General Risks of Investing in Unit Trust Funds

Posted on April 21, 2012

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Any investment carries with it an element of risk. Therefore, prior to making an investment, prospective investors should consider the following risk factors.

  1. Returns Not GuaranteedInvestors should be aware that by investing in a unit trust fund, there is no guarantee of any income distribution, returns or capital appreciation.
  2. General Market RiskAny purchase of securities will involve some element of market risk. Hence, a unit trust fund may be prone to changing market conditions as a result of:
    • global, regional or national economic developments;
    • governmental policies or political conditions;
    • development in regulatory framework, law and legal issues
    • general movements in interest rates;
    • broad investor sentiment; and
    • external shocks (e.g. natural disasters, war and etc.)

    In addition, the following risk factors should also be considered:

  3. Security specific riskThere are many specific risks which apply to the individual security. Some examples include the possibility of a company defaulting on the repayment of the coupon and/or principal of its debentures, and the implications of a company’s credit rating being downgraded.
  4. Liquidity riskLiquidity risk can be defined as the ease with which a security can be sold at or near its fair value depending on the volume traded in the market.
  5. Inflation riskInflation rate risk is the risk of potential loss in the purchasing power of your investment due to a general increase of consumer prices.
  6. Loan Financing RiskIf a loan is obtained to finance the purchases of units of any unit trust fund, investors will need to understand that:
    • Borrowing increases the possibility for gains as well as losses;
    • If the value of the investment falls below a certain level, investors may be asked by the financial institution to top up the collateral or reduce the outstanding loan amount to the required level;
    • The borrowing cost may vary over time depending on the fluctuations in interest rates;
    • The risks of using loan financing in light of investors’ investment objectives, attitude towards risk and financial circumstances should be carefully assessed.
  7. Risk of Non-ComplianceThis refers to the current and prospective risk to the unit trust fund and the investors’ interest arising from non-conformance with laws, rules, regulations, prescribed practices and internal policies and procedures by the manager.
  8. Manager’s RiskThe performance of any unit trust funds is dependent amongst others on the experience, knowledge, expertise and investment techniques/process adopted by the manager and any lack of the above would have an adverse impact on the fund’s performance thereby working to the detriment of Unit holders.
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Posted in: Knowledge Base