The risk band is a rating given to a fund based on an estimate (probability) of how many negative returns the super fund will experience over a twenty year period.

The estimated number of negative returns is based on the historical performance data of each asset class the fund invests in.

The rating is then calculated depending on how much of the investment is allocated into each asset class. 

Balanced funds mostly invest in equity markets.

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Hence, they are usually grouped with a risk band of 5 (medium to high risk), due to the volatile nature of the share market as opposed to cash or property.

Risk Band

Risk Label

Estimated number of negative annual returns over a 20 year period

1

Very low

Less than 0.5

2

Low

0.5 to less than 1

3

Low to medium

1 to less than 2

4

Medium

2 to less than 3

5

Medium to high

3 to less than 4

6

High

4 to less than 6

7

Very high

6 or greater

 

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Superannuation is a long term investment, so it is fair to say that a couple of negative returns over a 20 year period will usually be overshadowed by the positive returns by the time you retire.

The risk here is that at the time you retire, your fund might be experiencing a negative return, (such as the one many retirees experienced during the 2008 global financial crisis). As such, it is important to take the risk band into consideration when investing in a super fund.

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