Mutual Funds

Project Rationale:
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 childs

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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

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2. If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain.

Advantages of Mutual Funds

1. Professional Management Mutual Funds provide the services of experienced and skilled professionals, 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. This risk of default by any company that one has chosen to invest in, 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. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles.

2. Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

3. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

4. Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Apart from liquidity, these funds have also provided very good post-tax returns on year to year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds Famous 5

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have given returns of around 14 percent in the last one-year period. 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. Though they are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post tax basis.

5. 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, custodial and other fees translate into lower costs for investors.

6. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, 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. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, 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.

7. Transparency Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

8. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans; you can systematically invest or withdraw funds according to your needs and convenience. Famous 5

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9. 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. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

10. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

11. 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. The operations of Mutual Funds are regularly monitored by SECP.

12. Tax Benefits Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase costs and selling price.

Work Breakdown Structure:

The WBS is a deliverable-oriented hierarchical decomposition of the work to be executed by the project team, to accomplish the project objectives and create the required deliverables. Famous 5

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The WBS organizes and defines the total scope of the project. The WBS subdivides the project work into smaller, more manageable pieces of work, with each descending level of the WBS representing an increasingly detailed definition of the project work. The planned work contained

S. 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 0.5 0.3 0.1 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, which are called work packages, can be scheduled, cost estimated, monitored, and controlled. The WBS represents the work specified in the current approved project scope statement. Components comprising the WBS assist the stakeholders in viewing the deliverables of the project.

This is initial WBS of our project. The activities which are enlisted are the major activities and our entire project consists on these activities. Here bellow a brief detail of all these activities.

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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. Franchising: After preparing a feasibility study and approval the next activity which we have to do is franchising. In franchising we will submit request to establish a franchise of National Investment Trust (NIT) and will get approval to establish the franchise. Office Establishment: After getting approval for franchise we will establish our office at Tall Road Parachinar. The Office will be equipped with a modern communication system which will connect us to our head office and also with stock exchange. This modern communication system will also enable us to see the performance of our diversified investment. Famous 5

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Funds Collection: After the office establishment we will move toward the most important and tough activity of our project which is fund collection. For this we need a lot of effort to convince our potential customers. We will use different advertisement and promotional techniques along with personal contacts. Funds investment: After getting investment from our customer we will invest that money in diversified stocks. The purpose of diversification is to minimize risk and maximize the return for our investor. We will use different evaluation techniques such as CAPM and DDM to evaluate our stocks, so that we make an investment on proper evaluation. The fundamental and technical analysis will also be very helpful for us for the evaluation of the stock. Return: After funds investment the next is to give return to our valued customers. As we have earlier mentioned that this return can be in the following ways. 1. Income is earned from dividends declared by mutual fund schemes from time to time. 2. If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain. 3. If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain. 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.

Estimated Time Management:

Project Time Management includes the processes required to accomplish timely completion of the project. The Project Time Management processes include the following activities which are expressed in following table:

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Activity Definition Activity Sequencing Activity Resource Estimating Activity Duration Estimating Schedule Development

Schedule Control

S. 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)
0.1 0.5 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

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TIME MANAGEMENT MATRIX

We can also manage our activities according to their urgency and importance through Time Management Matrix as given below

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Important and Urgent Quadrant 1 represents things which are both urgent and important labeled firefighting. The activities need to be dealt with immediately, and they are important. These tasks are the ones that must be done right away, or consequences may result. An example would be bills that are due today. If we dont pay our bills on time, we would incur additional charges or they might cut off their services to us. Activities belonging to this category need to be acted upon without delay. We should give them the highest priority. Important but Not Urgent Quadrant 2 represents things which are important, but not urgent - labeled Quality Time. Although the activities here are important, and contribute to achieving the goals and priorities they do not have to be done right now. As a result, they can be scheduled when they can be given quality thought to them. A good example would be the preparation of an important talk, or mentoring a key individual. Prayer time, family time and personal relaxation/recreation are also part of Quadrant 2. Urgent but Not Important Quadrant 3 represents distractions. They must be dealt with right now, but frankly, are not important. For example, when a person answers an unwanted phone call, - he/she has had to interrupt whatever he/she is doing to answer it. Not Important and Not Urgent Quadrant 4 represents Time Wasting. We might think activities in this section are not worth peoples time, so they wont engage in these activities much. We would be surprised to know that people spend most of their time doing things that are both unimportant and non-urgent, such as watching TV and movies, playing video games, senseless chatting for hours on the phone, shopping for new clothes, etc. Famous 5 Of course, it is essential for people to relax and unwind once in a while.

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All work and no play makes Jack a dull boy, as they say. But we should be strict in limiting our time for these activities; that is, if we really want to accomplish a lot in our life. Treat activities belonging to this section with the lowest priority. If we really want to succeed, strictly limit our time in doing these activities or dont do them at all. Focus on those that will bring us fruitful results.

Project Cost Management

Our cost management process consist of the following three phases. Estimate Cost Determine Budget Control Cost

1. 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. Examples include the cost of material, supplies, and wages. Fixed Cost: These costs do not change as production changes. Examples include set-up, rental, etc. Direct Costs: These costs are directly attributable to the work on the project. Examples are team travel, team wages, recognition, and costs of material used on the project. Indirect Costs: Indirect costs are overhead items or costs incurred for the benefit of more than one project. Examples include taxes, fringe benefits, and janitorial services. 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.
2. Determine Budget:

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In this part of cost management, 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. To create a budget, activity costs, including costs for risk contingencies, are rolled up to work package costs. Work package costs are then rolled up to control account costs and finally into project costs. This process is called cost aggregation. Contingency reserves are added to achieve the cost baseline, in the final step, the management reserves are added.

Rs 1.25

8. Cost Budget

7. Management Reserves

Rs 0.10

6. Cost Baseline

Rs 1.15

5. Contingency Reserves

Rs 0.15

4. Project Estimates

Rs 1.00 Rs 0.1

3. Control Account Estimates

Rs 0.9 WP1 WP2 Rs 0.5 WP3 Rs 0.3 WP4 Rs 0.1

2. Work Package Estimates

Rs 0.02

Rs 0.1
Rs 0.02 Rs 0.02 Rs 0.02 Rs 0.02

1. Activity Estimates

Costs are given in Million Rupees (Rs.000000)

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In this section we have created a detailed budget for our project. It is starting from activity estimate ad ends up with cost budget. Basically as earlier mentioned we have divided our project into six work packages. These are feasibility, franchising, office establishment, funds collection, funds investment, and return. As funds investment and funds return are directly related to the customer, so we dont need to do any cost on them. So our cost will be basically consists on four

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work packages and their activities. Therefore, here we are only showing these four work packages for our cost estimates. In this estimates we have also taken some contingency and management reserves. 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. These contingency are kept as 15% of other costs and management reserves are kept as 10% of other costs.

3. Control Cost:
Cost control can be done only when our work is in progress. Here we compare our actual cost with estimated cost. So it will tell us that how much under budget or over budget we are. As we have till not started our project so we can only assume that only one activity is completed which is our feasibility study. The cost which we have assigned to that activity was 0.1 Million Rupees and we assume that the actual cost on that activity is 0.11 Million Rupees. Now here we will apply different formulas of cost control, so that we may come to know that how much under or over budget we are. 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 = 0.10 M = 0.10 M = 0.11 M = 1.25 M = 1.10 M = 1.00 M = -0.01 M Value -0.01 0.00 0.9090 1.00 1.26 Interpretation
Negative value shows that we are over budget Zero value shows that we are at the schedule We are getting 0.9090 rupees We are progressing at 100% of the rate originally planned This shows that we will complete with a budget more then planned

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VAC

=BAS-EAC

-0.01

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 Its one thing to understand mutual funds and their working; its 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 investors investment objectives. The factors listed below evaluate factors affecting the management style of a mutual fund. Knowing the profile Investors investments reflect his risk-taking capacity. Equity funds might lure when the market is rising and peers are making money, but if you are not cut out for the risk that accompanies it, dont bite the bait. So, check if the investors objective matches yours. Investors will invest only after they have found their match. If they are racked by uncertainty, they seek expert advice from a qualified financial advisor. 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. Investors would invest in an equity fund only if they are willing to stay on for at least two years. For income and gilt funds, have a one-year perspective at least. Anything less than one year, the only option among mutual funds is liquid funds. Declare and Inform

Watch what you commit. Investors look out for the Offer Document and Hey Information Memorandum (KIM) before they commit their money to a fund. The offer document contains essential details pertaining to the fund, including the summary information (type of scheme, Famous 5 name of the asset Management Company and price of units, among other things), investment objectives and investment procedure, financial information and risk factors.

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The fund fact sheet

Fund fact sheets give investors valuable information of how the fund has performed in the past. It gives investors access to the funds portfolio, its diversification levels and its performance in the past. The more fact sheets they examine, the better is their comfort level.

Diversification across fund houses

If Investors are routing a substantial sum through mutual funds, they would diversify across fund houses. That way, they spread their risk. Chasing incentives

Some financial intermediaries give upfront incentives, in the form of a percentage of the investors initial investment, to invest in a particular fund. Many amateur investors get lured into such incentives and invest in such attractive schemes, which may not meet their future expectations. The ideal investors focus would be to find a fund that matches his investment needs and risk profile, and is a performer. Tracking investments The investors job doesnt end at the point of making the investment. They do track your investment on a regular basis, be it in an equity, debt or balanced fund.

Portfolio Management
Portfolio management is an important foundation of mutual fund business. 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, effective portfolio management will have to give returns acceptable to the investor; else, the investor may move to better performing funds. From the investors perspective, the need for successful portfolio management function is obviously paramount. However, in the complex world of financial markets, portfolio management is a specialist function. Now how a fund manager manages the portfolio would depend on the type of the fund he is managing. The funds can be broadly classified as equity funds and debt funds. As there is no Famous 5

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strong bond and debt market in Pakistan therefore we will only deal with Equity Funds. Our whole investment will be made in diversified Equity Fund.

Equity Portfolio Management:

When the fund contains more than 65% equity, it is called as an equity fund. Thus such type of a fund would need equity portfolio management. An equity portfolio managers 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.

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, warrants or convertible debentures issued by many companies. Even within each category of equity instruments, shares of one company may be very different in terms of their potential than shares of other companies. So how does the fund manager go about choosing the different types of stocks, in order to construct his portfolio? The general answer is that his choice of shares to be included in funds portfolio must reflect the investment objective of the fund. more specifically, the equity portfolio manager will choose from a universe of invisible shares in accordance with: a) The nature of the equity instrument, or a stocks unique characteristics, and b) A certain investment style or philosophy in the process of choosing. Thus, you may see a mutual funds equity portfolio include shares of diverse companies. However, in reality, the group of stocks selected will have certain unique characteristics, chosen in accordance with the preferred investment style, such that the portfolio as a whole is consistent with the schemes objectives. Ordinary shares: Famous 5

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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. Losses as well as the profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are a risk investment, bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes.

Preference Shares: Unlike equity shares, preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings. 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. Warrants are in the nature of options on stocks. 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. Clearly, convertible debentures are debt instruments until converted; when converted, they become equity shares.

Equity Classes:
Equity shares are generally classified on the basis of either the market capitalization or the anticipated movement of company earnings. it is imperative for the fund manager to understand these elements of the stocks before he selects them for inclusion in the portfolio. a) Classification in terms of Market Capitalization Market Capitalization is equivalent to the current value of a company, i.e., current market price per share times the number of outstanding shares. There are Large Capitalization Famous 5

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Companies, Mid Cap Companies and Small Cap Companies. Different schemes of a fund may define their fund objective as a preference for the Large or Mid or the Small Cap Companies shares. For example, the tax plan of ICICI Prudential AMC is essentially a midcap fund where as the tax plan of Reliance is large-cap fund. Large Cap shares are more liquid and hence easily tradable. Mid or Small Cap shares may be thought of as having greater growth potential. The stock markets generally have different indices available to track these different classes of shares. b) Classification in terms of Anticipated Earnings In terms of anticipated earnings of the companies, 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 companys earning potential. 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. Dividend Yield for a stock is the ratio of dividend paid per share to the current market price. In India, at least in the past, investors have indicated the preference for the high dividend paying shares. What matters to the fund managers is the potential dividend yields based on earning prospects. Cyclical Stocks are the shares of companies whose earnings are correlated with the state of the economy. Growth Stocks are shares of companies whose earnings are expected to increase at the rates that exceed the normal market levels. Value Stocks are share of companies in mature industries and are expected to yield low growth in earnings. These companies may, however, have assets whose values have not been recognized by investors in general. Funds manager may try to identify such currently undervalued stocks that in their opinion can yield superior returns later.

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Approaches to Portfolio Management (Fund Management Style):

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Mutual funds can be broadly classified into two categories in terms of the fund management style i.e. actively managed funds and passively managed funds (popularly referred to as index funds). 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. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns, and in the process outperform the designated benchmark index. 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. 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. they tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio. 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, but whose worth he estimates will be recognized in the market valuation eventually.

Successful Equity Portfolio Management:

Portfolio Management skills are innate in nature and strong intuitive traits from the portfolio manager. Nevertheless, there are certain principles of good equity management that any portfolio manager can follow to improve his performance. Set realistic target returns based on appropriate benchmarks. Be aware of the level of flexibility available while managing the portfolio. Decide on appropriate investment philosophy, i.e., whether to capitalize on economic cycles, or to focus on the growth sectors or finding the value stocks. Develop an investment strategy based on the investment objective, the time frame for the Famous 5 investment and economic expectations over this period.

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Avoid over diversification. Although diversification is a major strength of mutual funds, the portfolio manager must avoid the temptation to invest into very large number of securities so as to maintain focus and facilitate sound tracking.

Develop a flexible approach to investing. Markets are dynamic and it is impossible to buy stocks for all seasons.

Models for the performance measurement of Mutual Fund

Following three models are used in order to measure the performance of a mutual fund.

Sharpe Ratio

(Rp R f )

p
(R p R f )

Treynor Ratio

Rp-Rf = p + p (Rm-Rf)

Jensen Measure
Where: Rp (Portfolios return) Rf (Risk free rate

p (Standard deviation of portfolio) p (Beta of the Portfolio) Rm (Expected Market Return)

Risk Management
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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, generally speaking, the higher the risk, the greater the potential reward. While it is important to consider the risks in the context of a specific investment or asset class, it is equally critical that investors consider market risk. Depending on the nature of the investment, relevant market risks may involve international as well as domestic factors. 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. Interest rate changes directly affect bonds - as interest rates rise, the price of a previously issued bond falls; conversely, when interest rates fall, bond prices increase. The rationale is that a bond is a promise of a future stream of payments; an investor will offer less for a bond that pays-out at a rate lower than the rates offered in the current market. The opposite also is true. An investor will pay a premium for a bond that pays interest at a rate higher than those offered in the current market.

Inflation Risk

It is the risk that general increases in prices of goods and services will reduce the value of money, and likely negatively impact the value of investments. Inflation reduces the purchasing power of money and therefore has a negative impact on investments by reducing their value. This risk is also referred to as Purchasing Power Risk. Famous 5 Inflation and Interest Rate risks are closely related as interest rates generally go up with inflation. To keep pace with inflation and compensate for loss of purchasing power, lenders will demand increase interest rates. However, one should note that inflation can be cyclical. During periods of

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low inflation, new bonds will likely offer lower interest rates. During such times, 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. Investors should be aware that such low-grade bonds, while they may to a certain extent compensate for the low inflation, bear much higher risks.

Currency Risk It comes into play if money needs to be converted to a different currency to purchase or

sell an investment. In such instances, any change in the exchange rate between that currency and Indian Rupee can increase or reduce your investment return. 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.

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. Sometimes one may not be able to sell the investment at all - there may be no buyers for it, resulting in the possibility of ones investment being worth little to nothing until there is a buyer for it in the market. The risk is usually higher in over-the-counter markets and small-capitalization stocks. Foreign investments pose varying liquidity risks as well. The size of foreign markets, the number of companies listed and hours of trading may be much different from those in the India. Additionally, certain countries may have restrictions on investments purchased by foreign nationals or repatriating them. Thus, one may: (1) Have to purchase securities at a premium; (2) Have difficulty selling your securities; (3) Have to sell them at a discount; or (4) Not be able to bring your money back home. Famous 5

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Business Risk
Risks associated with investing in a particular product, company, or industry sector are called business or "non-systematic" risks. Common business risks include:

Management Risk Also called company risk, encompasses a wide array of factors than can impact the value of a specific company. For example, the managers who run the company might make a bad decision or get embroiled in a scandal, causing a drop in the value of the company's stocks or bonds. Alternatively, a key competitor might release a better product or service.

Credit Risk Also called default risk, is the chance that a bond issuer will fail to make interest payments or to pay back your principal when your bond matures.

Sociopolitical Risk It involves the impact on the market in response to political and social events such as a

terrorist attack, war, pandemic, or elections. Such events, whether actual or anticipated, affect investor attitudes toward the market in general, resulting in system-wide fluctuations in stock prices. Furthermore, some events can lead to wide-scale disruptions of financial markets, further exposing investments to risks.

Country Risk It is similar to the Sociopolitical Risk described above, but tied to the foreign country in

which investment is made. It could involve, for example, an overhaul of the country's government, a change in its policies (e.g., economic, health, retirement), social unrest, or war. Any of these factors can strongly affect investments made in that country. For example, a country may nationalize an industry or a company may find itself in the middle of a Famous 5 nationwide labor strike.

Legal Remedies Risk

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is the risk that if one has a problem with his investment, he may not have adequate legal means to resolve it. When investing in an international market, one often has to rely on the legal measures available in that country to resolve problems. These measures may be different from the ones you may be used to in the India. Further, seeking redress can prove to be expensive and time-consuming if you are required to hire counsel in another country and travel internationally.

How to Deal with Risk:

While we cannot completely avoid market risks, we can take a number of steps to manage and minimize them.

Diversify: As in the case of business risks, market risks can be mitigated to a certain extent by

diversification - not just at the product or sector level, but also in terms of region (domestic and foreign) and length of holdings (short- and long-term). One can spread his international risk by diversifying his investment over several different countries or regions.

Do Homework: Learn about the forces that can impact your investment. Stay abreast of global economic

trends and developments. If you are considering investing in a particular sector, for example, aerospace, read about the future of the aerospace industry. If you are thinking about investing in foreign securities, learn as much as you can about the market history and volatility, sociopolitical stability, trading practices, market and regulatory structure, arbitration and mediation forums, restrictions on international investing and repatriation of investment. Learn more about the various types of investments options available to you and their risk levels. Inflation risk can be managed by holding products that provide purchasing power protection, such as inflation-linked bonds. Interest rate risk can be managed by holding the instrument to maturity. Alternatively, holding shorter term bonds and CDs provide the flexibility to take advantage of higher paying instruments if interest rates go up. Famous 5

Mutual Funds

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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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