Nine Common Type Of Risks Affecting Unit Trust Funds

Every investment carries risk, including unit trust funds. Here are nine type of common risk that can affect the funds you select.

Market risk refers to possibility to lose money from the unit trust investment due to decline in financial markets, slowdown of economic, political unstable with the invested country and other factors. All those factors will negatively affect the value of the fund.

The decision of the fund manager to invest into the asset allocation is direct impact of the fund performance. If the fund manager selected the portfolio which may not be in line with the market movement, this may affect the performance of the fund.

This is related to how easy to liquidate assets that the fund is holding. If the fund having the assets that are difficult to liquidate, the value of the fund will be affected when it has to sell the assets at unreasonable price.

Investor will have the loan financing risk when the investors is taking loan or financing to invest. The investor may run into situation that unable to service the loan. In the event of the units are used as collateral, investor will need to top up the investment if it fall below the level that the loan collateral is allowed. Failing to top up the investment, the unit will be forced selling at lower net asset value per unit as compare to the purchase price in order to settle the loan.

Therefore I strongly encourage NOT TO practice of loan financing to invest into unit trust. The beauty of unit trust investment is always can start will very small amount of money and allocate time for it to grow.

Bank interest changes can affect on the valuation of fixed income asset which is also known as bond fund. Generally when interest rate goes up, bond price will decline. The reverse applied when interest rate decline, bond price will goes up.

This risk related to creditor that issue the liquid assets like bond. If the bond issuer not able to make payment timely or the issuer default in the payment. The value of the fund may be adversely affected.

When invested into the fund that exposed in foreign currency assets, the investor has expose another additional risk which is currency risk. When the fund invested in the foreign currency assets and that currency depreciated against the local currencies, that scenario will negatively affect the fund price. When the foreign currency appreciated, then the fund price may adversely appreciated too.

When the fund invested into specific country, it will be affected by changes in the economic and political climate. The fund value will negatively affected when the economy of the country deteriorating or the politic of the country unstable.

This risk will arise when the fund is invested into selected sector or industries. The reason is the fund is not well diversified, any changes on the specific sector will cause the fund valuation deterate or vice versa.

As every investment comes with risk and return. Understand the risk is the first step and next is to learn how to manage the risk that will minimise our investment risk. Learn portfolio allocation and diversification base on the risk you can tolerate. Apply dollar cost averaging strategy to reduce the investment risk. I will discuss more about this in another article.