General Risks of Investing in Mutual Funds
Any investment carries with it an element of risk. Therefore, prior to making an investment, prospective investors should consider the following risk factors.
- Returns Not Guaranteed
Investors should be aware that by investing in a mutual fund, there is no guarantee of any income distribution, returns or capital appreciation.
- General Market Risk
Any purchase of securities will involve some element of market risk. Hence, a mutual fund may be prone to changing market conditions as a result of:
- global, regional or national economic developments;
- governmental policies or political conditions;
- development in regulatory framework, law and legal issues
- general movements in interest rates;
- broad investor sentiment; and
- external shocks (e.g. natural disasters, war and etc.)
In addition, the following risk factors should also be considered:
- Security specific risk
There are many specific risks which apply to the individual security. Some examples include the possibility of a company defaulting on the repayment of the coupon and/or principal of its debentures, and the implications of a company's credit rating being downgraded.
- Liquidity risk
Liquidity risk can be defined as the ease with which a security can be sold at or near its fair value depending on the volume traded in the market.
- Inflation risk
Inflation rate risk is the risk of potential loss in the purchasing power of your investment due to a general increase of consumer prices.
- Loan Financing Risk
If a loan is obtained to finance the purchases of units of any mutual fund, investors will need to understand that:
- Borrowing increases the possibility for gains as well as losses;
- If the value of the investment falls below a certain level, investors may be asked by the financial institution to top up the collateral or reduce the outstanding loan amount to the required level;
- The borrowing cost may vary over time depending on the fluctuations in interest rates;
- The risks of using loan financing in light of investors' investment objectives, attitude towards risk and financial circumstances should be carefully assessed
- Risk of Non-Compliance
This refers to the current and prospective risk to the mutual fund and the investors' interest arising from non-conformance with laws, rules, regulations, prescribed practices and internal policies and procedures by the manager.
- Manager's Risk
The performance of any mutual funds is dependent amongst others on the experience, knowledge, expertise and investment techniques/process adopted by the manager and any lack of the above would have an adverse impact on the fund's performance thereby working to the detriment of Unit holders.