Mutual Fund Risk Factors

Any investment will have its risk element. Saving in the bank account is the safest among all investment but it caries the lowest interest return. In overall, it will be a loss due to the rate of inflation is higher than the rate of interest/profit that is in the saving accounts. It is also known as the inflation or purchasing power risk. Stock trading has potential high return but it will subject the investor to the specific risk of falling share prices without stay of execution offered by the benefit of portfolio diversification or fund management expertise available under collective investment schemes. Stock option is one of the Mutual Fund investments; hence both have the similar risk factors.

1. 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 unit trust fund has a large group of securities that are less liquid or not easy to sell, the securities may be sold at a price cut to its fair value, hence affecting the value of the unit trust fund. The risk is reduced through the process of stock selection and group diversification by the fund managers.

2. Manager’s Risk: There is the risk that the manager may not stick to the investment authorization of the individual fund. Poor management of the fund will endanger the investment of unit holders through the loss of their capital invested in the scheme.

3. Currency Risk- Where a profit of the value of a fund is invested in foreign currency or assets denominated in foreign currency, the fund may be exposed to currency fluctuation risks. Fluctuations in foreign exchange rates will change the value of the fund’s foreign investments upon conversion to local currency and then impact the value of the unit holder’s investments.

4. Particular Stock Risk: Any major price fluctuations of a particular stock invested by the fund may affect the Net Asset Value and thus impact on the prices of units. This impact can, however, be reduced through the practice of group diversification by the fund managers.

5. Interest Rate risk: commonly, bond prices move in the opposite direction of interest rates. If interest rates rise and bond prices fall, this will lower the value of your investment.

6. Risk of Non-Compliance: There is the risk that the manager and others related fund will not comply with the deed of the fund, the law that governs the fund, or the internal policies, procedures and controls. Non- compliance of the deed, the law or the internal policies, procedures and controls may affect the investment of unit holders.

7. Country Risk: Overseas investments of the fund may be exaggerated by any news in the political and economic conditions of the country in which the investments are made. Such political and economic factors may impact the growth and development of business enterprises and influence the stock prices of listed companies.

8. Market risks: The purchase of equities corresponds to a risk since the prices of stocks essential the Net Asset Value of the fund fluctuate in response to many factors. Therefore, stock values fluctuate in response to the movements of individual companies, and general market or economic circumstances. Such activities in the underlying values of the shares of the investment portfolio will cause the Net Asset Value or prices of units to fall as well as rise, and profits produced by the fund may also vary.

9. Credit Risk refers to an issuer‘s ability to make appropriate payments of earnings and principal. In the event that the issuer of the tool is faced with financial difficulties, leading to a reduce in their credit worthiness and default in the payment of profit and principal, the value of the unit trust may be badly affected.

10. Loan Financing Risk; It is not recommended for unit holders to finance the purchase of fund units through borrowings. The price of units will fluctuate with the fundamental fund portfolio and unit holders may find themselves faced with the situation of being forced to show additional funds to top up on their loan limitations when the market goes down, or suffer the higher cost of financing when interest rates trend upwards; both these events increase the potential for capital loss. In addition, the returns on unit trusts are not sure and may not be earned consistently over time.