The portfolio specific risk factors will be identified for each investor and incorporated in the Term Sheet as portfolio specific Risk Factors.
Standard Risk Factors:
- Investment may involve investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal and there is no assurance or guarantee that the objectives of the portfolio will be achieved. li>A the price/ value/ interest rates of the securities in which the portfolio invests fluctuates, the value of the client’s investment in the portfolio may go down depending on the various factors and forces affecting capital markets and money markets.
- Past performance of the portfolio manager does not guarantee future performance of the portfolio and may not necessarily provide a basis of comparison with other investments.
- The names of the portfolio do not, in any manner, indicate either the quality of the portfolio or their future prospects or returns.
- The portfolio manager is not responsible or liable for any loss resulting from the operation of the portfolio.
Risks Associated With Investments In Debt Securities:
- Price-Risk or Interest -Rate Risk:
Fixed income securities such as bonds, debentures and money market instruments run price-risk or interest-rate risk. Generally, when interest rates rise, prices of existing fixed income securities fall and interest rates drop, such prices increase. The extent of fall or rise in the prices is a function of the exiting coupon, days to maturity and the increase or decrease in the level of interest rates.
- Credit Risk:
In simple terms this risk means that the issuer of a debenture/ bond or a money market instrument may default on payment of either interest or principal, the price of a security may also go down because the credit rating of an issuer goes down. It must, however, be noted that where the portfolio has invested in Government Securities, there is no credit risk to that extent.
- Liquidity or Marketability Risk:
This refers to the ease with which a security can be sold at or near to its valuation yield- to-maturity (YTM). The primary measure of liquidity risk is the spread between the bid price and the offer price quoted by a dealer. Liquidity risk is today characteristic of the Indian fixed income market.
- Credit Rating Risk:
Different types of securities in which the product would invest as given in the product note carry different upon their investment patterns. E.g. corporate bonds carry a higher amount of risk than Government securities. Further, even among corporate bonds, bonds which are rated AAA are comparatively less risky than bonds which are AA rated.
- Reinvestment Risk:
Investment in fixed income securities may carry reinvestment risk as interest rates prevailing on the interest payment date or maturity due date may differ from the original coupon. Consequently, the proceeds may get invested at a lower rate.
- Pre-payment Risk:
Certain fixed income securities give an issuer the right to call back its securities before their maturity date, in periods of declining interest rates. the possibility of such prepayment may force the product to reinvest the proceeds of such investment in securities offering lower yields, resulting in lower interest income for the fund.
- Other types of securities in which the portfolio would invest would carry different levels and types of risk. Accordingly, the portfolios risk may increase or decrease depending upon its investment pattern. E.g. corporate bonds which are AA rated, are comparatively riskier than the bonds which are AAA rated.
The above are some of the common risks associated with investment in fixed income and money market securities including derivatives. There can be no assurance that a portfolio’s investment objectives will be achieved, or that there will be no loss of capital. Investment outcome may vary substantially on a monthly, quarterly or annual basis.
Risks Associated with Investments in Equity and Equity related instruments:
- Some of the common risks include associated with investments in equity and equity linked securities are mentioned below. These risks include but are not restricted to:
- Equity and equity related securities by nature are volatile and prone to price fluctuations on a daily basis due to both macro and micro factors.
- The product seeks to generate returns out of identifying reforms and sectors or stocks that are likely to outperform in the future. Execution of investment strategies depends upon the ability of the portfolio manager to identify such opportunities which may not be available at all times and that the decisions made by the portfolio manager may not always be profitable.
- The portfolio manager may invest in stocks, which may or may not be undervalued with the anticipation of increase in price. However, the stocks may languish and may not attain the anticipated price.
- The portfolio is subject to investment style risk; the product may have a contrarian style of investment, the portfolio performance may not be in line with the general market in scenarios of strong upward or downward cycles. Further, the prices of securities invested by the product may not behave as expected by Portfolio Manager, this may affect the returns adversely.
- In Domestic markets, there may be risks associated with trading volumes, settlement periods and transfer procedure that may restrict liquidity of investments in Equity and Equity related securities.
- In the event of inordinately low volumes, there may be delays with respect to unwinding the portfolio and transferring the redemption proceed.
- The value of the portfolio, may be affected generally by factors affecting securities markets, such as price and volume volatility in the capital markets, interest rates currency exchange rates, changes in policies of the Government, taxation laws or policies of any appropriate authority and other political and economic developments and closure or all sectors including equity and debt markets. Consequently, the portfolio valuation may fluctuate and can go up or down.
- Investors may not that portfolio Managers investment decision may not always be profitable, as actual market movements may be at variance with anticipated trends.
- The portfolio may have higher concentration towards a particular may not always be profitable, as actual moments may be at variance with anticipated trends.
- The portfolio may have higher concentration towards a particular stock or sector, at a given point in time. Any change in government policy or any other adverse development with respect to such a stock or the sector, may adversely affect the value of the portfolio.
Risk Factors associated with investments in Derivatives:
- The portfolio manager intends to use traded derivatives as hedging tool &does not intend to take any naked positions. Nevertheless, trading in derivatives market has risks and issues concerning the use of derivatives that investor should understand. Derivative product are specialized instruments that require investment techniques and risk analysis different from those associated with stocks and bonds.
- Derivative products are leveraged instruments and can provide disproportionate gains as well as disproportionate losses to the investor. Execution of such strategies depends upon the ability off the portfolio manager to identify such opportunities. Identification and execution of such strategies to be persuaded by the portfolio Manager involve uncertainty and decision of the portfolio Manager may not always be profitable. No assurance can be that the portfolio Manager shall be able to identify or execute such strategies.
- The risk associated with the use of derivatives are different from or possibly greater than, the risk associated with investing directly in securities and other traditional investments.
- As and when the product trades in the derivates market there are risk factors and issues concerning the use of derivatives that investors should understand. Derivative product are specialized instruments that require investment techniques and risk analysis different from those associated with stocks and bonds. The use of derivative require an understanding not only of the underlying instrument but also of the derivative itself. Derivatives require the maintenance of adequate controls to monitor the transactions entered into, the ability to assess the risk that a derivative adds to the portfolio and the ability to forecast price or interest rate movements correctly. There is a possibility that loss may be sustained by the portfolio as a result of the failure of another party (usually referred as the “counter party”) to comply with the term of the derivatives contract. Other risk in using derivatives include the risk of misplacing or improper assets, rates and indices. Thus, derivatives are highly leveraged instruments. Even a small price movement in the underlying security could have a large impact on their value.
- The use of a derivative require an understanding not only of the underlying instrument but also of the derivative itself. Derivatives require the maintenance of adequate controls to monitor transactions entered into, the ability to assess the risk that a derivative add to the portfolio and the ability to forecast price or interest rate moment correctly
- Other risk un using derivatives include the risk of misplacing improper valuation of derivatives and the inability of derivatives to correct perfectly with underlying assets, rates and indices. Derivatives are highly averaged instruments. Even a small moment in the underlying security could have a large impact on their value. Execution of such strategies depends upon the strategies to be pursued by the portfolio manager involve uncertainty and decision of portfolio manager may not always be profitable. No assurance can be given that the portfolio manager will be able to identify or execute such strategies.
- Derivative trades involve execution risk, whereby the rates on the screen may not be the rate at which ultimate. However, the gains of an options writer are limited to the premiums earned.
- The writer of a put option bears the risk of loss of the value of the underlying asset declines below the exercise price. The writer of a call option bears a risk of if the value of the underlying asset increases above the exercise price.
- Investments in index futures face the same risk as the investments in a portfolio of shares representing an index. The extent of loss is the same as in the underlying stocks.
- Risk of loss in trading futures contracts can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures pricing and potential high volatility of the futures markets.
- The derivatives market in India is nascent and does not have the volumes that may be seen in other developed markets, which may result in volatility in the values.
The following are certain additional risks involved with use of fixed income derivatives:
- Interest Rate Risk: Derivatives carry the risk of adverse changes in the price due to change in interest rates.
- Liquidity Risk: During the life of the derivative, the benchmark might become illiquid and might not be fully capturing the interest rate changes in the market, or the selling, unwinding prices might not reflect the underlying rates and indices, leading to loss of value of the portfolio.
Risk Factors associated with investment in liquid Funds:
- The portfolio Manager may, from time to time, invest any un-deployed funds in liquid schemes of mutual funds or in money market instruments. Though the portfolio of liquid funds comprises of short-term deposits, government securities and money market instruments, they cannot be considered as totally risk free. This is because liquidity patterns and short term interest rates of the governments change, sometimes on a daily basis, thereby making the fund susceptible.
- Liquid fund return are not guaranteed and it entirely depends on market movements.
Risk of Quantitative Investing:
- Asset allocation based on quantitative analysis may perform differently from the market as a whole due to the factors used in the analysis and the weight placed on each factor and markets behaves differently from the factors historical trends.
- If the strategy of the portfolio is to always remain diversified across all asset class, it may tend to underperform the best performing asset class at any given point of time.
- If portfolio seeks to allocate assets dynamically, based on certain market factors, there could be times when the allocation may go wrong. In other words, portfolio may go overweight on an asset class, which subsequently may underperform or vice versa. However, the severity of impact will be lower due to its built-in feature of seer allocation.
- It portfolio propose to invest in ETFs/ Mutual Fund schemes, there will be a double layer of charger, one from the underlying ETFs/Mutual Fund schemes and the other at the portfolio level and all the risks related to the underlying ETYFs and mutual fund schemes are by default the risk associated with the portfolio.