Aviva’s risk and return ratings

Life and Pensions only

To help you decide which investment funds to invest in, we give each one a risk/return rating, ranging from 1 (low) to 5 (high). Each rating is a measure of the approximate risk/investment return potential of that fund. The table below explains what each rating means.

When it comes to investments, ‘risk’ refers to the possibility of losing money. ‘Return’, on the other hand, is any gain you make on top of what you originally invested.

High-risk investment funds tend to be capable of much greater returns than lower risk ones. But there’s more chance you’ll lose money with them. With low-risk funds, there’s less chance of losing money, but they tend to be capable of much lower returns than higher risk funds.

This chart shows the relationship between the two:

Fund centre risk return chart

Aviva’s risk and return ratings defined

We regularly review the ratings we give to each investment fund. So they might change from time to time. The fund centre is kept up to date with the latest risk rating.

Risk/return rating Typical fund characteristics
1 (Low) Funds with this rating usually aim to provide returns similar to those you’d get from deposit and savings accounts, although there’s still a risk the value of your investment could fall.
2 (Low to medium) Expected to provide better long-term returns than savings accounts. Typically invest in high quality corporate bonds or provide a form of guarantee or capital protection, although there is still a risk the value of your investment could fall.
3 (Medium) Typically don’t offer guarantees, but have the potential for better long-term returns than lower risk funds, although there’s a risk the value of your investment could fall. Generally invest in a diversified mix of assets or in fixed income bonds issued by higher risk companies.
4 (Medium to high) Funds that typically invest in shares of companies in the UK or other major stock markets. Fund prices may fluctuate significantly but offer the potential for good returns over the long term.
5 (High) Funds that invest in the higher risk sectors (typically emerging markets or specific themes), offering the greatest potential for long-term returns but the highest prices fluctuations and risk to your money.

Other things to consider

Risk factors

You will also need to consider the ‘risk factor’ of a fund, depending on what it invests in. For example, a fund investing in overseas assets will be affected by the exchange rate. The sections below explain what these are.

Emerging markets

The fund invests in emerging markets, which are generally less well regulated than the UK. There is an increased chance of political and economic instability and assets can be more difficult to buy and sell. A fund investing in overseas markets is also affected by currency exchange rates, which will affect the value of the fund. These factors all mean that an investment in an emerging market carries more risk.

Smaller companies

The fund invests in smaller companies. The shares of smaller companies can be more volatile and more difficult to buy and sell than larger company shares, so smaller companies funds can carry more risk.

High yield bonds

The fund invests in high yield (non investment grade) bonds. This means bonds that have a ‘Credit Quality’ rating of BB or less. High yield bonds carry a greater risk than investment grade bonds that the issuer may not be able to pay interest or return capital. In addition, economic conditions and interest rate movements will have a greater effect on their price.

Geared investments

The fund holds geared investments. This means that the underlying investments include a level of borrowing. It is possible that the fund may suffer sudden and large falls in value compared with a fund that has no geared investments.

Long Term Investments

You should always look at an investment as a long-term commitment. You shouldn’t invest money that you may need in the short term, but keep it in reserve.

Property funds

The fund invests substantially in property funds, property shares or direct property. You should bear in mind that:

  • properties are not always readily saleable and this can lead to times in which clients are unable to dispose of part or all of their holding.
  • property valuations are made by independent agents, but are ultimately subjective and a matter of judgement.
  • property transaction costs are high (typically around 7% due to legal costs, valuations and stamp duty), which will affect the fund’s returns.

Exchange rate

When funds invest in overseas assets, the value will go up and down in line with movements in exchange rates as well as the changes in value of the fund’s holdings.

Performance charges

This fund can charge a fee dependent upon the fund’s performance. Details of how the fee is calculated can be found on the relevant fund factsheet.

Derivative exposure

Derivatives are financial contracts whose value is based on the prices of other assets. Two examples of how a fund manager may use derivatives are:

  • they can be used to help reduce the risk of losing money due to changes in the value of the underlying assets
  • they can also be used to increase profit if the value of the underlying asset goes in the direction you expect. This is known as ‘speculation’.

The fund invests in derivatives as part of its investment strategy, over and above their use for efficient portfolio management. Under certain circumstances, derivatives can increase the volatility and risk profile of a fund compared to a fund that only invests in, for example, equities. The fund may also be exposed to the risk that the company issuing the derivative may not honour their obligations, which could lead to losses.

Need some advice?

If you’d like a hand deciding where to invest your money, a financial adviser could help.

Find details of advisers near you at unbiased.co.uk

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