In a previous article we discussed what we mean by investment risk in a general sense. You can read that article again here. Understanding how much risk you are willing to take is usually a good way to figure out which KiwiSaver fund is right for you.
We continue this series of helping you get to know your KiwiSaver better. Let’s now look at our Income Fund.
This Fund invests in cash, term deposits, NZ bonds, overseas bonds and mortgages. Traditionally, this type of fund has been seen to be a lower risk investment with lower long-term returns.
The Income Fund is usually suited for members who need access to their money fairly soon or for those who prefer a somewhat consistent performance (rather than “bigger” increases/decreases in performance).
There are factors which affect the performance of this Fund which include:
- Interest rates: This is the chance that changes in interest rates will affect an investment’s value. In the case of bonds, an increase in interest rates mean that the capital value of the bond will decrease.
- Inflation: This is the chance that if returns are below the inflation rate, meaning the “purchasing power” of the money will decline.
- Foreign exchange rates: This is the chance that the movement of the NZ dollar against other currencies will affect an investment’s value.
- Costs: This is the chance that the cost of managing an investment could significantly affect the return from the investment.
- Solvency/default: This is the chance that the financial institution or borrower is unable to repay some or all of the investment.
While the Income Fund is our lowest risk option, it does not mean that it is immune to negative returns. There can be occasions when a negative return is produced, particularly around interest rate changes. Historically, negative returns for the Income Fund happen less frequently than with the higher risk funds.
For more information about our Income Fund you can read more here. If you have specific financial questions or need financial advice, we encourage you to seek out a financial advisor.
Keep an eye out on our future newsletters as we continue to unpack your questions about KiwiSaver and help you get to know more about your investment.