Investing can be considered as a tricky topic for some. However, even for investors that have got their head around the basics, there is still some room for confusion. In this blog post, you will hear about three different sets of KiwiSaver terms that people get mixed up.
1. Returns and interest
I previously saw a press release that seemed to get the ideas of compound interest and returns mixed up. At first when reading this press release I was confused by what they were referring to. That was until a colleague of mine pointed out that they probably meant the word “returns” instead of “compound interest”.
The “return” from an investment is how much money someone has gained (or lost) from an investment over a given period of time. For example, if you bought a $1 million house in Auckland twenty years ago, and then sold it for $3 million, your return would be $2 million. You’ll often also find it expressed in percentage terms.
Interest is one specific way of getting a return. It is the payment one receives as a result of lending their money to someone else. For example, when you deposit money into a bank, the bank will sometimes pay you interest (although not often these days!) as a result of you lending them money.
2. Growth funds and ‘growth company’ funds
In a previous blog post I covered the difference between Growth funds and growth company funds. This was because some KiwiSaver investors believe that when a fund has the word “growth” in it that it is a growth fund. This is simply not the case.
A growth fund refers to the asset allocation of the fund. A growth fund is a fund that generally invests around 75 to 90 percent of its money into growth assets. Growth assets include assets such as shares, property and private equity (investing into private companies). The rest of the money in a growth fund is invested into other non-growth assets.
However, a growth company fund refers to the type of companies it invests in rather than than the type of assets. It is one that consists specifically of growth companies, which have the potential to expand faster than others in their sector or the economy as a whole. Many growth companies, such as Google and Tesla, are in fast growing industries like technology and healthcare.
If it sounds confusing, that’s okay! Take some time to re-read over this and understand the difference between the two.
3. Volatility vs risk
Volatility and risk are terms that are sometimes used interchangeably by people, however, people such as Warren Buffett have warned against believing that these two terms are the same.
Volatility is a measure of how much and how rapidly a security goes up and down in price. Examples of higher volatility investments include shares and property. These investments can most certainly experience large fluctuations at times, as you may have noticed in the news. Some examples of lower volatility investments include government bonds and term deposits. These investments tend not to make large sudden movements in price.
Risk is the probability and degree that an investor will lose money in the future. The riskiness of an investment is determined by more than the volatility of the investment in the past. For example, risk can be created by changes in the economy, lack of diversification in your KiwiSaver portfolio, and factors like Covid-19.
For more about volatility vs risk and their differences, click here to watch this video.
Want to learn more about KiwiSaver?
If you want to learn more about KiwiSaver, National Capital has a number of posts on our blog related to KiwiSaver we recommend you read.
We also invite you to check out our KiwiSaver HealthCheck to find out which KiwiSaver fund is best for you. Instead of spending hours finding out this information, leave this task to the experts and spend only 10-15 minutes completing the form. As part of our KiwiSaver HealthCheck, you will be able to talk to a real person who will help you find the right fund for you and clarify any KiwiSaver questions you may have. And the best part about all of this is that it’s free.
So take a few moments to fill out our KiwiSaver HealthCheck and take a step towards a more financially secure you. Your future self will thank you for doing so.