greenieS
Verified member
1. Country risk
This type of risk affects all financial instruments. This is because a financial instrument is issued or domiciled in a country. And when political changes occur or any situation of economic instability occurs, the value of investments domiciled in that country decreases.
To protect yourself from country risk, seek to build a portfolio of funds with global exposure. Thus, even if investments in a given country go through a worse period, their negative effect on the portfolio is minimized.
2. Credit risk
It only affects loan-based instruments, such as Corporate Bonds and Government Securities, and materializes if an entity is unable to pay its liabilities. In such cases, the financial instruments issued by them are worthless.
To protect you from credit risk, funds invest in loan-based instruments from multiple issuers. And so, even if one of them can no longer pay its obligations, the impact on the portfolio is small.
3. Currency risk
It manifests itself when other currencies devalue against the currency in which you invest.
For example, suppose you invest in a fund whose units are denominated in EUR but which hold financial instruments denominated in USD. If the USD depreciates significantly against the EUR, then the performance of that fund will be affected.
To protect yourself against currency risk, you may want to consider investing in hedging funds.
4. Interest rate risk
Again, here we are talking about a risk that mainly affects Government Securities. Because the value of government securities decreases as monetary policy interest rates rise, and newly issued securities will have more attractive interest rates.
It is quite difficult to protect yourself from this risk. But a fund's portfolio manager can protect you by selling low-yield instruments and replacing them with potentially higher-yielding ones.
5. Liquidity risk
This is the risk that the fund will not be able to sell an investment that it holds in its portfolio because there are no buyers. An example would be when a company has major problems and is heading for bankruptcy.
Such situations are quite rare and you have little control over your liquidity. But the inherent diversification of a fund's portfolio minimizes the impact of liquidity risk.
6. Market risk
This type of risk affects all investments and is inevitable. It is part of the course of life and any investor is exposed to it.
To protect yourself from it, it would be a good idea to invest your money in funds that invest in unrelated financial instruments. That way, when one asset class is affected, another can make some impressive gains. And so the impact on your portfolio is not that strong.
Can an Investment Fund go bankrupt?
This is a question that many novice investors ask themselves. And the answer is: NO.
A company can go bankrupt because it has more liabilities, ie debts to third parties, than assets, cash and money that it has to collect from customers. When several debts are due at the same time, things can get serious.
Instead, every leu invested in a fund has the equivalent of an asset that can be traded on the Capital Market. And if all investors demanded to withdraw all their money at once, the administrator would sell all the investments and return the money. But I've never heard of that.
But that doesn't mean you can't lose money when you put money into an investment fund. As the value of the fund units is related to the value of the instruments held in the portfolio, if the value of the latter units decreases, the value of the units will also decrease.
Obviously, if you sell the fund units at a lower price than the one you bought them with, you will incur a loss. But that's about the worst thing that can happen to you. And the risk that all the instruments held by all the funds in which you have invested will reach zero simultaneously is very small.
This type of risk affects all financial instruments. This is because a financial instrument is issued or domiciled in a country. And when political changes occur or any situation of economic instability occurs, the value of investments domiciled in that country decreases.
To protect yourself from country risk, seek to build a portfolio of funds with global exposure. Thus, even if investments in a given country go through a worse period, their negative effect on the portfolio is minimized.
2. Credit risk
It only affects loan-based instruments, such as Corporate Bonds and Government Securities, and materializes if an entity is unable to pay its liabilities. In such cases, the financial instruments issued by them are worthless.
To protect you from credit risk, funds invest in loan-based instruments from multiple issuers. And so, even if one of them can no longer pay its obligations, the impact on the portfolio is small.
3. Currency risk
It manifests itself when other currencies devalue against the currency in which you invest.
For example, suppose you invest in a fund whose units are denominated in EUR but which hold financial instruments denominated in USD. If the USD depreciates significantly against the EUR, then the performance of that fund will be affected.
To protect yourself against currency risk, you may want to consider investing in hedging funds.
4. Interest rate risk
Again, here we are talking about a risk that mainly affects Government Securities. Because the value of government securities decreases as monetary policy interest rates rise, and newly issued securities will have more attractive interest rates.
It is quite difficult to protect yourself from this risk. But a fund's portfolio manager can protect you by selling low-yield instruments and replacing them with potentially higher-yielding ones.
5. Liquidity risk
This is the risk that the fund will not be able to sell an investment that it holds in its portfolio because there are no buyers. An example would be when a company has major problems and is heading for bankruptcy.
Such situations are quite rare and you have little control over your liquidity. But the inherent diversification of a fund's portfolio minimizes the impact of liquidity risk.
6. Market risk
This type of risk affects all investments and is inevitable. It is part of the course of life and any investor is exposed to it.
To protect yourself from it, it would be a good idea to invest your money in funds that invest in unrelated financial instruments. That way, when one asset class is affected, another can make some impressive gains. And so the impact on your portfolio is not that strong.
Can an Investment Fund go bankrupt?
This is a question that many novice investors ask themselves. And the answer is: NO.
A company can go bankrupt because it has more liabilities, ie debts to third parties, than assets, cash and money that it has to collect from customers. When several debts are due at the same time, things can get serious.
Instead, every leu invested in a fund has the equivalent of an asset that can be traded on the Capital Market. And if all investors demanded to withdraw all their money at once, the administrator would sell all the investments and return the money. But I've never heard of that.
But that doesn't mean you can't lose money when you put money into an investment fund. As the value of the fund units is related to the value of the instruments held in the portfolio, if the value of the latter units decreases, the value of the units will also decrease.
Obviously, if you sell the fund units at a lower price than the one you bought them with, you will incur a loss. But that's about the worst thing that can happen to you. And the risk that all the instruments held by all the funds in which you have invested will reach zero simultaneously is very small.
