Risk Associated with Unit Trust Investment



unit trusts

Prior to making an investment, prospective investors should consider the following risk factors carefully in addition to the other information set forth elsewhere in this Prospectus.

Although unit trust management companies seek to minimize risks by investing in a diversified portfolio, investors should be warned that there are potential risks in investing in unit trusts.

They include:

1. Market risk

Market risk cannot be eliminated by diversification. It stems from the fact that there are other economy-wide perils, which threaten all businesses. That is why investors are exposed to market uncertainties, regardless of numbers or types of investment held. Fluctuation in the market caused by uncertainties in the economy, political and social environment will affect the market price of unit trust Fund.

2. Equity investment risk

The value of equity investment is mainly determined by its potential growth in earnings, sound management etc. Failing to achieve the expected earnings would result in declining investment value which in turn affects the performance of the unit trust.

3. Fund management risk

The performance of any unit trust fund depends on the experience and expertise of the investment managers. Poor management of the unit trust may jeopardize its performance.

4. Performance risk

There is no guarantee on the investment returns or on the distribution to Unit Holders.

5. Inflation risk

A unit trust fund is subject to the risk of an investor’s investment not growing proportionately to the inflation rate making the investor’s purchasing power falls over time.

6. Liquidity risk

It is a risk that the investment cannot be sold at or near its actual value without taking a significant discount. This will result a lower NAV of the fund.

7. Loan financing risk

Investors should assess the inherent risk of investing with borrowed money which includes risk of increase in interest rates, risk of inability to provide additional collateral should the unit prices fall.

8. Credit/ default risk

Credit risk refers to the possibility that the issuer of a security will not be able to make timely payments of interest on the coupon payment date or principal repayment on the maturity date. This may lead to a default in the payment of principal and interest and ultimately a fall in the value of unit trust funds.

9. Interest rate risk

The level of interest rates has an impact on the value of investments and economic growth of a country. High interest rates dampen investments and aggregate demand leading to a slower economic activities. Both equity and debt securities of conventional as well as Syariah-based funds are affected by interest rates. The value of debt securities move in the opposite direction of interest rates, any increase in rates will lead to a fall in the value of debt securities, thus affecting the NAV of unit trust funds.

10.Currency risk

Currency risk is also known as foreign exchange risk. It is a risk associated with investments that are denominated in foreign currencies. When the foreign currencies fluctuate in an unfavourable movement against Ringgit Malaysia, the investments will face currency losses in addition to the capital gains/ losses. This will lead to a lower NAV of the fund.

11. Country risk

The foreign investment of the Fund may be affected by risk specific to the country which it invests. Such risks include changes in the country’s economic fundamentals, social and political stability, currency movements and foreign investment policies etc. They may have an adverse impact on the prices of securities of listed companies.

12. Risk of non-compliance

The risk that unit trust management companies and others associated with the fund do not follow the rules set out in the fund’s constitution, or the law that governs the fund, or will act fraudulently or dishonestly. It also includes the risk that unit trust management companies may not comply with internal control procedures. The non-compliance may expose the fund to higher risks which may result in a fall in the value of the unit trust funds.

Source : HwangDBS


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