What are Investment Risks? - Complete Details

 

Investment is one of the most important and beneficial steps that one takes for capital growth and financial stability in times of expenditure. Regardless of having any financial goal in the near future or any long term specific plan, money investment in India is something that must be done essentially keeping in mind the relevant factors that are likely to affect your decision. Risk-taking is essential, however and the benefits of a decision come with that. However, the key is to take calculated risk and prefer long term, slow and steady growth over the allure of short term, unrealistic gains. In any case, investment comes with certain risks at different levels and as a responsible investor, you must remain mindful of these risks and must know when and how to mitigate them. Some risks generally associated with investment are:

1. Market risk:

This type of risk comes from a general, market-prevailing factor that impacts the entire market. The investment suffers i.e. reduces in its overall value/worth because of this. A market risk can be further classified into:

• Equity risk:

  Equity risk is the risk of loss happening due to a significant fall in a share’s price.

• IR (Interest Rate) risk:

  This type of market risk comes with investment in bonds and signifies the fall in the value of a bond with increase in interest rates.

• Currency risk:

  Currency risk is a type of market risk that affects foreign investment holders. This risk signifies the risk of a monetary loss due to a movement in exchange rates.

2. Liquidity risk:

If a person is unable to sell her/his investment profitably i.e. the risk of having to sell an investment at a loss.

3. Credit risk:

This is a type of risk that covers bonds and bond ratings. This is the risk of loss if the government entity or the company (that issued the bond) is unable to pay the interest due to financial difficulties or significant losses. Credit rating of bond is an indicator of the credit risk associated with that particular bond.

4. Concentration risk:

The risk of loss because your money is concentrated in 1 investment or type of investment. When you diversify your investments, you spread the risk over different types of investments, industries and geographic locations.

5. Reinvestment risk:

The risk of loss from reinvesting principal or income at a lower interest rate. Suppose you buy a bond paying 5%. Reinvestment risk will affect you if interest rates drop and you have to reinvest the regular interest payments at 4%. Reinvestment risk will also apply if the bond matures and you have to reinvest the principal at less than 5%. Reinvestment risk will not apply if you intend to spend the regular interest payments or the principal at maturity.

6. Inflation risk:

The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation. Inflation erodes the purchasing power of money over time – the same amount of money will buy fewer goods and services. Inflation risk is particularly relevant if you own cash or debt investments like bonds. 

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