guarantee that market movements will not have unforeseen consequences for the fund’s investments.
Diversification is a key tool for risk management. By investing in a wide variety of individual securities or asset classes the risk of each investment is spread across different sectors, markets, countries, regions, and so on. The degree of diversification within a fund is tailored to meet the relevant performance objectives and investment policy. Risk management is an integral part of the investment process as fund managers seek to ensure that their selection of assets will enable them to meet the fund’s performance objectives.
Details of a fund’s expected levels of risk exposure and return objective will be explained in the fund’s Key Investor Information Document as well as in its prospectus.