All types of investments carry some degree of risks which may have an adverse effect on the price of the investments. Therefore, before making an investment decision, investors are advised to consider the different types of risks that may affect the unit trust fund. Below are some of the general risks of investing in the unit trust fund and specific risks associated with the investment portfolio of the Funds.
General risks of investing in the Unit Trust Funds
Market risk refers to the possibility that an investment will lose value because of a general decline in financial markets, due to economic, political and/or other factors, which will result in a decline in the fund’s net asset value.
Liquidity risks refer to the ease of liquidating an asset depending on the asset’s volume traded in the market. If the fund hold assets that illiquid, or are difficult to dispose of, the value of the fund will be negatively affected when it has to sell such assets at unfavourable prices.
This is the risk that investors’ investment in the unit trust fund may not grow or generate income at a rate that keeps pace with inflation. This would reduce investors’ purchasing power even though the value of the investment in monetary terms has increased.
This risk refers to the day-to-day management of the fund by the manager which will impact the performance if the fund. For example, investment decisions undertaken by the manager, as a result of an incorrect view of the market or any non-compliance with internal policies, investment mandate, the deed, relevant law or guidelines due to factors such as human error or weaknesses in operational process and systems, may adversely affect the performance of the fund.
Loan Financing Risk
The risk occurs when investors take a loan/financing to finance their investment. The inherent risk of investing with borrowed money includes investors being unable to service the loan repayments. If units are used as collateral, an investor may be required to top-up the investor’s existing instalment if the prices of units fall below a certain level due to market conditions. Failing which, the units may be sold at a lower net asset value per unit as compared to the net asset value per unit at the point of purchase towards settling the loan.
As a result of the risk elements, the returns from a fund are not guaranteed. The value of the fund’s investment will vary when sold and an investment may be worth more or less than when purchased.
The abovementioned risks which investors should consider before investing into a unit trust fund should not be considered to be an exhaustive list. Investors should be aware that investments in the Funds may be exposed to other risks of an exceptional nature from time to time.