Systematic vs Unsystematic Risk

There is no investment that is absolutely risk-free, you name any... equity, bond, gold, FD, real estate, MF, insurance, etc. The problem is that we see risk only in equity & MF and not in other investment options.

We need to understand what kind of risks any product could have. Risk can be divided into two parts: 

                    

Total Risk = Systematic Risk + Unsystematic Risk

(Standard Deviation is the measure of total risk in the portfolio)

Systematic Risk: This works at the Macro-level. This can not be controlled and impact the overall financial market. It is also known as non-diversifiable risk. Beta measures systematic risk. Examples are 

• Inflation risk
• Interest rate risk
• Reinvestment risk
• Currency risk
• Economical risk
• Social  / Political risk
• Global risk
• Country risk
• Natural calamities
• Market risk

Unsystematic Risk: This works at the Micro-level and is also known as Specific Risk. This can be controlled/eliminated with proper risk management tools such as diversification. It impacts specific industries or markets. Examples are 

• Credit / Default risk
• Liquidity risk
• Sector-specific risk
• Company-specific risk
• Management risk
• Business risk
• Concentration risk
• Labor strike risk      

Now, one should also understand that which asset class contains which kind of risk before making any investment decision:

CASH (FD / Liquid fund): Inflation risk, Credit / Default risk, Devaluation risk

DEBT (Bonds / Debentures):  Inflation risk, Interest rate risk, Reinvestment risk, Credit / Default risk, Liquidity risk

GOLD: Currency risk, Inflation risk

INSURANCE: Liquidity risk, Reinvestment risk

REAL ESTATE: Liquidity risk, Encroachment risk, Title ownership risk, Estate planning risk

EQUITY: Economical risk, Social  / Political risk, Global risk, Country risk, Natural calamities risk, Market risk, Sector-specific risk, Company-specific risk, Management risk, Business risk, Concentration risk      

No asset class is risk-free in the true sense!

Disclaimer: Investment in securities & mutual funds are subject to Market Risk