Know your investment

What are the risks?

The level of risk in a mutual fund depends on the content of its investment portfolio. For example, stocks are usually riskier than bonds, so you would expect an equity fund to be riskier than a fixed income fund.

All investments have risk. The key is to understand the risks and decide how much risk you can tolerate - your risk tolerance.

Risk and return

The higher the potential return, the higher the risk. Different types of investments have different levels of risk.  If you want higher returns, you have to be prepared to accept greater risk.

Common types of risk

Different investments have different risks. This table shows some of the common risks and the possible effect on a fund's performance. A fund may face one or all of the following risks.

Type of investment

Type of risk

How the fund could lose money

All

Market risk

The fund's investments decline in value because of events affecting the market e.g. a recession

All

Liquidity risk

The fund cannot sell an investment that is declining in value because there are no buyers. This may affect your ability to redeem your investment

Fixed income securities, such as bonds

Credit risk

If a bond issuer cannot repay a bond, it may end up being a worthless investment.

Fixed income securities

Interest rate risk

The value of fixed income securities generally falls when interest rates rise.

Foreign investments

Country risk

The value of a foreign investment declines because of political or economic instability.

Investments measured in a currency other than the Canadian dollar

Currency risk

If the other currency declines against the Canadian dollar, the investment will lose value.

Assessing risk

One way to assess a fund's level of risk is to look at how its returns change from year to year. A fund's return that varies a lot will be riskier because its performance can change quickly in either direction. For example, if a fund lost 5% two years ago, then gained 17% last year and 2% this year, it is likely to be riskier than a fund that has gained 6% for each of the past three years. 

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