Liquidity Risk

From Financial Literacy Wiki

Liquidity risk is associated with the ease of selling assets in the fund. Both Sector-Specific Unit Trusts and Country-Specific Unit Trusts have liquidity risk.

For Sector-Specific Unit Trusts, fund managers may invest in small companies that have small daily trading volume in developed markets. For example, fund manager may invest in a biotechnology that he believes is receiving approval for a drug that will command a large demand. But this firm may not be receiving any analysts' or investors' interest due to the small volume traded daily.

For Country-Specific Unit Trusts, which are investing in emerging markets may face with liquidity problems. The reason is that primary and the secondary markets are not well developed or the lack of investors interest in these markets. Thus fund managers may not be able to liquidate their holdings in time if there is a dramatic fundamental change in these countries, resulting in losses.