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Pramerica Credit Opportunities Fund
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A fund with triple benefits, managed by professionals
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Life in the rising interest rate scenario
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In the last 18 months, interest rates have gone up by 12 times. Your EMIs are the
first to shoot up. However, the returns on your Fixed Deposits (FD), Fixed Maturity
Plans (FMP), Non-Convertible Debentures(NCD) remain the same (since they are locked-in).
So, is locking-in your money in FD/FMP/NCD a wise thing to do?
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Life in a FD, FMP?
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Locked-in returns
FDs/FMPS do not re-set their returns in case of rising interest rates. FD/FMP/NCD
launched 18 months back missed out on all the rate hikes. Even if the interest rates
were to fall from here, you would miss out on the capital gains that an open ended
fund can generate. You also face a re-investment risk by investing in these products
– upon maturity you have to invest at the prevailing interest rates.
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Blind spots
FD, FMP and NCD are products with fixed tenure. You invest on one particular date
and it matures on a particular date. At the end of the tenure, FD, FMP and NCD compulsorily
have to be redeemed, even if you do not need the money. And at that time you may
have to keep your money idle, waiting for the right FD/FMP/NCD to re invest in thus
losing out on interest.
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Liquidity
FMPs are relatively illiquid. If you need the money before maturity, you can sell
the FMP units only on the stock exchange, where the transactions are very few and
you may have to sell at a discount. FMPs can be redeemed only on maturity.
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You can potentially earn a lot more if you invest in an actively managed open ended
mutual fund product as compared to FD/FMP/NCD.
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Life in Corporate FD or NCD ?
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Investing in a Corporate FD or NCD is like putting all your eggs in one basket.
Your money and future returns are dependent on that one company. If the company
faces cash crunch, you may not even get your principal amount back. Many would recall
the fixed deposit schemes launched in the 1990s by plantation companies promising
very high returns by investing in teak trees, or the ones launched by finance companies
which disappeared without a trace.
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Even in the recent past, Fixed Deposits and NCDs issued by real estate companies
and modern retailers, with strong support from financiers, ran into a lot of trouble.
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How to overcome these challenges?
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Life is full of challenges. Do you know when will the next interest rate hike be
announced? Do you know which investment is risky and which is not? Do you which
corporate FD will go bust? If not, then, how would you overcome these challenges?
Here is an answer…
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- Invest in a actively managed open ended mutual fund scheme
- Benefit from changes in market conditions like interest rate, credit spreads etc.
- Do not keep money idle waiting for the right FMP/NCD issue to invest in
- Plan your investment & redemption, thus your tax incidence, as per your requirements
- Invest in a diversified portfolio
- Spread your risk across the risk/reward curve
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An open ended debt fund based on the three pillars of:
- High Accrual Securities
- Invests across credit spectrum and rating categories
- Active Portfolio Management
- Dynamically managed portfolio that helps to gain from volatile interest rates and
credit spreads
- Opportunistic Play
- Opportunities arising out of changes in credit ratings & credit outlook
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1. High Accrual Securities
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Investing in the current high interest scenario will aid in higher accruals. Also,
it is seen that investing in AA rated securities could improve the overall returns
by an average of 0.50% to 1.00%.
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Since the rate hikes started, while short term rates have gone up considerably,
long term rates have remained flat. Thus opportunity to earn higher returns lies
in short term securities with 12-18 months tenure.
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2. Active Portfolio Management
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Changes in interest rates throw up various opportunities for a fund.
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FMPs typically follow a buy and hold strategy. They cannot make the above re-adjustments
to their portfolio. Only with an actively managed portfolio, one can capture these
benefits.
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3. Opportunistic Play
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At times markets provide opportunities where the risk/reward ratio becomes highly
skewed Let us look at a hypothetical example in the NBFC sector. Say, the regulator
announces higher capital adequacy norms for NBFCs. Securities issued by all NBFCs
will come under stress immediately as many might not be able to meet the new norms
or these norms will hurt their profitability.
However, some strong promoter backed NBFCs can meet these higher norms easily as
the promoters can easily infuse more capital. Here lies the opportunity! Investing
in such securities at a discount will help you lock-in a higher yield at a much
lower risk.
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The fund manager will look for opportunities that can be in the form of:
- Upward or downward revision in the credit rating of a security
- Investing in a AA rated security which upgrades to AAA : Opportunity for capital
gains E.g. 2009-10 : Bank of India, Dabur India Limited, Global Trade Finance, Union
Bank of India
- Investing in a fundamentally sound AAA rated security after it is downgraded to
AA :Opportunity to lock-in higher yield
E.g. 2009-10 : IDFC, PNB Housing Finance, Reliance Infrastructure, Standard Chartered
Investments & Loans
E.g. 2010-11 : Reliance Capital, DCB
- Change in credit outlook of a company or sector
E.g. Bajaj Hindustan, IndusInd Bank
- Unlisted securities with favorable risk/reward ratio
- Securities issued by a subsidiary of large & stable promoter group
E.g. Trapti Trading (Birla Group), Tata Housing Finance (Tata Group), Shriram Equipment
Finance (Shriram Group)
(The above examples are for illustrative purposes only.)
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Why Pramerica Credit Opportunities Fund?
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The investment objective of the scheme is to generate income by investing in debt
/and money market securities across the credit spectrum. The scheme would also seek
to maintain reasonable liquidity within the fund The Scheme will follow an active
duration management strategy.
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Current Portfolio Strategy
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Make the right choice
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So, which is the ideal option to invest in for 1 year or more?
- FD/FMP/NCD which have re-investment risk & returns cannot adjust to dynamic interest
or rates
- Pramerica Credit Opportunities Fund which is tax efficient and has the potential
to benefit from high interest rate scenario
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Important Disclosures: Name of the Scheme:
Pramerica Credit Opportunities Fund. Scheme Classification:
An open ended debt scheme. Investment Objective: The
investment objective of the scheme is to generate income by investing in debt /and
money market securities across the credit spectrum. The scheme would also seek to
maintain reasonable liquidity within the fund. However, there is no assurance that
the investment objective of the Scheme will be realized and the Scheme does not
assure or guarantee any returns. Asset Allocation : Money
market instruments & Debt securities : 0% t0 100% Benchmark:
CRISIL Composite Bond Fund Index Terms of issue and sale and redemption of units:
Issue of units of Rs. 1000 each for cash during the New Fund Offer and at NAV based
prices thereafter. The scheme offers sale and redemption facility on all business
days during the ongoing offer. NAV of the Scheme will be calculated and disclosed
at the close of every Business Day. Load Structure:
Entry Load: Not Applicable, Exit Load:
@2%, If the Units are Redeemed / Switched-out within 365 days of allotment; and
NIL - If the Units are Redeemed / Switched-out after 365 days of allotment
Recurring Expenses: Recurring expenses including the investment
management and advisory fee that can be charged to the Scheme shall be subject to
a percentage limit of average weekly net assets @ 2.25% for the first 100 crore;
@ 2.00 %, next Rs. 300 crore; @1.75 % on the next Rs. 300 Crores; and @ 1.50% on
the balance. NFO expenses: To be fully borne by AMC/ Sponsor.
Copy of SID/SAI and Key Information Memorandum (KIM) can be obtained from any of
our Investor Services Centers as well as from our website
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Risk Factors: All mutual funds and securities investments
are subject to market risks and there can be no assurance that the objective of
the Scheme will be achieved. As with any investment in securities, the NAV of the
units under the scheme may go up or down depending upon the factors and forces affecting
the securities markets. Pramerica Credit Opportunities Fund is only the name of the
scheme and does not in any manner indicate either the quality of the Scheme, its
future prospects and returns.
Performance of the Sponsor has no bearing on the expected performance of the mutual
fund or any of its schemes. Past performance of the Sponsor and their Affiliates/AMC/Mutual
Fund & its Scheme(s) does not indicate the future performance of the Scheme and
may not necessarily provide a basis of comparison with other investments. Investment
in Mutual Fund Units involves investment risks such as trading volumes, settlement
risk, liquidity risk, default risk including the possible loss of principal. As
the price / value / interest rates of the securities in which the scheme invests
fluctuate, the value of your investment in the Scheme may go up or down. Investors
are not being offered any guaranteed / assured returns under any scheme of Pramerica
Mutual Fund. FOR SCHEME-SPECIFIC RISK FACTORS & TAX IMPLICATIONS, PLEASE
REFER TO THE SCHEME INFORMATION DOCUMENT.
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This document has been prepared by Pramerica Asset Managers Private Limited (the
AMC) on the basis of publicly available information, internally developed data and
other third party sources believed to be reliable. However, no assurances are provided
regarding the reliability of such information. There can be no assurance that any
forecast made herein will be actually realized. The information contained herein
is current as of the date of issuance (or such earlier date as referenced herein)
and is subject to change without notice. The AMC has no obligation to update any
or all of such information; nor does the AMC make any express or implied warranties
or representations as to its completeness or accuracy.
The AMC is neither a legal nor tax advisor. The information contained herein does
not constitute investment or tax advice. These materials do not take into account
individual client circumstances, objectives or needs. No determination has been
made regarding the suitability of any securities, financial instruments or strategies
for particular clients or prospects. The information contained herein is provided
on the basis of and subject to the explanations, caveats and warnings set out elsewhere
here in. In view of the individual nature of the tax implications, each investor
is advised to consult his or her own professional tax advisor and/or consultant,
for advice concerning the investor’s particular situation with respect to the specific
tax and other implications arising out of his/her/its participation in the Scheme
& suitability of the Scheme for the investor’s objective & needs.
These materials are not intended for distribution to or use by any person in any
jurisdiction where such distribution would be contrary to local law or regulation.
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Statutory Details: Pramerica Mutual Fund is set up as a
Trust under the Indian Trusts Act, 1882 and registered with SEBI. Sponsor: Prudential
Financial, Inc. (PFI) of the United States of America [liability restricted to initial
contribution of Rs. 1 Lac towards the corpus of the Mutual Fund]. [Pramerica is
the brand name used by PFI and its affiliates in select countries outside the United
States. Prudential Financial, Inc. of the United States is not affiliated in any
manner with Prudential plc, a company incorporated in the United Kingdom]
Trustee: Pramerica Trustees Private Limited. Investment Manager:
Pramerica Asset Managers Private Limited.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. PLEASE READ ALL SCHEME
RELATED DOCUMENTS CAREFULLY BEFORE INVESTING
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