Market Risk:

The success of the investment activities may be affected by the success or failure of the companies in which the Fund invests and by general economic and market conditions, such as market and other trends, interest rates, availability of credit, volatility, inflation rates, economic uncertainty, changes in laws, national and international political circumstances and other factors. These factors may affect the level and volatility of securities prices and the liquidity of the investments, and may affect substantially and adversely the business and prospects of the investment.

Tracking Error Risk:

Normally, the Investment Manager will utilize the concept of “estimated tracking error” as a measure of the target portfolios risk relative to the Index. The estimated tracking error is based on statistical probabilities (i.e., uncertainties) and, therefore, cannot precisely predict future results. The actual tracking error will be the result of many factors including, without limitation, market volatility, company specific anomalies, instability of correlation between securities included in the Index, and other factors, and there can be no assurance that the Fund’s tracking error in relation to the Index will be at levels suggested by the Investment Manager’s forecasts. Accordingly, the actual tracking error of the Fund relative to the Index may from time to time, or consistently, be higher than the estimated tracking error including, without limitation, as a result of the occurrence of an Index Adjustment Event.

Un clear Investment Policy

This situation arises because investors do not have a clear cut idea about their risk disposition.  It involves unclear view of risk and the investor is exposed to greed if the market is up and fear if it the market is down. The desire to reap profits when prices are high and the fear of running into losses when the prices are low are the major factors responsible for poor performance.

Portfolio Management

Stock Switching

It is a situation where the investor is selling one stock and at the same time buying another stock as he expects the value of the first stock to go down and expects the price of the second stock to go up. There are two important considerations to be taken into account when such a decision is taken. First, though it may be the correct time to sell the first stock it may not be the correct time to buy the second stock as it is very possible that the second stock is also falling in value. Second, it possibly can be the right time to buy the second stock but it does not necessarily mean it is the right time to sell the first stock as the stock might still have some appreciation in the market.

Over-diversification

It is a case where an investor has large number of names in his portfolio, maybe 30-40 different stocks. An investor’s portfolio in the case of over diversification is the same or is a tad above or below the index depending on the names in the portfolio. Managing a portfolio with 30-40 different stocks would become a very tough job. Decision making would become slow and ineffective. An investor should typically have 10-15 well researched stocks.

Under-diversification

It is a situation where an investor has only 1-2 stocks in his portfolio. This happens because the investor is over confident of the performance of the stock or it is due to plain complacency.  This is considered to be a bad strategy as the investor exposes himself to individual asset risks. Diversification is mainly required to lessen the idiosyncratic risk.

Wrong attitude towards losses and profits

A common tendency in investors is that they are reluctant to confess that he has made a mistake. While purchasing a stock if an investor expects the price to rise, but on the contrary the stock falls, the investor still hopes that it will rebound and he can break even. Surprisingly such kind of hopes tends to persist even when the scenario is bleak and there is a greater possibility of a further decline. This arises out of a disinclination to admit mistakes. The investor wants to postpone the booking of a loss. If at all due to some favorable conditions the price of the stock recovers the investor will sell the stock price more or less equals the original purchase price even though there might be fair chances of further increase. Such behavior is governed because of the psychology of the investor.