KiwiSaver has become a popular way for people in New Zealand to save for retirement and achieve their financial goals. It offers many advantages, such
KiwiSaver has become a popular way for people in New Zealand to save for retirement and achieve their financial goals. It offers many advantages, such as contributions from employers and the government, as well as the potential for long-term growth. However, it’s important to know that KiwiSaver funds also come with risks that investors need to understand and handle wisely. This guide aims to explain the potential risks of investing in KiwiSaver funds in a simple and straightforward manner. By understanding these risks, New Zealand investors can make informed decisions and navigate the investment landscape with confidence. Let’s explore the risks together.
Market Volatility and Investment Risk:
Financial markets can be unpredictable, and KiwiSaver funds are not immune to their ups and downs. For example, during the global financial crisis in 2008, KiwiSaver funds experienced significant drops in value. The average balanced fund lost around 20% of its value during that time. It’s important to remember that while markets generally recover over the long term, short-term volatility can affect the value of your investments.
To reduce the risk of market volatility, consider investing in diversified funds that spread your money across different types of investments. Diversification helps lower the impact of market downturns on your overall investment.
Economic and Political Factors:
The performance of KiwiSaver funds is influenced by various economic and political factors both in New Zealand and around the world. Changes in interest rates, inflation, government policies, and global events can affect how these funds perform. For example, trade disputes or sudden government rule changes can impact company profits and, in turn, affect the returns of KiwiSaver funds.
During the COVID-19 pandemic, New Zealand also experienced economic disruptions that affected KiwiSaver funds. Some funds even had negative returns during this time. It’s essential to stay informed about economic trends and global developments that could impact your investments.
Manager Performance:
The success of KiwiSaver funds depends on the skills and decisions of the fund managers. Not all managers consistently achieve good results, and their performance directly affects the returns of the funds. To evaluate a fund manager’s performance, look at their historical returns, compare them to the market average, and consider industry ratings.
For example, some funds consistently outperform their peers over a 10-year period, while others struggle to generate above-average returns. Before choosing a KiwiSaver fund, assess the track record and investment strategy of the fund manager.
Asset Allocation Risk:
KiwiSaver funds invest in different types of assets, such as shares, bonds, property, and cash. The allocation of these assets is based on the fund’s investment strategy and risk profile. However, different types of assets come with varying levels of risk and potential returns.
Around 70% of KiwiSaver funds’ investments are allocated to growth assets like shares and property. While these assets offer higher returns, they also have higher volatility and risk. Conservative funds, on the other hand, allocate more to stable assets like bonds, which provide steady but potentially lower long-term growth.
Consider your risk tolerance, investment goals, and time horizon when choosing a fund with the right asset allocation for your needs.
Fees and Costs:
KiwiSaver funds charge fees and costs that impact your overall returns. These can include management fees, administration fees, and performance-based fees. It’s important to understand the fee structure and compare them across different funds.
For example, if you have a KiwiSaver balance of $50,000 and the fund charges an annual fee of 1.5%, you would pay $750 in fees each year. Over time, these fees can add up and reduce the growth of your investments. So, it’s wise to choose funds with reasonable fees that align with the services they provide.
Liquidity Risk:
Liquidity risk is an important factor to consider when investing in KiwiSaver funds. These funds typically have a lock-in period until retirement age or a specific time frame. Withdrawing funds before this period may result in penalties or limitations. It’s crucial to assess your liquidity needs and have an emergency fund outside of KiwiSaver to cover unexpected expenses.
Having a separate emergency fund ensures you have readily available funds for unforeseen circumstances without disrupting your long-term savings goals. If you anticipate significant expenses within a specific time frame, such as buying a home or starting a business, consider alternative savings or investment options that offer more flexibility and liquidity.
By being aware of liquidity risk and planning accordingly, you can strike a balance between the long-term benefits of KiwiSaver and having access to funds when unexpected situations arise.
Conclusion:
Investing in KiwiSaver funds can be a valuable strategy for achieving long-term financial goals. However, it’s crucial to be aware of the associated risks and make informed decisions. By understanding market volatility, economic factors, manager performance, asset allocation, fees, and liquidity risks, New Zealand investors can navigate the world of KiwiSaver more confidently.
Remember, seeking professional financial advice tailored to your specific situation is essential for creating an investment strategy that aligns with your goals and risk tolerance. Stay informed, regularly review your KiwiSaver fund performance, and make adjustments when necessary to ensure you’re on track to achieve your financial objectives.
