Types of risk

When it comes to making the most of your savings, ideally you’d want to beat inflation by achieving higher returns than you might get from a normal deposit account. We appreciate that you want to do this at a level of risk you’re comfortable with.

Generally, the more risk you’re prepared to take, the greater the potential rewards. But everyone has a different attitude to risk, so here’s an overview of the main types of risk which you need to consider:

Interest rate risk

If you save your money in a fixed rate deposit account for a fixed term you could find yourself getting a lower rate of interest than the market average if savings rates rise. Alternatively if rates fall overall, your fixed rate would become more beneficial than what was typically available.

Inflation risk

You’re probably aware of the effect inflation has on your money. If you leave your money in an account receiving 2% interest per year and inflation is running at 3% per year, then although your capital (original investment) will have increased in value, its buying power has reduced by 1%.

Capital risk

A general rule of investing is the higher the investment returns you want to achieve, the higher the risk you must be willing to take. That's because where high gains are achievable, there tends to also be high volatility, which means that while your capital could grow significantly, it could also fall significantly.

You need to strike an appropriate balance between the risk to your capital that you're willing and able to take and the level of returns that you are looking for to reach your investment goals.

Market risk

This is the risk of a fall in the particular country's stock market where your money is invested. When a benchmark index, such as the FTSE 100, falls you’ll usually find that most shares are dragged down with it. Some fall by more than the average, some by less, but few will buck the overall trend.

You can consider investing gradually, for example on a monthly basis, as this may smooth out big variations in the price you pay. Similarly, if you’re investing with a time horizon of at least five years then there may be an opportunity to recover from any market losses. It’s important to remember that you may not get back the original amount you invested if investment markets fall.

Performance risk

There will always be a variation in performance between funds with similar objectives due to the different assets selected by each fund. Funds aiming for relatively high performance can result in greater performance variations than those adopting a more standard investment approach. The performance of your investment is not guaranteed.

Understand the risks

The value of an investment can fall as well as rise, and you may get back less than you invest. If you are not sure about investing, seek independent advice.

Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628.