Our investments are constantly exposed to some or the other risk at every point in time.
Let’s understand them one by one.
Whenever you invest in a Debt type of investment, you should check the credit score or Credit rating of the institution or the instrument where you are investing your money. As there is CIBIL for assessing an individual’s credit score there are credit rating agencies like CARE or ICRA for assessing the credit rating of the institutions, the banks, the companies, and even the government.
Your investment is constantly exposed to the risk of reduction of interest rates. RBI decides the interest rates in the Indian Economy. In case RBI decides to decrease the Rate of Interest, also known as the Repo Rate, you will have to invest at a lower rate of interest. Interest rate risk is applicable to Debt type of investments.
Whenever you invest in an instrument that is related to the share market (equity investment), you are exposed to this type of risk. Since the share market prices keep on fluctuating, the value of your investment too, moves up and down. You always have a risk of losing the value of your investment.
When you invest a large amount of your total investment in any one instrument, you face the concentration risk. There is always a risk that this particular instrument may not do well. There is also a risk that this instrument will default. Hence the investment is diversified across the instruments.
The return on any investment should be looked at in context to inflation. Suppose you are earning an interest of 6% in an FD. At this point, suppose inflation is 5%. Your next earning on investment is considered as 6% minus 5% that is 1% only.
There are some other risks such as Liquidity risk – the risk of not being able to withdraw the money you had invested whenever you wish to.
Reinvestment Risk – not being able to invest at the same interest rate as that of the old rate, due to a reduction in the rate of interest.