Why are investors climbing the risk ladder?

High risk level meter

A concerning number of investors are putting their money into high-risk funds and may not completely understand the risks involved, investment platform Rplan has warned.

The company found that almost half (47 per cent) of the money invested by its customers in the past three months went into funds with a risk level of six - out of a maximum of seven.

This represents a significant shift up the risk ladder compared to the same period a year ago, when the money flowing into level six assets made up 35 per cent of the total.

Notably, the proportion flowing into level three assets - low to mid range risk - dropped from 22 per cent to only 9 per cent in the year.

INVESTORS' HUNT FOR YIELD

Stuart Dyer, chief investment officer of Rplan, tells Money Observer this trend is in part due to investors hunting for yield.

'You have to go higher up the risk curve to get yield. There's zero yield on cash and virtually zero yield on gilts, and you have to go into riskier assets to get higher yield.

'Even within equities there is a gradual trend towards the higher risk end of the spectrum. Some of the developed markets have had highs, and there may be a feeling that at the higher end you have to go beyond the main developed market equity story to get at yield.'

He adds that Rplan's investor base tends to be at the younger end of the market, so they have a longer timescale in which to invest; they can therefore afford to take more risk.

However, he also says he is concerned they might not fully understand that although the potential yield is better, their capital is at risk.

'The high proportion of investment funds with a high [risk] rating is a concern. Investors need to be sure they understand the risks involved, and look at how these investments fit into a balanced portfolio that helps them meet their financial goals.'

The same research found that 28 per cent of investments in the past three months went into tracker funds.

Top 10 funds sold on Rplan between December and February
RankFundPer cent of total
1Vanguard LifeStrategy 80% Equity5.8
2Axa Framlington Biotech3.8
3CF Woodford Equity Income3.7
4Axa Framlington Health3.7
5Fundsmith Equity3.0
6Artemis Global Growth2.9
7Vanguard LifeStrategy 60% Equity2.7
8Vanguard FTSE All Share Index2.5
9Premier Pan European Property Share2.4
10Vanguard UK Government Bond Index1.8

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