The need for investor education about risk-taking and Unit Trusts

Interview with Jeevan Sukumaran, Secretary, Unit Trust Association, Sri Lanka

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What does “risk” really mean in investing, and why should the public not be afraid of it?

At the mention of the word risk in terms of investing, especially in a Sri Lankan context, there can be a significant level of fear or stigma attached to it. To some degree, this is fair given the country's history of civil war, investment company scams (such as Golden Key/Ceylinco and Sakvithi and in more recent times, the Easter Attacks, Covid and the Economic crisis. This has led to a large majority of potential investors being afraid to venture very far beyond commercial banking products and, therefore, losing out on the earnings potential of other asset classes.

In investing, risk means the possibility that the value of your investment might go up or down and not a guarantee of loss, but more a chance of fluctuation. For example, share prices rise and fall all the time. While those movements may look worrying in the short term, history shows that markets generally grow in the long run. As such, investors shouldn't necessarily fear risk, but should instead understand the different types of risk (both in general and based on the asset class) as well as risk's relationship to return.

What are the main types of risks (market, credit, liquidity) that investors should understand?

Several different types of risks affect investors in terms of capital markets (and unit trusts); however these can be classified into direct and indirect risks. The three most direct risk types that can affect investors are;