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.
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