All investment will come together with risk and it is important for investor to understand all type of investment risk that come together with the investment.One investment most likely will have more than one type of investment risk and this the reason that no one can predict the investment trend.However, there are some basic investment risk that all type of investment will definitely have.
Fundamental risk or business risk is one of the basic investment risk which applies to all type of investment products.It is the risk that inherent with a business enterprise or corporate and it is affected by the company management and the company's competitiveness in the market.If the company management is good and the company is competitive in the market, definitely the fundamental risk for that company is low.Hence, to reduce fundamental risk or business risk, investor need to invest in business that is doing good and will continue to perform well. Another way to reduce fundamental risk is diversification, which involve investing on different companies on diferent industries.
Market risk is another basic investment risk that relates to how well the market of your investment fares in regard to economic factors like business cycles, unemployment rate, inflation and more.For instance, investing on real estate may obtain better return than share market in certain period of economy cycle.In term of risk management for market risk, investor will still need to depend on diversification to have balanced porfolio. Continue from previous examples, diversifying on real estate and share market and changing your portfolio percentage between two different investment products based on market outlook can help investor to mitigate market risk.
Next is Interest rate risk, which is investment risk that show how the investment react to interest rates.Despite the inverse relationship between bonds and interest rates, changing of interest rate will affect a company earning too.When interest rate increase, companies will need to pay more interest to the bank, which will obviously affect the companies earning too.
Inflation risk is the risk that inflation will outpace your investment and erode the value of your investment amount when the inflation rate is higher than your investment return rate.Inflation risk, which is also known as purchasing power risk because of the fact that high inflation will reduce consumer purchasing power.Investing in bank deposit or fixed deposit is the safest investment but its return cannot beat inflation risk. Hence, investor always looks for investment that will beat inflation risk as this is one of the factor that investor should include when you count on your actual investment return.
Lastly, liquidity risk is the one that shows investor how fast you can convert your investment into cash at full value.Fixed deposit has the lowest liquidity risk as investor can cash out their money from bank account anytime while real estate has the highest liquidity risk as you need to find a right buyer to sell of your real estate.Share and mutual fund are consider pretty liquid as investor can receive their investment amount in few days time.