What are the risks involved with Simple Plus?
Simple Plus is a cash management portfolio, so by default, it’s considered an ultra-low risk investment.
But remember, it is exposed to market fluctuations, so it can briefly experience negative returns. That’s because it’s exposed to market fluctuations, caused by:
1. Interest rate movements: Bond prices tend to fall when interest rates rise. Though if an investor holds a bond to its maturity, the drawdowns won’t affect them - they’ll still receive their principal as well as the coupons during the bond’s lifetime. But if they were to sell the bond before maturity, they could experience a loss due to the bond’s drop in value. So in short, the closer a bond is to maturity, the less sensitive it is to interest rates. This sensitivity is also known as ‘duration’.
What does that mean for Simple Plus? The duration of Simple Plus is about 1.5 years. Basically, that means that for each 1% move in interest rates, you can expect 1.5% move in the market price for the bonds in the portfolio.
Given this volatility, we recommend you hold your cash in Simple Plus for at least 12 months.
2. Credit risks: Simple Plus holds high-quality corporate debt. In a bad economic downturn, there’s a risk that some companies may default on their debt. But those risks are controlled through our stringent selection of fund managers. Our fund managers limit the amount of corporate debt held at different credit ratings, select companies carefully, and diversify their holdings, which helps to mitigate risk from any single holding.
You can read more about the types of underlying funds in different cash management options and their associated risks here.
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