A discussion on any form of Collective Investment Scheme would not be complete without a discussion on the risks that are associated with making such an investment.

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When considering an investment in a Collective Investment Scheme, it is always important to remember that the value of all financial investments will fluctuate over time. The degree to which these fluctuations occur is usually subject to the basic principle that the greater the risk associated with the investment, the more it will be expected to fluctuate. However those funds that provide exposure to greater risks are also often able to provide greater rewards over the long term.

 

If you want to realise your financial goals, it is important to start with an honest appraisal of your personal situation and to gauge your appetite for risk in relation to that. Individuals’ tolerance levels for risk vary considerably as some investors can accept short-term volatility with ease, whilst others are not in a financial position to support any volatility. So whether you consider your investment temperament to be conservative, moderate or aggressive, you need to focus on how comfortable or uncomfortable you will be as the value of your investment moves up or down.

 

Recognising the type of investor you are will go a long way towards helping you build a meaningful portfolio of investments that you can live with.

Managing Risk

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Collective Investment Schemes offer incredible flexibility in managing investment risk and they allow investors to enjoy the benefits of diversification, along with monthly investment plans that can be used to reduce your investment risk considerably in reaching your long-term financial goals.

 

-  Diversification

 

When you invest in one Collective Investment Scheme, you instantly spread your risk over a number of different companies. You can also diversify over several different kinds of securities by investing in different Collective Investment Schemes (or in a balanced fund) to further reduce your risk exposure.

 

Diversification is a basic risk management tool that you will want to use throughout your lifetime as your investment needs and goals will change over time. Investors, who are willing to maintain a selection of equity shares, bonds and money market securities have a better chance of earning higher returns over time than those investors who invest in only the most conservative instruments.

 

-  Monthly Investment Plan

 

The investors of certain Collective Investment Schemes can benefit by investing predetermined amounts on a periodic basis over a length of time. By doing so the investor minimises their exposure to market risk (the upward and downward movements that take place in most markets) as they would have invested over a complete cycle, so long as they have invested for a suitable period of time.

Types of Risks

 

All investments involve some form of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started. Consider these common types of risk and evaluate them against the potential rewards before you select an investment.

 

-  Market Risk

 

The prices or yields of all the securities in various markets will rise or fall due to various influences. When this happens, the prices of the underlying securities in a portfolio may be affected, which would imply that the value of your Collective Investment Scheme would also be affected.

 

-  Inflation Risk

 

This term is also referred to as "loss of purchasing power". Whenever inflation rises faster than the earnings on your investment, you run the risk that you'll actually be able to buy less in the future than you would be able to in the present.

 

-  Credit Risk

 

This term relates to the certainty that is associated with the ability that an organisation will pay either the interest that the fund is promised or the principal that was invested.

 

-  Foreign Exchange Risk

 

A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies.