In investing, risk is the probability that actual returns will differ from expected returns — including the possibility of losing part or all of the investment.
Investment risk is multi-dimensional: it includes market risk (overall market falls), credit risk (bond issuers default), liquidity risk (can't exit quickly), inflation risk (returns don't beat inflation), and concentration risk (too many eggs in one basket). Risk is not inherently bad — it's the price of potentially higher returns. The challenge is taking on appropriate risk for your time horizon, goal, and emotional capacity to handle losses.
Risk is the chance that your investment doesn't do what you hoped — whether that's losing money, earning less than inflation, or not being able to cash out when needed. Every investment carries some form of risk. A savings account has very low market risk but high inflation risk (3-4% return vs 6% inflation = you're slowly losing purchasing power). Equity has high market risk but low inflation risk over long periods. Understanding which type of risk you're carrying is essential.
Market risk: value fluctuates with markets — equity funds have high market risk.
Credit risk: bond issuer may default — relevant for debt funds holding lower-rated bonds.
Interest rate risk: bond prices fall when interest rates rise — relevant for long-duration debt funds.
Liquidity risk: can't sell your investment quickly — relevant for small-cap funds and real estate.
Concentration risk: too much in one stock, sector, or region — diversification reduces this.
Inflation risk: returns below inflation erode real purchasing power — relevant for very conservative portfolios.