The main risks of investment funds

Discover the risks you face when investing in a fund.
In the years following the global financial crisis, many investors and savers began to show greater aversion to risk and the instability of financial markets. After the financial crisis, many investors understood that achieving good returns on their long-term savings would require assuming certain risks in a controlled manner, consequently investment started a slow, but steady, recovery. In fact, it has been observed in Spain that in the last six years the proportion of savers investing in higher-risk products, such as investment funds, has increased, to the detriment of safer products with lower returns, such as bank deposits, penalized by low interest rates. In this article, we will explain everything you need to know about the risks of investment funds.
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Important concepts for understanding the risks of an investment fund

When it comes to determining the risk of an investment fund, it is vital to know in detail some concepts that determine this risk to a large extent. These are: the fund's volatility, term and investment policy.

  • Volatility: this concept refers to the historical changes in the net asset value or, in other words, how much it deviates from its historical average. Thus, if an asset shows a great deal of volatility it will be higher risk since large losses or gains may be generated when it is paid out.
  • Duration: this concept indicates how the value of the asset is affected depending on changes in interest rates. When rates rise, the price of fixed-income assets falls. The longer the term, the greater the impact of changes in rates on the price of the asset.
  • Investment policy: another aspect that needs to be considered when subscribing for a fund is its investment policy, that is, its investment strategies, as well as the types of assets in which it invests. The fund's investment policy provides a good idea of the maximum and minimum levels of risk that may be incurred. It is also highly advisable to obtain the fund's latest reports for an idea of the make-up of its portfolio.

On the other hand, there are other factors that have an impact on the risk of an investment fund. One of these is the so-called country risk: investments in emerging countries have a clear added risk arising from the possible economic, social and political instability of the region in which they are invested. Furthermore, investing in assets in currencies other than the euro also entails an additional risk, related to exchange rate fluctuations.

Types of investment funds and their associated risks

In general, the risk of an investment fund depends on the type of fund in question. Thus, from lower to higher risk, investment funds can be classified as:

  • Monetary funds: these types of funds present the lowest risk and are made up of assets of high liquidity and high credit quality, such as treasury bills. Their value fluctuates with short-term interest rates, which makes the risk low.
  • Fixed income: funds made up of fixed-income assets, such as bonds issued by governments and companies, are the second type of fund with lower risks, as their value is affected by the medium and long-term interest rates, as well as the ratings of the issuers of the same. However, there is a wide range within this category, with high-risk fixed-income funds, such as those with high-yield investments.
  • Mixed funds: mixed funds hold both fixed-income and equity assets. The risk depends on the proportion held in the make-up of the fund.
  • Equity: these funds are made up of equity assets, such as shares in companies listed on the stock exchange. Since the value of the shares is very sensitive to market volatility in the short term, these funds present the highest risk.
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Finally, there are also guaranteed funds, which are a special case as their risks are greatly reduced. These types of funds allow the investor to ensure recovery of the capital invested in them, in some cases offering added returns, provided the investor waits until the maturity of the guarantee.

In short, there is a wide variety of types of investment funds, and each entails a different level of risk. In addition, each individual has a different investor profile, with a particular risk tolerance. This is why at BBVA Asset Management, we offer a wide range of investment funds for all kinds of profiles. Go to or visit any of our branches for more information.

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