Reliance Portfolio Management

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Disclaimer

Reliance Capital Asset Management Limited (RCAM) is a subsidiary of Reliance Capital Limited.
The sponsor and promoter of RCAM is Reliance Capital Limited (RCL). RCL is a part of the Reliance - Anil Dhirubhai Ambani Group. Reliance Capital is one of India's leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of networth (Rs. 6086 crores) as at March 31, 2008. Reliance Capital Ltd has interests in asset management and mutual funds, life and general insurance, private equity and proprietary investments, stock broking and other activities in financial services.

Risk Factors

Investments in securities are subject to market risks and there is no assurance or guarantees that the objectives of any of the Schemes will be achieved.
Investors are not being offered any guaranteed or indicative returns through any of the Schemes. The investments may not be suited to all categories of investors.
The past performance of the Portfolio Manager in any Scheme/option is not indicative of the future performance in the same Scheme/option or in any other scheme /option either existing or that may be offered. There is no assurance that past performances indicated in earlier Schemes/options will be repeated.
The names of the Schemes/option do not in any manner indicate their prospects or returns. The various factors which may impact the value of the Schemes' investments include, but are not limited to, fluctuations in the equity and bond markets, fluctuations in interest rates, prevailing political and economic environment, changes in government policy, factors specific to the issuer of the securities, tax laws, liquidity of the underlying instruments, settlement periods, trading volumes etc.
Technology stocks and some of the investments in niche sectors run the risk of volatility, high valuation, obsolescence and low liquidity.
The investments made are subject to external risks such as war, natural calamities, policy changes of Local/International markets which affects stock markets.
The Portfolio Manager may invest in the shares, units of mutual funds, debt, deposits and other financial instruments of group companies.
In case the portfolio invests in mutual funds registered with SEBI, scheme specific risk factors of each such underlying scheme will be applicable to the Portfolio. All risks associated with such underlying schemes, including performance of their underlying stocks, derivative instruments, stock-lending, off- shore investments etc. will therefore be applicable to the Portfolio
Risk arising out of non diversification: The investment objectives of one or more of the portfolio management schemes could result into concentration on a specific asset/asset class/sector/issuer etc., which could lead to non diversified portfolio which tends to be more volatile than diversified portfolio.
The liquidity of the Portfolio's investments may be affected due to its holdings of unlisted securities.
The Portfolio Manager may, subject to authorisation by the Client in writing,participate in securities lending. There are risks inherent in securities lending, including the risk of failure of the other party. Such failure can result in a possible loss of rights to the collateral, and the possible loss of corporate benefits accruing thereon. The Portfolio Manager is not responsible or liable for any loss resulting from the operations of the schemes/options.
Each portfolio will be exposed to various risks depending on the investment objective, investment strategy and the asset allocation. The investment objective, investment strategy and the asset allocation may differ from client to client. However, generally, highly concentrated portfolios with lesser number of stocks will be more volatile than a portfolio with a larger number of stocks. Portfolios with higher allocation to equities, will be subject to higher volatility than portfolios with low allocation to equities.
Risk attached with the use of derivatives :
The portfolio manager may use derivative products as may be permitted by SEBI from time to time. As and when the schemes trade in the derivatives market there are risk factors and issues concerning the use of derivatives that investors should understand. Derivative products are specialized instruments that require investment techniques and risk analyses different from those associated with stocks and bonds. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself. Derivatives require maintenance of adequate controls to monitor the transactions entered into, the ability to assess the risk that a derivative adds to the portfolio and other related capabilities. There is the possibility that a loss may be sustained by the portfolio as a result of the failure of another party (usually referred to as the "counter party") to comply with the terms of the derivatives contract. Other risks in using derivatives include market risk, valuation risk, option risk, liquidity risk and basis risk. Also, it is to be noted that the market for derivative instruments is nascent in India.
Given below are some of the common risks associated with investments in fixed income and money market securities. These risks include but are not restricted to:
Interest Rate Risk :
As with all debt securities, changes in interest rates will affect the valuation of the Portfolios, as the prices of securities generally increase as interest rates decline and generally decrease as interest rates rise. Prices of longer-term securities generally fluctuate more in response to interest rate changes than do shorter-term securities. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the valuation of Portfolios.

Liquidity or Marketability Risk :
This refers to the ease at which a security can be sold at or near its true value. The primary measure of liquidity risk is the spread between the bid price and the offer price quoted by a dealer. Liquidity risk is characteristic of the Indian fixed income market.

Credit Risk :
Credit risk or default risk refers to the risk which may arise due to default on the part of the issuer of the fixed income security (i.e. will be unable to make timely principal and interest payments on the security). Because of this risk debentures are sold at a yield spread above those offered on Treasury securities, which are sovereign obligations and generally considered to be free of credit risk. Normally, the value of a fixed income security will fluctuate depending upon the actual changes in the perceived level of credit risk as well as the actual event of default.

Reinvestment Risk :
This risk refers to the interest rate levels at which cash flows received from the securities under a particular Portfolio are reinvested. The additional income from reinvestment is the "interest on interest" component. The risk refers to the fall in the rate for reinvestment of interim cashflows.
As with any other debt instrument, the following risk factors have to be taken into consideration while investing in PTCs:
Credit Risk :
Since most of the PTCs are drawn from a cherry picked pool of underlying assets, the risk of delay / default due to poor credit quality is low.Further more most of the PTCs enjoy additional cashflow coverage in terms of subordination by another lower class of PTCs or in terms of excess cash collateralisation. Moreover, we intend to invest mostly but not exclusively in PTCs rated AAA or equivalent so as to keep control on credit risk. However, it shall be understood that not all PTCs shall be AAA rated and thus credit risk may be higher based upon the ratings. PTCs which are AAA rated are comparatively less risky than PTCs which are AA rated.

Liquidity Risk :
Since the maturity of the PTCs will be in line with the maturity of the Portfolio, the risk arising from low secondary market liquidity of such instruments is low.

Price Risk / Interest Rate Risk :
The price risk of these instruments shall be in line with the maturity / duration of such instruments. However given the fact that these instruments will have a maturity profile upto 2 years, the duration risk is relatively less.Domestic Securitised debt can have different underlying assets and these assets have different risk characteristics. These may be as given in the following example:
Security 1 - Backed by receivables of personal loans originated by ICICI Bank Specific Risk Factors: Loss due to default and/or payment delay on Receivables, Premature Termination of Facility Agreements, Limited loss cover, Delinquency and Credit Risk, Limited Liquidity and Price Risk, Originator/Collection Agent Risk, Bankruptcy of the Originator, Co-mingling of funds.
Security 2 - Senior Series Pass Through Certificates backed by commercial vehicles and two-wheeler loan and loan receivables from IndusInd Bank Limited Specific Risk Factors - Credit And Rating Downgrade Risk, Prepayment And Foreclosures Risk for Senior PTC Series , Prepayment And Foreclosures Risk for Senior PTC Series, Servicing Agent Risk, Co-mingling Risk, Bankruptcy of the Seller.
The Portfolio Manager has previous experience / track record of about three years since August 2004 in providing Portfolio Management Services by virtue of having commenced its activities after obtaining no-objection from the SEBI - Investment Management Department vide letter no. IMD/PSP/17209/2004 dated August 5, 2004.
Specific Risk Factors & Disclosures pertinent to Structured Notes like Index Linked Debentures & Securitised Debt Instruments ( this would be same as PTCs)
- Presently, secondary market for such securitised papers is not very liquid. There is no assurance that a deep secondary market will develop for such securities. This could limit the ability of the scheme to resell them. Even if a secondary market develops and sales were to take place, these secondary transactions may be at a discount to the initial issue price due to changes in the interest rate structure.
- Securitised transactions are normally backed by pool of receivables and credit enhancement as stipulated by the rating agency, which differ from issue to issue. The Credit Enhancement stipulated represents a limited loss cover to the Investors. These Certificates represent an undivided beneficial interest in the underlying receivables and there is no obligation of either the Issuer or the Seller or the originator, or the parent or any affiliate of the Seller, Issuer and Originator. No financial recourse is available to the Certificate Holders against the Investors' Representative. Delinquencies and credit losses may cause depletion of the amount available under the Credit Enhancement and thereby the Investor Payouts may get affected if the amount available in the Credit Enhancement facility is not enough to cover the shortfall. On persistent default of an Obligor to repay his obligation, the Seller may repossess and sell the underlying Asset. However many factors may affect, delay or prevent the repossession of such Asset or the length of time required to realize the sale proceeds on such sales. In addition, the price at which such Asset may be sold may be lower than the amount due from that Obligor.
  - The Structured Notes like the Index linked securities, in which a portion of the funds of the scheme are proposed to be invested in, are high risk, high return instruments. A small movement in returns generated by the underlying index could have a large impact on their value and may also result in a loss.
  - The Issuer of equity index linked securities or any of its Agents, from time to time may have long or short positions or make markets including in NIFTY indices, futures and options (hereinafter referred to as "Reference Assets") (and other similar assets), they may act as an underwriter or distributor of similar instruments, the returns on which or performance of which, may be at variance with or asymmetrical to those on the securities, and they may engage in other public and private financial transactions (including the purchase of privately placed investments or securities or other assets). The foregoing activities of "The Issuer of index linked securities" or any of its Agents and related markets (such as the foreign exchange market) may affect the value of the securities. In particular, the value of the securities could be adversely impacted by a movement in the Reference Assets, or activities in related markets, including by any acts or inactions of "The Issuer of index linked securities" or any of its Agents;
  - The equity Index linked securities, even after being listed, may not be marketable or may not have a market at all;
  - The returns on the Structured securities, primarily linked to the S&P CNX Nifty Index and/or any other equity benchmark as the Reference Asset, and even otherwise, may be lower than prevalent market interest rates or even be nil or negative depending entirely on the movement in the underlying index and futures values as also that over the life of the securities (including the amount if any, payable on maturity, redemption, sale or disposition of the securities) the security holder may receive no income/return at all or negative income/return on the security, or less income/return than the security-holder may have expected, or obtained by investing elsewhere or in similar investments.
  - The return on investment in securities would depend on the prevailing market conditions, both domestically as well as internationally. The returns mentioned in the term sheets are indicative and may or may not accrue to an investor accordingly.
  - In equity index linked securities, in the event of any discretions to be exercised, in relation to method and manner of any of the computations including due to any disruptions in any of the financial markets or if for any other reason, the calculations cannot be made as per the method and manner originally stipulated or referred to or implied, such alternative methods or approach shall be used as deemed fit by the issuer and may include the use of estimates and approximations. All such computations shall be valid and binding on the investor, and no liability there for will attach to the issuer of equity index linked securities / AMC;
  - There is a risk of receiving lower than expected or negligible returns or returns lower than the initial investment amount in respect of such equity index linked securities over the life and/or part thereof or upon maturity, of the securities.
  - At any time during the life of such securities, the value of the securities may be substantially less than its redemption value. Further, the price of the securities may go down in case the credit rating of the Company or issuer goes down;
  - The securities and the return and/or maturity proceeds hereon, are not guaranteed or insured in any manner by the Issuer of equity index linked securities;
  - The Issuer of equity index linked securities or any person acting on behalf of the Issuer of equity index linked securities, may have an interest/position as regards the Portfolio Manager and/or may have an existing banking relationship, financial, advisory or other relationship with them and/or may be in negotiation/discussion with them as to transactions of any kind,
  - The Issuer of equity index linked securities or any of its Agents, have the legal ability to invest in the units offered herein and such investment does not contravene any provision of any law, regulation or contractual restriction or obligation or undertaking binding on or affecting the investor, and/or itS assets;
  - In the interest of investors, the portfolio manager may, at its sole discretion, invest up to 100% of the portfolio in liquid and / or debt mutual fund schemes. Moreover, the portfolio manager may at its sole discretion decide not to apply to the securities and return the funds to investors, in case there is any change in the risk/return profile of the portfolio in the backdrop of changed market conditions or for any other reason that the portfolio manager may deem appropriate.
  - Risks pertaining to the equity index linked securities schemes:
    - Performance of the Reference Index will have a direct bearing on the performance of the Scheme. In the event the Reference Index is dissolved or withdrawn by the Index Provider, such as, India Index Services and Products Ltd. (IISL) (for NSE- Nifty), BSE for BSE-Sensex etc., the Debenture-Trustees upon request by the issuer may modify the terms of issue of debentures, so as to track a different and suitable index and appropriate intimation will be sent to the debenture holders.
    - Tracking errors are inherent in any equity index linked security and such errors may cause the equity Index-Linked security to generate returns which are not in line with the performance of the Reference Index or one or more securities covered by / included in the Reference Index. Such variations, referred to as tracking error, are expected to be around 2% per annum, but may vary substantially due to several factors including but not limited to:
    - Any delay experienced in the purchase or sale of securities due to liquidity of the market, settlement and realisation of sales proceeds and the registration of any security transfer and any delays in receiving cash and scrip dividends and resulting delays in reinvesting them.
    - The Reference Index reflects the prices of securities at close of business hours.

The Index Provider undertakes a periodic review of the scrips that comprise the Reference Index and may either drop or include new securities.