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Lower the risk of equity investment through diversificationNEW investors often ask whether there are risks involved when one invests in unit trust funds. The fact is all investments carry risk - some more than others. Angela Delport, product manager of Syfrets Unit Trusts Investment Management Services, says unpredictable fluctuations in financial markets are an unavoidable risk factor. In an equity fund, when share prices decline the value of one's investment will decrease accordingly - because the value of the fund's units are vulnerable to market fluctuations. Delport says with unit trusts, however, risk is reduced through the diversification of the fund's underlying portfolio. This diversification (the spreading of investments, and thereby risk, across a variety of shares and market sectors) is one of the greatest advantages of a unit trust investment. She explains that by pooling their investments, unitholders are able to achieve a balanced exposure to a relatively wide range of shares. This would not be possible had they attempted to invest their limited funds on their own. This spread of investments substantially reduces the risks which are associated with investing in a single or limited number of shares, where underperformance of an investor's only or major holding could have dramatic consequences. Also, says Delport, one is able to manage the level of risk exposure by choosing a unit trust (or a combination of unit trusts) that matches one's personal risk profile. She advises that the best way to reduce risk is by taking a longer-term view on your unit trust investments. Although the markets may be volatile in the short term, volatility and risk is reduced where investments are held over the longer term (three to five years or more). Historically, equities have provided the best protection against inflation and outperform most other forms of investments over the longer term, says Delport.
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