Investment involves risks and each investment-linked fund will involve its own individual level of risk:
Eq Where an underlying fund invests in equities, it entails risk, as individual stock prices can move up and down more dramatically than other forms of investment. Shares, when sold, may be worth less than their original cost and you may get back less than you paid in.
Li Some underlying funds invest in asset classes that are considered illiquid, in that sometimes they may not be so easy to sell. It should be recognised that an investment in an investment-linked fund of this type may have liquidity constraints that may lead to delays in the sale of investment-linked fund units.
FI Where an underlying fund invests in fixed interest securities the value can go up and down as interest rates change. For example, if interest rates rise, the value is likely to fall.
B Some underlying funds invest in company bonds. High yielding bonds are usually lower grade. These carry an increased risk to both the income and capital value of the investment-linked fund - for example, the company issuing the bond has financial difficulties and stops trading.
Com Some underlying funds invest in commodity markets and investment values can move up and down sharply depending on levels of speculation and supply and demand.
EM Where an underlying fund invests in emerging markets, investment values can move sharply down or up. These markets tend not to be so well regulated as developed markets and political unrest is more likely.
D Many underlying funds can now use derivative instruments as an investment tool. A derivatives instrument normally is a contract between two or more parties and, used in underlying funds, derives its value based on the value of an underlying asset at a particular point in time. The main types of derivatives are futures, forwards, options and swaps, with these instruments generally being used to hedge (reduce) risk, but can also be used for speculative purposes (at increased risk). Losses can be greater than the money put into these instruments.