Risk and return

Understand risk and return in fund investing

From "Fund 101", you may learn about investment fund features and benefits, yet investment always involves risks. There are various funds with different risk levels that suit investors with different risk tolerance levels. Therefore, knowing the potential fund risks and your risk tolerance by conducting a risk assessment are necessary before making any fund investment.

Know your risk tolerance level with risk assessment to choose suitable investment products

The risk tolerance level of each individual varies, it is the best to conduct a Risk Profiling Questionnaire (RPQ) and Investor Protection Assessment to know your own risk tolerance level and whether any additional investment protection measures are required. Risk tolerance level can be generally measured on a scale of 1 to 5, with 1 indicating a conservative investor and 5 meaning a very aggressive one. You can complete the RPQ with Personal e-Banking to assess your risk tolerance level as a reference before making any investment decisions. Be aware that risk tolerance level will change according to financial goals, age, investment experience, etc., so investors need to update their RPQ regularly.

Similarly, each fund has its own potential investment risks: Level 1 being the lowest risk and Level 5 being the riskiest. Generally speaking, the higher the potential fund returns, the higher the risk. On the contrary, a fund with lower risk would probably have smaller potential returns. There is no good or bad between high and low investment risks. The only thing you need to consider is whether an investment fund suits your financial goal and risk tolerance level.

For example, an investor with low risk tolerance level may not be able to take the instability of asset's price and investment returns brought by high-risk products, such as equity funds, thus he/she might tend to make irrational investment choices due to market fluctuations and incur losses. While for investors with higher risk tolerance level, they are more willing to take more aggressive investment profiles and bear bigger losses. If they act too conservatively and only focus on low-risk investment products like bonds and money market funds, they might not achieve their desired investment returns.

Risk tolerance level
Description of each risk tolerance level
1 Low Risk
The investor is conservative. Capital preservation is of primary importance. The investor understands he/she will need to and is willing to take a minimal amount of risk with the capital invested
2 Low to Medium Risk
The investor is moderately conservative. The investor wants to achieve low to medium level of capital growth and understands he/she will need to and is willing to take low to medium amount of risk with the capital invested
3 Medium Risk
The investor is moderately aggressive. The investor wants to achieve medium level of capital growth and understands he/she will need to and is willing to take a medium amount of risk with the capital invested
4 Medium to High Risk
The investor is aggressive. The investor wants to achieve medium to high capital growth and understands he/she will need to and is willing to take medium to high amount of risk with the capital invested
5 High Risk
The investor is very aggressive. The investor wants to achieve high capital growth and understands he/she will need to and is willing to take high amount of risk with the capital invested, including the possibility of losing more than the capital invested

Active investment risk management through diversification and asset allocation

Fund investment involves various types of risks, including currency risk, equity market risk, concentration risk, etc. which could possibly lead to a loss of capital invested. Yet investors could effectively mitigate risks to lower investment risk with the below suggestions:

During a falling market or even a bear market, investors may consider rebalancing their asset allocation and incorporate more defensive assets in portfolios. Generally, compared with global stock market, global bond market is less volatile and more stable in return, and high-grade bonds are considered to be more defensive among bonds. Another way to spread risks is to build a diversified portfolio by investing in asset classes with low correlation for diversification. However, investors have to bear in mind that no matter how you manage your portfolio, you should always understand the investment objectives of the fund and whether it suits your level of risk tolerance before making any decisions.

Investors can explore investment opportunity in a falling market. If the fund price drops, investors can buy more units with the same amount, thus potentially leading to greater fund returns when it rebounds. However, do not blindly “buying low”. If the market or the fund is deteriorating, and the fund price keeps falling, "buying low" may result in losses. Also, if your expectation for the fund is bearish, you may consider cutting loss or rebalancing your asset allocation by switching to other funds or asset classes.

How to calculate fund returns

There are two types of fund returns including the return of “Acc” (Accumulation) unit class and the return of Dis (Distribution) Fund. The terms to show fund performance are different depending on the type of purchased fund.

Based on the principle of Price-to-Price of the relevant fund, with reinvestment of all dividends (if any) and all fund fees have been taken. Below are 3 common terms to show fund performance:

  • Cumulative Return: The aggregate performance from a fund over a set time period based on the date of latest available fund price, for instance, the return generated 6 months ago.
  • Annualised Return: Converting Cumulative Return into an annualised form based on the fund’s investment period and the compound interest effect.
  • Calendar Year Return: Refers to the performance of a fund in a specific calendar year. For example, supposing the price of fund A on January 1, 2019 was HKD10, and increased to HKD15 on December 31, 2019, then its Calendar Year Return should be (HKD15-HKD10)/HKD10 x 100%=50%.

The most common way is to pay dividends regularly. Different funds have different dividend policies, such as paying monthly, quarterly or annually. The dividend payout ratio and amount also vary. Before investing this type of fund, there are three points to pay attention to:

  • Paying high dividends does not equal to high investment return: If a fund pays dividend of 10% but losses 10% in its price, then the return is still zero
  • Dividends may not be guaranteed: It can be paid out of capital, which is the fund investment principal. This will not only lead to the decrease of a fund’s price, but also reduce a fund’s investable amount
  • Keep in mind that past performance is not indicative of future results: The fund’s dividend yield showed on the investment platform is based on the dividends record in the past. It does not guarantee the same level of dividend payout. Investors are suggested to read the Dividend Composition Information of the fund to understand the source of dividend payment

Last but not least, be aware of fund fees. Fund trading is associated with several fund fees, including fund transaction fee, subscription fee, redemption fee, monthly fee, administrative and management fee, etc. Theoretically, investors need to deduct all relevant expenses from the fund return before knowing the actual return. Different fund platforms have different charging models. Take SimplyFund as an example, the displayed fund price has already reflected the fund administrative and management fees. Since SimplyFund does not charge fund subscription fees and redemption fees, you can simply deduct the monthly fee to get the net fund returns.

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Other point(s) to note

All investments involve risks (including the possibility of loss of the capital invested). Prices of securities and investment products may go up as well as down and may even become valueless. Past performance information presented is not indicative of future performance. The risk disclosure statements and the offering documents of the relevant securities and investment products should be read in detail before making any investment decision.