A fund that knows how much risk you can take They have certainly proved popular. Standard Life's MyFolio range of such funds now has £2bn under management. Its 15 risk-rated funds claim to offer a single-product investment solution to every investor out there. Skandia, Standard Life and Invesco Perpetual have all built multi-asset funds offering varying degrees of risk. Each of these funds is then assigned a "risk rating" by an independent agency. Some have the added advantage of being tax efficient - investors in Skandia's Spectrum range, for example, can move between the funds without creating a capital gains tax liability. Many financial advisers love them, as the responsibility of asset allocation can be passed on to someone else - absolving them from culpability. "The origins of these products are in the US market, where risk-rated and life-cycle funds have accounted for most of the growth in the US fund-of-funds market over the past decade," said Jason Hollands of BestInvest, the advisory firm. Life-cycle funds work on a similar principle, with assets automatically moving into lower-risk funds as investors near a set target date - usually their retirement. Such is the appetite for this style of quantifiable investing that many fund management groups are now rebranding their existing multi-manager funds to cash in on the trend. Jupiter had its flagship Merlin fund-of-funds range risk-rated in September. These funds will range from a risk level of "four" to "eight." Henderson has announced plans to risk-rate its multi-manager offerings, and M & G has used the firm Distribution Technology to risk-rate three of its multi-asset funds. But critics have argued that risk-rated funds are oversimplified. There are also concerns that the various fund managers and independent firms compiling risk ratings don't always concur on how risky a fund actually is. The same fund can be given different ratings, depending on whose system is used. And there is a degree of subjectivity in how the so-called experts interpret investors' questionnaires, while problems can arise because the questions aren't always answered truthfully. Greg Davies, a behavioural finance expert at Barclays, said that often it could be difficult for investors to be honest with themselves. Some people like to think of themselves as composed risk-takers, but if you try to invest in a way that does not respect your natural 'type' you make decisions you are not comfortable with and you will lose money. Problems also lie in investors' views of both risk and the market. One wealth manager said all clients were looking for low-risk investments - but, when questioned on the sort of returns they wanted, investors sought inflation plus three percentage points. "That sort of return from a so-called low-risk portfolio might have been possible 20 years ago," said Mark Dampier of Hargreaves Lansdown. But it is not possible to achieve 5pc growth from the type of assets deemed low risk today. Mr Dampier also highlighted that some of the assets classified as "low risk" today might not be so in the future. "Several years ago commercial property was deemed low risk - and it certainly wouldn't be considered so now," he said. Similarly, sovereign debt is currently classified as low risk, but if you hold bonds to maturity you will make losses. For investors dead set on investing in risk-rated funds, Mr Dampier suggested buying two or three. "Whatever type of fund you are buying, be it equity income funds or risk-rated ones, we always recommend that investors buy two or three complementary funds," he said. Tony Stenning of BlackRock, the fund manager, agreed that investors should look beyond these funds. "Risk-rated products are a great anchor and building block for a portfolio, but should not be solely relied on by investors, particularly when investing for longer-term savings such as retirement," he said. Rather than trying to avoid volatility, investors should learn to live with it, and think about how they can profit from market movements, said Mr Davies. Investors often treat volatility as much more relevant and important than it in fact is, and they tend to equate it with risk. However, the two are in general quite different: risk is the chance that your portfolio has a low value when you need it, the fact that the portfolio has large or small fluctuations before then is immaterial. But volatility can be a problem if you are likely to need your money in the short term, although those who do probably shouldn't be invested in equities. Volatility can be alarming but behavioural finance experts said investors should try to ignore it and stick to their long-term investment goals.