Liquidity risk refers to the difficulty in redeeming an investment without incurring a loss in value. When a seller is unable to locate a buyer for security, this might also happen. These risks arise when an investment is redeemed without a considerable loss of primary value. The lock-in period in mutual funds such as ELSS might result in liquidity risk. During the lock-in period, the investor can do nothing done.
Market risk is the risk that all forms of investments have as a result of the market’s and the global economy’s inherently volatile character. Market risk, in other terms, is the variation in a security’s return from the overall market. Recessions, economic structural changes, tax legislation changes, and changes in consumer preferences all have an impact on all securities exposed to the market. The conditions that cause individual investments to lose value, independent of the issuing entity’s performance or profitability. However, certain price swings might be more volatile than others.
The possibility of losing one’s buying power as a result of growing inflation is called inflation risk. When the rate of return on their assets does not keep pace with inflation the investors get exposed to the risk of inflation. To put it another way, this risk is linked to unexpected fluctuations in inflation rates. Fixed income and cash products are the assets most vulnerable.
Specific risk, also known as unsystematic risk, is the inherent unpredictability of an investment in a company or sector. A new market rival with the capacity to grab a significant market share from the firm being invested in, a legislative change, a management turnover, and/or a product recall are examples of specific risks. It is unique to a certain asset and, ideally, perhaps reduced through sufficient diversification in a mutual fund portfolio. However, several circumstances contribute to the persistence of non-systematic risk in mutual funds.
Fund managers are crucial for the selection, performance, and efficacy of the funds; thus, some factors must be considered while selecting fund management. The risk of ineffective, damaging, or lagging fund management might result in non-holdings in the portfolio. An efficient fund can be picked by very competent fund management. Paying attention to fund management might be a wise move when investing in a mutual fund. The manager and their fund management staff are important to most seasoned investors.
Concentration is the inverse of diversity. Concentration risk occurs when all of your investments are concentrated on a single stock, sector, or subject. Concentration risk occurs when a portfolio is not appropriately diversified. To avoid such diversifiable risk, an investor might diversify his exposure among several fund companies and schemes. Sectoral and Thematic funds include a high level of concentration risk.
Currency is an important factor in investment. Currency risks exist for funds with foreign exposure. Currency fluctuations, whether in the home or foreign currency, can either increase or decrease the profits on international investments.
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