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Three risks of investing in unit trusts

by , 25 March 2014

Unit trusts are a great way to invest. You can make money on your investment. And you gain instant diversification, something that investing in individual shares will take you a lot of time and money to replicate. But, of course, there are risks. But what are they? Let's take a closer look at the main risks of putting your money into unit trusts…
Investing in unit trusts carries risk

When you invest your hard-earned cash into unit trusts, you need to be aware that there are risks, as with all things investing.

Here are three main risks you should be aware of, as CIMB Principal Asset Management highlight…

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Risk #1: There is no guarantee your unit trust will perform

When you invest in a unit trust, you do so in the hope you’ll make decent returns on your investment. If this wasn’t the case, you’d keep your cash in the bank.

But by investing in unit trusts, you need to accept there’s a risk the unit trust won’t perform.

Risk #2: By investing in unit trusts, you take on general market risk

As we saw when the financial crisis struck in 2008, the markets don’t always perform and they can come crashing down.

If you have money in unit trusts if a market crash or recession hit, for example, chances are your unit trust’s performance will reflect this too.

So the performance of your unit trust is also at risk of general market risk

Risk #3: There will be security specific risk for your unit trust

These are the risks that are specific to the type of unit trust you invest in.

For example, if you invest in a mining sector specific unit trusts, if commodity prices take a heavy tumble your unit trust’s performance will show this.

The security specific risks depend on the unit trust you invest in. And depending on what the unit trust invests in, these risks can be higher.

If you make the decision to invest in unit trusts, it’s important you’re aware of the risks involved.

Have a look at the unit trust’s fact sheet. These give you a rating of the risk involved with each fund. This can give you can indication of the risk you take on.

Companies like Old Mutual have online tools that can help you select the right unit trust for you taking into account your appetite for risk. Make use of these before you make a decision about which fund to invest in.

So there you have it, three main risks of investing in unit trusts.

Three risks of investing in unit trusts
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