Market risk is the primary risk affecting equity funds. Market risk is the risk of loss in value of securities due to a variety of reasons that affect the entire stock market. Hence market risk is also referred to as systematic risk i.e the risk that cannot be diversified away.
Market risk can be attributed to many factors like macroeconomic trends, global economic crisis, geopolitical tension, or even regulatory changes. Equity price risk is the biggest component of market risk affecting equity funds. When the market falls, all stock prices get impacted which in turn affects the performance of an equity fund. Apart from the above sources of market risk, equity funds can also be prone to currency risk as one of the market risk contributors. Currency risk is relevant to funds that invest in companies having operations in multiple countries.
Since equity funds invest in companies across different industries or sectors, they are exposed to industry specific risk i.e the risk of an unfavourable development adversely impacting the companies within an industry. Equity funds can also be impacted by unfavourable development around a company like say a change in management or company policy. This is referred to as company specific risk. Industry and company specific risks, also known as unsystematic risk, can be mitigated through diversification.
