Processed foods usually state saturated and transfat per portion. But how do you know if, for example, 20 grams of saturated fat per 100 grams of portion is too much? You can experience a similar situation with investment products. In this article we discuss whether Asset Management Companies (AMCs) can reveal risks related to their investment funds as a recognizable statistics.
Recognizable risk
What if we are informed that burning fat from consuming ice would require us to walk five kilometers at a speed of six kilometers per hour, for example? In this way we can relate to the efforts needed to maintain good health and still enjoy such food.
Can we apply a similar argument to investment products?
There are various problems to consider. Firstly, individuals have different life goals and different time horizons for the same purpose. For another, the impact of a shortage in a portfolio can be different for everyone at the end of the time horizon. That is why presenting a standardized set of information can be a challenge when you invest to achieve a life purpose.
Consider active funds with a large cap. The riskometer categorizes such funds as a high risk. But what does that mean if you invest to finance your child’s university education or make a down payment for a house? Note that being conservative and not taking a risk can also lead to the failure of life goals, unless you considerably increase your savings. It will be easier if AMCs make a standardized metric in relation to your goal. Suppose you assume that a fund must give 12 percent annual returns (referred to as a minimum acceptable return or Mar) to help you achieve your goal. The riskometer could prove the frequency during the last 5, 7, 10 years and since the beginning when the fund gave a return lower than 12 percent.
This can give a perspective of how risky the fund is in connection with the purpose that you want to achieve. Note Risk is defined as the possibility to achieve lower returns in each year than Mar, because that can lead to targetals. A fund can accept a standardized return, regardless of your goals; Because Mar is the expected return on equity as an asset class.
Conclusion
AMCs must announce the risk triek in a way that we can relate to the information provided. The metric must be standardized for comparison between Peer funds. The above argument applies to stock funds with track record, not to new fund offers.
(The author offers training programs for individuals to manage their personal investments)
Published on July 28, 2025
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