Investment Risk Assessment and Fund Return Calculation

From assessing risks to picking the right funds, learn to manage investment risks with ease!

When it comes to investing in funds, the first step is always risk assessment. Different funds have different risk levels and higher returns usually come with greater volatility. Before you start investing, it's crucial to figure out how much risk you're comfortable with and choose the right products. That way, you won't be caught off guard when market conditions change. [1]

Want to know what type of investor are you? Just ask yourself 3 questions:

  • Think it through first: What are your investment goals, investment timeline and the maximum loss you can tolerate?
  • Then look at the product: Do the risk level, fees and asset allocation match what you have in mind?
  • Finally, review: Has your portfolio strayed from your goals? Has your life stage changed? Remember to review it regularly!

How do you understand investment fund risk?

A risk assessment isn't a crystal ball for predicting market movements. Instead, it's a tool to help you balance your investment goals, timeline, income and tolerance for volatility.

For example, if you have a shorter investment timeline, you'll likely find it harder to stomach big price swings. On the other hand, even if your timeline is long, it doesn't mean you can completely ignore your need for liquidity.

Taking a risk assessment to understand your risk appetite

Everyone's tolerance for risk is different. That's why you need to complete a "Risk Assessment Questionnaire" and an "Investor Protection Assessment" first. This helps you understand your risk appetite and whether you might need extra safeguards. Your risk tolerance generally falls into one of 5 levels. Here’s how we explain them:

Level Risk Tolerance Description
1 Low Risk
  • The investor is conservative. Capital preservation is of primary importance. The investor wants to achieve a low level of investment returns and understands he/she will need to and is willing to take a minimal (not zero) amount of risk with the capital invested
  • In normal market conditions, the investor expects the price fluctuation of his/her investment to be minimal (not zero).
2 Low to Medium Risk
  • The investor is moderately conservative. The investor wants to achieve a low to medium level of capital growth and understands he/she will need to and is willing to take a low to medium amount of risk with the capital invested
  • In normal market conditions, the investor expects the price fluctuation of his/her investment to be low to medium.
3 Medium Risk
  • The investor is moderately aggressive. The investor wants to achieve a 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
  • In normal market conditions, the investor expects the price fluctuation of his/her investment to be medium.
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 a medium to high amount of risk with the capital invested
  • In normal market conditions, the investor expects the price fluctuation of his/her investment to be medium to high.
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 a high amount of risk with the capital invested, including the possibility of losing more than the capital invested
  • In normal market conditions, the investor expects the price fluctuation of his/her investment to be high.

How to fill out the Risk Assessment Questionnaire?

  • Online completion: You can log on to Hang Seng Mobile App or Personal e-Banking anytime to complete the assessment. Remember to update your record regularly if your financial situation, age or investment experience changes
  • Accurate information: If you fudge or omit the details, you could end up with a portfolio that's riskier than you can handle. That won't do you any favours!

What are the main types of fund investment risk?

All fund investments involve risk and you could lose money, potentially even your entire principal. Here are some of the most common risks:

  • Market risk: A fund's price will fluctuate with the broader economy, political events, interest rates and stock market movements. If market conditions are poor, the fund's value could drop significantly
  • Specific risk: If you concentrate your investments in a particular industry, a single country or non-investment-grade bonds, you'll face risks tied to that sector's business cycle or the issuer defaulting
  • Liquidity and currency risk: Investing in overseas assets means you have to bear currency exchange fluctuations. What's more, some funds can be difficult to sell quickly during extreme market volatility
  • Fee erosion: Costs like subscription charges and management fees will slowly chip away at your total returns, so always remember to deduct them when calculating your actual profit

How can you manage fund investment risks?

Knowing how to calculate risk is the first step to managing it. You can try these methods:

  • Quantify the risk: Compare the volatility, maximum drawdown, Sharpe Ratio and fees of different funds. The "maximum drawdown" is a key metric that tells you the biggest drop you might have to endure in extreme conditions
  • Diversify and rebalance: Spreading your money across different regions, industries and asset classes can reduce concentration risk. However, this can't completely eliminate the risk of a market-wide downturn
  • Responding to a downturn: You can consider buying the dip when the market falls, but only if you're sure the fund's fundamentals haven't worsened. At the same time, setting a "stop-loss" can prevent further losses
  • Keep some cash on hand: Remember to set aside money for daily living and emergencies. This way, you won't be forced to sell your investments at a low point if you suddenly need cash

How do you calculate fund returns?

Fund returns mainly come in 2 types: accumulation (Acc) and distribution (Dis) and they're calculated a bit differently.

Accumulation (Acc) unit returns

These funds automatically reinvest any earnings (like dividends) for you, helping you achieve a "compounding" effect. The return, therefore, comes from the change in the fund's price. It's usually expressed in 3 ways:

  • Cumulative return: The total return over a specific period
  • Annualised return: The average annual rate of return, calculated using compounding
  • Calendar year return: For example, if Fund A's price is HKD10 on 1 Jan 2025 and it rises to HKD15 by 31 Dec of the same year, the return is: (HKD15 - HKD10) ÷ HKD10 × 100% = 50%

Distribution (Dis) fund returns

These funds pay out income at regular intervals (e.g. monthly, quarterly or annually), but there are 2 key things to note:

  • High distributions don't equal high returns: A fund might pay a 10% distribution, but if its price falls by 10% over the same period, your actual return could be 0 or even a loss!
  • Distributions may come from your capital: The money paid out might be part of your original investment. This would reduce the fund's unit price and the total value of your investment. You can check the fund's distribution composition information to find out more

Want to calculate it yourself? The formula is simple:

Total Return = (End Value - Start Value + Income Received) ÷ Start Value

A quick reminder: When comparing funds, be sure to deduct all fees, use the same basis for handling distributions and pay attention to your purchase timing and the power of compounding!

FAQs about risk assessment

Because life changes all the time. Your income, family situation or investment goals can all shift over time. For example, after getting married or having children, your risk tolerance might be different. That's why it's important to update it regularly to ensure your portfolio is still the right fit for you.

You can check the fund's sales documents, financial reports and distribution announcements. These will clearly state the source of the distribution and its impact on the net asset value, so you'll have a clear picture.

Yes, diversification helps you lower "non-systemic risk", which is risk tied to a single company, industry or region. However, "systemic risks", like a global recession, cannot be completely eliminated through diversification.

Feeling clearer about your investment direction now? If you're ready to find investment products that match your risk level, why not explore the options in the investment section of the Hang Seng Mobile App or on our website? It's a great first step in your financial planning journey.

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Investment involves risk. Prices of investment products may go up as well as down and may even become valueless.

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Footnote

Important information

Regarding the Risk Profiling Questionnaire:

  • The Risk Profiling Questionnaire is provided by Hang Seng Bank Limited ("the Bank") to help customers understand their current risk profile and investment needs. The Bank makes no representation, warranty or undertaking as to the accuracy or completeness of any information or recommendations herein, and accepts no liability in respect thereof. All views are based on the information provided to the Bank by the customer. The views expressed following this analysis, having regard to the needs of the customer and the customer's indicated attitude towards risk, are intended solely as a reference for the customer when making their own investment decisions. No view expressed herein should be construed as an invitation to buy or sell any investment product, nor should it be treated as investment advice

Regarding the Investor Protection Assessment:

  • Hang Seng Bank Limited ("Hang Seng Bank", "the Bank" or "Bank") is committed to providing additional safeguards for investment product transactions conducted with specific customers. The Bank provides this assessment to help customers understand, based on their individual circumstances (including their investment transaction experience), whether they qualify as a "specific customer
  • Unless there is any update to the customer's personal circumstances in the Bank's records that causes the assessment result to be automatically invalidated, the Investor Protection Status derived from the Investor Protection Assessment will be valid for one year from the date of assessment. Customers are required to undergo a new assessment if there is any change in personal circumstances that may affect their Investor Protection Status
  • Any assessment of Investor Protection Status is based on information in the Bank's records (e.g. age, educational background, net liquid assets and investment experience over the past 5 years), information provided to the Bank by the customer, and information obtained through observation during the Bank's contact with the customer. Failure to provide complete, accurate and up-to-date information will affect the assessments and services provided by the Bank
  • For joint-named accounts, each account holder must complete the Investor Protection Assessment separately

For authorised persons, they must complete the Investor Protection Assessment before conducting any investment transaction.

 

Risk disclosure of Investment Funds

Investors should note that all investments involve risks (including the possibility of loss of the capital invested), prices or value of investment fund units may go up as well as down and past performance information presented is not indicative of future performance. Investors should read carefully and understand the relevant offering documents of the investment funds (including the fund details and the full text of the risk factors stated therein) and the Notice to Customers for Fund Investing before making any investment decision. Investment funds are investment products and some may involve derivatives. Investors should carefully consider their own circumstances whether an investment is suitable for them in view of their own investment objectives, investment experience, preferred investment tenor, financial situation, risk tolerance abilities, tax implications and other needs, etc., and should understand the nature, terms and risks of the investment products. Investors should obtain independent professional advice if they have concerns about their investment.

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.

Sources

  1. Investment Risk, Investor and Financial Education Council, https://www.ifec.org.hk/web/en/investment/market-intermediaries/financial-market/risk-management/investment-risk.page