03.07.2018

Funds and the risks they entail

Investing in funds can reduce risks specific to securities. Investment in a bigger pool of assets means risks are better distributed with funds than investments in individual shares or bonds. But funds are not without risk either. Investors can find out everything they need to know here.

There is always a market risk. If market performance is poor across the board, this also has an impact on your funds.

The same is true of cluster risk. Some investment funds focus on particular regions, sectors or themes. If these perform poorly, the value of the associated investment funds also falls. If a technology bubble bursts, for example, this has a bigger impact on a fund purely focused on technology than funds containing securities from different sectors. If the SMI slumps, equity funds with a heavy weighting of Swiss securities are hit worse than funds which invest worldwide.

It is advisable to look closely at the exact composition of a fund. Even if you have different funds in your portfolio, they may invest in the same company or region. Such cluster risks are not immediately obvious.

Adopt a cautious approach to foreign currencies

Currency risks also have to be taken into account. Two things should be borne in mind: if you invest in a fund in a foreign currency, there is a risk that the value of this currency will decline against the Swiss franc. However, funds in Swiss francs sometimes also invest in foreign securities. This also presents a currency risk which is not apparent at first glance. The fund currency in itself does not give a clear indication of the fund’s actual currency distribution.

Special case – bond funds

Bond funds are an alternative to equity funds which are suitable for cautious investors, as they are generally exposed to less significant fluctuations. Their value can nevertheless fluctuate. They are exposed to currency risks when investing in foreign currencies. Bond funds also react to changes in the general interest rate. Not all debtors are of the same quality, either. In particular with junk bonds that offer potentially high returns (also known as high-yield bonds), there is also the risk of default on interest payments or even on capital repayment, which in turn has a negative effect on the value of the entire fund.

Risk potential – assessment of past performance

In the end, you decide not to manage your fund yourself as an investor but instead entrust the decisions to a fund manager. The fund information contains details of past performance. However, nobody can guarantee that similar performance will be achieved in future.

You must be aware that funds also involve risk. Study the fund information on a regular basis and make the effort to find out how your fund is composed, how it works and how the management makes decisions. Here too the prospect of higher returns also goes hand in hand with greater risk.

This might interest you too