Just like any other form of investment, unit trust funds also carry risks. Risk is the uncertainty to which any form of investment may fluctuate in value. One should consider, amongst others, the following when investing in a unit trust fund:

Affected by variable factors and not guaranteed
The performance of a unit trust fund is affected by many variable factors and is not guaranteed. These include overall economic and financial market conditions such as interest rate fluctuation and stability of local currency. While a track record may provide some insight on future performance, it is by no means guaranteed. The prices of units may go down as well as up. Likewise, distribution may vary from year to year depending on the performance of the unit trust fund.

Market Risk
Stock values fluctuate in response to the general market and economic conditions. Such movements in the underlying values of the shares of the investment portfolio will cause the NAV or prices of units to fall as well as rise, and income produced by the fund may also fluctuate.

Specific Stock Risk
This risk is associated to the individual investment in each stock. Any unique activities of the individual companies may cause price fluctuations of that particular stock. This may include dramatic events such as natural disaster, loss in material litigation or bid to a big contract, inability to obtain adequate raw materials or even decline in sales. Hence, when a fund is heavily invested to a particular stock, it may have an impact (adversely or favourably) on the NAV of the fund and ultimately on the prices of units.

Liquidity Risk
Liquidity risk is defined as the ease with which a security can be sold at or near its fair value depending on the volume traded on the market. If a fund has a large portfolio of stocks issued by smaller companies, the relatively lower level of liquidity of these stocks can adversely affect the value of the fund. This is because there are generally less ready buyers of such stocks compared with the stocks of larger and more established companies. The risk is managed by taking greater care in stock selection and diversification.

Interest Rate Risk
As interest rates rise, the value of fixed income securities in a unit trust fund’s portfolio is likely to decrease. Securities with longer duration tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter duration. The interest rate risk here also refers to the general interest rate risk of the country which may affect the value of investment even if the fund (e.g. Shariah based fund) does not invest in interest bearing instruments.

Credit Risk
This risk refers to the possibility that the issuer of a fixed income security will not be able to make timely or full payment of principal or income due on that investment. This may lead to a default in the payment of principal and interest/profit and ultimately a reduction in the value of unit trust funds.

Issuer Risk
The value of each individual security that a unit trust fund invests in may decline for a number of reasons which is directly related to the issuer, such as but not limited to, the management performance, financial leverage, changing industry conditions and changes in consumer tastes and demand.

Loan Financing Risk
Investors should assess the inherent risk of investing with borrowed money, which should include the ability to service the loan repayments and the effect of increase in interest rates on the loan repayments.

Management Risk
Poor management of the unit trust fund may jeopardise the investment of each unit holder. Therefore, it is important to set investment objectives, policies and appropriate strategies before any investment activities can be considered. However, there can be no guarantee that these measures will produce the desired results.

Non-compliance Risk
The operations and administration of the fund by the Manager or its delegate are governed by the fund’s deed, all applicable laws and regulations or internal policies and procedures. Risk may arise when compliance with the provisions of the deed or the applicable law is not ensured. The magnitude of such risk and its impact on the funds and/or unit holders are dependent on the nature and severity of the non-compliance.

Investors are reminded that the above list of risks may not be exhaustive and if necessary, they should consult their adviser(s), e.g. their bankers, lawyers, stockbrokers or independent financial advisers for a better understanding of the risks.