One of the key factors that influences the level of risk that a fund has, is the asset allocation of that fund.
The asset allocation shows the percentage of funds that are invested in either income and/or growth assets, and it's this distribution that influences the level of risk for the fund.
But what does this mean exactly? Let’s break down these key terms.
Cash, term deposits and bonds are referred to as ‘income assets’ because they generate income in the form of interest payments. Income assets are typically less risky than growth assets, as they are less susceptible to market volatility (although returns can go up and down).
However, because they are less risky, income assets will usually provide lower returns than growth assets over the long-term. That’s why they are considered to be more ‘conservative’ investments.
Shares (equities), property and infrastructure are referred to as ‘growth assets’ because they can generate a return both from capital growth (price gains) as well as through dividends.
However, while there is a greater potential to achieve higher returns through capital growth over the long-term, investing in growth assets also involves more risk. Typically, the returns of growth assets will fluctuate more than income assets, and growth assets are more likely to experience periods of negative returns.
All Generate KiwiSaver and Managed Funds have an asset allocation.
The asset allocation is the percentage of income and growth assets in the fund. Depending on which fund you choose, your fund will either have more income or growth assets in its asset allocation. For example, defensive funds, usually have a higher percentage of investments in income assets because these investments are less risky. While the returns may be lower, the goal here is to protect the investment from short-term market volatility. That’s why these funds are generally recommended for people who are planning to withdraw their savings in the near future.
On the other end of the scale, growth funds have a higher percentage of investments in growth assets. Growth funds like our Focused Growth fund are long-term investments, and while they may be more sensitive to short-term market fluctuations, they also have the potential to earn more through capital growth over the long-term. That’s why growth funds are generally recommended for people who aren’t going to withdraw their savings for at least five years.
Target investment mix:
One final key term to understand is the ‘target investment mix’.
The target investment mix shows what types of income or growth assets the fund is invested in. For example cash, bonds, international shares (equities) and property.
However, it’s important to note, that a target investment mix is just a ‘target’. The actual investment mix may vary from the target investment mix as we pursue tactical investment opportunities, or as we seek to protect asset values in periods of market volatility. For further information about the funds’ investment activities see the Statement of Investment Policy and Objectives (SIPO) here.
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Take our KiwiSaver survey to see what fund could be right for you. Or contact one of our friendly KiwiSaver Advisers on email@example.com if you have any questions.
Disclaimers: No part of this blog is intended as financial advice; it is intended as general information only. To see our Financial Advice Disclosure Statement, please see Generate FAP Disclosure Statement. For more information about the Generate KiwiSaver Scheme please refer to the Generate KiwiSaver Scheme Product Disclosure Statement. For more information about the Generate Focused Growth Trust please refer to the Generate Unit Trust Scheme Product Disclosure Statement or the fund updates. The issuer of both schemes is Generate Investment Management Limited and the Product Disclosure Statements are available at generatewealth.co.nz/pds. Past performance is not indicative of future performance.