How to assessing a fund’s risk level

December 26th, 2018. 06:05 pm

Many MPF service providers designate a risk rating to the funds that they offer. Members should take note of the fact there is as yet no uniform formula in the market to calculate or assess the risk rating of a fund, and providers might refer to factors other than the past performance of a fund in coming up with a particular rating. Risk ratings are also expressed differently; some providers use numerals while others colors.

 

MPFA’s Fund Risk Indicator, on the other hand, provides a quantifiable standard to help us assess in an objective way the risk level of different MPF funds. The figure given by the Fund Risk Indicator is calculated as the annualized standard deviation based on monthly rates of return of the fund over a 3-year period. The higher the figure, the larger is the fluctuation of the value of the fund in the last three years. At the same time, the potential return of the fund is higher.

 

When members log on to MPFA website to consult the Fund Risk Indicator in deciding on an investment strategy, they should also be aware of the following points:

  1. Different types of assets have their particular risk level. When you consult the Fund Risk Indicator, remember that comparison of risk level should be undertaken for assets of the same type. For example,an equity fund and a bond happen to have a risk indicator of 4, but that should not be taken to mean that these two funds are subject to the same risk level.
  2. The statistics of an MPF is based on the MPF’s past performance. But past performance is not necessarily an indicator of future performance. Keep in mind, therefore, that the Fund Risk Indicator serves only as a reference, and a flawless predictor of what is to come.

Still confused? We are here to explain!

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