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Understanding Risk  

Saturday, 5 January 2008

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

1.Market Risk
Any purchase of securities will involve an element of risk, As unit trust funds principally invest in listed stocks they may be prone to changing market conditions 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.

2.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.

3.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.

4.Inflation Risk
Ideally the purpose of any investment is to secure returns that are greater that 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.

5.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 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.

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