Investment Basics

Types of Risks

In general, the term risk refers to the probability of some undesirable event. The element of risk that troubles investors is the possibility of downside fluctuations in value and return.

Following are the various types of risks associated with different investments:

  1. Market Risk

    The prices of and the income generated by the securities held by mutual funds may decline in response to certain events, including those directly involving the companies whose securities are owned by the funds, general economic and market conditions, regional or global economic instability, or currency and interest rate fluctuations.

  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates. Normally, rise in interest rates during the investment period may result in reduced prices of the held securities.

  3. Inflation Risk

    The risk that the cash flows from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation.

  4. Currency Risk

    A form of risk that arises from the change in price of one currency against another. It is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or foreign-currency traded investments.

  5. Liquidity Risk

    The risk stemming from the lack of marketability of an investment that cannot be quickly bought or sold to convert in cash without loss.