5 risks that could affect your portfolio

As investors, you’ve probably heard of the adage - High risk, high return! There are stock market risks and debt market risks that can hurt the value of your investment portfolio. There’s a reason why stocks and even some debt instruments are called “risky assets”: while they enjoy excellent return potential, they carry some risks. You can’t enjoy good returns without taking on some market risks that may hurt your portfolio. 

What are the different types of investment risks, and how can risks impact your investment portfolio? These are the key things to know before you invest. Here, we share some of the different types of investment risks. 

1. Market risk: This is also called systematic risk. It impacts the entire stock market, like interest changes, natural calamities, war, and inflation. Remember, in March 2020, the stock market crashed 12-13% in 1 day due to COVID fears. That’s a market risk. It cannot be diversified away. 
2. Concentration risk: This is the risk of investing too much money in just 1 stock or group. Imagine if you had invested your life savings in, say, Satyam or DHFL. Concentration risk can actually wipe out your entire investment down to zero! Unlike market risk, this risk can be reduced through diversification. An easy way to do this is by investing in Mutual Funds.
3. World risks: We live in an increasingly interconnected world. Hence, issues in 1 part of the world affect another. When the Suez Canal got blocked, global trade was impacted, and many companies here in India saw their supply chains being hit, too!
4. Political risk: Markets react to change in the Governments. Because governments release policies that affect businesses and markets, some governments are perceived as business-friendly, and some not so much, so markets react accordingly. Some sectors, like sugar, fertilisers, and oil & gas, are particularly politically sensitive. 
5. Debt investments carry Interest rate risk and credit risk: Interest rate risk is when interest rate movements impact the value of bonds. When interest rates go up, bond prices go down and vice versa. Credit risk is when the issuer of the debt instrument defaults; it can cause the value of the investment to go down to zero! 

The objective behind this article is not to scare you but rather to inform you that while these risks exist, you can manage risks in investing through a series of methods like diversification and proper asset allocation. Knowing what you’ll get into to take calculated risks and invest as per your risk appetite across different asset classes available is essential! 

Disclaimer

Mutual fund investments are subject to market risks, read all scheme related documents carefully.