With the exception of deposits/ monies in deposit-taking institutions (which are covered by deposit insurance), investments placed in investment companies are typically characterized by the risk of loss of some or all of the monies invested. The extent of this risk of loss depends on the market behaviour of the respective investment instrument.
High Risk: The stock market is characterized by volatility (rapid movements) in stock prices. Because the investor could lose the entire principal investment if the stock market performs poorly, stocks are considered a risky investment and is generally classified as high risk.
Medium Risk: Compared to stocks, bonds are less risky. They are less risky as the issuer of the bond guarantees coupon payments and the return of the principal at maturity of the contract. The level of risk is to some extent dependent on whether the interest rate is fixed or variable. The latter is determined by the behaviour of the bond market, which is considered less volatile than the stock market.
Due to the nature of mutual funds, its value depends on the market behaviour of the underlying instrument (s). Therefore, the level of risk is dependent on the type of underlying instrument(s), which (with the exception of money market funds) are generally characterized by some level of risk.
Stock fund – high risk
Bond fund – medium risk
Money market fund – low risk
Mixed asset fund – medium to high risk
Low to Medium Risk: The investment philosophy of most Unit Trusts is to invest in low risk and/ or a combination of underlying instruments in order to balance risk exposure. As such unit trusts may be considered to have a low to medium risk profile.
Medium to High Risk: The risk of loss depends on the type of instrument(s) the insurance company invests in. Typically this includes stocks, real estate, bonds or a combination thereof. The investment-linked insurance may therefore be classified by medium to high risk.