Investing and risk
Investing money always means taking some risk. Even if you leave cash under a mattress, the risk is that its value can be eroded over time by rising prices. Generally the more risk you take with an investment, the greater the potential for reward. On the other hand, the greater the potential for a bigger loss.
Risk means different things to different people, but for many it means the risk of their original investment losing value. Fund values will move up and down with investment markets, but to varying degrees. That's why we have risk ratings: to give you a good idea of the risk you are taking when you invest in our funds.
Here's how we measure the risk of the funds
We give each of our funds a risk rating, ranging from 1 (lowest volatility) to 7 (highest volatility). These ratings reflect the potential for a fund to go up and down in value over time. We calculate our risk ratings using historical performance data and information from each fund’s investment manager(s). We review each fund's risk rating on a yearly basis, so they may change from time to time.
Risk and return are linked. This means funds with a rating of 1 are less likely to lose money, but your money might not grow very much. Funds with a rating of 7 have a much higher risk of losing money, but the potential for your money to grow over the long term is higher.
These investment risk ratings are based on our interpretation of investment risk and are only meant as a guide. Risk tends to be associated with potentially higher volatility. The higher the risk levels, the more likely the value of a fund may go up and down from day to day.
The fund centre is kept up to date with the latest risk rating. You can find the latest risk rating for our funds on the fund centre.
| Risk rating | Description |
|---|---|
| 7. Highest | Funds typically investing in the highest-risk sectors, such as those with specific investment themes or the shares of companies in emerging markets. These funds offer the highest potential for long-term returns, but also see the largest day-to-day changes in value compared with other funds. This means there’s the highest risk that the value of your investment could fall. |
| 6. High | Funds typically investing in high-risk sectors, such as shares of companies in developed overseas markets. These funds offer high potential for long-term returns, but also see large day-to-day changes in value, so there’s a high risk that the value of your investment could fall. |
| 5. Medium to High | Funds typically investing in shares of companies in the UK or a mix of major stock markets around the world. These funds offer the potential for good returns over the long term, but their values will go up and down and there’s a significant risk that the value of your investment could fall. |
| 4. Medium | Funds typically investing in a mix of asset types with the potential for better long-term returns than lower-risk funds. Compared with lower-risk funds there’s a greater risk that the value of your investment could fall. |
| 3. Low to Medium | Funds typically investing in assets like corporate bonds or a mix of assets where day-to-day changes in value have historically been less than for shares. There’s still a risk that the value of your investment could fall. |
| 2. Low | Funds typically investing in assets such as the highest-quality corporate bonds, which normally offer better long-term returns than savings accounts. There’s still a risk that the value of your investment could fall. |
| 1. Lowest | Funds typically investing in lower-risk sectors, such as the money market. They usually aim for similar returns to deposit and savings accounts. These funds have the lowest potential for long-term returns, but also see the smallest day-to-day changes in value compared with other funds. They present the lowest risk to your investment, although it could still fall in value. |
The way we describe our risk ratings was updated in December 2024 and may differ from your investment literature. This does not affect the level of risk we associate to each rating.
Fund risk warnings
As well as the risk ratings there are specific risks associated with investing in some funds, or types of funds. We recommend you read through these before deciding which fund(s) to invest in.
Not all of these warnings apply to each fund and there is no direct relationship between the number of fund risk warnings and the investment risk rating for a fund.
| Risk warning code | Risk warning description |
|---|---|
| A - General | Investment is not guaranteed: The value of an investment is not guaranteed and can go down as well as up. You could get back less than you’ve paid in. Specialist funds: Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors. Suspend trading: Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period. Derivatives: Derivatives are financial contracts whose value is based on the prices of other assets. Most funds can invest partly in derivatives so that the fund can be managed more efficiently or to reduce risk, but there’s a risk that the company that issues the derivative may default on its commitments, which could lead to losses. Some funds also use derivatives to increase potential returns – this is known as ‘speculation’ – and an additional risk warning applies to those funds (see risk F below). |
| B - Foreign exchange risk | When a fund invests substantially in overseas assets, its value will go up and down in line with movements in exchange rates as well as the changes in value of the fund’s investments. |
| C - Emerging markets | Where a fund invests substantially in emerging markets, its value is more likely to move up and down by large amounts and more frequently than a fund that invests in developed markets. Emerging markets may not be as strictly regulated, and investments may be harder to buy and sell than in developed markets. Emerging markets may also be politically unstable which can make these funds riskier. |
| D - Smaller companies | Where a fund invests substantially in the shares of smaller companies, it’s more likely to move up and down by large amounts and more frequently than a fund that invests in the shares of larger companies. The shares can also be more difficult to buy and sell, so smaller-companies funds can be riskier. |
| E - Fixed interest | Where a fund invests substantially in fixed-interest assets, such as corporate or government bonds, changes in interest rates or inflation can contribute to the value of the fund going up or down. For example, if interest rates rise, the fund’s value is likely to fall. |
| F - Derivatives | See risk A above. Some funds also invest in derivatives as part of their investment strategy, not just for managing the fund more efficiently. Under certain circumstances, derivatives can cause large movements up or down in the value of the fund, making it riskier compared with funds that only invest in, for example, company shares. There’s also a risk that the company that issues the derivative may default on its commitments, which could lead to losses. |
| G - Cash/money market funds | These are different to cash deposit accounts, such as those held with high-street banks, and their value can fall. Also, when interest rates are low, the fund’s charges could be higher than the return from the investment, so you could get back less than you’ve paid in. |
| H - Property funds | When a fund invests substantially in property funds, property shares or directly in property, you should bear in mind that: Property isn’t always easy to sell, so at times the fund may not be able to cash-in or switch part or all of its holdings. You may not be able to access your money during this time. Property valuations are made by independent valuers, but effectively they remain a matter of judgement and opinion. Property transaction costs are high due to legal costs, valuation costs and stamp duty, all of which affect the value of a fund. |
| I - High yield bonds | These are issued by companies and governments that have a lower credit rating. When a fund invests substantially in high yield bonds, there’s a higher risk that the bond issuer might not be able to pay interest or return the capital that was invested. The value of these bonds is also more greatly affected by economic conditions and interest rate movements. There may be times when it’s not easy to buy or sell these bonds, so cashing-in or switching your investment in the fund may be delayed. You may not be able to access your money during this period. |
| J - Reinsured funds | Where a fund invests in a fund that’s operated by another insurance company, you could lose some or all of the value of your investment in the fund if the other insurance company became insolvent. |
| K – Alternative Investment Funds | The fund invests partly in one or more Alternative Investment Funds, for example Long-Term Asset Funds (LTAFs) or Reserved Alternative Investment Funds (RAIFs). These investments give access to sectors such as infrastructure, venture capital, private equity and private debt investments and they add diversification to the fund, but it can take longer to move money out of them than from many other types of asset. This could mean that in exceptional circumstances cashing-in or switching your investment in the fund may need to be delayed. Some of the underlying holdings may be valued by independent valuers which means they are a matter of judgement and opinion and transaction costs may be high due to legal costs, valuation costs and stamp duty, all of which affect the value of a fund. To reduce these risks, we set strict limits on how much of the fund can be invested in Alternative Investment Funds and monitor this closely. |
View our fund range
Once you’ve read all the important information above, why not visit our fund centre to view our funds?
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