As many ordinary savings accounts fail to deliver worthwhile returns on savings, an increasing number of Irish savers are turning to alternative investment opportunities for the first time.
People often say that “your money should work for you” and one place your hard-earned cash is certainly not working for you is in an ordinary bank saving account. Low interest rates on savings, coupled with DIRT in Ireland standing at a rate of 41%, have made a return on investment almost impossible for ordinary hard-working people, yet many are still saving in this way.
There’s no reason why you have to limit your investment to the institutions that you hold your current account in, nor is there any reason why you have to limit your ambitions to traditional savings accounts.
For some savers, the notion of funds or investment vehicles can be intimidating. There is a perceived myth that these ‘complicated’ investment options are exclusively for the mega-rich who are happy to gamble a vast fortune on a risky bet.
This couldn’t be further from the truth. A simple explanation of funds is as follows: people put money into a fund and then, in turn, the collective power of that fund invests in a lot of different things. It could be shares in companies, precious metals or something completely different.
Regardless of the target industries of the investment vehicle, the goal of every fund is the same — to make money for the investors over time. With funds, the higher the potential returns, the higher exposure to risk.
Risk is an important yet misunderstood element of fund investment. How risk averse a person is, is what often defines the path their investment takes, but investors have a big say in the amount risk their investment will be exposed to.
The most effective way to choose a fund that is right for you, is to first determine your risk profile.
What’s my risk profile?
Using a tool like the Prisma Risk Profiler potential investors, like you, can answer a number of questions related to your attitude towards financial investment which will ultimately assign you to a risk profile. The key questions in the profiler centre on a potential investor’s age, the level of risk they are comfortable with, the amount of money they are thinking of investing, the length of time over which they wish to invest and their overall expected goals and returns.
Risk profiles are broken up into three main categories: ‘Lower risk and reward’, ‘medium risk and reward’ and ‘higher risk and reward’.
Within lower risk and reward there are three sub profiles: very low risk (profile number 1), low risk (profile number 2) and low-to-medium risk (profile number 3). This group of cautious, or first time investors are not willing to accept large risks to their money and a result of this, are content in the knowledge that their returns could be on the modest side.
Profile 1 will typically be an investor who is comfortably only with investing in deposit accounts. Profile 2 will be willing to take some level of risk, but will primarily want to protect the value of their principal, and will mostly invest in deposit accounts (or similar assets). Profile 3 will be willing to accept some fluctuations in values, with the aim of making higher returns in the long term. However, they will not be comfortable with the prospect of losing a large amount of their principal.
Medium risk and reward (profile number 4) refers to investors who are likely to accept some risk in return for the potential of good investment gains over the long-term. These investors accept that there will be significant short-term fluctuations at the start of their investment journey.
Higher risk and reward refers to three sub categories: medium-to-high risk (profile 5), high risk (profile 6) and very high risk (profile 7). Investors belonging to any of these categories are typically well versed in the relative nature of investments: “the value of your investment can go down as well as up.” Medium-to-high and high profilers are willing to take a measured risk in the short-term at the prospect of achieving greater returns in the long-term.
Members of the very high risk category are very likely to aim for the highest possible returns and accept the highest levels of risk. These investors understand that value of investment may fluctuate very widely in the opening stages of the investment journey.
The risk profile calculated by the tool is intended as a guide for the types of investments you might be interested in.
Matching your risk profile to a fund
Once you are assigned a risk profile number, a financial broker or advisor will be in a better position to match you to a fund that is best suited to your investment preferences. At Zurich Life these risk profile numbers can be matched to specific funds.
1. Low risk
An investor with the risk profile number of ‘2’ would be matched to Zurich Life’s Pathway 2 fund. This is a low risk multi-asset fund that invests in a diversified range of global asset classes, including equities, bonds, property, cash and alternative assets. Its aim is to generate long-term capital growth, over a rolling five year period. This fund is designed for low risk, defensive investors, looking for better returns than a regular savings account but still want to preserve their capital. It’s suitable for investors with a medium to long term investment horizon.
2. Medium risk
Climbing slightly up the ladder, an investor with a profile risk of 4 could be matched to The Active Asset Allocation Fund (AAA). This is an actively managed, diversified unit-linked fund that seeks to achieve performance from a well-diversified portfolio of global equities, government bonds, property shares, cash and alternatives. Alternatives can include precious metals such as gold and copper, as well as investments in water infrastructure and agriculture. The fund is designed to deliver low volatility.
3. High risk
Investors who are comfortable with a very high level of risk could be matched to the Green Resources Fund which has a risk rating of 6. This fund targets exposure to the Alternative Energy and Water sectors. The increasing demand for these resources, resulting from an expanding population and economic growth in emerging markets, underpins the potential for this fund to provide strong investment returns. However, a currency risk arises as many of the underlying companies operate outside the Eurozone.
So there you have it, three equally fascinating investment options, each with different characteristics but all a part of the exciting and flexible world of funds. Find out what type of investor you are by clicking here or by giving the trusted financial advisors at Zurich Life a call today on LoCall 1850 804 164.
So there you have it, three equally fascinating investment options, each with different characteristics but all a part of the exciting and flexible world of funds. Find out what type of investor you are by clicking here.
Disclaimer: Your aim should be that over the long-term any investment you make will go up in value. But, of course, the value could also go down and you may have to accept some level of risk when you make an investment. To invest in the right funds, you should first decide how much risk you are comfortable with.
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