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We are going to launch the mutual investment fund in parachinar, remote area of FATA, Kuram Agency .Our purpose is to facilitate the people of this area financially to improve the economic condition of their businesses and agricultural products by giving them short term loans and interest on their respective investments.
How Mutual Fund works?
Our Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.
Savings form an important part of the economy of any nation. With savings invested in various Famous 5 options available to the people, the money acts as the driver for growth of the country. Investment goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child‟s
education while somebody might be saving for the proverbial rainy day or even life after retirement. With objectives defying any range, it is obvious that the products required will vary as well.
Types of mutual fund schemes
A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry. By structure: a) open-ended schemes b) close-ended schemes c) interval schemes By investment objective: a) growth schemes b) income schemes c) Balanced schemes d) money market schemes Other schemes: a) Tax saving schemes b) special schemes c) index schemes d) sector specific schemes
Investors Earn from a Mutual Fund in Two ways:
1. Income is earned from dividends declared by mutual fund schemes from time to time. Famous 5
they stand to make a gain. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. these funds have also provided very good post-tax returns on year to year basis. can be minimized by investing in mutual funds as the fund managers analyze the companies‟ financials more minutely than an individual can do as they have the expertise to do so.Mutual Funds 3 2. Return Potential Over a medium to long-term. we find that some of the debt funds have generated superior returns at relatively low level of risks. The best performing funds Famous 5 . Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. This risk of default by any company that one has chosen to invest in. 2. 4. Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. On an average debt funds have posted returns over 10 percent over one-year horizon. This is reflected in the price of each unit. Apart from liquidity. Mutual Funds save your time and make investing easy and convenient. Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. When investors sell these units at prices higher than their purchase price. delayed payments and follow up with brokers and companies. Professional Management Mutual Funds provide the services of experienced and skilled professionals. If the fund sells securities that have increased in price. the fund has a capital gain. Even historically. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. 3. Advantages of Mutual Funds 1.
on a post tax basis. In closed-end schemes. 6. the net income received is still tax free in the hands of investor and is generally much more than all other avenues. Since there is no penalty on pre-mature withdrawal. the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. 5. debt funds provide enough liquidity. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage.5 percent (plus a surcharge of 10 percent). 8. the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Moreover. Transparency Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme. custodial and other fees translate into lower costs for investors. Liquidity In open-end schemes. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. regular withdrawal plans and dividend reinvestment plans. Flexibility Through features such as regular investment plans.Mutual Funds 4 have given returns of around 14 percent in the last one-year period. mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. as in the cases of fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 12. Famous 5 . 7. the investor gets the money back promptly at net asset value related prices from the Mutual Fund. you can systematically invest or withdraw funds according to your needs and convenience.
11. The operations of Mutual Funds are regularly monitored by SECP. They also give you the advantages of capital gains taxation. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. Affordability A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. you get the benefits of indexation. Dividends distributed by them are tax-free in the hands of the investor. Tax Benefits Last but not the least. indexation benefits increase your purchase cost by a certain portion. Here again. Work Breakdown Structure: The WBS is a deliverable-oriented hierarchical decomposition of the work to be executed by the project team. Famous 5 . mutual funds offer significant tax advantages. thereby reducing the gap between your actual purchase costs and selling price. to accomplish the project objectives and create the required deliverables. Simply put. investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment.Mutual Funds 5 9. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Investors individually may lack sufficient funds to invest in high-grade stocks. 12. Well Regulated All Mutual Funds are registered with SECP and they function within the provisions of strict regulations designed to protect the interests of investors. This limits him from diversifying his portfolio as well as benefiting from multiple investments. depending upon the yearly cost-inflation index (which is calculated to account for rising inflation). 10. If you hold units beyond one year.
Components comprising the WBS assist the stakeholders in viewing the deliverables of the project. The WBS subdivides the project work into smaller.1 0 0 To provide feasibility report Approval of NIT for Franchising Establish a office on Kurram Raod(PCR) Collection of funds Investment of funds in Stock Market Return of respective investment within the lowest-level WBS components. with each descending level of the WBS representing an increasingly detailed definition of the project work. more manageable pieces of work. monitored.5 0. The activities which are enlisted are the major activities and our entire project consists on these activities.Mutual Funds 6 The WBS organizes and defines the total scope of the project. which are called work packages.3 0. The WBS represents the work specified in the current approved project scope statement. cost estimated. No Activity 1 2 3 4 5 6 Feasibility Franchising Office Establishment Funds Collection Funds Investment Return Time 1 Month 1 Month 10 Days 2 Months 2 Months 1 Year Cost(M) Objectives 0.1 0. Here bellow a brief detail of all these activities. Famous 5 . The planned work contained S. This is initial WBS of our project. can be scheduled. and controlled.
Mutual Funds 7 WBS OF MUTUAL FUND Feasibility Report Feasibility Report Approval Franchising Request NIT for Franchising Office Equipment PCR Office 1 PCR Office 2 Funds Collection Stocks Fund Investment Micro Financing Small Business Risk Agriculture Promotional Techniques Personal Contacts Dividend Advertisement Capital Gain Feasibility: This is the starting activity of our project. The main purpose of this activity is to prepare a feasibility report after a feasibility study and then take approval in order to establish a mutual fund. The Office will be equipped with a modern communication system which will connect us to our head office and also with stock exchange. In franchising we will submit request to establish a franchise of National Investment Trust (NIT) and will get approval to establish the franchise. This modern communication system will also enable us to see the performance of our diversified investment. Franchising: After preparing a feasibility study and approval the next activity which we have to do is franchising. Famous 5 . Office Establishment: After getting approval for franchise we will establish our office at Tall Road Parachinar.
Estimated Time Management: Project Time Management includes the processes required to accomplish timely completion of the project. We will use different evaluation techniques such as CAPM and DDM to evaluate our stocks. When investors sell these units at prices higher than their purchase price. so that we make an investment on proper evaluation. As we have earlier mentioned that this return can be in the following ways. 3. If fund holdings increase in price but are not sold by the fund manager. This is tantamount to a valuation gain. they stand to make a gain. The Project Time Management processes include the following activities which are expressed in following table: Famous 5 . the fund has a capital gain. Funds investment: After getting investment from our customer we will invest that money in diversified stocks. We will use different advertisement and promotional techniques along with personal contacts. The purpose of diversification is to minimize risk and maximize the return for our investor.Mutual Funds 8 Funds Collection: After the office establishment we will move toward the most important and tough activity of our project which is fund collection. Return: After funds investment the next is to give return to our valued customers. 2. Income is earned from dividends declared by mutual fund schemes from time to time. For this we need a lot of effort to convince our potential customers. We will also have a fix portion of income from all these returns according to the roles and regulation of Mutual Fund Association of Pakistan and SECP. the fund's unit price increases. 1. You can then sell your mutual fund units for a profit. If the fund sells securities that have increased in price. The fundamental and technical analysis will also be very helpful for us for the evaluation of the stock. This is reflected in the price of each unit.
1 0.3 0.1 0 0 Nature Finish-to-Start Finish-to-Start Finish-To-Start Start-to-start Start-to-Start Start-to-Start Office Establishment 01-08-2010 to 10-08-2010 Funds Collection Funds Investment Returns 10-08-2010 to 10-10-2010 10-08-2010 to 10-10-2010 10-08-2010 to 10-08-2011 Famous 5 .Mutual Funds 9 Activity Definition Activity Sequencing Activity Resource Estimating Activity Duration Estimating Schedule Development Schedule Control S.5 0. No Activity 1 2 3 4 5 6 Feasibility Franchising Time Frame 01-06-2010 to 31-06-2010 01-07-2010 to 31-07-2010 Cost(millions) 0.
Mutual Funds 10 TIME MANAGEMENT MATRIX We can also manage our activities according to their urgency and importance through Time Management Matrix as given below Famous 5 .
If we don‟t pay our bills on time. or consequences may result. etc. they can be scheduled when they can be given quality thought to them. and contribute to achieving the goals and priorities they do not have to be done right now. Activities belonging to this category need to be acted upon without delay. are not important. but not urgent . Important but Not Urgent Quadrant 2 represents things which are important.he/she has had to interrupt whatever he/she is doing to answer it. shopping for new clothes. We should give them the highest priority. They must be dealt with right now. we would incur additional charges or they might cut off their services to us. .Mutual Funds 11 Important and Urgent Quadrant 1 represents things which are both urgent and important – labeled “firefighting”. but frankly. Urgent but Not Important Quadrant 3 represents distractions. As a result. such as watching TV and movies. it is essential for people to relax and unwind once in a while. For example. These tasks are the ones that must be done right away. family time and personal relaxation/recreation are also part of Quadrant 2. We would be surprised to know that people spend most of their time doing things that are both unimportant and non-urgent. or mentoring a key individual. senseless chatting for hours on the phone. A good example would be the preparation of an important talk. playing video games. An example would be bills that are due today. so they won‟t engage in these activities much. Although the activities here are important. The activities need to be dealt with immediately. and they are important. We might think activities in this section are not worth people‟s time. Famous 5 Of course. Not Important and Not Urgent Quadrant 4 represents Time Wasting. Prayer time.labeled “Quality Time”. . when a person answers an unwanted phone call.
Determine Budget: Famous 5 . fringe benefits. and wages. 2. team wages.Mutual Funds 12 ”All work and no play makes Jack a dull boy. etc.” as they say. Estimate Cost: The costs through which we have to deal are given below: Variable Cost: These costs change with the amount of production or the amount of work. strictly limit our time in doing these activities or don‟t do them at all. But we should be strict in limiting our time for these activities. Fixed Cost: These costs do not change as production changes. Treat activities belonging to this section with the lowest priority. Project Cost Management Our cost management process consist of the following three phases. if we really want to accomplish a lot in our life. If we really want to succeed. and costs of material used on the project. Examples include the cost of material. that is. Examples are team travel. In our project we have done bottom up costing in order to determine the cost estimates which will appear in the budget determination section of the cost management. Examples include taxes. Indirect Costs: Indirect costs are overhead items or costs incurred for the benefit of more than one project. Estimate Cost Determine Budget Control Cost 1. Examples include set-up. rental. and janitorial services. recognition. Direct Costs: These costs are directly attributable to the work on the project. supplies. Focus on those that will bring us fruitful results.
15 5. Cost Baseline Rs 1.1 3. As funds investment and funds return are directly related to the customer.02 Rs 0. To create a budget.1 2. in the final step. Contingency reserves are added to achieve the cost baseline.5 WP3 Rs 0. the total cost of the project needs to be calculated in order to determine the amount of funds the organization needs to set aside or have available for the project.02 Rs 0.000000) Famous 5 In this section we have created a detailed budget for our project. funds investment. Work Package Estimates Rs 0. franchising.9 WP1 WP2 Rs 0. are rolled up to work package costs. so we don‟t need to do any cost on them.00 Rs 0. Cost Budget 7. Contingency Reserves Rs 0. These are feasibility. funds collection.15 4.25 8.Mutual Funds 13 In this part of cost management. including costs for risk contingencies. So our cost will be basically consists on four . office establishment.3 WP4 Rs 0. It is starting from activity estimate ad ends up with cost budget. Work package costs are then rolled up to control account costs and finally into project costs.1 Rs 0. Project Estimates Rs 1.02 Rs 0. activity costs. Management Reserves Rs 0. This process is called cost aggregation. Control Account Estimates Rs 0. the management reserves are added.02 Rs 0. Basically as earlier mentioned we have divided our project into six work packages. Rs 1.10 6. and return.02 1. Activity Estimates Costs are given in Million Rupees (Rs.
00 M = -0. Therefore.25 M = 1.01 M Value -0. Control Cost: Cost control can be done only when our work is in progress.01 0.11 M = 1.10 M = 1.Mutual Funds 14 work packages and their activities. So it will tell us that how much under budget or over budget we are.1 Million Rupees and we assume that the actual cost on that activity is 0. 3.00 0. so that we may come to know that how much under or over budget we are.10 M = 0.11 Million Rupees. The cost which we have assigned to that activity was 0.9090 1.10 M = 0. As we have till not started our project so we can only assume that only one activity is completed which is our feasibility study.26 Interpretation Negative value shows that we are over budget Zero value shows that we are at the schedule We are getting 0. Here we compare our actual cost with estimated cost. here we are only showing these four work packages for our cost estimates. Now here we will apply different formulas of cost control.00 1. These contingency are kept as 15% of other costs and management reserves are kept as 10% of other costs. These contingency and management reserves are put there in order to meet some unusual situation which we may have face during the completion of our project. In this estimates we have also taken some contingency and management reserves.9090 rupees We are progressing at 100% of the rate originally planned This shows that we will complete with a budget more then planned Famous 5 . PV (Planned Value) EV (Earned Value) AC (Actual Cost) BAS (Budget at completion) EAC (Estimate at completion) ETC (Estimate to complete) VAC (Variance at completion) Name CV SV CPI SPI EAC Formula =EV-AC =EV-PV =EV/AC =EV/PV =(BAC-EV)+AC = 0.
The offer document contains essential details pertaining to the fund. Investors look out for the Offer Document and Hey Information Memorandum (KIM) before they commit their money to a fund. have a one-year perspective at least. If they are racked by uncertainty. it‟s another to ride on this potent investment vehicle to create wealth in tune with your risk profile and investment needs. Here are seven factors that go a long way in helping an AMC meet its investor‟s investment objectives. check if the investor‟s objective matches yours. the only option among mutual funds is liquid funds. So. among other things). Investors would invest in an equity fund only if they are willing to stay on for at least two years. The factors listed below evaluate factors affecting the management style of a mutual fund. including the summary information (type of scheme. Anything less than one year. but if you are not cut out for the risk that accompanies it. Identifying the investment horizon How long on an average does the investor want to stay invested in a fund is as important as deciding upon your risk profile. .Mutual Funds 15 VAC =BAS-EAC -0. Investors will invest only after they have found their match. Knowing the profile Investor‟s investments reflect his risk-taking capacity. Famous 5 name of the asset Management Company and price of units. For income and gilt funds. don‟t bite the bait. investment objectives and investment procedure. Declare and Inform Watch what you commit. financial information and risk factors. Equity funds might lure when the market is rising and peers are making money.01 We will be Rs 0.01 Million over budgeted at the end of project Fund Management Style & Structuring of Portfolio Factors affecting Management style of Mutual Funds It‟s one thing to understand mutual funds and their working. they seek expert advice from a qualified financial advisor.
and is a performer. However. they spread their risk. the need for successful portfolio management function is obviously paramount. else. The performance of the fund measured by the risk adjusted returns produced by the investor arises largely by successful portfolio management function. After collecting the investors‟ funds. its diversification levels and its performance in the past. Many amateur investors get lured into such incentives and invest in such attractive schemes. effective portfolio management will have to give returns acceptable to the investor. The more fact sheets they examine.Mutual Funds 16 The fund fact sheet Fund fact sheets give investors valuable information of how the fund has performed in the past. to invest in a particular fund. As there is no Famous 5 . The funds can be broadly classified as equity funds and debt funds. the better is their comfort level. which may not meet their future expectations. Tracking investments The investor‟s job doesn‟t end at the point of making the investment. It gives investors access to the fund‟s portfolio. They do track your investment on a regular basis. in the form of a percentage of the investor‟s initial investment. Chasing incentives Some financial intermediaries give upfront incentives. debt or balanced fund. in the complex world of financial markets. Now how a fund manager manages the portfolio would depend on the type of the fund he is managing. The ideal investor‟s focus would be to find a fund that matches his investment needs and risk profile. From the investors‟ perspective. the investor may move to better performing funds. That way. Diversification across fund houses If Investors are routing a substantial sum through mutual funds. they would diversify across fund houses. Portfolio Management Portfolio management is an important foundation of mutual fund business. be it in an equity. portfolio management is a „specialist‟ function.
warrants or convertible debentures issued by many companies.Mutual Funds 17 strong bond and debt market in Pakistan therefore we will only deal with Equity Funds. such that the portfolio as a whole is consistent with the scheme‟s objectives. Thus. it is called as an equity fund. Our whole investment will be made in diversified Equity Fund. How To Identify Which Kind Of Stocks To Include? The equity portfolio manager has available to him a whole universe of equity shares and other instruments such as preference shares. in reality. However. chosen in accordance with the preferred investment style. Ordinary shares: Famous 5 . An equity portfolio manager‟s task consists of two major steps: a) Constructing a portfolio of equity shares or equity linked instruments that is consistent with the investment objective of the fund and b) Managing or constantly re-balancing the portfolio to produce capital appreciation and earnings that would reward the investors with superior returns. So how does the fund manager go about choosing the different types of stocks. more specifically. the group of stocks selected will have certain unique characteristics. Even within each category of equity instruments. and b) A certain „investment style‟ or philosophy in the process of choosing. in order to construct his portfolio? The general answer is that his choice of shares to be included in fund‟s portfolio must reflect the investment objective of the fund. Equity Portfolio Management: When the fund contains more than 65% equity. shares of one company may be very different in terms of their potential than shares of other companies. Thus such type of a fund would need equity portfolio management. or a stock‟s unique characteristics. the equity portfolio manager will choose from a universe of invisible shares in accordance with: a) The nature of the equity instrument. you may see a mutual fund‟s equity portfolio include shares of diverse companies.
a) Classification in terms of Market Capitalization Market Capitalization is equivalent to the current value of a company.Mutual Funds 18 Ordinary shareholders are the owners if the company and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at the meetings. they become equity shares. Preference Shares: Unlike equity shares. unpaid dividends for years of inadequate profits are paid in subsequent years. preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. Losses as well as the profits are shared by the equity shareholders. current market price per share times the number of outstanding shares. Clearly. it is imperative for the fund manager to understand these elements of the stocks before he selects them for inclusion in the portfolio.e.. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings. bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes. equity share are a risk investment. If preference shares are cumulative. Without any guaranteed income or security. when converted. There are Large Capitalization Famous 5 . Warrants are in the nature of options on stocks. Equity Classes: Equity shares are generally classified on the basis of either the market capitalization or the anticipated movement of company earnings. Convertible Debentures: As the term suggests. these are fixed rate debt instruments that are converted into specified number of equity shares at the end of the specified period. Equity Warrants: These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within specified period. convertible debentures are debt instruments until converted. i.
b) Classification in terms of Anticipated Earnings In terms of anticipated earnings of the companies. Growth Stocks are shares of companies whose earnings are expected to increase at the rates that exceed the normal market levels. The stock markets generally have different indices available to track these different classes of shares. have assets whose values have not been recognized by investors in general. at least in the past. These companies may. Mid or Small Cap shares may be thought of as having greater growth potential. Mid – Cap Companies and Small – Cap Companies. Young and fast growing companies usually have high P/E ratios and the established companies in the mature industries may have lower P/E ratios. Different schemes of a fund may define their fund objective as a preference for the Large or Mid or the Small Cap Companies‟ shares. Dividend Yield for a stock is the ratio of dividend paid per share to the current market price. What matters to the fund managers is the potential dividend yields based on earning prospects. investors have indicated the preference for the high dividend paying shares. Large Cap shares are more liquid and hence easily tradable. however.Mutual Funds 19 Companies. Funds manager may try to identify such currently undervalued stocks that in their opinion can yield superior returns later. Famous 5 Approaches to Portfolio Management (Fund Management Style): . the tax plan of ICICI Prudential AMC is essentially a midcap fund where as the tax plan of Reliance is large-cap fund. In India. shares are generally classified on the basis of their market price relation to one of the following measures: Price/Earnings Ratio is the price of the share divided by the earnings per share and indicated what the investors are willing to pay for the company‟s earning potential. Cyclical Stocks are the shares of companies whose earnings are correlated with the state of the economy. Value Stocks are share of companies in mature industries and are expected to yield low growth in earnings. For example.
the time frame for the Famous 5 investment and economic expectations over this period. or to focus on the growth sectors or finding the value stocks. Decide on appropriate investment philosophy. ii) Value Investment Style: wherein the funds manager looks to buy shares of those companies which he believes are currently under valued in the market. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns. but whose worth he estimates will be recognized in the market valuation eventually. they tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio. Nevertheless. . there are certain principles of good equity management that any portfolio manager can follow to improve his performance. in active fund management two basic fund management styles that are prevalent are: i) Growth Investment Style: wherein the primary objective of equity investment is to obtain capital appreciation. actively managed funds and passively managed funds (popularly referred to as index funds). Develop an investment strategy based on the investment objective. Be aware of the level of flexibility available while managing the portfolio.e. i. Set realistic target returns based on appropriate benchmarks.Mutual Funds 20 Mutual funds can be broadly classified into two categories in terms of the fund management style i. Actively managed funds are the ones where in the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. this investment style would make the funds manager pick and choose those shares for investment whose earnings are expected to increase at the rates that exceed the normal market levels.e.. whether to capitalize on economic cycles. Successful Equity Portfolio Management: Portfolio Management skills are innate in nature and strong intuitive traits from the portfolio manager. and in the process outperform the designated benchmark index.
Markets are dynamic and it is impossible to buy „stocks for all seasons‟. Although diversification is a major strength of mutual funds. Develop a flexible approach to investing. Models for the performance measurement of Mutual Fund Following three models are used in order to measure the performance of a mutual fund. the portfolio manager must avoid the temptation to invest into very large number of securities so as to maintain focus and facilitate sound tracking.Mutual Funds 21 Avoid over – diversification. Sharpe Ratio (Rp R f ) p (R p R f ) Treynor Ratio Rp-Rf = αp + βp (Rm-Rf) Jensen Measure Where: Rp (Portfolios return) Rf (Risk free rate αp (Standard deviation of portfolio) βp (Beta of the Portfolio) Rm (Expected Market Return) Risk Management Famous 5 .
While it is important to consider the risks in the context of a specific investment or asset class. An investor will pay a premium for a bond that pays interest at a rate higher than those offered in the current market. bond prices increase. To keep pace with inflation and compensate for loss of purchasing power. generally speaking. Famous 5 Inflation and Interest Rate risks are closely related as interest rates generally go up with inflation. lenders will demand increase interest rates. an investor will offer less for a bond that pays-out at a rate lower than the rates offered in the current market. The rationale is that a bond is a promise of a future stream of payments.Mutual Funds 22 Risk management is one of the key elements of each and every project. Here first we discuss that which kind of risks we can face after this we will discuss the mitigation strategies how to manage these risks. Market Risk: Most investors know that investing involves risks as well as rewards and that. The opposite also is true. This risk is also referred to as Purchasing Power Risk. relevant market risks may involve international as well as domestic factors. Inflation reduces the purchasing power of money and therefore has a negative impact on investments by reducing their value. it is equally critical that investors consider market risk.as interest rates rise. when interest rates fall. conversely. Inflation Risk It is the risk that general increases in prices of goods and services will reduce the value of money. one should note that inflation can be cyclical. During periods of . Key market risks to be aware of include: Interest Rate Risk It relates to the risk of reduction in the value of a security due to changes in interest rates. the price of a previously issued bond falls. the greater the potential reward. and likely negatively impact the value of investments. Interest rate changes directly affect bonds . Depending on the nature of the investment. the higher the risk. However.
These risk usually only impacts one if one invest in stocks or bonds issued by companies based outside the India or funds that invest in international securities. (3) Have to sell them at a discount. Currency Risk It comes into play if money needs to be converted to a different currency to purchase or sell an investment. Investors should be aware that such low-grade bonds. In such instances. (2) Have difficulty selling your securities. new bonds will likely offer lower interest rates. During such times. Foreign investments pose varying liquidity risks as well. any change in the exchange rate between that currency and Indian Rupee can increase or reduce your investment return. Thus. certain countries may have restrictions on investments purchased by foreign nationals or repatriating them. or (4) Not be able to bring your money back home. The size of foreign markets. one may: (1) Have to purchase securities at a premium. investors looking only at coupon rates may be attracted to investing in low-grade junk bonds carrying coupon rates similar to the ones that were offered by ordinary bonds during inflation period. Additionally. while they may to a certain extent compensate for the low inflation. resulting in the possibility of one‟s investment being worth little to nothing until there is a buyer for it in the market. Famous 5 . Liquidity Risk It relates to the risk of not being able to buy or sell investments quickly for a price that tracks the true underlying value of the asset. The risk is usually higher in over-the-counter markets and small-capitalization stocks.Mutual Funds 23 low inflation. bear much higher risks. the number of companies listed and hours of trading may be much different from those in the India.there may be no buyers for it. Sometimes one may not be able to sell the investment at all .
Legal Remedies Risk . Any of these factors can strongly affect investments made in that country. some events can lead to wide-scale disruptions of financial markets. For example. causing a drop in the value of the company's stocks or bonds. further exposing investments to risks. or industry sector are called business or "non-systematic" risks. pandemic. health. Furthermore. encompasses a wide array of factors than can impact the value of a specific company.g. resulting in system-wide fluctuations in stock prices.. for example. the managers who run the company might make a bad decision or get embroiled in a scandal. is the chance that a bond issuer will fail to make interest payments or to pay back your principal when your bond matures. company.Mutual Funds 24 Business Risk Risks associated with investing in a particular product. For example. Sociopolitical Risk It involves the impact on the market in response to political and social events such as a terrorist attack. a key competitor might release a better product or service. an overhaul of the country's government. war. Common business risks include: Management Risk Also called company risk. a country may nationalize an industry or a company may find itself in the middle of a Famous 5 nationwide labor strike. social unrest. Alternatively. Country Risk It is similar to the Sociopolitical Risk described above. Such events. economic. or war. It could involve. Credit Risk Also called default risk. whether actual or anticipated. retirement). affect investor attitudes toward the market in general. or elections. a change in its policies (e. but tied to the foreign country in which investment is made.
aerospace. he may not have adequate legal means to resolve it. market and regulatory structure. When investing in an international market. such as inflation-linked bonds. Interest rate risk can be managed by holding the instrument to maturity. Alternatively. These measures may be different from the ones you may be used to in the India.and long-term). restrictions on international investing and repatriation of investment. Diversify: As in the case of business risks. market risks can be mitigated to a certain extent by diversification . one often has to rely on the legal measures available in that country to resolve problems. arbitration and mediation forums. Do Homework: Learn about the forces that can impact your investment. Inflation risk can be managed by holding products that provide purchasing power protection. learn as much as you can about the market history and volatility. If you are thinking about investing in foreign securities. How to Deal with Risk: While we cannot completely avoid market risks. we can take a number of steps to manage and minimize them. Learn more about the various types of investments options available to you and their risk levels.Mutual Funds 25 is the risk that if one has a problem with his investment. Further. holding shorter term bonds and CDs provide the flexibility to take advantage of higher paying instruments if interest rates go up. Stay abreast of global economic trends and developments. read about the future of the aerospace industry. sociopolitical stability. seeking redress can prove to be expensive and time-consuming if you are required to hire counsel in another country and travel internationally. One can spread his international risk by diversifying his investment over several different countries or regions. but also in terms of region (domestic and foreign) and length of holdings (short. trading practices. If you are considering investing in a particular sector. Famous 5 . for example.not just at the product or sector level.
Famous 5 .Mutual Funds 26 Some investments are more volatile and vulnerable to market risks than others. Selecting investments that are less likely to fluctuate with changes in the market can help minimize risks to a certain extent.
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