What is Investment Risk?

The chance of losing all or part of your money or not receiving the anticipated returns is known as investment risk. Every investment carries some level of risk, and in India, these risks may be impacted by changes in policy, interest rates, market volatility, and worldwide economic trends.

Key Types of Investment Risks in Investments 

Risk type	Description	Mutual fund impact
Market risk	Fluctuations in equity or debt markets due to domestic/global factors	Affects NAV of equity, hybrid, and debt funds
Credit risk	Risk of default by bond issuer (mainly in debt funds)	Credit risk funds and low-rated debt instruments are vulnerable
Interest rate risk	Change in interest rates affects bond prices	Long-duration debt funds face higher impact
Liquidity risk	Difficulty in selling fund units without loss	Common in niche or thematic funds
Inflation risk	Reduction in the value of money over time	Low yield debt funds may lose the real value
Concentration risk	Over-exposure to a single instrument, sector, or industry	Sector/thematic funds carry higher concentration risk
Currency	Fluctuations in currency rates	Affects the international mutual funds
Regulatory/political risk	Changes in SEBI or govt policies	Can impact fund structure, taxation, or asset exposure

Understanding Risk by Fund Type

Fund type	Typical risk level	Notes
Equity Funds	High	Volatile, but good for long term
Debt Funds	Low to medium	Safer, but exposed to interest and credit risk
Hybrid funds	Medium	Mix of equity and debt to balance and mitigate risk
ELSS (tax savings)	High	Equity-based, with 3-year lock-in
Index Funds / ETFs	Medium	Track indices, less active management risk
International Funds	High	Adds currency & geopolitical risk

How to manage the risks:

• Use diversification as a tool to spread the risk 

• Match investments with time horizon and current financial goals 

• Use SIPs to average the cost over time 

• Avoid short-term gratification and goals

• Monitor the fund performance and rebalance the portfolio if necessary 

• Understand riskometer and fact sheets before investing.