Identifying and Understanding Risk

All investments involve some degree of risk. The amount of risk entailed in a mutual fund investment is directly related to the Fund's investment objective. Typically, a Fund seeking higher returns will involve more volatility and higher risk.

A mutual fund, however, can reduce an investor's risk by its very nature. Mutual funds are managed by experienced, professional investment managers who oversee the portfolios on a full-time basis. Mutual funds also provide a degree of diversification that would be very difficult to achieve by individual investors. Risk is therefore dispersed among a number of different investments, making the Fund less vulnerable to fluctuations in stock prices.

An often-ignored element of risk is the risk of not investing. By keeping your savings in 'safe' investments like a bank account or GICs, you may see inflation deplete the value of your savings over time.

Because risk is relative to everyone's personal experience, not only must you understand what type of risk a mutual fund is exposed to, you must also comprehend your own level of risk tolerance.

In order to understand the potential risks of your mutual fund investment, you should reference the Fund's simplified prospectus which outlines its investment objective and the types of investments that could be added to the portfolio. The Fund's financial statements will also provide insights by presenting the individual investments held in the portfolio.

To gain a better understanding of your personal risk tolerance, try to use the 'sleep test' as a guideline. If you have trouble falling asleep at night because you are concerned about your investments, you've likely incurred too much risk.