Short-term investors may find volatility a greater risk than those with a long-term investment horizon because under normal market conditions, price fluctuations frequently balance themselves out over the long term.
The volatility of an investment fund’s value will reflect that of the assets in which it invests. Analysing a fund’s prospectus provides information about how volatile a fund has been in the past – although this is never a certain indication of the future volatility and performance of the fund. By reading a prospectus, you can also find out whether growth coincided with strong price volatility or was achieved continuously and in steady steps. Two funds may deliver the same level of capital growth and income, but have taken very different routes to do so, thus demonstrating significant differences in volatility.
An investment fund’s volatility can derive from a number of different sources, such as fluctuations in the price of a particular share or in the currency in which the price is measured. Highly-focused investment funds may experience greater volatility because they contain fewer securities, so the performance of a single investment may have a greater impact on the fund as a whole. However, it is important to remember that volatility can also have a positive effect because it not only can bring greater risk but higher potential returns as well.