Underlying Risk & Mitigates
Director.
The return of the Scheme is subject to fluctuations in interest rates. As a result, there is a risk that a decline in short term interest rates may lower the Scheme's returns and consequently affect the overall return on investment.
Factors affecting the health of financial services companies may have a significant impact on the overall performance of the Scheme.
Although the Scheme intends to protect the value of your investment, it is possible to lose money by investing in the Scheme.
As with any money market/income fund, there is a risk that the issuers or guarantors of securities owned by the Scheme, including securities owned by Government Agencies not backed by the full faith and credit of the Government of Pakistan, may default on the payment of the principal or profit/interest or the obligation to repurchase securities from the Scheme.
The Management Company shall incorporate adequate safeguards for controlling the risks in the portfolio construction process. The risk control process would include reducing risks through portfolio diversification and altering the various types of investments depending on market conditions.
In order to counter the judgment risk, the Management Company has employed qualified personnel with professional experience in the investments department. Investors in the POBOP Advantage Plus Fund are advised that all investments in mutual funds and securities are subject to market risks.
Risks include but are not limited to:
Credit Risk – Credit Risk is composed 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 shall not be able to pay the obligation, either on time or at all.
(b) Credit Spread Risk – is the risk that there shall be an increase in the difference between the return/markup rate of an issuer’s bond and the return/markup rate of a bond that is considered to have little associated risk. The difference between this return/markup rates is called ‘credit spread’. An increase in the credit spread would decrease the value of a fixed income security, including money market instruments.
(c) Downgrade Risk – is the risk that a credit rating agency such as PACRA or JCR-VIS or any other reputed international credit rating agency shall reduce the credit rating of an issuer’s security. Downgrades in credit rating shall decrease the value of those associated fixed income securities, including money marketing instruments if that were the case.
Currency Risk – The Scheme may be affected favorably or unfavorably by changes in currencies and exchange control regulations. The income earned by the POBOP Advantage Plus Fund may also be affected by foreign exchange rates.
Interest Rate Risk – Debt securities, including money market instruments, pay a fixed rate of coupon/markup. The value of the Scheme due to its holding in debt securities including money market instruments shall rise and fall as markup rates vary. For example, when interest rates fall, the value of an existing bond will rise because the coupon rate on the bond is greater than prevailing return/markup rates and vice versa.
Government Regulation Risk – Government policies or regulations are more prevalent in some sectors than in others. Schemes that invest in these sectors may be affected due to changes in these regulations or policies, which directly or indirectly affect the earnings and/or cash flows and/or any governmental or court orders restraining payment of capital, principal or income.
Derivative Risk – Derivatives may be used to limit or hedge potential fund losses associated with capital markets and return/markup/coupon rates. This process is referred to as “hedging”. Derivatives may also be used for non-hedging purposes to reduce transaction costs, achieve greater liquidity, and create effective exposure to financial markets or increase speed and flexibility in making portfolio changes. Any use of derivatives has risks, including:
Voluminous Purchase/Redemption of Units Risk – Any significant transaction made by an investor could significantly impact the Scheme’s cash flow. If the investor(s) buys a large number of Units of the Scheme, the Scheme may temporarily have a high cash balance. Conversely, if the Unit holder(s) redeems a large number of Units, the Scheme may be required to fund the redemption by selling securities at an inopportune price. This unexpected sale may have a negative impact on the performance of the Scheme.
Counterparty Risk – The risks with REPO/Reverse REPO/Money Market Placement Transactions are that the other counterparty may default under the agreement or go bankrupt. In a reverse repurchase transaction, the Scheme may be left holding the security and may not be able to sell it at the same price it paid for it, plus return/markup, if the market value of the security has dropped. In case of repurchase transaction, the Scheme may incur a loss if the value of the security sold has increased more than the value of the cash or the collateral held.
Other Risks Involved.
(a) 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.
(b) Breakdown of law and order, war, terrorist activity, natural disasters, etc.
(c)Senior rights of some creditors over other creditors in the event of winding up.
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