Risk is simply a reflection of the uncertainty and unpredictability of the future. There is always an upside risk that things go better than expected. However, because of our natural tendency towards loss aversion, we mostly associate risk with the negative.
When referring to risk with investing in index funds, the level of risk associated with a fund depends on how much the value of a fund's assets goes up and down (volatility).
While an individual company or companies might be reduced to dust, the chance that a whole diversified fund is significantly and permanently gone is very low. The real risk is that the value of your investment is less than you had hoped or less than you need when you withdraw. This is why your time horizon is important.
A higher risk generally means higher potential returns over time, but more fluctuations along the way. For lower risk, it's vice versa.
The risk indicator scale
At Kernel, we use the industry-standard risk indicator scale to illustrate the level of risk associated with investing in a specific fund. These can be found on the Individual Fund Pages, Fund Factsheets (here's an example) or our Product Disclosure Statement (PDS).
The risk indicator scale runs from 1 (low risk) to 7 (high risk).
The lowest risk rating doesn’t mean “risk-free” and this risk indicator is not a guarantee of a fund’s future performance. It measures the range of weekly returns as an annualised standard deviation, against a standardised scoring table. It is therefore an indication of the amount of fluctuation in the recent past.
The risk indicator of a fund is based on performance for the 5 years to the end of the last quarter.
Kernel funds haven't been in existence for 5 years. Therefore they are a combination of actual returns since inception and the underlying index returns for the balance of the 5-year period.