Funds are classified as open-ended close-ended, exchange-traded funds.
Meaning of risk
Risk refers to the likelihood we will receive a return on an investment that is different from the return we expected to make. Risk is the likelihood that your investment will either earn money or lose money.
It is the degree of uncertainty about your expected return from an investment, including the possibility that some or all of your investment may be lost.
Thus risk includes not only the bad outcomes (returns that are lower than expected) but also good outcomes (returns higher than expected). Indeed both downside and upside risks are considered while measuring risk.
Factors that affect the risk
Some common risk factors are:
- Business risk: This is the possibility that the company holding your money will not pay the interest or dividend due, or the principal amount when your bond matures. This may be caused by a variety of factors like heightened competition, the emergence of new technologies, development of substitute products, shifts in consumer preference, inadequate supply of essential inputs, changes in governmental policies and so on.
- Inflation risk: Inflation risk is the chance that the purchasing power of the invested rupees will decline. This is the risk that the rupee you get when you sell your asset will buy less than the rupee you originally invested in the asset.
- Interest rate risk: The variability in a security’s return resulting from changes in the level of interest rates is referred to as interest rate risk. This is the possibility that a fixed debt instrument, such as a bond, will decline in value due to a rise in interest rates. As the interest rate goes up, the market price of existing fixed-income securities fall, and vice versa. This happens because the buyer of fixed income security would not buy it at its par value or face value if its fixed interest rate is lower than the prevailing interest rate on similar security.
- Market risk: Market risk is the variability in a security’s returns resulting from fluctuations in the aggregate market (such as the stock market). This is the risk that the unit price or value of your investment will decrease because of a decline in the market. The market tends to move in cycles.