All investments carry risk. Risk can be defined as the "variability of returns". Another way of looking at this is to think about risk as the chance that you could lose some or all of the money that you have invested. Before investing you should have a clear idea of how much risk you are willing to accept to maximise your returns. Some of the key risks affecting fixed income products include:

Interest rate risk - The interest rate on a fixed income instrument or security can be thought of as the price of the money being borrowed or lent. Lenders want to be paid the highest amount of interest for lending their money (and for not spending it now), while borrowers want to pay the lowest cost, i.e. amount of interest, for borrowing the funds. Generally when interest rates rise, the price of fixed income products fall and vice versa. This is why it is sometimes called "price risk". Investors must be aware of the outlook for interest rates and how it will affect the value of their fixed income investments.

Credit risk - This is the risk that the issuer may be unable to meet the interest payments and repay the loan i.e. default on the loan. Generally, the higher the credit risk of the issuer, the higher the interest rate that investors will expect to lend their money to the issuer. Ratings agencies like Standard and Poors and Moody's provide a credit rating service that allows investors to assess and grade issuers, for example the Federal Government has the highest credit rating of AAA (meaning it has very low credit risk). You can ask your RIMsec representative to provide you with the credit rating for the security you may be interested in buying.

Liquidity risk - This is the risk that a security cannot be easily sold at, or close to, its market value. When a security is highly liquid, this means that it can be easily sold in the secondary market. Typically, investors want to own liquid securities so that they can easily sell them if they need their cash back. One way to judge if a security is liquid is to check the spread between the buying and selling prices. If there is a very narrow spread, the security is probably very liquid.

Re-investment risk - Fixed income securities are valued on the basis that future cash flows i.e. the coupons or interest payments received, will be invested at current market interest rates. However, if interest rates fall, the coupons or interest received will be invested at lower interest rates and will therefore reduce the overall return on the investment.

Maturity risk - This is the risk that in the case of longer dated securities, there is higher risk of default by the issuer.

Political or regulatory risk - Unexpected political events can affect the value of your fixed income investments. For example, the Federal Government may change tax laws affecting the returns from your investments.

Exchange rate risk - If you invest in fixed income securities in overseas markets, adverse movements in the Australian dollar relative to that country's currency can reduce the returns on your investment and vice versa.