Risk Factors

Standard Risks:

Investment in Securities entails a high degree of risk and that there can be no assurance by the Portfolio Manager about returns thereon or even as regards preservation of capital. There is no assurance or guarantee that the objectives of the product will be achieved. The Client is therefore, investing through this Agreement, only such funds that can be entirely risked and places them with the Portfolio Manager for its best advice.
The Portfolio Manager does not provide any warranty (express or implied) as to the appreciation of the Securities of the Companies in which funds are invested by the Portfolio Manager. The Portfolio Manager shall not be liable in case of depreciation in the value of Securities in which funds are invested by the Portfolio Manager, or any indirect or consequential losses.
The past performance of the Portfolio Manager does not indicate the future performance or future performance of any other future products.
Every portfolio manager has a particular style of investing. In each business cycle the client will see both the merits and demerits of the strategy adopted. All strategies have some base assumptions which may or may not be right due to the external circumstances like monsoon, political developments, international events (terrorism/war/SARS, etc.) and hence clients should only consider that all strategies are best at any given point in time and can also be unsuccessful with external changes.
There are tremendous risks of having concentrated portfolios in either any sector/ company and the Portfolio Manager follow a very sound approach of de–risking the entire portfolio by diversifying the same within many sectors/ companies.
Diversification of portfolio can always give safe returns to clients with a relatively lower degree of risks but such a strategy does not ensure a huge out performance.
Investment decisions made may not always be profitable.
Equity instruments by nature are volatile and prone to price fluctuations on a daily basis due to both macro and micro factors. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments.
The Portfolio Manager will make best efforts to safeguard the Client’s interests with regard to dealings with capital market intermediaries such as brokers, custodians, bankers, etc. Any contract or understanding arrived at by the Portfolio Manager with any such intermediary shall be strictly on behalf of the Client, and the Portfolio Manager shall not be responsible for the due performance of the contract or understanding by the intermediary.
The Portfolio Managers’ decision (taken in good faith) in deployment of the clients’ funds is absolute and final and cannot be called in question or be open to review at any time during the period of the agreement or any time thereafter except on the ground of malafide, fraud, conflict of interest or gross negligence.
The liability of the client shall not exceed his investment with Portfolio Manager.
Any trades undertaken by any of the employees of the portfolio manager are pre-approved by the compliance officer before such execution by the employee to ensure that there is no conflict of interest with any of the transaction undertaken on behalf of any clients of the company. However, transactions of purchase and sale of securities by portfolio manager and its employees, if any, who are directly involved in investment operations will be disclosed if found having conflict of interest with the transactions in any of the client’s portfolio.
The debt investments and other fixed income Securities may be subject to interest rate risk, liquidity risk, credit risk, and reinvestment risk. Liquidity in these investments may be affected by trading volumes, settlement periods and transfer procedures.
The Portfolio Manager may invest in non-publicly offered debt securities and unlisted equities which may expose the Client’s Portfolio to liquidity risks.
The arrangement of pooling of funds from various clients and investing them in Securities could be construed as an ‘Association of Persons’ (“AOP”) in India under the provisions of the Income-Tax Act 1961 and taxed accordingly.
After accepting the corpus for management, the Portfolio Manager may not get an opportunity to deploy the same or there may be delay in deployment. In such situations, the Clients may suffer opportunity loss.
The investment objectives of one or more of the investment profiles could result in concentration of a specific asset/asset class/sector/issuer etc., which could expose the Clients’ Portfolio to risks arising out of non-diversification, including improper and/or undesired concentration of investment risks.
Market Trading Risks – Absence of Active Market: Although Securities are listed on the exchange(s), there can be no assurance that an active secondary market will develop or be maintained.
Lack of Market Liquidity: Trading in Securities on the exchange(s) may be halted because of market conditions or for reasons that in the view of the exchange Authorities or SEBI, trading in a particular Security is not advisable. In addition, trading in Securities is subject to trading halts caused by extra ordinary market volatility and pursuant to exchange and SEBI ‘circuit filter’ rules. There can be no assurance that the requirements of the market necessary to maintain the listing of Securities will continue to be met or will remain unchanged. ETF may trade at prices other than NAV: ETF may trade above or below their NAV. The NAV or ETF will fluctuate with changes in the market value of Scheme’s holdings of the underlying stocks. The trading prices of ETF will fluctuate in accordance with changes in their NAVs as well as market supply and demand of ETF. However, given that ETF can be created and redeemed only in creation units directly with the mutual fund, it is expected that large discounts or premiums to the NAVs of ETFs will not sustain due to availability of arbitrage possibility.
Regulatory Risk: Any changes in trading regulations by the exchange(s) or SEBI may affect the ability of market maker to arbitrage resulting into wider premium/ discount to NAV for ETFs. In the event of a halt of trading in market the Portfolio may not be able to achieve the stated objective.
Performance Risk: Frequent rebalancing of Portfolio will result in higher brokerage/ transaction cost. Also, as the allocation to other Securities can vary from 0% to 100%, there can be vast difference between the performance of the investments and returns generated by underlying securities.
Systematic Risk: Systematic Risk refers to the risk inherent to the entire market or market segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular stock or industry. This type of risk is both unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the correct asset allocation strategy.
Model portfolio risk: Model Portfolio is a concept where the fund manager constructs a portfolio with a certain number of scripts and allocation for each. The same is replicated in terms of scripts and allocation for all future clients. Clients may for certain interim periods have portfolios which are different from the model portfolio i.e. that some stocks may be different or may have a lesser weight compared to the model portfolio. This is a function of many factors like liquidity, organisation level risk practices or other investment decision making considerations.
Execution Risk: Execution Risk is that a transaction won’t be executed within the range of recent market prices or within the stop order limits that have been set by an investor. Execution risk exists on virtually all financial instruments.

Risks Associated with investing in Equities & Equity related Securities:

The value of the portfolio investments may be affected by factors affecting the securities markets such as price and volume volatility in the capital markets, interest rates, currency exchange rates, changes in law/policies of the government, taxation laws and political, economic or other developments which may have an adverse bearing on individual Securities, a specific sector or all sectors. Consequently, the portfolio value of the Product may be affected.
Equity Securities and equity–related Securities are volatile and prone to price fluctuations on a daily basis. The liquidity of investments made may be restricted by trading volumes and settlement periods. This may impact the ability of the client to redeem their portfolio.
The inability of the portfolio manager to make intended Securities purchases, due to settlement problems, could cause the Product to miss certain investment opportunities. Similarly, the inability to sell Securities held in the portfolio could result, at times, in potential losses to the investor, should there be a subsequent decline in the value of Securities held in the client’s portfolio.
Securities which are not quoted on the stock exchanges are inherently illiquid in nature and carry a larger liquidity risk in comparison with Securities that are listed on the exchanges or offer other exit options to the investors, including put options. Though the portfolio manager is not intended to purchase/invest in any unlisted securities, the securities received upon corporate action like de–merger, amalgamation, etc. pending listing, the liquidity and valuation of the portfolio investments due to its holdings of unlisted Securities may be affected if they have to be sold prior to the target date for disinvestment.
Investments in niche sectors run the risk of volatility, high valuation, obsolescence and low liquidity.
Management Integrity: While this risk being universal, it has historically been pronounced in smaller and or owner driven companies. Integrity related issues can have a direct and adverse impact on stock prices and hence investor returns.

Risks Associated with investing in Debt, Money Market and Debt related instruments including Mutual Funds:

Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.
As the price / value / interest rate of the Securities in which the Product invests fluctuates, the value of your investment in the Product may go up or down.
Mutual funds, like Securities investments, are subject to market and other risks and there can be no guarantee against loss resulting from an investment in the Product nor can there be any assurance that the Product’s objectives will be achieved.
Past performance of the Sponsor/AMC/Mutual Fund does not guarantee future performance of the Product.
In case of investments in schemes of mutual funds, alternative investment funds and venture capital funds, the Client shall bear the recurring expenses and performance fee, if any, of the portfolio management services in addition to the expenses of the underlying schemes. Hence, the Client may receive lower pre-tax returns compared to what he may receive had he invested directly in the underlying schemes in the same proportions.
Interest Rate Risk: Changes in interest rates will affect the Scheme’s NAV. The prices of securities usually increase as interest rates decline and usually decrease as interest rates rise. The extent of fall or rise in the prices is guided by modified duration, which is a function of the existing coupon, days to maturity and increase or decrease in the level of interest rate. The new level of interest rate is determined by the rate at which the government raises new money and/or the price levels at which the market is already dealing in existing securities. Prices of long-term securities generally fluctuate more in response to interest rate changes than short-term securities. The price risk is low in the case of the floating rate or inflation-linked bonds. The price risk does not exist if the investment is made under a repo agreement. Debt markets, especially in developing markets like India, can be volatile leading to the possibility of price movements up or down in fixed income securities and thereby to possible movements in the NAV. Modified Duration is a measure of price sensitivity, the change in the value of investment to a 1% change in the yield of the investment.
Credit Risk: Credit risk refers to the risk that an issuer of fixed income security may default or may be unable to make timely payments of principal and interest. NAV of units of the liquid scheme is also affected because of the perceived level of credit risk as well as actual event of default.
Even where no default occurs, the prices of security may go down because the credit rating of an issuer goes down. It must be, however, noted that where the Scheme has invested in Government securities, there is no risk to that extent.
Illiquidity Risk: The corporate debt market is relatively illiquid vis-a-vis the government securities market. There could therefore be difficulties in exiting from corporate bonds in times of uncertainties. Further, liquidity may occur only in specific lot sizes. Liquidity in a Security can therefore suffer. Even though the Government securities market is more liquid compared to that of other debt instruments, on occasions, there could be difficulties in transacting in the market due to extreme volatility or unusual constriction in market volumes or on occasions when an unusually large transaction has to be put through. Trading in specified debt securities on the Exchange may be halted because of market conditions or for reasons that in the view of the Exchange Authorities or SEBI, trading in the specified debt security is not advisable. There can be no assurance that the requirements of the securities market necessary to maintain the listing of specified debt security will continue to be met or will remain unchanged. In such a situation, the Portfolio Manager at his sole discretion will return the Securities to the Client.
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 fund to reinvest the proceeds of such investments in securities offering lower yields, resulting in lower interest income for the fund.
Reinvestment Risk: Investments in fixed income securities may carry reinvestment risk as interest rates prevailing on the interest or maturity due dates may differ from the original coupon of the bond. Consequently, the proceeds may get invested at a lower rate.
Spread Risk: In a floating rate security the coupon is expressed in terms of a spread or mark up over the benchmark rate. In the life of the security this spread may move adversely leading to loss in value of the portfolio. The yield of the underlying benchmark might not change, but the spread of the security over the underlying benchmark might increase leading to loss in value of the security.
Investments in money market instruments would involve a moderate credit risk, i.e. risk of an issuer’s inability to meet the principal payments.
Money market instruments may also be subject to price volatility due to factors such as changes in interest rates, general level of market liquidity and market perception of credit worthiness of the issuer of such instruments.
The value of the Product, to the extent that the Product is invested in money market instruments, will be affected by changes in the level of interest rates. When interest rates in the market rise, the value of a portfolio of money market instruments can be expected to decline.

Risks associated with investing in Derivatives:

The portfolio manager may invest in derivative products in accordance with and to the extent permitted under the Regulations. The use of derivatives requires an understanding of the underlying instruments and the derivatives themselves. The risk of investments in derivatives includes mispricing or improper valuation and the inability of derivatives to correlate perfectly with underlying assets, rates and indices.
Trading in derivatives carries a high degree of risk although they are traded at a relatively small amount of margin which provides the possibility of great profit or loss in comparison with the principal investment amount.
The portfolio manager may find it difficult or impossible to execute derivative transactions in certain circumstances. For example, when there are insufficient bids or suspension of trading due to price limits or circuit breakers, the portfolio may face a liquidity issue.
The option buyer’s risk is limited to the premium paid, while the risk of an option writer is unlimited. However, the gains of an option writer are limited to the premiums earned. Since in case of the portfolio all option positions will have underlying assets, all losses due to price–movement beyond the strike price will actually be an opportunity loss.
The relevant stock exchange may impose restrictions on exercise of options and may also restrict the exercise of options at certain times in specified circumstances.
The writer of a put option bears the risk of loss if the value of the underlying asset declines below the exercise price. The writer of a call option bears a risk of loss if the value of the underlying asset increases above the exercise price.
Investments in index futures face the same risk as investments in a portfolio of shares representing an index. The extent of loss is the same as in the underlying stocks.
The portfolio bears a risk that it may not be able to correctly forecast future market trends or the value of assets, indexes or other financial or economic factors in establishing derivative positions for the portfolio.
The 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 the potential high volatility of the futures markets.
Derivative products are leveraged instruments and can provide disproportionate gains as well as disproportionate losses to the investor. Execution of such strategies depends on the ability of the fund manager to identify such opportunities. Identification and execution of the strategies to be pursued by the fund manager involves uncertainty and the decision of fund manager may not always be profitable. No assurance can be given that the fund manager will be able to identify or execute such strategies.
The risks associated with the use of derivatives are different from or possibly greater than, the risks associated with investing directly in securities and other traditional investments.
As and when the portfolio manager trades in derivative products, there are risk factors and issues concerning the use of derivatives that investors should understand. Derivatives require the maintenance of adequate controls to monitor such transactions and the embedded market risks that a derivative adds to the portfolio.
Besides the price of the underlying asset, the volatility, tenor and interest rates affect the pricing of derivatives. Other risks in using derivatives include but are not limited to:

1. Credit Risk: This occurs when a counterparty defaults on a transaction before settlement and therefore, the portfolio manager is compelled to negotiate with another counterparty at the then prevailing (possibly unfavourable) market price, in order to maintain the validity of the hedge.
2. Market Liquidity Risk: This is where the derivatives cannot be sold (unwound) at prices that reflect the underlying assets, rates and indices.
3. Model Risk: This is the risk of mis–pricing or improper valuation of derivatives.
4. Basis Risk: This is when the instrument used as a hedge does not match the movement in the instrument/ underlying asset being hedged. The risks may be inter–related also; for e.g. interest rate movements can affect equity prices, which could influence specific issuer/ industry assets.

Risks associated with Securities Lending:

The risks in lending portfolio Securities, as with other extensions of credit, consist of the failure of another party, in this case the approved intermediary, to comply with the terms of the agreement entered into between the lender of Securities, and the approved intermediary. Such failure to comply can result in a possible loss of rights in the collateral put up by the borrower of the Securities, the inability of the approved intermediary to return the Securities deposited by the lender and the possible loss of any corporate benefits accruing to the lender from the Securities deposited with the approved intermediary. The portfolio manager may not be able to sell such Securities and this can lead to temporary illiquidity.

SPECIAL CONSIDERATIONS:

1. 1. - The portfolio manager or its associates are not responsible or liable for any loss or shortfall resulting from the operation of the Portfolio.
    - Before investing, prospective investors should review/ study this Document carefully and in its entirety and shall not construe the contents thereof or regard the summaries contained therein as advice relating to legal, taxation or financial/ investment matters. Investors should consult their own professional advisor(s) as to the legal, tax or financial implications resulting from (i) Subscription, gifting, acquisition, holding, disposal (by way of sale, switch or Redemption or conversion into money) and (ii) to the treatment of income (if any), capitalisation, capital gains, any distribution, and other tax consequences relevant to their Subscription, acquisition, holding, capitalisation, disposal (by way of sale, transfer, switch, Redemption or conversion into money) of portfolio within their jurisdiction or under the laws of any jurisdiction to which they may be subject to possible legal, tax, financial or other consequences.
    - The portfolio manager have not authorized any person to give any information or make any representations, either oral or written, not stated in this document in connection with investment under the Product. Prospective investors are advised not to rely upon any information or representations not incorporated in this document as the same have not been authorised by the Portfolio manager. Any Subscription or Redemption made by any person on the basis of statements or representations which are not contained in this document or which are inconsistent with the information contained herein shall be solely at the risk of the investor.
    - From time to time, the affiliates/associates of the portfolio manager may invest either directly or indirectly in the Securities. Their investment may be the same or differ from the investment made by the portfolio manager for its clients. The investment made by these affiliates/ associates may acquire a substantial portion and collectively constitute a major investment in the Scrip. Accordingly, Redemption of such scrips may have an adverse impact on the value of the portfolio because of the timing of any such Redemption and may affect the ability of other investors to redeem their investments.
    - As the liquidity of the portfolio investments may sometimes be restricted by trading volumes and settlement periods, the time taken by the portfolio manager for Redemption of securities may be significant in the event of an inordinately large number of Redemption requests or of a restructuring of the portfolio.
    - The tax benefits described in this document are as available under the prevailing taxation laws. Investors should be aware that the relevant fiscal rules or their interpretation may change. As is the case with any investment, there can be no guarantee that the tax position or the proposed tax position prevailing at the time of an investment in the portfolio Product will endure indefinitely. In view of the individual nature of tax consequences, each investor is advised to consult his/ her/ their own professional tax advisor.
    - Redemptions due to a change in the fundamental attributes of the portfolio or due to any other reason may entail tax consequences. Such tax shall be borne by the investor and the Portfolio manager shall not be liable for any tax consequences that may arise.
    - Portfolio Manager invests in Securities which may not always be profitable and there can be no guarantee against loss resulting from investing in the Portfolio Product. The portfolio value may be impacted by fluctuations in the bond markets, fluctuations in interest rates, prevailing political, economic and social environments, changes in government policies and other factors specific to the issuer of the securities, tax Laws, liquidity of the underlying instruments, settlement periods, trading volumes etc.
    - Investors are urged to study the terms of the offer carefully before investing in the Portfolio Product and to retain this Document for future reference.