Investment Assets and Risks
Investing and Risk
All investments involve some degree of risk. In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment decision. In general, as investment risks rise, investors seek higher returns to compensate themselves for taking such risks.
Every saving and investment product has different risks and returns. Differences include: how readily investors can get their money when they need it, how fast their money will grow, and how safe their money will be.
Diversification and Risk
All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount you originally invest. To enable funds to be able to manage the risks the manager will usually practice some level of 'diversification.' This works on the premise that holding 2 different shares is better than 2 of the same shares. This is because all shares react differently to investment conditions and changes.
For example, imagine that there are only 2 companies, one company making t-shirts and one company making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the t-shirt company as they expect demand for t-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling the other is able to support and perhaps offset the falls, meaning that the investor doesn't suffer a loss.
The value of investments may fall as well as rise. You may get back less than you originally invested.
All investments carry some risk, and the Investing and Risk page includes some information on how we might manage this risk. We can learn more about the particular risks and rewards of different investment funds by looking at their sector and assets in more detail.
All types of shares have different characteristics and these characteristics are complex. Hence there are fund managers within the industry to assess and measure these features and make investment decisions based on their knowledge and market experience.
Investment funds will have a particular aim, and often have a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund (the investments made by the fund manager on behalf of individual investors) remain in proportion with the selected aims and specification of the fund.
Sectors and Assets
The fund sector identifies broadly the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry. For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in 'technology' companies (IT, telecoms etc).
In addition to this there are sectors that are a mixture of assets. A typical 'balanced managed' fund will have some money invested in shares, some in property and some in fixed interest investments or bonds.
It doesn’t matter whether you invest in a specific fund, asset or sector there are no guarantees as to the performance or returns.