RISK FACTORS OF INVESTING IN UNIT TRUSTS

Risks refer to the potential for the value of a unit trust fund to drop. The following are risks involved in investing in unit trusts.

General Risks

Manager’s Risk

Poor management of the fund will jeopardise the investments of unit holders through the loss of their capital invested in the scheme.

Loan Financing Risk

Unit trust funds invest in stocks and other capital market securities which are medium to long-term assets. It is considered inadvisable for unit holders to finance the purchase of units through borrowings as this will result in a mismatch of unit holders’ medium to long-term assets (i.e., their units of the fund) with their short-term liabilities (i.e., their borrowings). Unit holders may find themselves faced with the scenario of being forced to provide additional funds to top up their loan margins when the market goes down, or suffer a higher cost of financing when interest rates trend upwards. In addition, the returns on unit trust funds are not guaranteed and may not be earned evenly over time. Shariah-based unit trust fund’s investor is advised to seek for Islamic financing to finance their acquisition

Inflation Risk

This refers to the likelihood of a unit holder’s investments not growing proportionately to the inflation rate resulting in the unit holder’s decreasing purchasing power even though the investments increase in monetary terms.

Risk of Non-Compliance

There is the risk that the manager and others associated with the fund will not comply with the deed of the fund, the law that governs the fund, or internal policies, procedures and controls. Non-compliance with the deed, the law, or internal policies, procedures and controls may affect the investments of unit holders.

Currency Risk

This refers to the risk of the currency exchanges fluctuating resulting in the investments of the unit trust funds in securities in foreign market to lose its value and ultimately causing a fall in the net asset value of the unit trust funds.

Country Risk

This refers to the risk of price fluctuations in securities in foreign markets due to the political, financial and economic events of the foreign country. This will in turn cause the net asset value of the unit trust funds to be adversely affected.

Specific Risks

Where a unit trust fund participates in stock market-related investments, the following risks become key considerations:

Stock Market Risk

The price of stocks underlying the NAV of the fund will fluctuate in response to many factors such as economic conditions or outflow of short-term foreign investment funds. Such movements in the underlying values of the shares of the investment portfolio may cause the NAV or prices of units to rise or fall.

Specific Company Risk

This risk refers to the individual risk of the respective companies issuing the securities. Specific risk includes but is not limited to changes in consumer tastes and demand, legal suits, competitive operating environments, changing industry conditions and management omissions and errors. However, this impact can be minimised through portfolio diversification by the fund manager.

Liquidity Risk

This refers to the likelihood of the investment suffering a loss in value in the event of a sudden need for liquidity when faced with material unit holder redemptions. This risk is managed by a fund manager maintaining a sufficient level of liquid assets so that illiquid assets need not be sold to the detriment of the fund.

Investments in bonds/sukuk carry the following specific investment risks:

Interest Rate Risk

The risk refers to the effect of interest rate changes on the market value of a bond/sukuk portfolio. In the event of rising interest rates, prices of fixed income securities/demand for sukuk will decrease and vice versa, thus affecting the NAV of the fund. Meanwhile, debt securities/sukuk with longer maturity and lower coupon /profit rates are more sensitive to interest rate changes. The interest rate is a general economic indicator that will have an impact on the management of the fund regardless of whether it is a conventional fund or a Shariah-based fund. Even though a Shariah-based fund does not invest in interest-bearing instruments, interest rates can directly affect the value of a Shariah-based fund. This risk is generally mitigated by the management of the duration structure of a fixed income/sukuk portfolio.

Credit Risk

This refers to the possibility that an issuer may not be able to make timely interest/profit or principal payments. A default in the payment of interest/profit and principal will adversely affect the value of the fund.