High risk funds like unregulated collective investment schemes (UCITS) offering big returns are a temptation for investors – but here are 10 top points to watch before paying across any cash.
The problem for many consumers is not understanding how to identify investment risks for UCITs.
Some opportunities look too good to be true – and that means they often are.
To help sort the good from the bad, here are the tips:
- Check if the fund manager deducts management charges from the capital or income – if it’s from the capital, your investment is gradually whittled away
- Beware of emerging markets. The returns are often exciting, but the investments are sometimes difficult to buy and sell. Volatility is another issue, as the markets are generally smaller than more established financial centres and subject to more peaks and troughs
- Look at the fund size. The idea is to spread the risk for a pool of investors, but small funds have less assets and fewer investors and may carry more risk
- Funds investing in bonds can carry a higher risk as companies are more likely to default than governments
- UCITs often involve complex financial instruments like warrants, options and derivatives. The rewards offered may be great, but they can drop in value just as fast as they might rise. This can lead to investors losing all their money.
- The smaller the market the fund invests in, the higher the risk. Look at funds with holdings across several sectors
- Don’t invest in property unless you know what you are doing. Valuations are based on surveyor reports which are opinions, not guaranteed prices. Other costs come with property as well, like buying and selling charges and maintenance.
- High risk investments are long-term, not a quick route to riches
- Read the fund’s prospectus and key features. They are documents regulators want you to read because they contain caveats and warnings about investment performance claims
- UCITs are outside the Financial Services Compensation Scheme, so if something goes wrong, there is no appeal to an independent ombudsman and no way to claim compensation without resorting to court action.
The Financial Conduct Authority suggests UCITs and other high risk investments are for experienced and sophisticated investors. They are not suitable for investors with relatively small amounts of capital.
Many of the advisers selling unregulated investment schemes are also not answerable to the FCA, so taking a second opinion before committing to a contract is recommended.
