Underlying Risk & Mitigates
The minimum amount of investment to open and maintain an account will be Rs. 5,000/-, with no maximum limit.
Subsequent investment into the Scheme shall be for a minimum of Rs. 1,000/- per transaction, with no applicable maximum amount.
Investors are advised that all investments in mutual funds and securities are subject to market risks. A targeted return/dividend range cannot be guaranteed. It should therefore be clearly understood that the portfolio of POAIIF is subject to market risk and other risks inherent in all such investments. The risk emanates from various factors that include, but are not limited to:
1. Equity Risk - Companies issue equities, or stocks to help finance their operations and future growth. A company’s performance outlook, market activity and the larger economic picture influence the price of its shares. When the economy is expanding, the outlook for many companies will be good and the value of their stocks should rise. The opposite is also true. Usually, the greater the potential reward, the greater would be the risk. For small companies, startups, resource companies and companies in emerging sectors, the risks and potential rewards are usually greater. Some of the products and services offered by technology companies, for example, can become obsolete as science and technology advance.
2. Credit Risk - Credit risk is comprised of default risk, credit spread risk and downgrade risk. Each can have a negative impact on the value of a fixed-income security including money market instruments.
a) Default risk is the risk that the issuer of the security will not be able to pay the obligation, either on time or at all.
b) Credit spread risk is the risk that there will be an increase in the difference between the return/mark-up rate of an issuer’s bond and the return/mark-up rate of a bond that is considered to have little associated risk (such as a government guaranteed bond or treasury bill). The difference between this return/mark-up rates is called a “credit spread”. Credit spreads are based on macroeconomic events in the domestic or global financial markets. An increase in credit spread will decrease the value of fixed income securities including money market instruments.
c) Downgrade risk is the risk that a credit rating agency will reduce the credit rating of an issuer’s securities. Downgrades in credit rating will decrease the value of those securities including Shariah compliant money market instruments.
3. 3. Derivative Risk - Derivatives may be used to limit or hedge potential losses associated with investments. This process is called “hedging”. The hedging strategy may not be effective and there is no guarantee that a market will exist when a Fund wants to buy or sell the derivative contract. There is also no guarantee that an acceptable counterpart will be willing to enter into the derivative contract. The counter-party to the derivative contract may not be able to meet its obligations or the Exchanges on which the derivative contracts are traded may set daily trading limits, preventing a Fund from closing out a particular contract. If an Exchange halts trading in any particular derivative contract, a Fund may not be able to close out its position in that contract. The price of a derivative may not accurately reflect the value of the underlying security or index.
4. Government Regulation Risk - Government policies or regulations are more prevalent in some sectors than in others. Funds that invest in these sectors may be affected due to change in these regulations or policies, which directly or indirectly affect the earnings and/or the cash flows and/or any governmental or court orders restraining payment of capital, principal or income.
5. Voluminous Purchase/Redemption of Fund Units Risk - Any significant transaction made by any investor could significantly impact a Fund’s cash flow. If the third party buys large amounts of Units of a Fund, the Fund could temporarily have a high cash balance. Conversely, if the third party redeems large amounts of Units of a Fund, the Fund may be required to fund the redemption by selling securities at an inopportune time. This unexpected sale may have a negative impact on the performance of the investment.
6. Counterparty Risk - The risks with Shariah compliant placement transactions are that the other party may default under the agreement or go bankrupt. The Fund may be left holding the security and may not be able to sell it at the same price it paid for it, if the market value of the security has dropped.
7. Liquidity Risk - Some companies have limited market floats of their issued shares and hence are not actively traded in the stock market or they may generally have very few total shares issued and outstanding. Securities issued by such companies may be difficult to buy or sell, which may cause the value of the Fund if it buys such securities to rise and fall substantially because any buying or selling of such companies’ shares may have a great impact on that companies’ share prices.
8. Market Risk - This risk involves volatility in stock prices resulting from their dependence on market sentiment, speculative activity, supply and demand for the securities and liquidity in the market. The volatility in securities prices results in volatility in the NAV based price of the Unit of the Fund.
9. International Investing Risk - The Fund may also invest outside Pakistan and such investments outside Pakistan may be exposed to certain additional risk including political, economic and exchange rate risks that may reduce the value of the investments. However studies show that diversifying internationally would tend to reduce the overall volatility of a portfolio and thus may reduce risks for investors
10. Country or Political Risks - is the uncertainty of returns caused by possibility of a major change in political or economic environment of the country such as
a. Breakdown of law and order, war, natural disasters, etc
b. Any Government actions, legislative changes or court orders restricting payment of principal or income
c. Any enactment by government of Foreign exchange restrictions
d. Any governmental or court orders restraining payment of capital income
11. Other Risks Involved − Mismanagement of the investee company, third party liability whether through class action or otherwise or occurrence of other events such as strikes, fraud etc., in the company in which the investment is made or a breakdown of law and order, war, terrorist activity, natural disasters etc, senior rights of creditors over the shareholders in the case of winding up, break-down of communication systems of the issuers, stock exchanges or general disruptions of satellite system.
12. Prices of Units of the Fund and income from them may go up or down.
13. Under exceptional (extraordinary) circumstances, the Management Company may declare suspension of redemptions, invoke a queue system or announce winding-up in such events the investor will probably have to wait for payment beyond the normal period and the redemption amount so determined may be lower than the price at the time the redemption request is lodged. Investors are advised to read the relevant clauses of the Fund’s Trust Deed for more detailed information regarding this clause.
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