Risk:- Most people would like to get the best out of an investment. With every kind of investment there is some risk involved and knowing a few risks would help you manage the risks better.
Types of Risk ?
1. Inflation risk is your deposit keeping up with inflation. You may invest in a savings account, or certificate of deposit or bonds. When there is inflation in the economy your deposit is worth less than what you imagined it would be.
2. Principal risk is a loss in the initial amount you invested. For example you buy stocks worth Rs5000 and the stock value has fallen and you find no other option but to sell rather than lose further.
3. Interest Rate risk is the fluctuation of the price of stocks or bonds due to a fluctuation in the rates of interest.
4. Market risk is the factors outside the control of companies like changes in the economy, government policy or market trade.
5. Credit risk is when you invest in bonds and the company is unable to make interest. They return your entire principal. Then your investment has not yielded returns.
What is Duration?
Duration is as important a factor as risk in evaluating your investment. Duration is the time within which investors can get back their investments. Duration and risk determine the investment returns. Duration can be short term or long term and fixed or managed (by investor). Liquidity Any asset that you own, be it property, stock, bonds etc. can be converted into cash. Money in the form of cash is the most liquid asset. In case you cannot convert your bond to cash within the term then your asset is illiquid.