Investment Risks: Have you ever wondered what could go wrong when you make an investment? Or maybe you’ve heard people talk about the risks involved but aren’t quite sure what those risks mean. Investing always comes with some level of risk, but understanding these risks can help you make more informed decisions and protect your hard-earned money. To know about this in detail we got in touch with VLA Ambala, Research Analyst (SEBI Registered) and Co-Founder, Stock Market Today for expert insights. Take a look at the most common types of investment risks that every investor should be aware of:
Types of Investment Risks
1. Market Risk (Systematic Risk)
Market risk is the risk of an investment losing value due to changes in market conditions. “One of the most common threats is market risk, where your investment value can fluctuate due to the volatile nature of the stock market. In 2024, geopolitical tensions, AI-led job market shifts, and tariff uncertainties triggered volatility in our equity markets”, says VLA Ambala.
Unfortunately, market risk affects the entire market, meaning you can’t fully avoid it by diversifying. However, over time, markets tend to recover, so long-term investors often ride out these fluctuations.
2. Credit Risk
Credit risk occurs when a borrower (such as a corporation or government) fails to repay their debt, leaving investors with potential losses. If you invest in bonds or other fixed-income securities, credit risk is a key factor to consider. This risk is particularly important when investing in lower-rated bonds, where the chance of default is higher. To manage credit risk, always check the credit ratings of the bonds you’re considering and diversify your investments.
3. Currency Fluctuation
Currency fluctuation risk, also known as exchange rate risk, is the financial risk faced by companies, investors, or individuals due to changes in the value of one currency relative to another. This risk arises when transactions, assets, or liabilities are denominated in a currency other than the domestic currency, potentially leading to financial losses. VLA Ambala shared, “When the INR slumped to 85/USD in mid-2025, high-performing US stocks delivered muted returns, impacting ROI goals. While the risks are many, investors can minimize their effects by adopting smart strategies that balance risk appetite with investment goals.”
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4. Liquidity Risk
Liquidity risk arises when you’re unable to sell an investment quickly at a fair price. Some investments, like real estate or certain private equity assets, can be hard to sell in a pinch. If you need to access your money quickly, you could be forced to sell at a loss. To avoid liquidity risk, ensure you maintain an emergency fund in liquid assets and carefully assess the liquidity of your investments before purchasing.
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5. Inflation Risk
Inflation risk occurs when the purchasing power of your investment returns is eroded by rising inflation. VLA Ambala explained, “If the inflation rate is 6%, a return of 7% means your real ROI is just 1%. Early this year, Indian retail inflation was around 5.1%, highlighting the need to invest in inflation-adjusted assets. Interest rate adjustments also influence debt investors, especially those holding bonds. Typically, when interest rates rise, bond prices slump. This explains the caution among investors when the RBI paused rates in Q1 2025. Individuals who park money into real estate and small-cap stocks often face greater exposure to liquidity issues. This risk typically occurs when investors cannot sell their assets quickly without losing value. Even investors who park money in traditional instruments like FDs are not immune.”To protect against inflation risk, consider investing in assets that tend to outpace inflation, like gold, stocks, or real estate.
By staying informed and managing risks carefully, you can maximise your chances of success in the world of investing.
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