Last updated
- March 16, 2022
- 11:42 pm
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Every investment carries risk, including unit trust funds. Here are nine types of common risks that can affect the funds you select.
#1 Market Risk
Market risk refers to the possibility to lose money from the unit trust investment due to a decline in financial markets, slowdown of the economy, political unstable with the invested country, and other factors. All those factors will negatively affect the value of the fund.
#2 Manager Risk
The decision of the fund manager to invest in the asset allocation is a direct impact on the fund performance. If the fund manager selected a portfolio that may not be in line with the market movement, this may affect the performance of the fund.
#3 Liquidity Risk
This is related to how easy to liquidate assets that the fund is holding. If the fund has assets that are difficult to liquidate, the value of the fund will be affected when it has to sell the assets at an unreasonable price.
#4 Loan Financing Risk
The investor will have the loan financing risk when the investors are taking a loan or financing to invest. The investor may run into a situation that is unable to service the loan. In the event of the units are used as collateral, the investor will need to top up the investment if it falls below the level that the loan collateral is allowed. Failing to top up the investment, the unit will be forced to sell at a lower net asset value per unit as compared to the purchase price in order to settle the loan.
Therefore I strongly encourage NOT TO practice loan financing to invest into a unit trust. The beauty of unit trust investment is always can start will a very small amount of money and allocate time for it to grow.
#5 Interest Rate Risk
Bank interest changes can affect the valuation of fixed income assets which is also known as a bond fund. Generally, when the interest rate goes up, the bond price will decline. The reverse applied when interest rate decline, bond price will go up.
#6 Credit Risk
This risk is related to creditors that issue liquid assets like bonds. If the bond issuer is not able to make payment timely or the issuer default on the payment. The value of the fund may be adversely affected.
#7 Currency Risk
When invested into the fund that is exposed to foreign currency assets, the investor has exposed another additional risk which is currency risk. When the fund is invested in the foreign currency assets and that currency depreciates against the local currencies, that scenario will negatively affect the fund price. When the foreign currency is appreciated, then the fund price may be adversely appreciated too.
#8 Country Risk
When the fund is invested in a specific country, it will be affected by changes in the economic and political climate. The fund value will be negatively affected when the economy of the country deteriorates or the politic of the country unstable.
#9 Industry or Sector Risk
This risk will arise when the fund is invested in a selected sector or industry. The reason is the fund is not well-diversified, any changes in the specific sector will cause the fund valuation to deteriorate or vice versa.
Conclusion
As every investment comes with risk and return. Understanding the risk is the first step and the next is to learn how to manage the risk that will minimize our investment risk. Learn portfolio allocation and diversification based on the risk you can tolerate. Apply a dollar-cost averaging strategy to reduce the investment risk. I will discuss more this in another article.
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