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Prudential ICICI Mutual Fund Future price = Closing spot price = 4950 Profits for the Fund = (4950-4920)*10000 = Rs 300,000 Please note that the above example is given for illustration purposes only. The net impact for the Fund will be in terms of the difference between the closing price of the index and cost price (ignoring margins for the sake of simplicity). Thus, it is clear from the example that the profit or loss for the Fund will be the difference of the closing price (which can be higher or lower than the purchase price) and the purchase price. The risks associated with index futures are similar to the one with equity investments. Additional risks could be on account of illiquidity and hence mispricing of the future at the time of purchase. Risks attached with the use of derivatives: 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 of the derivative itself. Derivatives require the maintenance of adequate controls to monitor the transactions entered into, the ability to assess the risk that a derivative adds to the portfolio and the ability to forecast price or interest rate movements correctly. 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 the risk of mis pricing or improper valuation of derivatives and the inability of derivatives to correlate perfectly with underlying assets, rates and indices. Thus, derivatives are highly leveraged instruments. Even a small price movement in the underlying security could have a large impact on their value. Also, the market for derivative instruments is nascent in India. Valuation of Derivative Products : a) The traded derivatives shall be valued at market price in conformity with the stipulations of sub clauses (i) to (v) of clause 1 of the Eighth Schedule to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, as amended from time to time. b) The valuation of untraded derivatives shall be done in accordance with the valuation method for untraded investments prescribed in sub clauses (i) and (ii) of clause 2 of the Eighth Schedule to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as amended from time to time. 12) Subject to the Regulations and the applicable guidelines, the Scheme and the Plans thereunder may, if the Trustee permits, engage in stock lending. Advantages and Risks attached with investments in ADRs/GDRs: It is AMCs belief that the investment in ADRs/GDRs/overseas securities offer new investment and portfolio diversification opportunities into multi-market and multi-currency products. However, such investments also entail additional risks. Such investment opportunities may be pursued by the AMC provided they are considered appropriate in terms of the overall investment objectives of the schemes. Since the Schemes would invest only partially in ADRs/GDRs/overseas securities, there may not be readily available and widely accepted benchmarks to measure performance of the Schemes. To manage risks associated with foreign currency and interest rate exposure, the Fund may use derivatives for efficient portfolio management including hedging and in accordance with conditions as may be stipulated by SEBI/RBI from time to time. To the extent that the assets of the Schemes will be invested in securities denominated in foreign currencies, the Indian Rupee equivalent of the net assets, distributions and income may be adversely affected by the changes in the value of certain foreign currencies relative to the Indian Rupee. The repatriation of capital also may be hampered by changes in regulations concerning exchange controls or political circumstances as well as the application to it of the other restrictions on investment. Offshore investments will be made subject to any/all approvals, conditions thereof as may be stipulated by SEBI/RBI and provided such investments do not result in expenses to the Fund in excess of the ceiling on expenses prescribed by and consistent with costs and expenses attendant to international investing. The Fund may, where necessary, appoint other intermediaries of repute as advisors, custodian/sub-custodians etc. for managing and administering such investments. The appointment of such intermediareis shall be in accordance with the applicable requirements of SEBI and within the permissible ceilings of expenses. The fees and expenses would illustratively include, besides the investment management fees, custody fees and costs, fees of appointed advisors and sub-managers, transaction costs, and overseas regulatory costs. Risks associated with stock lending : The risks in lending portfolio securities, as with other extensions of credit, consist of the failure of another party, in this case the Approved Intermediary, to comply with the terms of agreement entered into between the lender of securities i.e. the Scheme and the approved intermediary. Such failure to comply can result in the possible loss of rights in the collateral put up by the borrower of the securities, the inability of the Approved Intermediary to return the securities deposited by the lender and the possible loss of any corporate benefits accruing to the lender from the securities deposited with the Approved Intermediary. 32
Prudential ICICI Balanced Fund h) Investment Restrictions for the Scheme Pursuant to the Regulations and amendments thereto, the following investment restrictions are presently applicable to the Scheme: 1) The initial issue expenses in respect of any Scheme will not exceed 6% of the Funds raised under that Scheme. 2) A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by a credit rating agency authorised to carry out such activity under the SEBI Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset management company. Provided that, such limit shall not be applicable for investments in government securities and money market instruments. Provided further that investment within such limit can be made in mortgage backed securitised debt which are rated not below investment grade by a credit rating agency registered with SEBI. 3) A mutual fund scheme shall not invest more than 10% of its NAV in un rated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made by an internal committee constituted by AMC to approve the investment in un-rated debt securities in terms of the parameters approved by the Board of Trustees and the Board of asset management company Otherwise such investments shall be made with the prior approval of the Board of Trustees and the Board of asset management company or the Committee of Directors constituted in this behalf. Debentures, irrespective of any residual maturity period (above or below one year), shall attract the investment restrictions as applicable for debt instruments as specified under Clause 2 & 3 above. 4) The Fund under all its schemes shall not own more than 10% of any company’s paid up capital carrying voting rights. 5) Transfer of investments from one Scheme to another Scheme in the same Mutual Fund is permitted provided: a) Such transfers are done at the prevailing market price for quoted instruments on spot basis (spot basis shall have the same meaning as specified by a Stock Exchange for spot transactions); transfer of unquoted securities will be made as per the policies laid down by the Trustees from time to time; and b) The securities so transferred shall be in conformity with the investment objective of the Scheme to which such transfer has been made. 6) The Scheme may invest in other schemes under the same AMC or any other Mutual Fund without charging any fees, provided the aggregate inter-scheme investment made by all the schemes under the same management or in schemes under management of any other asset management company shall not exceed 5% of the Net Asset Value of the Fund. 7) The Fund shall get the securities purchased transferred in the name of the Fund on account of the concerned Scheme, wherever investments are intended to be of a long-term nature. 8) The Fund may buy and sell securities on the basis of deliveries and will not make any short sales or engage in carry forward transaction or badla finance, except as and when permitted by the RBI in this regard (for example “when issued market” transactions). Provided that mutual funds shall enter into derivatives transactions in a recognised stock exchange for the purpose of hedging and portfolio balancing, in accordance with the guidelines issued by SEBI. 9) All the Scheme’s investments will be in transferable securities (whether in capital markets or money markets) or bank deposits or in money at call as in privately placed debentures as securitised debt. 10) No loans for any purpose can be advanced by the Scheme. 11) The Fund may lend securities in accordance with stock lending scheme of SEBI. 12) The mutual fund scheme shall not make any investment in; a) any unlisted security of an associate or group company of the sponsor; or b) any security issued by way of private placement by an associate or group company of the Sponsor; or c) the listed securities of group companies of the Sponsor which is in excess of 25% of the net assets 13) No mutual fund scheme shall invest more than 10% of its NAV in equity shares of any one issuer (limit not applicable for index or sector specific schemes). 14) No open-ended mutual fund scheme shall invest more than 5% of its NAV in unlisted equity shares or equity related instruments. 15) The Fund shall not borrow except to meet temporary liquidity needs of the Fund for the purpose of repurchase redemption of units or payment of interest and dividend to the Unitholders, provided that the Fund shall not borrow more than 20% of the net assets of the individual Scheme and the duration of the borrowing shall not exceed a period of 6 months. 16) Pending deployment of funds of a Scheme in securities in terms of investment objectives of the Scheme, the AMC can invest the funds of the Scheme in short term deposits of scheduled commercial banks or in call deposits. 33
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