Your quick guide to KiwiSaver risk

You might have heard people talk about how “risky” their KiwiSaver fund is, and wondered what that means.

All investments entail a certain level of risk, and your KiwiSaver fund is no exception. In the investing context, risk means the potential for losses over the lifetime of your investment. For example, an investment with very low risk has a lower chance of your balance going backwards. On the other hand, something that is very risky may mean you could experience a significant drop in value from time to time.

The flip side is that – usually – taking a bit more risk means you have the potential to get a greater return over the long term.

So, what’s the risk in your KiwiSaver fund like?

KiwiSaver funds are generally available in five different risk categories: defensive, conservative, balanced, growth and aggressive. The number and name of the type of fund varies across KiwiSaver providers.

The level of risk in your KiwiSaver fund depends on what is invested into. 

Defensive funds, for example, invest into ‘income’ assets such as term deposits, money market accounts and cash-equivalent securities. 

Conservative funds are still defensive and designed to protect investors’ capital. But they usually add a few bonds in the mix and potentially some lower-risk equities, like infrastructure companies and others that usually pay dividends to shareholders. 

Balanced funds have a mix of low-risk assets like bonds and higher-risk investments like shares – usually the mix is about 60% growth assets to 40% more defensive. Default funds (the ones you end up in if you don’t make an active choice) are now all balanced funds.

Growth funds take more risk, with significantly more money in things like shares, while aggressive funds are the riskiest of all.

Why would anyone want to take risk with their retirement savings?

You might wonder why anyone would want to take a chance on an investment that could go backwards.

The reason is simple. Your KiwiSaver plan is a long-term investment tool. Over time, the markets will go up and down (that’s their nature), and if you’re invested in a growth or aggressive fund, you’ll likely experience bigger fluctuations. But in the long run, investments in growth assets do tend to deliver better returns than lower-risk options. 

So, if you can tolerate your balance dropping from time to time, you’re likely to be rewarded for taking on more risk.

Of course, your tolerance for risk also depends on how long your investment horizon is (when you plan to withdraw your money, be that for retirement or your first-home). Generally, people who need their money sooner are told to invest in lower-risk funds, to minimise the volatility of their KiwiSaver plan. On the other hand, if you have more than 10 years ahead of you before withdrawing, you may want to consider a growth or aggressive fund, as your KiwiSaver plan has time to bounce back from a downturn. 

Low risk isn’t no risk

Many investors discovered, as interest rates started to rise after Covid-19 lockdowns, that a lower-risk fund does not mean no risk. Conservative funds fell over the year to March 2022, as interest rates rose sharply, which reduced the value of the bonds they were holding.

This came as a surprise to some investors, particularly as conservative funds underperformed compared to some of the “riskier” funds during that period. 

But fund managers said it was only an ‘on paper loss’, because the bonds had to be priced as if they were being sold that day. On paper losses don’t become real losses until you sell your investments, which – when it comes to KiwiSaver – only happens if you withdraw your money or switch funds when the market is low. Most investors would hold on to the bonds until they matured and the fund would be repaid its money, plus interest.

Like to talk?

When you’re investing, it’s important to choose a fund that’s aligned with your risk profile – your appetite and tolerance for risk. We can help you make sure that your KiwiSaver plan is a good fit for your circumstances, and help you to understand what sort of volatility you might be able to expect.