Risk Classification of ETFs and Unit Trusts

Given that ETFs and unit trusts differ widely based on the type of assets they hold and their geographical and sector exposures, their risk levels are usually widely varied as well. Generally, funds invested in fixed income (e.g. money market funds, bond funds, and short duration bond funds) are of the lowest risk while balanced funds (funds with a relatively similar portion of equities and fixed income in their portfolios) are perceived to be of slightly higher risks and finally, equity funds are perceived to be of the highest risk. Within bond funds, the maturities and geographical exposures of the underlying bonds as well as the credit qualities of the borrowers would affect the risk levels of the funds. Meanwhile, within equity funds, the geographical and sector concentration of the fund’s equity investments would affect their risk levels. The risk levels of balanced funds are typically determined based on their composition of either asset class as well as the factors which determine the risk level of both asset classes.

In descending order is how we, at Fundsupermart, rate our funds.

Further Explanation On Our Risk Classification

Money Market Funds

Given that money market funds are invested in bank deposits, which are perceived to be almost riskless, or short-term money market instruments, they are ranked the lowest in terms of risk level.

Singapore Government Bond Funds

When investors invest in longer term government bonds, they are exposed to greater interest rate risks. This as bond prices move inversely with interest rates, creating the possibility of an investor faced with capital loss when he redeems his bond. Thus, the risk level of Singapore government bond funds is higher than that of fixed deposits and money market funds.

Singapore Equity Funds & Single Country Equity Funds

Singapore equity funds are the sole single country equity funds that are rated similar to regional equity funds. This is as Singaporean investors do not face exchange rate risks when they invest in Singapore equity funds, thus reducing the risks these funds pose to investors compared to other Singapore country equity funds.

Balanced Funds

Balanced funds, which are not shown in the above list, typically pose risk levels around the middle of the above chart, as they hold a mixed portfolio of relatively similar portions of equities and fixed income. Their risk ratings will depend on their geographical and sector exposure, as well as their allocation to equities and fixed income. For instance, a more concentrated portfolio on the geographical and sector level that has a slightly higher portion of equities in their portfolio would be assigned a higher risk rating as compared to one that is globally diversified in across all sectors and have a higher portion of their portfolio in fixed income.

Alternative Investment Funds

Alternative investment funds, which are not shown in the above list, vary widely and are thus difficult to be placed above or beneath specific types of funds. Here, you can find funds which invest in other funds so as to profit from different investment strategies as well as funds which invest in non-traditional investment products such as currency and other structured products which do not guarantee or protect capital. They are typically assigned a risk rating ranging from that slightly above the middle risk rating to the maximum risk rating (in the above chart, they are classified under the highest risk level). Funds which adopt multi-strategies typically pose lower risks that single-strategy alternative investment funds as the strategies adopted usually have low correlations with one another, which reduces overall portfolio risk. Also, funds which utilise derivatives to generate returns are usually assigned higher risk ratings.