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Any investment carries with it an element of risk. Hence, prospective investors should consider the following risk factors before making any investment.
Currency Risk
Investment into Unit Trust funds that have exposure to foreign investments may be exposed to currency risk. Currency risk is a form of risk that arises from the change in price of one currency against another.
Inflation Risk
Whilst a fund will constantly seek to maximize returns and exceed the inflation rate, at times it may experience losses, which result in investment returns that are below the inflation rate in the short run.
Interest Risk
Fixed income securities and bonds yields are sensitive to movements in interest rates. When interest rates rise, the value of fixed income securities and bonds fall and vice versa, thus affecting the investment returns of the fund. The general interest rate of the country may also affect the value of the investment even if the fund (e.g Shariah Fund) does not invest in interest bearing instruments.
Liquidity Risk
The various asset classes that the fund manager has invested into may encounter liquidity risk. Liquidity risk can be related to the fund’s ability to easily and quickly trade at a reasonable price, e.g. to sell or buy units. Should a fund comprise a security that has become temporarily or permanently illiquid or difficult to sell, the fund manager may need to sell the security at a deep discount to its fair value, which will negatively affects the fund’s value.
Market Risk
As unit trust funds principally invest in public listed companies they are exposed to changing market conditions as a result of global, regional and national economic conditions, governmental policies or political developments. Market uncertainties and fluctuations caused by these uncertainties will affect the net asset value (NAV) of unit trusts which may fall or rise, thus causing the returns generated by the fund to fluctuate.
Management Risk
Performance of the fund depends on the investment acumen of the fund manager. Inferior management of a fund can cause considerable losses to the fund which will negatively affect the returns of the investment.