The importance of risk management while investing

Investing has the potential to increase your wealth, but it also carries risk. Markets fluctuate, economies shift, and even promising assets can underperform. That is why learning to manage risk is essential for investing. Read more to know what risk management is and why it matters.

Published on 13 November 2025

3 min read

What is risk in investing?

Risk refers to the possibility that your investment may not perform as expected. For example, it could earn low returns than you hoped for or even fall in value. Investing in stocks, bonds, mutual funds, commodities, and other traded instruments all carry a degree of risk.

But risk is not inherently bad. In fact, it is often the price you pay for potential returns. The goal of risk management is not to eliminate risk, but to understand, prepare for, and balance it.

Why risk management matters

It helps to protect your capital

Risk management helps you avoid large losses that can derail your financial goals. It is about preserving what you have built, especially during market downturns.
It gives you the confidence to remain invested long-term

By managing risk effectively, you’re better positioned to navigate market cycles and support long-term portfolio growth.
It reduces impulsive decision-making

When markets are volatile, seesawing emotions can lead to impulsive decisions. A risk-managed strategy helps you stay calm and focused.

Potential investment risks

Understanding the different kinds of risks can help you manage them better:

Market risk: the risk of incurring losses due to market fluctuations.
Credit risk: the chance that a bond issuer may default.
Liquidity risk: the difficulty of finding a buyer for an asset at a given price point.
Interest-rate risk: the chance that interest rates will change, impacting the price of equities and the returns on fixed-income investments.

How to manage risk effectively

Risk profiling

Before investing, work out how much risk you are comfortable with. Tools like risk profiling questionnaires can help you evaluate your comfort with financial risk based on factors like age, income, financial goals, and investment timeline.
Diversification

Spread your investments across different asset classes (equity, debt, commodities) and sectors. This reduces the impact of any single underperforming asset.
Asset allocation

Choose the right mix of assets based on your goals, investment horizon, and risk tolerance. For example, younger investors may lean more towards equities, while retirees may prefer stable income-generating assets.
Rebalancing

Over time, market movements can shift your portfolio away from its intended allocation. Rebalancing helps you realign your investments and keep risk at a level you are comfortable with.

Bottom line: Risk is inevitable, but it can be managed

Risk is inherent to investing, make sure you understand it to use it as a tool to drive deliberate decisions. This is how you can build a portfolio that will be more robust and rewarding.

Disclaimer: This article is for educational purposes only.