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Five types of risk affecting mutual funds

Every type of investment carries some kind of risk. Even not investing involves risk – opportunity risk, or the risk that you could have made more by investing than by sitting on the sidelines.

Here is a list of the main types of investment risk that affect mutual funds*.

Market risk

The risk that you will lose some or all of your principal. As markets fluctuate, there is always a possibility that the mutual funds you hold might be caught in a decline.

Inflation risk

The risk of losing purchasing power. If your mutual funds gain 5% in a year and the cost of living goes up by 2%, you are left with a real return of only 3%.

Interest rate risk

The risk that rising interest rates will cause your mutual funds to decline in value. When interest rates rise, bond prices decline and bond mutual funds may also decline as a result.

Currency risk

The risk that a decline in the exchange rate will reduce your gains (or add to losses). Even if the value of a foreign-currency-denominated fund goes up, a decline in the foreign currency can reduce your returns when they are exchanged back into Canadian dollars.

Credit risk

The risk that the issuer of a bond or other security won't have enough money to make its interest payments or to redeem the bonds for face value when they are due. Securities with a higher risk of default tend to pay higher returns.

Fortunately, not every type of mutual fund is susceptible to every kind of risk. Equity funds, for example, are subject to market risk but help protect against inflation risk. Similarly, fixed-income funds are susceptible to interest-rate risk but offer some protection against market risk. By diversifying, you can reduce the impact of risk on your portfolio as a whole.

Contact us today to review your portfolio and ensure your current investment risk is at the right level for you.

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Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.

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