Risk and returns go hand in hand. Higher the risk, higher is the possibility of earning a good return. Thus, it follows that all types of investments have some form of risk attached to them. Theoretically, even 'safe' investments (such as bank deposits) are not without some element of risk. Broadly, here are the various types of risks that you might have to face as an investor.
This issuer of the security will default, or not repay the principal amount. This is valid for corporate bonds etc.
If you invest in securities, stocks, bonds, you are risking their sellability. In other words, your money gets stuck unnecessarily, creating an asset-liability mismatch.
Financial markets are volatile in nature. Volatility means sudden swings in value from high to low, or the reverse. The more volatile an investment is, the more profit or loss you can make, since there can be a big spread between what you pay and what you sell it for. But, you also have to be prepared for the price to drop by the same amount. Those who invest in stocks and mutual funds typically run this risk.
Interest Rate Risk
Depending on the interest rate movement in the economy, the rates of interest in investment instruments may go up or come down, resulting in a subsequent reverse movement of their prices. Such a scenario of economic instability might effect mutual funds etc.
The whole idea behind investment approach is to evaluate the risk associated with various type of investments and take steps so as to balance it with the desired return.
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