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SFS
1. Risks
Mouni Sharon

Risk
The term risk means the variability in the rate of return of an investment. It is the amount by which the returns of an investment may increase or decrease from your expected value. The wider this gap, the greater is the risk you experience. Your investment time horizon, age, surplus cash position and investment goal all determine your risk taking ability. Also the higher the expected return from an investment, greater is the risk borne by it. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. Reading the prospectus will help you to understand the risk associated with that particular fund.

Defining Mutual fund risk

Different mutual fund categories have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a higher risk/return potential than bond funds. Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund. Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk. Following is a glossary of some risks to consider when investing in mutual funds.

Call Risk. The possibility that falling interest rates will cause a bond issuer to redeemor callits high-yielding bond before the bond's maturity date. Country Risk. The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline. Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and

when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.

Currency Risk. The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk. Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk. The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates. Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. Manager Risk. The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives. Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance. Principal Risk. The possibility that an investment will go down in value, or "lose money," from the original or invested amount. Non-market risk: Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries.

Banking
The two main risks for banks are: 1. Liquidity Risk - The risk that all customers who have deposits with the bank want to withdraw their deposits at the same time. No bank on earth can survive such a calamity. 2. Credit Risk - The risk that customers who borrowed money from the bank would default on the repayments and not pay the money they owe the bank.

Insurance
Pure Risk: When the risk is either all or none, it is called a pure or static risk. Pure risks are straight bets, and most insurance companies deal in these kinds of bets. This is because there are only two possible outcomes for the risk of insuring the person or property: either the risk will pay off, or it won't. This design is obviously at work in policies, such as life or flood insurance. These policies only pay off in the event of total loss of the insured item. The benefit of pure risk policies to the policyholder is a potentially large payoff in the event of a catastrophe; the benefit to the insurance company is the likelihood that the policy will remain active, and premiums will continue to be paid. Personal Risk: When an individual is personally affected by the risk involved, this is known as personal risk. Personal risk is the basis behind a wide variety of insurance types, including unemployment, health, homeowner's and renter's insurance. This is also where policyholders find the most ambiguity in their policies. Losses in a personal risk policy do not have to be total; and because the chances of at least a partial payout of the policy are good, many insurance companies look to specify the circumstances under which a loss is covered by the policy. For example, a health insurance policy may cover cancer treatment but only if that treatment falls within certain guidelines. Fundamental Risk: Fundamental risk is one that involves the entire community. These types of risk include high inflation, stock market crashes, high instances of unemployment and widespread natural disasters. Insurance companies occasionally find themselves wrapped up in these types of fundamental risks (e.g., the homeowner's insurance companies were entangled in debts to homeowners from hurricane Katrina for years), but most fundamental risks must be insured by government agencies. Stock market crashes and bank runs are a good example of fundamental risks handled by government agencies, such as the Federal Reserve Bank. The Risks in ULIP: Even though ULIPs are predominantly an insurance tool, it is fraught with risks owing to the element of capital market investment it bears. As an investor in ULIP here is what one may experience.

Market Risk: ULIP are directly affected by the ups and downs in the capital market. Whether it is volatility in the equity market or an increase or decline in interest rates, the Net Asset Value of the fund is impacted and may show a rise or fall. Lack of Guaranteed Returns- ULIP returns is not guaranteed. The investment risk of a portfolio is borne by the policy holder. The performance of the underlying fund and expertise of the fund manager put together determine the gains or losses the investment would make.

Liquidity Risk- ULIP being an insurance product comes with a lock-in period of 3 to 4 years. They are thus low in liquidity and you may loss out a certain percentage of your investment if you wish to redeem during this lock-in period. Past performance indicator: Though the past performance of the ULIP may seem to be attractive, what one should keep in mind is that this may not follow in future. Past performance of a fund is not an indication of its future performance, as predicting market behavior and volatility is a near to impossible task. High cost structure- The charges in a ULIP are quite high. A high fee structure especially during a decline in the market, affects the returns on a ULIP.

Type of Funds in ULIPs: Insurance companies offer a range of fund options in a ULIP plan to suit the different objectives and risk profiles of investors. Here are the different funds that are commonly offered. The risk and the returns vary from fund to fund. EQUITY FUNDS DEBT/FIXED INCOME FUNDS MONEY MARKET FUNDS Invests in bank deposits, cash and money market instruments BALANCED FUNDS Combines equity and debt investments Medium risk for Capital term preservation with moderate levels of capital appreciation

Primarily Primarily invests invests in in bonds, equity government and market fixed income securities. Medium high risk to Low risk to

medium Low risk

Aims towards capital appreciation

Aims at capital Primarily preservation short investors