Project Pp

8/3/2019 Project Pp

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1Mutual 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

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

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2Mutual Funds

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.

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3Mutual Funds

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

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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.

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5Mutual Funds

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.

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6Mutual Funds

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

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.

S. No Activity Time Cost(M) Objectives1 Feasibility 1 Month 0.1 To provide feasibility report

2 Franchising 1 Month 0.5 Approval of NIT for Franchising

3 Office Establishment 10 Days 0.3 Establish a office on Kurram Raod(PCR)

4 Funds Collection 2 Months 0.1 Collection of funds

5 Funds Investment 2 Months 0 Investment of funds in Stock Market

6 Return 1 Year 0 Return of respective investment

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WBS OF MUTUAL FUND

Report

Feasibility

Re ort

Feasibility

Approval

Franchising

Request NIT

for Franchising

Office Equipment

PCR

Office 1

PCR

Office 2

Funds Collection

Advertisement Promotional

TechniquesPersonal

Contacts

Fund Investment

Stocks Micro Financing

A riculture Small

Business

R

Dividend 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 mutualfund.

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.

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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 Time Frame Cost(millions) Nature

1Feasibility 01-06-2010 to 31-06-2010 0.1

Finish-to-Start

2 Franchising 01-07-2010 to 31-07-2010 0.5 Finish-to-Start

3 Office Establishment 01-08-2010 to 10-08-2010 0.3 Finish-To-Start

4 Funds Collection 10-08-2010 to 10-10-2010 0.1 Start-to-start

5Funds Investment 10-08-2010 to 10-10-2010 0

Start-to-Start

6 Returns 10-08-2010 to 10-08-2011 0 Start-to-Start

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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 don‟t 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

people‟s time, so they won‟t 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.

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 don‟t 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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WP1 WP3 WP2 WP4

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.

Costs are given in Million Rupees (Rs.000000)

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 don‟t need to do any cost on them. So our cost will be basically consists on four

1. Activity Estimates

8. Cost Budget

4. Project Estimates

3. Control Account Estimates

2. Work Package Estimates

7. Management Reserves

6. Cost Baseline

5. Contingency Reserves

Rs 1.25

Rs 1.15

Rs 0.1

Rs 0.9

Rs 0.10

Rs 0.15

Rs 1.00

Rs 0.5 Rs 0.1 Rs 0.3

Rs 0.02Rs 0.02Rs 0.02Rs 0.02Rs 0.02

Rs 0.1

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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) = 0.10 M

EV (Earned Value) = 0.10 M

AC (Actual Cost) = 0.11 M

BAS (Budget at completion) = 1.25 M

EAC (Estimate at completion) = 1.10 M

ETC (Estimate to complete) = 1.00 M

VAC (Variance at completion) = -0.01 M

Name Formula Value Interpretation

CV =EV-AC -0.01 Negative value shows that

we are over budget

SV =EV-PV 0.00 Zero value shows that we

are at the schedule

CPI =EV/AC 0.9090 We are getting 0.9090rupees

SPI =EV/PV 1.00 We are progressing at

100% of the rate originally

planned

EAC =(BAC-EV)+AC 1.26 This shows that we will

complete with a budget

more then planned

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Fund Management Style & Structuring of Portfolio

Factors affecting Management style of Mutual Funds

It‟s one thing to understand mutual funds and their working; 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.The factors listed below evaluate factors affecting the management style of a mutual fund.

Knowing the profile

Investor‟s 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, don‟t bite the bait. So, check if the investor‟s 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,

name of the asset Management Company and price of units, among other things), investment

objectives and investment procedure, financial information and risk factors.

VAC =BAS-EAC -0.01 We will be Rs 0.01 Million

over budgeted at the end of

project

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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 fund‟s 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

investor‟s 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 investor‟s focus would be to find a fund that matches his investment

needs and risk profile, and is a performer.

Tracking investments

The investor‟s job doesn‟t 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

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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 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.

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 fund‟s 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 stock‟s unique characteristics, and

b) A certain „investment style‟ or philosophy in the process of choosing.

Thus, you may see a mutual fund‟s 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 scheme‟s objectives.

Ordinary shares:

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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 understandthese 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

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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 mid-

cap 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 company‟s 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.

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

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 p

f p R R

)(

Treynor Ratio

Jensen Measure Rp-Rf = αp + βp (Rm-Rf )

Where:

Rp (Portfolios return)

Rf (Risk free rate

αp (Standard deviation of portfolio)

βp (Beta of the Portfolio)

Rm (Expected Market Return)

Risk Management

)( f p R R

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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.

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 one‟s

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.

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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, orwar. 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

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, socio-

political 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.

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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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