Risk in investing explained

Risk is inherent to investing. Generally the higher the returns the greater the risk to your money. We explain what exactly risk is, and how to understand it.

What is risk?

In investing ‘risk’ simply means the chance that your investment will decrease in value and you will end up with less money than you initially invested.

Generally there is a close relationship between risk and return, with higher returns coming with higher risk. 

We have named our funds to give an indication of their risk/return profile, as well as a risk rating and their past performance. You should consider all this information carefully and your appetite for risk before buying into a fund. 

Remember that as a rule you should never invest money you need for necessary expenses, and you should be prepared to lose all the money you invest (though this is unlikely with a well diversified investment fund). 

What is a risk rating? / What is “a Synthetic Risk & Reward Indicator (SRRI)”?

We use an industry standard risk rating on all funds. Known in industry jargon as a Synthetic Risk and Reward Indicator (SRRI).

It’s a number on a scale of 1-7, the higher it is, the riskier the fund is considered to be. But remember there is typically a direct relationship between risk and reward, the higher the risk, the higher the reward. 

How are Chip’s risk ratings calculated? 

We don’t calculate the risk rating ourselves, we get the risk rating from BlackRock and it is based on the ‘volatility’ of the assets in the fund (i.e. how likely they’ll increase or decrease in value). 

With the BlackRock Consensus funds this is based on the split between equities and bonds. Equities are the high-return/high-risk investments in company stocks and shares, and bonds are the stable investments with governments and other reliable institutions. 

We explain more about equities and bonds above in the ‘investment basics’ section, but as a rule, the higher the percentage of equities vs bonds in a fund, the higher the risk rating is. 

Why has my account balance dropped?

Your account balance will have dropped because the investments that make up the fund have decreased in value due to changes in the market, and so your fund units have also dropped in value. 

It’s nothing to panic about and this does happen regularly with investing. It is very unlikely you will see a steady and consistent upwards growth trend, your growth will jump up and down in a bumpy line, but the overall trend should be going up. 

Remember investing in a fund is not single share trading and it is not the same as playing the stock market, take a long term view, zoom out and consider how things will look over a 5-10 year period. 

Read more about investments

• About Chip Investments

• Investment basics

• About BlackRock

• Eligibility and costs for Chip Investments

• ISAs explained

• How returns from investments work

• Accessing your money in an investment fund

• All the legal details

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