Study guide
2.5 Understanding Risk and the Risks of Investing in Schemes
FIMM Combined Examination FCE
Track your progress as you read
Finished sections get a check mark.
1 Introduction: The FIMM Combined Examination (FCE)
0.1 FCE Exam Facts, Registration Rules and How to Use This Guide
2 Chapter 1: Understanding Collective Investment Schemes in Malaysia
1.1 What a Collective Investment Scheme Is and How Malaysian CIS Are Classified 1.2 Investment-Linked Funds Are Not UTS; Industry Growth and History 1.3 Participants in the CIS Ecosystem: Unit Holders, Managers, Trustees, Distributors and Regulators
3 Chapter 2: Introduction to UTS and PRS
2.1 UTS and PRS as Investments: Mechanics, Unit Calculations and How They Compare 2.2 Types of Funds: By Asset Class, Fund Structure and Investment Objective 2.3 Methods of Investing and Dollar Cost Averaging 2.4 Benefits and Disadvantages of Investing in UTS and PRS 2.5 Understanding Risk and the Risks of Investing in Schemes 2.6 Shariah-Compliant Schemes, Their Risks and the Role of the Shariah Advisory Council
4 Chapter 3: Regulatory Framework
3.1 The Regulatory Framework: The SC, Other Regulators and FIMM's Dual Role 3.2 Legislation, SC Guidelines and FIMM Rules Governing UTS and PRS 3.3 Regulation of Scheme Providers and Oversight Functions 3.4 The Deed, the Prospectus or Disclosure Document, and the Product Highlights Sheet 3.5 Portfolio Constraints: Permitted Investments, Liquidity, Borrowing and Exposure Limits 3.6 Regulations for Other CIS: Real Estate Investment Trusts and Exchange-Traded Funds 3.7 Regulation and Duties of the Scheme Trustee 3.8 Regulation of Marketing and Distribution: Distributor Categories, Collection Points and Agency Structure 3.9 Registration of Consultants: Eligibility, Fit and Proper, Duration, Variation and Revocation
5 Chapter 4 (Part 1): Marketing and Distribution — Disclosure and Transactions
4.1 Servicing Investors and the Contents of the Prospectus and Disclosure Document 4.2 The Product Highlights Sheet, Advertising Standards and Account Maintenance 4.3 The Purchase Process and Suitability Assessment Before Personal Advice 4.4 Cooling-Off Rights, Repurchase of Units, Suspension and Switching 4.5 Financing the Purchase of UTS: Process, Safeguards and the Risk Disclosure Statement 4.6 EPF Transfers and Withdrawals for Investment in Approved Unit Trust Funds
6 Chapter 4 (Part 2): Marketing and Distribution — Distributions, Reporting and Service
4.7 Distributable Income, Distributions and NAV, "Buying" a Distribution and Taxation 4.8 Reporting to Investors: Confirmations, Statements, and Semi-Annual and Annual Reports 4.9 Marketing Principles, Delivering Quality Service and Handling Complaints 4.10 The Effect of Inflation, Taxation and Investment Costs on Returns 4.11 Investment Alternatives to UTS and PRS
7 Chapter 5: Code of Ethics
5.1 Compliance, Ethics and the Structure of the FIMM Code of Ethics 5.2 Core Principle 1: Honesty and Integrity 5.3 Core Principle 2: Professionalism 5.4 Core Principles 3 to 5 and Non-Compliance: Conflicts, Disclosure, Confidentiality and Misconduct
8 Chapter 6: Personal Financial Planning
6.1 Personal Financial Planning: Definition, Features, Five Areas and the Six Steps 6.2 Financial Planner Credentials, Skills, Remuneration, and How a Planner Differs from a Consultant 6.3 The Consultant's Role in Investment Planning and Advising Clients Through the Life Cycle
9 Chapter 7A: Features and Operations of UTS
7A.1 Structure of a UTS, the Trust Deed, the Parties and Modifying the Deed 7A.2 UTS Fees, Charges and Expenses, and the Management Expense Ratio 7A.3 Dealing in Units, Valuation, NAV Calculation and Unit Prices 7A.4 Forward and Historical Pricing, and the UTMC's Holding of Units 7A.5 Unit Splits, Distributions and Their Effect on NAV 7A.6 Measuring UTS Performance: Returns, Performance Tables, Risk Measures and Qualitative Factors 7A.7 Operational Aspects of Shariah-Compliant UTS and PRS and the Shariah Contracts Between the Parties 7A.8 Borrowing to Invest in UTS and the Risks of Loan Financing
10 Chapter 7B (Part 1): The Pension Landscape and the PRS Framework
7B.1 The Malaysian Pension Landscape and the Adequacy of Retirement Savings 7B.2 The World Bank's Five-Pillar Pension Framework in the Malaysian Context 7B.3 Key Players: EPF, KWAP, LTAT, Employer-Sponsored Schemes and Annuities 7B.4 Why Malaysia Needs PRS: Ageing, Longevity Risk and the Benefits of PRS 7B.5 The PRS Framework and the Private Pension Administrator (PPA) 7B.6 PRS Structure, the Trust and Deed, Advantages over Other Products, Eligibility and Contributions
11 Chapter 7B (Part 2): PRS Operations
7B.7 The PRS Default Option and Tax Incentives for Members and Employers 7B.8 The PRS Account Structure (Sub-Accounts A and B) and Vesting 7B.9 PRS Withdrawals: Pre-Retirement, Retirement, Permanent Departure, Incapacity and Death 7B.10 Switching Between Funds and Transferring Between PRS Providers (Portability) 7B.11 Unclaimed Monies, Death of a Member and PRS Nomination 7B.12 PRS Funds: Number, Core and Non-Core Funds, Objectives, Risk Profiles, Asset Classes, Authorisation and Naming 7B.13 PRS Fees, Charges and Expenses 7B.14 PRS Unit Creation, Forward Pricing, Valuation, Distributions, Performance Measurement and Electronic Communication
2.5 Understanding Risk and the Risks of Investing in Schemes
Key Takeaways Explain This Topic AI
Consultants must explain the risks of a scheme to investors before they invest and direct them to the relevant sections of the prospectus or offering documents.
For an investor, risk is the chance that the actual return will be less than expected, and higher returns require taking higher risks.
Investing through a scheme does not reduce the volatility of the underlying investments, but diversification reduces its effect for investors with limited capital.
In extreme conditions, such as when a material part of a fund's assets cannot be valued, dealing in units may be suspended until conditions improve.
Risk warnings must state that past performance is not a guide to future performance, past distributions are not guaranteed, and unit prices and distributions may go down as well as up.
Last updated: October 2026
The Consultant's Duty to Explain Risk
Like any investment, schemes carry risk. The study guide says Consultants must ensure investors are given an explanation of the risks before they invest , and must direct them to the relevant sections of the prospectus or offering document. Product Highlights Sheets and promotional material can help explain the differences in risk between schemes. FIMM's practice question asks what a Consultant must give an investor: the answer is an explanation of the risks , not a guarantee, gifts or an unlimited right to cancel.
What "Risk" Means
A dictionary definition is "the probability or chance of injury, loss, damage or harm".
For an investor, risk is the chance that the actual return will be less than expected .
Risk is linked to objectives: high returns require higher risk . If the risk needed to reach a goal is uncomfortable, the investor must lower the expected return.
Risk can also be measured as variability of total return . Listed shares, whose prices swing, are riskier than a fixed deposit whose value does not move.
The "safe" investment that is actually risky
A long-term investor with limited capital who keeps everything in fixed income or cash may fail to reach the goal (education fund or retirement). For that investor the traditionally low-risk choice becomes the risky one.
Risk is personal
The same equity fund is lower-risk for someone who can hold it for many years and ride out short-term swings, and much higher-risk for someone who needs the money in a few months. That person might be better advised to use a less volatile fixed income or cash scheme. So the Consultant must understand each client's objectives, investment time horizon and attitude to risk before recommending a scheme. The study guide's Diagram 2.7 lists the factors that affect a client's ability to handle risk; understanding them reduces disputes.
- Risks of Investing in Schemes
- Investment risk
This is the main risk. For equity funds, share-price movements flow through to the NAV; REIT investors are exposed to the property cycle. Prices reflect local and international economic and political factors and sentiment.
Important
Owning investments through a scheme does not and cannot reduce the underlying volatility of those investments. What diversification does is reduce the effect of that volatility for an investor with limited capital.
Other risks
Risk What the study guide says
Business risk The Scheme Provider may cease operations. The effect is limited because the Trustee holds the assets, but day-to-day management may be disrupted, so investors should also look at the provider's financial health.
Liquidity risk In extreme conditions (markets in turmoil or closed) the liquidity buffer may run out and securities cannot be sold. If the value of a material part of the assets cannot be determined, dealing may be suspended until conditions improve. Temporary liquidity shortfalls alone may not justify suspension.
Regulatory risk Changes in law, for example tax law, may affect investors.
Change in management fee Fees may change. Where needed a meeting of investors is called and a vote taken, and investors are usually given time to sell before changes apply.
Interest rate risk (borrowing) Investors who borrow to invest take on extra risk if rates rise. This applies to UTS only, since loan financing is not allowed for PRS (Chapter 7A).
Interest rates also matter for fixed income funds: when rates rise, existing bond prices fall and so does the NAV of a bond fund, and longer-maturity holdings are hit harder (section 2.2).
Mandatory Risk Warnings
Offering documents, advertisements and promotional materials must carry warnings such as:
Past performance of a scheme is not a guarantee or indication of future performance.
Past income distributions are not guaranteed and may not be repeated.
Unit prices and income distributions , if any, may go down as well as up.
The study guide notes that when Consultants and clients understand these risks, the number of complaints falls considerably.
Applying It: A Short Scenario
A 58-year-old retiree needs RM40,000 in six months to pay for a child's wedding and asks about an aggressive regional equity fund that "did 25% last year". A Consultant who follows the study guide would:
explain that last year's return is no indication of future returns;
point out that a six-month horizon gives no time to recover from a fall, so equity investment risk is high for this goal;
consider a money market or short-term fixed income scheme instead; and
record the discussion and the reasons for the recommendation.