II pillar

Funds risk level

Estonian pension funds have a rather safe background – they are supervised on many levels and the investment restrictions are very precisely defined.

But why are the funds as tools for collective investment so popular in the world? There are four main reasons for that:

  • Distributed risks – pursuant to the laws of Estonia, the portfolio of each fund must contain at least 10 different investments, for pension funds the number is 20. Generally, the portfolios of international funds contain a few hundred investments.
  • Professional management – purchasing an investment fund also entails purchasing investment advice: investors transfer their money into a fund that will be managed by an investment specialist appointed for that purpose.
  • Low costs – buying a fund entails management fees as well as issue and redemption fees of units. If these costs are added up, the sum will be certainly lower than when a person invests on its own.
  • Small start-up sum – even if the sum invested into the fund is small, the rate of return for the money is the same as for the big investors and their large sums.

Despite of the low risk level, all mandatory pension funds are open for investment risk. This means that the value of a unit depends on the value of the investments of the pension fund – the price of a unit may rise or fall. Funds that invest more into equity and less into bonds are generally riskier than the ones that invest mostly or only into bonds. Funds with higher risk level have a bigger chance to yield higher rate of return, but the risk to lose with an investment is also higher.