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Monday, December 4, 2006

Risk vs Return

Generally, in investment the greater the risk that a person takes the higher the return that he will get. And less risk entails lower return.

Unit trust fund that have a high risk or aggressive risk profile seek to achieve capital growth. This unit trust fund will be mostly invested in the equities or securities of listed companies. This kind of unit trust funds would produce higher return but with higher volatility.

Unit trust funds that have a conservative risk profile will be invested mostly in corporate bonds, government securities and liquid securities like bills and cash. Conservative trust funds seek to provide regular income with less emphasis on capital growth. Although it is low risk, it is possible for these funds to incur capital gain and losses during periods of volatile interest rate. Bond has an inverse relation with the interest rate. When the interest rate increase the bond return will decrease and vice versa.

Unit trust funds that have moderate risk profile will be mostly invested in diversified portfolio of blue-chip stocks, growth stocks and fundamentally undervalued stocks which earn significant dividend income. Moderate investors who prefer capital gain and income would benefit from this kind of unit trust.

Then there are the conservative to moderate risk-reward unit trust funds or another name for it is balanced unit trust fund. The composition of the asset classes may vary according to investor’s risk and return appetite. High risk investor may want to invest in a balanced product that has a higher component of equities, whereas a low risk investor may prefer a balanced allocation in both categories of asset or more bond and cash.

The final decision to invest in what categories of unit trust will depend on your risk profile, and time horizon that you have to achieve your goal. The more time you have the greater risk that you can take. But if your are the one who cannot stand the volatility of an aggressive fund price movement, stick to the conservative to moderate kind of unit trust fund. It is better for your peace of mind.

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