Glossary
Risk
The possibility that your investment loses value or does not perform as expected.
Simple explanation
Risk is not just about losing money. It also includes missing your financial goals.
Common types: market risk (crashes), company risk (business failure), liquidity risk (cannot sell), and inflation risk (returns do not beat inflation).
The higher the potential return, the higher the risk you are usually taking.
In the Indian context, there are additional risks that retail investors should be aware of. Regulatory risk is when SEBI changes rules suddenly, for example, when SEBI tightened F&O margin requirements in 2021, many traders found their strategies no longer viable overnight. Currency risk matters if you invest in US stocks or global funds through Zerodha or INDMoney.
Inflation risk is particularly important in India where inflation averages 5-6% per year. If your money is sitting in a savings account earning 3-4%, you are actually losing purchasing power every year. This is why financial advisors push equity investing, historically, the Nifty 50 has returned 12-14% annually, comfortably beating inflation.
Liquidity risk is real for small-cap and micro-cap stocks on BSE and NSE. A stock might have barely 1,000 shares traded per day. If you hold 5,000 shares and need to sell urgently, you could move the price down 5-10% just with your own selling pressure. Always check the average daily trading volume before investing.
Understanding your personal risk tolerance is the first step in investing. If losing 20% of your portfolio would keep you up at night, you should not have 100% equity exposure. A simple rule: subtract your age from 100 to get your equity percentage. A 30-year-old might hold 70% equity and 30% in debt instruments like PPF, FDs, or debt mutual funds.
Real-world example
Priya has ₹5 Lakhs to invest. She puts ₹2 Lakhs in a bank FD earning 7% (low risk, guaranteed return by RBI insurance up to ₹5 Lakhs), ₹2 Lakhs in a Nifty 50 index fund (moderate risk, market-linked), and ₹1 Lakh in a small-cap stock on NSE (high risk, could double or crash). After one year, the FD gives her a certain ₹14,000 return. The Nifty fund might return anywhere from -15% to +25%. The small-cap could return -50% to +100%. By spreading across risk levels, Priya ensures that even in the worst case, her total portfolio does not suffer a catastrophic loss.
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