About risk and returns

A growth strategy focuses on investments that have a higher chance of producing greater returns over the long-term. These higher returns will also involve more risk, and the value of your portfolio may fall. The key is to try and ensure that your investments have time to recover from any setbacks, so they can potentially go on to grow in the future.

Time is the key to a growth strategy. It may suit investors who still have many years to go before they retire. If you are considering adopting a growth strategy, you should be comfortable with the higher level of risk associated with achieving higher returns in the longer term.

A balanced strategy aims to achieve a balance between investments that offer high growth potential, with a relatively high level of risk, and those that offer more security. The idea is to provide some protection for the money that has already built up within a portfolio, while ensuring there is still the potential for some growth in the years before you retire.

While not as risky as a growth strategy, there is still some risk involved. Investors can achieve this balance by combining different types of funds or by simply focusing on investment funds that offer a medium level of risk and growth potential.

A balanced approach may suit investors who are approaching retirement, or are only prepared to accept a limited amount of investment risk.

A conservative strategy focuses on lower‑risk funds so there is less chance of your portfolio suffering any short‑term losses. The types of investments to consider include cash deposits and the more secure types of bonds. By moving away from share-based funds, you can help protect your investments from the danger of a sudden drop in the stock market.

The drawback with this approach is that the potential returns from conservative investments tend to be lower than higher risk options.

A conservative strategy may suit investors who are relatively close to achieving their investment goal. It’s important to remember that even if the investment risks are relatively low, there is still a risk of inflation eating into the value of your savings, if they aren’t growing enough. Following a conservative strategy when you still have many years before you can retire may mean your portfolio won’t grow as much as you need it to.

Passively managed funds, try to match the average performance of a stock market. There is no need for company analysis and the day-to-day decisions about which shares to buy and sell, as the fund will aim to hold the same proportion of shares that make up the market it’s tracking.

This means the charges on passive funds tend to be lower. Passive funds aim to match the market’s performance, not beat it. Choosing a passively managed fund means you’d rather not pay extra for the expertise of an active fund manager.

For example, a passive fund that aims to track the FTSE All-Share Index (based on the top 100 companies listed on the London Stock Exchange) will hold a variety of shares reflecting the composition of the UK stock market.

Actively managed funds aim to produce above average performance. They’re run by expert fund managers, who are responsible for choosing which investments to buy and sell. Each manager may have to keep within certain criteria, but within these, they can exercise their own judgement over which investments to hold.

The management charges of active funds tend to be higher than those of passive funds, as they have to cover the costs of things like research. By choosing an actively managed fund you’re paying a premium for the fund manager’s expertise and resources.

For example, in the case of an active fund, the manager may hold a subset of funds in the index according to what he feels is appropriate.

At times funds employ elements of both passive and active management. For example a fund manager may actively choose which asset class to invest in across a range of different assets but would use passive investment strategies within those asset classes. Often these funds are multi-asset or diversified funds which invest in a range of asset classes such as equities, bonds, cash, property and commodities.