How do with-profits funds differ from unit-linked funds in terms of risk and potential returns?

• A. With-profits have no guarantees; unit-linked have smoothing guarantees.
• B. Unit-linked funds guarantee market returns; with-profits reflect direct market exposure.
• C. With-profits typically include smoothing and guarantees through the insurer; unit-linked funds reflect the underlying investments with direct market exposure.
• D. Both fund types are identical in risk and return.

Answer: (C)

The main idea is how risk and potential returns are managed in these two fund types. With-profits funds use smoothing and insurer-backed guarantees. The insurer pools profits and smooths the experience for investors, adding regular bonuses and sometimes a guaranteed minimum value or final bonus. This makes returns feel steadier over time, but it also means some upside from strong markets can be moderated by the smoothing and guarantees.

Unit-linked funds, on the other hand, pass through the actual performance of the underlying investments. There is no smoothing or insurer guarantees, so the value of units moves with market performance. This exposes investors directly to market risk, but also to the full potential of favorable market moves.

So, with-profits offer smoother, insurer-managed returns with possible guarantees, while unit-linked funds reflect underlying market movements with direct exposure to risk and return. The other options mix up these features and aren’t accurate.