All About Investment Risks: Types, Impact, and Mitigation Strategies
12 Sep 2024
All About Investment Risks
Investing is an effective way to grow wealth and secure financial stability, but it comes with various risk associated with it. Understanding these risks and their potential impact is crucial for making informed investment decisions. Outlined below are types of investment risks that investors should be aware of and ways to mitigate them.
1. Market risk, or systematic risk, is the risk linked to overall market performance, influenced by economic conditions, geopolitical events, interest rates, sentiments etc. It impacts all types of asset classes, especially Stocks and Equity Mutual funds.
Diversification across various asset classes like equity debt and gold is the way to mitigate this risk.
2. Credit risk is the risk associated that a bond issuer may default on interest payments or principal repayment. It's relevant for corporate, municipal, and treasury bonds, as well as peer-to-peer lending.
To mitigate, retail investors should ideally invest in govt bonds/bonds with high credit ratings, diversify investments, and review credit ratings over a period.
3. Interest rate risk occurs when changes in interest rates affects the value of fixed-income investments. Rising rates generally lead to falling bond prices, impacting bondholders.
To mitigate match bond durations with your investment horizon
4. Liquidity risk arises when investments cannot be easily bought or sold without affecting their price, often seen in less-traded stocks,bonds, real estate etc
To mitigate the risk, one should optimally invest in the top 200 stocks based on market capitalization and always evaluate the liquidity of bonds before making investment decisions.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The information provided is generic in nature and is for informational purpose only. Please consult your financial advisor before taking any decision.
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The contents of this article/infographic/picture/video are meant solely for information purposes and do not necessarily reflect the views of Bank of Baroda. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy; completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Bank of Baroda or its affiliates to any licensing or registration requirements. Bank of Baroda shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
