Risk of Investing in Unit Trust

As any other investments, even unit trust does have risk.
Based on my personal views, the risk associated with unit trust is manageable. Risks are manageable trough diversification that is offered by unit trust. Risk of return being not guaranteed is manage through the idea of unit trust investments are for long terms investment so they could gain an average return through out the years of investing.

What are the risks associated with unit trust?

1) Market Risks

Due to price fluctuations of securities invested in by the funds, the value of a unit trust investment may go up as well as down. The movement in securities prices is influenced by a number of factors, which include changes in economic, political and social environments.

2) Specific stock risk

Risk that is specific to a stock and is not correlated with the specific risks of other stocks. Examples of such risks are poor management due to departure of key management staff, loss of market share to competitors due to changes in the environment, and shifts in consumer demand due to changes in fashion and taste.

Any price fluctuations due to specific risk, of securities invested in by the funds, will affect the NAV of the funds. However, specific risk can be mitigated through portfolio diversification.

3) Inflation Risks

The purchasing power of income received from unit trust investments may not keep pace with inflation.

4) Currency Risk

The stock prices may be affected by the political and economic conditions of the country in which the stocks are listed. Unexpected events may stop the fund manager realising the full value of assets in those countries.

5) Borrowing risk

The price or value of units in a unit trust fund that invests in the equity markets fluctuates with the value of the underlying portfolios. Therefore when you borrow money to finance the purchase of units in a fund, there is a risk of capital loss. This is because you may either be forced to provide additional funds to top up on loan margins when the market goes down, or when interest rates go up you may be burdened with higher cost of financing.

6) Return not guaranteed

The income distribution is not guaranteed. There is a risk that there may not be any distribution of income for the particular fund.

7) Credit risk

Applies to debt-type investments such as bonds, debentures and fixed income instruments. The institution invested in may not be able to make the required interest/profit payments or repayment of principal.

8) Interest rate risk

Applies to fixed income securities, where the value of the investment may go up as well as down resulting from interest rate movement. The interest rate risk is a general economic indicator that will have an impact on DMP and PAXJI. It does not in any way suggest that DMP and PAXJI will invest in fixed income securities which are not approved by the Shariah.

9) Manager’s risk

Poor management of a fund by the Manager may cause the fund to decrease in value, which in turn may cause the capital invested by a unitholder to be at risk.

10) Risk of non-compliance

The risk that the Manager and others associated with the fund did not comply with the deed of the fund, the law that governs the fund, or the internal policies, procedures and controls. The non-compliance may expose the fund to higher risk that may affect your investments.