Selecting funds and managing investment risk

When investing, you need to consider the risk and reward that comes from different types of funds. You need to choose a level of risk that makes sense for you and your financial goals. It’s a good idea to consider:

You can find more information about each fund in-app, which includes a link to the Key Investor Information Document (KIID). Simply tap on the Fund details for any fund from your Allocation settings. The KIID sets out details such as the geographies and types of assets the fund invests in, the fund’s risk rating and fund manager fees.


Understand your attitude to risk

All investing involves risk. The higher the risk, the higher the potential return, but also the potential loss. A fund’s level of risk is affected by the nature of the assets it invests in, for example, whether it invests in bonds or shares, and whether those investments are restricted to a certain country, geographical region (such as emerging markets) or type of business (like technology companies).

The level of risk for a fund is set out on a one to seven scale in the fund’s KIID. You should consider how much risk you are willing to take, remembering that other factors, such as the variety of investments you hold and how long you hold them should feed into your decision. We cover these other aspects in more detail below.


Consider your investment time horizon

You may have different financial goals and plan to achieve these at different times of your life, from shorter-term goals like buying a new car, to medium-term goals like saving for your first house, or even ambitions that are decades away, such as setting money aside for retirement.  

Knowing your investment time horizon may help you determine the level of risk that is appropriate for your needs. For example, if you are a long way from retiring, depending on your personal circumstances, you may choose to have a higher attitude to risk as you have more time to ride out the ups and downs of investing.


Build a diversified investment portfolio 

We’re often told not to put all our eggs in one basket and the same applies to investing. Buying just one stock is a very high-risk strategy. Funds allow you to spread your money between a variety of investments, so spreading your risk. Your investment portfolio could be made up of one fund or a number of funds depending on how you choose to invest.

Funds differ in how widely they spread your money, depending on how they are invested. For example, some funds invest across many asset types (shares, bonds, commodities, property, cash), countries and business types, while other funds may invest in one particular country or region (such as emerging markets) or in a particular industry (such as technology). The more widely a fund is invested, the more it is diversified. As different asset types, geographical regions and industries can perform differently, a well-diversified portfolio evens out any sharp movements in a particular asset, geography or industry, so reducing your risk and exposure to market volatility. 

While it may make sense for some investors to select more than one fund, you do not necessarily have to select multiple funds to build a diverse investment portfolio. This is because certain funds, such as the Starting funds for our Personal Pension, provide a diversified investment. Some funds, such as the target date funds (such as the BlackRock LifePath fund), are designed to reduce the level of risk over time by automatically changing how the fund is invested as it approaches the target date. Other funds will invest in a range of companies but restricted to specific industries or certain regions of the world. For example, the Legal & General Global Technology Index fund will only invest in companies in the technology sector, whereas the Royal London Emerging Markets ESG Leaders will only invest in a range of companies that score highly on environmental, social and governance (ESG) factors in Emerging Markets such as Asia, Latin America and Africa.


Review your investment allocation

Selecting an investment fund(s) may not be a one-off exercise. You should review your investments regularly to ensure the risk level remains appropriate with your personal circumstances and goals.