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The concept of risk is never a simple one, more so in the finance and investment field. There are various types of risk identified and some of these types are relatively more or less important in various applications and situations. This means that while there are many types of risks, not all of them might matter to you. It is therefore important that every investor knows the many possible risks in order to determine what he or she has to be concerned about.

One of the risks that mutual fund investments entail is market risk. Market risk is defined as the daily potential of an investor to suffer from loss due to fluctuations or changes in securities prices. The changes of these market prices may be caused by factors affecting the company, which can be minimized through proper diversification, or fluctuation caused by factors associated with the financial markets and the economy in general. The latter unfortunately, cannot be diversified away.

In large price movements, liquidity risks can also occur. Liquidity risk stems from the deficiency of the investment’s marketability. An investment may not be sold or bought quickly enough and may have to be disposed at a considerable loss. Liquidity risks can be reduced by staying away from stocks or bonds that do not have ready buyers or are very volatile.

Economic or market factors that affect an industry sector could also cause a change on the worth of a fund’s investments. These risks are often referred to as sector risk, since they cover changes in stocks of a particular sector or industry.

For mutual funds that are denominated and invested in instruments in different currencies, there is a certain degree of currency or foreign exchange risk. This risk involves fluctuations in the currency exchange rates that may have a negative effect on the worth of your investment.

Bond and stock prices are inversely associated to interest rates. When interest rates increase, bond prices decrease and vice versa. That it why there can be a rise in the volatility of bond values that result from the fluctuation of interest rates. The fluctuation is usually caused by inflation, political risk, monetary policy and other economic factors.

Since mutual funds are also being managed by a professional fund manager, there is also a risk in the management of the investments. The portfolio managers are susceptible to making mistakes or making wrong decisions that may negatively affect the pooled funds. These lapses in judgment may result to the underperformance of funds, losses or decline in value.