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

Market Risk

Any purchase of securities will involve an element of risks. As unit trust funds principally invest in listed stocks, it may be prone to losses as a result of global, regional or national economic conditions, governmental policies or political developments. Market uncertainties and fluctuations in the market caused by these uncertainties will affect the net asset value (NAV) of unit trusts which may fall or rise, thus causing the income generated by the fund to fluctuate from funds with higher risk, higher returns to funds with lower risk, lower returns.

Liquidity Risk

The various securities that are purchased by a fund may encounter liquidity risk. Liquidity risk relates to the fund’s ability to quickly and easily trade at a reasonable price, in and out of positions. 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 discount to its fair value, which eventually affects the fund’s value.

Management Risk

Performance of the fund depends on the experience, expertise, knowledge and investment techniques of the fund manager. Poor management of a fund can cause considerable losses to the fund, which in turn may affect the capital invested.

Inflation Risk

Ideally the purpose of any investment is to secure returns that are greater than the inflation rate. While a fund will constantly seek to maximize returns and exceed inflation rate, it may occasionally experience losses, which result in returns that will not keep pace with inflation in the short run.

Interest Risk

Fixed income securities and bonds are particularly 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 NAV of the fund. The general interest rate environment of the country may affect the value of the investment even if the fund(e.g Syariah Fund) does not invest in interest bearing instruments.

Credit: FIMM Malaysia
Source: https://www.fimm.com.my/investor/abc-of-unit-trusts/understanding-unit-trusts/