Interest rate risk

This risk is associated with investments that provide fixed rate income e.g. fixed deposits and bonds. Normally, the return of investment for e.g. fixed deposits would directly correlate with the movement of the interest rate. The higher the rate, the higher is the return and vice versa. But for investments in fixed income products like bonds, the value of the product will vary inversely or opposite to the interest rate.

Thus, when interest rates increase, the value of existing bonds go down because it is paying a lower rate. Bonds with longer maturities are usually more vulnerable to interest rate risks.

Reinvestment risk

Like all investment markets, interest rates may go up and down depending on the economic climate. A drop in interest rate will mean that when your investment matures, you may have to reinvest your capital at a lower rate than before. As an investor, you would need to choose between a long-­term investment promising a reasonable return or a short-term investment with a high return but would expose you to reinvestment risk once the investment period expires.

Market risk

Market risk refers to volatility or the extent to which the market value of your investments fluctuate. The fluctuation of a market has a great impact on the value of an investment. An investor will see his capital depreciate if the market continues to fall. This risk may be offset if the company has strong fundamentals, like good core businesses that can provide good dividends. Thus, even though the price of the share may fluctuate and affect your capital, you can still gain from the company's dividends. So, choose the companies to invest in wisely.

Market timing risk

Many people think they can predict market movement or “time the market” i.e. try to buy before the market goes up or sell before it declines. Unfortunately, not many can predict with any degree of accuracy when, and how much, the securities market will rise or fall. As a result, many investors jump into the market only after a sustained rally is over or are susceptible to panic when the prices fall, and they sell at a loss. Essentially, this risk relates to the time when an investor makes his investment. If he enters the market when the stock prices are high, he runs the risk of losing his capital if the market falls. Conversely, an investor has a higher probability of profiting from the market if he enters a market when it is low because the stock prices are low, with a potential to rise. So it is a question of timing.