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Make good use of lower-risk funds to navigate market volatility

8September 2023

What would you do if you got caught in a sudden storm but didn’t have an umbrella? Naturally, your immediate reaction would be to seek temporary shelter. Similarly, when confronted with investment market volatility,1 employees may try to navigate the turbulent conditions by transferring their Mandatory Provident Fund (MPF) contributions to lower-risk funds.

However, it is important to note that these lower-risk funds may exhibit significantly different characteristics and returns compared to the investor’s current funds. Moreover, it is crucial to adopt a strategic approach. After a brief “risk off” period, investors should consider a timely reallocation of their assets to other fund options that align with their risk tolerance levels.

Conservative Fund

Given current market conditions, there are three possible reasons why an employee would allocate a more significant portion of their MPF contributions to the Money Market Fund - MPF Conservative Fund- that carries lower risk:

1. The current market volatility has surpassed the risk tolerance level of the investor. Therefore, the investor may allocate a portion of their accrued benefits and/or new contributions to low-risk funds as a “short-term refuge” to reduce overall portfolio volatility.

2. The investment outlook and long-term trends for the assets held by the investor suddenly change or deviate from the original investment objectives and their risk tolerance. In that case, the investor may sell the relevant investments and switch to lower-risk funds until other suitable investment options become available for portfolio rebalancing. However, it is essential to remember that short-term market volatility does not reflect the investment outlook and long-term trends. It should not undermine the individual's long-term investment goals. Click here for more details.

3. The investor plans to switch funds. Unlike regular monthly contributions, fund switching represents a lump-sum investment and does not benefit from the advantages of dollar-cost averaging. The returns will depend on the buying and selling prices at the time of the switching. The investor will also face higher risks during volatile markets, or when the amount involved in the fund switch is significant/ represents a higher proportion of the portfolio value.

While conservative funds do not guarantee capital preservation, they typically invest in low-risk assets denominated in Hong Kong dollars, such as Hong Kong dollar bank deposits and Hong Kong dollar bonds. Consequently, these funds exhibit lower potential volatility (and returns).

The size of the MPF Conservative Fund has been increasing over the past year2

Guaranteed Fund

Investor attention may also be drawn to another fund type known as the Guaranteed Fund, which, like the Conservative Fund, is a lower-risk option. However, the Guaranteed Fund typically incorporates mechanisms that ensure the preservation of the principal and/or provide minimum returns, such as interest. Certain funds offer unconditional guarantees that allow investors to receive the guaranteed principal and/or interest. The interest earned (after deducting fees) depends on the investment duration.

It is important to note that some guaranteed funds come with particular conditions. For instance, investors may be required to maintain the investment for an explicit period or until they reach a specific withdrawal age. These funds are suitable for certain groups, such as pre-retirees who aim to lock in their accrued benefits at a set level. If you intend to temporarily park your funds for a few months or even weeks, selecting an unconditional guaranteed fund that aligns with your objectives is crucial. Opting for a guaranteed fund with conditions may mean you cannot access the guaranteed principal or returns and could even involve higher-than-expected risks (as some funds may invest in stocks with greater volatility).

In the face of sudden market volatility, it is understandable for investors to seek refuge in lower-risk assets as a short-term parking place for their assets. However, they should remember that "storms won't last forever." These safe havens are typically intended as temporary shelters, and the initial goal of "short-term parking" should not be transformed into "long-term parking". Holding too many lower-risk assets for an extended period is not ideal unless the investor approaches retirement age and plans to withdraw funds at age 65, gradually transitioning away from higher-risk assets. This caution is because such assets offer lower capital returns and may not meet the growth requirements of a Mandatory Provident Fund portfolio with a long-term investment horizon spanning 40 years.

As shown in the table below, since the establishment of the Mandatory Provident Fund in 2000, the annualised net returns of the Money Market Fund - MPF Conservative Fund and the Guaranteed Fund have been only 0.7% and 0.9%, respectively. These returns are lower than the 4% return of the Equity Fund and the 3.7% return of the Mixed Assets Fund. They also fell behind the 1.8% inflation rate during the same period.3

The Conservative Fund and the Guaranteed Fund have consistently underperformed inflation3


Read more: 3 FAQs amid volatile market




Since March of last year, the US Federal Reserve has initiated the rate hike cycle, resulting in a cumulative increase of 5.25 percentage points so far. During this period, global financial markets have experienced intermittent volatility. In addition to the ongoing interest rate hikes, various factors have triggered market volatility, including geopolitical developments, evolving market expectations regarding the economic outlook, unforeseen statements from global financial officials, and company specific events that impact investor perceptions of specific industries and their future prospects.

Mandatory Provident Fund Schemes Statistical Digest Quarterly Report March 2023 – published by the Mandatory Provident Fund Schemes Authority (MPFA). Data as of 31 March 2023. The net asset value of the Money Market Fund - MPF Conservative Fund was HKD 120.226 billion, higher than the Guaranteed Fund (another lower-risk fund) which had a net asset value of HKD 79.588 billion.

Mandatory Provident Fund Schemes Statistical Digest Quarterly Report March 2023 – published by the Mandatory Provident Fund Schemes Authority (MPFA). Data as of 31 March 2023. Past performance is not indicative of future performance.


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