Thursday, February 28, 2008

Risks of Investing in Unit Trust Scheme

We face risks every day - for example, whilst driving to work, or of catching a serious illness - and we become familiar with and accept these risks as part of normal life. Yet the risks of an investment falling in value - even for a short time - somehow assumes a level of anxiety way out of line with the 'normal' risks we face!

A dictionary definition would suggest the risk is 'the probability or chance of injury, loss, damage or harm'. For an investor, risk is the chance that the actual return will be less than he or she expected to receive. Risk is therefore, directly linked to an investor's objectives. To meet an investor's objectives, some degree of risk must be taken - if high returns are required, high risks will be need to be take. It is not possible to achieve high returns without taking on a high level of risk. If the level of risk required to achieve an objective makes an investor uncomfortable, then he or she must reduce the level of expected returns accordingly.

A long-term investors with limited capital is unlikely to meet his or her objective of financing a child's education - or deriving an amount upon which to retire - by investing in a fixed income or cash UTS. Ironically, the traditionally low-risk fixed income or cash or cash investment would now become a risky' investment, as it may not help investor meet his or her retirement/child education objectives.

Risk can also be defined in terms of the variability or fluctuation in total return from investment. So an investment that is volatile in price or value - such as listed shares - is regarded as a higher risk investment than one, such as a fixed deposit, that does not vary in prices or value.

However, an investment that is 'risky' to one investor may be much less risky to another. For example, an investor who can hold units in a volatile equity unit trust scheme for the long term can ride out any short-tem fluctuations in values in the expectation that, over the long term, he or she is likely to come out ahead. An investor who can hold units in the same equity unit trust scheme for only few months (before requiring the funds to meet another commitment) is taking a much higher risk. The investor may be better advised to purchase a much less volatile fixed income or cash unit trust scheme.