21042903 Comparitive Analysis of Mutual Funds and Ulips Project Report

8/20/2019 21042903 Comparitive Analysis of Mutual Funds and Ulips Project Report

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PREFACE

MBA is a stepping-stone to the management carrier and to develop good

manager it is necessary that the theoretical must be supplemented with

exposure to the real environment.

Theoretical knowledge just provides the base and it’s not suicient to

produce a good manager that’s why practical knowledge is needed.

Thereore the research product is an essential re!uirement or the student o

MBA. This research project not only helps the student to utili"e his skills

properly learn ield realities but also provides a chance to the organi"ation to

ind out talent among the budding managers in the very beginning.

#n accordance with the re!uirement o MBA course # have summer trainingproject on the topic $%omparitive Analysis o Mutual unds and &lips'. The

main objective o the research project was to study the two instruments and

make a detailed comparison o the two.

(or conducting the research project sample si"e o )* customers

o +B#M( and +B, was selected. The inormation regarding the project

research was collected through the !uestionnaire ormed by me which was

illed by the customers there.

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INDUSTRY PROFILE

The mutual und industry is a lot like the ilm star o the inance business.

Though it is perhaps the smallest segment o the industry it is also the most

glamorous / in that it is a young industry where there are changes in the rules

o the game everyday and there are constant shits and upheavals.

The mutual und is structured around a airly simple concept the mitigationo risk through the spreading o investments across multiple entities which is

achieved by the pooling o a number o small investments into a large bucket.

0et it has been the subject o perhaps the most elaborate and prolonged

regulatory eort in the history o the country.

A little history1

The mutual und industry started in #ndia in a small way with the &T# Act

creating what was eectively a small savings division within the 2B#. ,ver aperiod o 3) years this grew airly successully and gave investors a good

return and thereore in 4565 as the next logical step public sector banks

and inancial institutions were allowed to loat mutual unds and their success

emboldened the government to allow the private sector to oray into this area.

The initial years o the industry also saw the emerging years o the #ndian

e!uity market when a number o mistakes were made and hence the mutual

und schemes which invested in lesser-known stocks and at very high levels

became loss leaders or retail investors. (rom those days to today the retail

investor or whom the mutual und is actually intended has not yet returned

to the industry in a big way. But to be air the industry too has ocused on

brining in the large investor so that it can create a signiicant base corpus

which can make the retail investor eel more secure.

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The Indian MF industry has 2s ).78 lakh crore o assets under

management. As per data released by Association o Mutual (unds in #ndia

the asset base o all mutual und combined has risen by 8.93: in April theirst month o the current iscal. As o now there are 99 und houses in

the country including 47 joint ventures and 9 whollyowned oreign asset

managers.

According to a recent Mc;insey report the total A&M o the #ndian mutual

und industry could grow to hile the revenue and proit ?AT@ pools o #ndian AM%s are

pegged

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Major

players in

Indian

mutual

fund

industry

and teir

!UM

Mutual Fund NameNo. of

Schemes*

As on Corpus

AB AM2, M (998 Culy 94

3**6

86*9

A# lobalM ()= Culy 94

3**6

9)49

SI Mutual Fund 488 Culy 94

3**6

354)4.**

Birla Mutual (und 9=9 Culy 94

3**6

98=58.**

B,B Mutual (und 33 Culy 94

3**6

)7.**

%anara 2obeco Mutual (und )= Culy 94

3**6

=)87.**

DB+ %hola Mutual (und 6* Culy 94

3**6

46)9.**

Deutsche Mutual (und 468 Culy 94

3**6

4*853.**

D+ Merrill Eynch Mutual (und 344 (eb 35 3**6 45=69.**Fscorts Mutual (und 37 (eb 35 3**6 488.**(idelity Mutual (und 95 Mar 94 3**6 8=7=.**

(ranklin Templeton #nvestments

39* Culy 94

3**6

3===4.**

GD(% Mutual (und 984 Culy 94

3**6

)*8)3.**

G+B% Mutual (und 334 Culy 94

3**6

4796).**

#%#%# rudential Mutual (und =94 Culy 94

3**6

))474.**

# Mutual (und 373 Culy 94

3**6

8*54.**

CMorgan Mutual (und5 Culy 94

3**6

9*)=.**

;otak Mahindra Mutual (und 46) Culy 943**6

46863.**

E#% Mutual (und 443 Culy 94

3**6

48=55.**

Eotus #ndia Mutual (und347 Culy 94

3**6

8694.**

Morgan +tanley Mutual (und 9 Culy 94

3**6

364=.**

2#%#AE Mutual (und 4)4 Culy 94

3**6

449)5.**

Huantum Mutual (und 7 Culy 94

3**6

77.**

2eliance Mutual (und 9=) Culy 943**6

6=)7=.**

+ahara Mutual (und =) Culy 94

3**6

48).**

Mirae asset mutual und3)) Culy 94

3**6

3)=7.**

+undaram Mutual (und 345 Culy 94

3**6

44656.**

Tata Mutual (und 965 Culy 94

3**6

3*==9.**

Taurus Mutual (und 4= Culy 94

3**6

365.**

&T# Mutual (und 94) Culy 94

3**6

=743*.**

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http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM047http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM037http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM024http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM047http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM037http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM024http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046


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"ISTORY OF MUTU!L FUND

The mutual und industry in #ndia started in 4579 with the ormation o &nit

Trust o #ndia at the initiative o the overnment o #ndia and 2eserve Bank.

The history o mutual unds in #ndia can be broadly divided into our distinct

phases1 -

First Phase ! "#$%&'(

An Act o arliament established &nit Trust o #ndia ?&T#@ on 4579. #t was set

up by the 2eserve Bank o #ndia and unctioned under the 2egulatory and

administrative control o the 2eserve Bank o #ndia. #n 4586 &T# was de-

linked rom the 2B# and the #ndustrial Development Bank o #ndia ?#DB#@ took

over the regulatory and administrative control in place o 2B#. The irst

scheme launched by &T# was &nit +cheme 457=. At the end o 4566 &T# had2s.78** crores o assets under management.

Second Phase ! "#'(&"##) Entry of Pu+lic Sector Funds,

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4568 marked the entry o non- &T# public sector mutual unds set up by

public sector banks and Eie #nsurance %orporation o #ndia ?E#%@ and eneral

#nsurance %orporation o #ndia ?#%@. +B# Mutual (und was the irst non- &T#

Mutual (und established in Cune 4568 ollowed by %an bank Mutual (und

?Dec 68@ unjab ational Bank Mutual (und ?Aug 65@ #ndian Bank Mutual

(und ?ov 65@ Bank o #ndia ?Cun 5*@ Bank o Baroda Mutual (und ?,ct 53@.

E#% established its mutual und in Cune 4565 while #% had set up its mutual

und in December 455*.

At the end o 4559 the mutual und industry had assets under management

o 2s.=8**= crores.

Third Phase ! "##)&-) Entry of Pri/ate Sector Funds,

>ith the entry o private sector unds in 4559 a new era started in the #ndian

mutual und industry giving the #ndian investors a wider choice o und

amilies.

Also 4559 was the year in which the irst Mutual (und 2egulations came into

being under which all mutual unds except &T# were to be registered and

governed. The erstwhile ;othari ioneer ?now merged with (ranklin

Templeton@ was the irst private sector mutual und registered in Culy 4559.

Fourth Phase ! since Fe+ruary -)

#n (ebruary 3**9 ollowing the repeal o the &nit Trust o #ndia Act 4579 &T#

was biurcated into two separate entities. ,ne is the +peciied &ndertaking o

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the &nit Trust o #ndia with assets under management o 2s.3569) crores as

at the end o Canuary 3**9 representing broadly the assets o &+ 7=

scheme assured return and certain other schemes. The +peciied

&ndertaking o &nit Trust o #ndia unctioning under an administrator and

under the rules ramed by overnment o #ndia and does not come under the

purview o the Mutual (und 2egulations.

The second is the &T# Mutual (und Etd sponsored by +B# B B,B and

E#%. #t is registered with +FB# and unctions under the Mutual (und

2egulations. >ith the biurcation o the erstwhile &T# which had in March

3*** more than 2s.87*** crores o assets under management and with the

setting up o a &T# Mutual (und conorming to the +FB# Mutual (und2egulations and with recent mergers taking place among dierent private

sector unds the mutual und industry has entered its current phase o

consolidation and growth. As at the end o +eptember 3**= there were 35

unds which manage assets o 2s.4)94*6 crores under =34 schemes.

0R12T3 IN ASSETS 4N5ER MANA0EMENT

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E#ONOMI# EN$IRONMENT

0R12T3 1F M4T4A6 F4N5 IN54STR7 IN IN5IA

>hile the #ndian mutual und industry has grown in si"e by about 93*: rom

March 4559 ?2s. =8* billion@ to December 3**= ?2s. 4)*) billion@ in terms o A&M the A&M o the sector excluding &T# has grown over 6 times rom 2s.

4)3 billion in March 4555 to < 4=6 billion as at March 3**6.

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Though #ndia is a minor player in the global mutual und industry its A&M as

a proportion o the global A&M has steadily increased and has doubled over

its levels in 4555.

The growth rate o #ndian mutual und industry has been increasing or thelast ew years. #t was approximately *.43: in the year o 4555 and it is

noticed *.3): in 3**= in terms o A&M as percentage o global A&M.

Some facts for the 8ro9th of mutual funds in India

• 4**: growth in the last 7 years.

• umber o oreign AM%’s is in the !ueue to enter the #ndian markets.

• ,ur saving rate is over 39: highest in the world. ,nly channeli"ing

these savings in mutual unds sector is re!uired.

• >e have approximately 35 mutual unds which is much less than &+

having more than 6**. There is a big scope or expansion.

• Mutual und can penetrate rurals like the #ndian insurance industry with

simple and limited products.

• +FB# allowing the M(Is to launch commodity mutual unds.• Fmphasis on better corporate governance.

• Trying to curb the late trading practices.

• #ntroduction o (inancial lanners who can provide need based advice.

Re%ent trends in mutual fund industry

The most important trend in the mutual und industry is the aggressive

expansion o the oreign owned mutual und companies and the

decline o the companies loated by the nationali"ed banks and smaller

private sector players.

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Many nationali"ed banks got into the mutual und business in the early

nineties and got o to a start due to the stock market boom was

prevailing. These banks did not really understand the mutual und

business and they just viewed it as another kind o banking activity.

(ew hired speciali"ed sta and generally chose to transer sta rom

the parent organi"ations. The perormance o most o the schemes

loated by these unds was not good. +ome schemes had oered

guaranteed returns and their parent organi"ations had to bail out these

AM%s by paying large amounts o money as a dierence between the

guaranteed and actual returns. The service levels were also very bad.

Most o these AM%s have not been able to retain sta loat new

schemes etc.

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TE#"NOLO&I#!L EN$IRONMENT

IMPACT 1F TEC3N16107

Mutual und during the last one decade brought out several innovations in

their products and is oering value added services to their investors. +ome o

the value added services that are being oered are1

•

Flectronic und transer acility.• #nvestment and re-purchase acility through internet.

• Added eatures like accident insurance cover mediclaim etc.

• Golding the investment in electronic orm doing away with the

traditional orm o unit certiicates.

• %he!ue writing acilities.

• +ystematic withdrawal and deposit acility.

ONLINE MUTU!L FUND TR!DIN&

The innovation the industry saw was in the ield o distribution to make it more

easily accessible to an ever increasing number o investors across the

country. (or the irst time in #ndia the mutual und start using the automated

trading clearing and settlement system o stock exchanges or sale and

repurchase o open-ended de-materiali"ed mutual und units.

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+ystematic #nvestment lan ?+#@ and +ystematic >ithdrawal lan ?+>@

were options introduced which have come in very handy or the investor to

maximi"e their returns rom their investments. +# ensures that there is a

regular investment that the investor makes on speciied dates making his

purchases to spread out reducing the eect o the short term volatility o

markets. +> was designed to ensure that investors who wanted a regular

income or cash low rom their investments were able to do so with a pre-

deined automated orm. Today the +> acility has come in handy or the

investors to reduce their taxes.

6E0A6 AN5 P16ITICA6 EN:IR1NMENT

!SSO#I!TION OF MUTU!L FUNDS IN INDI! '!MFI(

>ith the increase in mutual und players in #ndia a need or mutual und

association in #ndia was generated to unction as a non-proit organi"ation. Association o Mutual (unds in #ndia ?AM(#@ was incorporated on 33nd August

455).

AM(# is an apex body o all Asset Management %ompanies ?AM%@ which has

been registered with +FB#. Till date all the AM%s are that have launched

mutual und schemes are its members. #t unctions under the supervision and

guidelines o board o directors. AM(# has brought down the #ndian Mutual

(und #ndustry to a proessional and healthy market with ethical lines

enhancing and maintaining standards. #t ollows the principle o both

protecting and promoting the interest o mutual unds as well as their unit

holders.

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#t has been a orum where mutual unds have been able to present their

views debate and participate in creating their own regulatory ramework. The

association was created originally as a body that would lobby with the

regulator to ensure that the und viewpoint was heard. Today it is usually the

body that is consulted on matters long beore regulations are ramed and it

oten initiates many regulatory changes that prevent malpractices thatemerge rom time to time.

AM(# works through a number o committees some o which are standing

committees to address areas where there is a need or constant vigil and

improvements and other which are adhoc committees constituted to address

speciic issues. These committees consist o industry proessionals romamong the member mutual unds. There is now some thought that AM(#

should become a sel-regulatory organi"ation since it has worked so

eectively as an industry body.

O)*E#TI$ES+

To deine and maintain high proessional and ethical standards in all areaso operation o mutual und industry

To recommend and promote best business practices and code o conduct

to be ollowed by members and others engaged in the activities o mutual

und and asset management including agencies connected or involved in the

ield o capital markets and inancial services.

To interact with the +ecurities and Fxchange Board o #ndia ?+FB#@ and to

represent to +FB# on all matters concerning the mutual und industry.

To represent to the overnment 2eserve Bank o #ndia and other bodies

on all matters relating to the Mutual (und #ndustry.

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To develop a cadre o well trained Agent distributors and to implement a

programme o training and certiication or all intermediaries and other

engaged in the industry.

To undertake nation wide investor awareness programme so as to

promote proper understanding o the concept and working o mutual unds.

To disseminate inormation on Mutual (und #ndustry and to undertake

studies and research directly andJor in association with other bodies.

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MEM)ERS OF !MFI+

o an; Sponsored

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o Pri/ate Sector

". Indian

4. Benchmark Asset Management %ompany vt. Etd.

3. DB+ %holamandalam Asset Management Etd.9. Deutsche Asset Management ?#ndia@ vt. Etd.

=. Fdelweiss Asset Management Eimited

). Fscorts Asset Management Eimited

7. #D(% Asset Management %ompany rivate Eimited

8. CM (inancial Asset Management rivate Eimited

6. ;otak Mahindra Asset Management %ompany

Eimited?;MAM%E@

5. Huantum Asset Management %o. rivate Etd.

4*.2eliance %apital Asset Management Etd.

44. +ahara Asset Management %ompany rivate Eimited

43.Tata Asset Management Eimited

49.Taurus Asset Management %ompany Eimited

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-. Forei8n

4. A# lobal Asset Management %ompany ?#ndia@ vt. Etd.

3. (#E (und Management rivate Eimited

9. (ranklin Templeton Asset Management ?#ndia@ rivate

Eimited

=. Mirae Asset lobal #nvestment Management ?#ndia@ vt.

Etd.

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). CMorgan Asset Management #ndia vt. Etd.

7. Eotus #ndia Asset Management %o. rivate Etd.

8. Morgan +tanley #nvestment Management vt.Etd.

6. rincipal nb Asset Management %o. vt. Etd.

RE&UL!TORY ME!SURES )Y SE)I

Eike Banking L #nsurance up to the nineties o the last century Mutual (und

industry in #ndia was set up and unctioned exclusively in the state monopoly

represented by the &nit Trust o #ndia. This monopoly was diluted in the

eighties by allowing nationali"ed banks and insurance companies ?E#% L #%@to set up their institutions under the #ndian Trusts Act to transact mutual und

business allowing the #ndian investor the option to choose between dierent

service providers. &nit Trust was a statutory corporation governed by its own

incorporating act. There was no separate regulatory authority up to the time

+FB# was made a statutory authority in 4553. but it was only in the year 4559

when a government took a policy decision to deregulate #ndian Fconomy rom

government control and to transorm it market oriented that the industry was

opened to competition rom private and oreign players. By the year 3***

there came to be established in the market 9= mutual unds oerings a variety

o about ))* schemes.

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SE#URITIES !ND E,#"!N&E )O!RD OF INDI!

'MUTU!L FUNDS( RE&UL!TIONS- .//0

The ast growing industry is regulated by +ecurities and Fxchange Board o

#ndia ?+FB#@ since inception o +FB# as a statutory body. +FB# initially

ormulated $+F%&2#T#F+ AD FK%GAF B,A2D ,( #D#A ?M&T&AE

(&D+@ 2F&EAT#,+ 4559' providing detailed procedure or

establishment registration constitution management o trustees asset

management company about schemesJproducts to be designed about

investment o unds collected general obligation o M(s about inspectionaudit etc. based on experience gained and eedback received rom the

market +FB# revised the guidelines o 4559 and issued resh guidelines in

4557 titled $+F%&2#T#F+ AD FK%GAF B,A2D ,( #D#A ?M&T&AE

(&D+@ 2F&EAT#,+ 4557'. The said regulations as amended rom time

to time are in orce even today.

The +FB# mutual und regulations contain ten chapters and twelve schedules.

%hapters containing material subjects relating to regulation and conduct o

business by Mutual (unds.

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RE&ISTR!TION OF MUTU!L FUND+

Application for re8istration

". An application or registration o a mutual und shall be made to the Boardin (orm A by the sponsor.

!ppli%ation fee to a%%ompany te appli%ation

-. Fvery application or registration under regulation 9 shall be accompanied

by nonreundable application ee as speciied in the +econd +chedule.

!ppli%ation to %onform to te re1uirements). An application which is not complete in all respects shall be liable to be

rejected1

Pro/ided that beore rejecting any such application the applicant shall be

given an opportunity to complete such ormalities within such time as may be

speciied by the Board.

Furnisin2 information

%. The Board may re!uire the sponsor to urnish such urther inormation or

clariication as may be re!uired by it.

Eli2i3ility %riteria

=. (or the purpose o grant o a certiicate o registration the applicant has to

ulill the ollowing namely 1

a, the sponsor should have a sound track record and general reputation o

airness and integrity in all his business transactions.Fxplanation 1 (or the purposes o this clause $sound track record' shall mean

the

sponsor should

i , be carrying on business in inancial services or a period o not less than

ive

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yearsN and

?ii @ the networth is positive in all the immediately preceding ive yearsN and

iii , the networth in the immediately preceding year is more than the capital

contribution o the sponsor in the asset management companyN and

i4 , the sponsor has proits ater providing or depreciation interest and tax in

three out o the immediately preceding ive years including the ith yearN

3, in the case o an existing mutual und such und is in the orm o a trust

and the trust deed has been approved by the BoardN

% , the sponsor has contributed or contributes at least =*: to the net worth o

the asset management company1Pro/ided that any person who holds =*: or more o the net worth o an

asset

management company shall be deemed to be a sponsor and will be re!uired

to ulill the eligibility criteria speciied in these regulationsN

d , the sponsor or any o its directors or the principal oicer to be employed

by the mutual und should not have been guilty o raud or has not been

convicted o an oence involving moral turpitude or has not been ound guiltyo any economic

oenceN

e, appointment o trustees to act as trustees or the mutual und in

accordance with the provisions o the regulationsN

f , appointment o asset management company to manage the mutual und

and operate the scheme o such unds in accordance with the provisions o

these regulationsN

2 , appointment o a custodian in order to keep custody o the securities 4*>or

gold and gold related instruments and carry out the custodian activities as

may be authori"ed by the trustees.23


24/136


#onsideration of appli%ation

'. The Board may on receipt o all inormation decide the application.

&rant of #ertifi%ate of Re2istration

#. The Board may register the mutual und and grant a certiicate in (orm B

on the applicant paying the registration ee as speciied in +econd +chedule.

Terms and %onditions of re2istration

". The registration granted to a mutual und under regulation 5 shall be

subject to the ollowing terms and conditions1

a, the trustees the sponsor the asset management company and thecustodian shall comply with the provisions o these regulationsN

?3, the mutual und shall orthwith inorm the Board i any inormation or

particulars previously submitted to the Board was misleading or alse in any

material respectN

% , the mutual und shall orthwith inorm the Board o any material change in

the

inormation or particulars previously urnished which have a bearing on theregistration granted by itN

d , payment o ees as speciied in the regulations and the +econd +chedule.

Reje%tion of appli%ation

"". >here the sponsor does not satisy the eligibility criteria mentioned in

regulation 8 the Board may reject the application and inorm the applicant o

the same.

Payment of annual ser4i%e fee+

"-. A mutual und shall pay beore the 4)th April each year a service ee as

speciied in the +econd +chedule or every inancial year rom the year

ollowing the year o registration1

24


25/136


Pro/ided that the Board may on being satisied with the reasons or the

delay permit the mutual und to pay the service ee at any time beore the

expiry o two months rom the commencement o the inancial year to which

such ee relates.

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26/136


Failure to pay annual ser4i%e fee

"). The Board may not permit a mutual und who has not paid service ee to

launch any scheme.

#ONSTITUTION !ND M!N!&EMENT OF !SSET

M!N!&EMENT

#OMP!NY !ND #USTODI!N

!ppli%ation 3y an asset mana2ement %ompany

"%. ", The application or the approval o the asset management company

shall be made in (orm D.

-, The provisions o regulations ) 7 and 6 shall so ar as may be apply to

the

application made under sub-regulation ?4@ as they apply to the application or

registration o a mutual und.

!ppointment of an asset mana2ement %ompany

"=. ", The sponsor or i so authorised by the trust deed the trustee shall

appoint an asset management company which has been approved by the

Board under sub-regulation?3@ o regulation 34.

-, The appointment o an asset management company can be terminated by

majority o the trustees or by seventy-ive per cent o the unitholders o thescheme.

), Any change in the appointment o the asset management company shall

be subject to prior approval o the Board and the unitholders.

26


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Eli2i3ility %riteria for appointment of asset mana2ement %ompany

"$. ", (or grant o approval o the asset management company the applicant

has to ulill the ollowing 1

?a@ in case the asset management company is an existing asset management

company it has a sound track record general reputation and airness in

transactions.

E5planation: (or the purpose o this clause sound track record shall mean

the

networth and the proitability o the asset management companyN

?aa@ the asset management company is a it and proper personN

3, the directors o the asset management company are persons having

ade!uate proessional experience in inance and inancial services relatedield and not ound guilty o moral turpitude or convicted o any economic

oence or violation o any se%urities la6s7

% , the key personnel o the asset management company 38Ohave not been

ound guilty o moral turpitude or convicted o economic oence or violation o

securities laws or worked or any asset management company or mutual und

or any intermediary 35Oduring the period when itsP registration has been

suspended or cancelled at any time by the BoardN?d , the board o directors o such asset management company has at least

ity per cent directors who are not associate o or associated in any manner

with the sponsor or any o its subsidiaries or the trusteesN

e, the %hairman o the asset management company is not a trustee o any

mutual undN

f , the asset management company has a networth o not less than rupees

ten crores 1

Pro/ided that an asset management company already granted approval

under the provisions o +ecurities and Fxchange Board o #ndia ?Mutual

(unds@ 2egulations 4559 shall within a period o twelve months rom the date

o notiication o these regulations increase its networth to rupees ten crores 1

27


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Pro/ided Ofurther P that the period speciied in the irst proviso may be

extended in appropriate cases by the Board up to three years or reasons to

be recorded in writing 1

Pro/ided further that no new schemes shall be allowed to be launched or

managed by such asset management company till the networth has been

raised to rupees ten crores.

E5planation 1 (or the purposes o this clause $networth' means the

aggregate o the paid up capital and ree reserves o the asset management

company ater

deducting thererom miscellaneous expenditure to the extent not written o or

adjusted or deerred revenue expenditure intangible assets and accumulated

losses.-, The Board may ater considering an application with reerence to the

matters

speciied in sub-regulation ?4@ grant approval to the asset management

company.

Terms and %onditions to 3e %omplied 6it

"(. The approval granted under sub-regulation ?3@ o regulation 34 shall be

subject to the

ollowing conditions namely1

a, any director o the asset management company shall not hold the oice o

the

director in another asset management company unless such person is an

independent director reerred to in clause ?d @ o sub-regulation ?4@ o

regulation 34 and approval o the Board o asset management company o

which such person is a director has been obtainedN

3, the asset management company shall orthwith inorm the Board o any

material change in the inormation or particulars previously urnished which

have a bearing on the approval granted by itN

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% , no appointment o a director o an asset management company shall be

made without prior approval o the trusteesN

d , the asset management company undertakes to comply with these

regulationsN

e, no change in the controlling interest o the asset management company

shall be made unless

i , prior approval o the trustees and the Board is obtainedN

?ii @ a written communication about the proposed change is sent to each

unitholder and an advertisement is given in one Fnglish daily newspaper

having

nationwide circulation and in a newspaper published in the language o the

region where the Gead ,ice o the mutual und is situatedN and?iii @ the unitholders are given an option to exit on the prevailing et Asset

Qalue

without any exit loadNP

?f @ the asset management company shall urnish such inormation and

documents to the trustees as and when re!uired by the trustees.

Pro%edure 6ere appro4al is not 2ranted

"'. >here an application made under regulation 45 or grant o approval does

not satisy the eligibility criteria laid down in regulation 34 the Board may

reject the application.

Restri%tions on 3usiness a%ti4ities of te asset mana2ement %ompany

"#. The asset management company shall

", not act as a trustee o any mutual undN

-, not undertake any other business activities except activities in the nature

o

portolio management servicesP management and advisory services to

oshore unds pension unds provident unds venture capital unds

management o insurance unds inancial consultancy and exchange o29


30/136


research on commercial basis i any o such activities are not in conlict with

the activities o the mutual und 1

Pro/ided that the asset management company may itsel or through its

subsidiaries undertake such activities i it satisies the Board that the key

personnel o the asset management company the systems back oice bank

and securities accounts are segregated activity-wise and there exist systems

to prohibit access to inside inormation o various activities 1

Pro/ided further that asset management company shall meet capital

ade!uacy

re!uirements i any separately or each such activity and obtain separate

approval i necessary under the relevant regulations.), The asset management company shall not invest in any o its schemes

unless ull disclosure o its intention to invest has been made in the oer

documents 9=Oin case o schemes launched ater the notiication o these

regulations 1

Pro/ided that an asset management company shall not be entitled to charge

any ees on its investment in that scheme.

!sset mana2ement %ompany and its o3li2ations

-. ", The asset management company shall take all reasonable steps and

exercise due diligence to ensure that the investment o unds pertaining toany scheme is not contrary to the provisions o these regulations and the trust

deed.

-, The asset management company shall exercise due diligence and care in

all its investment decisions as would be exercised by other persons engaged

in the same business.

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), The asset management company shall be responsible or the acts o

commission or omission by its employees or the persons whose services

have been procured by the asset management company.

%, The asset management company shall submit to the trustees !uarterly

reports o each year on its activities and the compliance with these

regulations.

=, The trustees at the re!uest o the asset management company may

terminate the assignment o the asset management company at any time1

Pro/ided that such termination shall become eective only ater the trustees

have accepted the termination o assignment and communicated theirdecision in writing to the asset management company.

$, otwithstanding anything contained in any contract or agreement or

termination the asset management company or its directors or other oicers

shall not be absolved o liability to the mutual und or their acts o

commission or omission while holding such position or oice.

$A, The %hie Fxecutive ,icer ?whatever his designation may be@ o the

asset

management company shall ensure that the mutual und complies with all the

provisions o these regulations and the guidelines or circulars issued in

relation thereto rom time to time and that the investments made by the und

managers are in the interest o the unit holders and shall also be responsible

or the overall risk management unction o the mutual und.

E5planation.(or the purpose o this sub-regulation the words $these

regulations' shall mean and include the +ecurities and Fxchange Board o

#ndia ?Mutual (unds@ 2egulations 4557 as amended rom time to time.

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$, The und managers ?whatever the designation may be@ shall ensure that

the unds o the schemes are invested to achieve the objectives o the

scheme and in the interest o the unit holders.

(, a, An asset management company shall not through any broker

associated with the sponsor purchase or sell securities which is average o )

per cent or more o the aggregate purchases and sale o securities made by

the mutual und in all its schemes 1

Pro/ided that or the purpose o this sub-regulation the aggregate purchase

and sale o securities shall exclude sale and distribution o units issued by the

mutual und 1

Pro/ided further that the aoresaid limit o ) per cent shall apply or a blocko any three months.

3, An asset management company shall not purchase or sell securities

through any broker Oother than a broker reerred to in clause a, o sub-

regulation ?8@ which is average o ) per cent or more o the aggregate

purchases and sale o securities made by the mutual und in all its schemes

unless the asset management company has recorded in writing the

justiication or exceeding the limit o ) per cent and reports o all suchinvestments are sent to the trustees on a !uarterly basis 1

Pro/ided that the aoresaid limit shall apply or a block o three months.

', An asset management company shall not utilise the services o the

sponsor or any o its associates employees or their relatives or the purpose

o any securities transaction and distribution and sale o securities 1

Pro/ided that an asset management company may utilise such services i

disclosure to that eect is made to the unitholders and the brokerage or

commission paid is also disclosed in the hal-yearly annual accounts o the

mutual und 1

Pro/ided further that the mutual unds shall disclose at the time o declaring

halyearly and yearly results 1

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i , any underwriting obligations undertaken by the schemes o the mutual

unds with respect to issue o securities associate companies

ii , devolvement i any

iii , subscription by the schemes in the issues lead managed by associate

companies

i4 , subscription to any issue o e!uity or debt on private placement basis

where the sponsor or its associate companies have acted as arranger or

manager.

#, The asset management company shall ile with the trustees the details o

transactions in securities by the key personnel o the asset management

company in their own name or on behal o the asset management companyand shall also report to the Board as and when re!uired by the Board.

", #n case the asset management company enters into any securities

transactions with any o its associates a report to that eect shall be sent to

the trustees at its next meeting.

"", #n case any company has invested more than ) per cent o the net assetvalue o a scheme the investment made by that scheme or by any other

scheme o the same mutual und in that company or its subsidiaries shall be

brought to the notice o the trustees by the asset management company and

be disclosed in the hal-yearly and annual accounts o the respective

schemes with justiication or such investment =*Oprovided the latter

investment has been made within one year o the date o the ormer

investment calculated on either side.

"-, The asset management company shall ile with the trustees and the

Board

a, detailed bio-data o all its directors along with their interest in other

companies

within iteen days o their appointmentN33


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3, any change in the interests o directors every six monthsN and

% , a !uarterly report to the trustees giving details and ade!uate justiication

about the purchase and sale o the securities o the group companies o the

sponsor or the asset management company as the case may be by the

mutual und during the said !uarter.

"), Fach director o the asset management company shall ile the details o

his transactions o dealing in securities with the trustees on a !uarterly basis

in accordance with guidelines issued by the Board.

"%, The asset management company shall not appoint any person as key

personnel who has been ound guilty o any economic oence or involved in

violation o securities laws.

"=, The asset management company shall appoint registrars and share

transer agents who are registered with the Board1

Pro/ided i the work relating to the transer o units is processed in-house

the charges at competitive market rates may be debited to the scheme and

or rates higher than the competitive market rates prior approval o the

trustees shall be obtained and reasons or charging higher rates shall bedisclosed in the annual accounts.

"$, The asset management company shall abide by the %ode o %onduct as

speciied in the (ith +chedule.

!ppointment of %ustodian

-". ", The mutual und shall appoint a %ustodian to carry out the custodial

services or the schemes o the und and sent intimation o the same to the

Board within iteen days o the appointment o the %ustodian1

Pro/ided that in case of a gold exchange traded fund scheme, the assets of

the scheme being gold or gold related instruments may be kept in custody of

a bank which is registered as a custodian with the Board.

34


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-, o custodian in which the sponsor or its associates hold )* per cent or

more o the voting rights o the share capital o the custodian or where )* per

cent or more o the directors o the custodian represent the interest o the

sponsor or its associates shall act as custodian or a mutual und constituted

by the same sponsor or any o its associates or subsidiary company.

!2reement 6it %ustodian

--. The mutual und shall enter into a custodian agreement with the

custodian which shall contain the clauses which are necessary or theeicient and orderly conduct o the aairs o the custodian1

Pro/ided that the agreement the service contract terms and appointment o

the

custodian shall be entered into with the prior approval o the trustees.

#"!R!#TERISTI#S OF MUTU!L FUNDS

• The ownership is in the hands o the investors who have pooled in their

unds.

• #t is managed by a team o investment proessionals and other service

providers.

• The pool o unds is invested in a portolio o marketable investments.

• The investors share is denominated by Runits’ whose value is called aset Asset Qalue ?AQ@ which changes everyday.

• The investment portolio is created according to the stated investment

objectives o the und.

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!D$!NT!&ES OF MUTU!L FUNDS

The advantages o mutual unds are given below1 -

Portfolio 5i/ersification

Mutual unds invest in a number o companies. This diversiication

reduces the risk because it happens very rarely that all the stocks decline at

the same time and in the same proportion. +o this is the main advantage o

mutual unds.

Professional Mana8ement

Mutual unds provide the services o experienced and skilled

proessionals assisted by investment research team that analysis the

perormance and prospects o companies and select the suitable investments

to achieve the objectives o the scheme.

6o9 Costs

Mutual unds are a relatively less expensive way to invest as compare to

directly investing in a capital markets because o less amount o brokerage

and other ees.

6i?uidity

This is the main advantage o mutual und that is whenever an investor needs money he can easily get redemption which is not possible in most o

other options o investment. #n open-ended schemes o mutual und the

investor gets the money back at net asset value and on the other hand in

close-ended schemes the units can be sold in a stock exchange at a

prevailing market price.

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Transparency

#n mutual und investors get ull inormation o the value o their

investment the proportion o money invested in each class o assets and the

und manager’s investment strategy

Fle@i+ility

(lexibility is also the main advantage o mutual und. Through this

investors can systematically invest or withdraw unds according to their needs

and convenience like regular investment plans regular withdrawal plans

dividend reinvestment plans etc.

Con/enient Administration

#nvesting in a mutual und reduces paperwork and helps investors to

avoid many problems like bad deliveries delayed payments and ollow up

with brokers and companies. Mutual unds save time and make investing

easy.

Afforda+ility

#nvestors individually may lack suicient unds to invest in high-grade

stocks. A mutual und because o its large corpus allows even a small investor

to take the beneit o its investment strategy.

2ell Re8ulated

All mutual unds are registered with +FB# and they unction with in the

provisions o strict regulations designed to protect the interest o investors.

The operations o mutual unds are regularly monitored by +FB#.

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DIS!D$!NT!&ES OF MUTU!L FUNDS

Mutual unds have their ollowing drawbacks1

No 0uarantees

o investment is risk ree. # the entire stock market declines in value the

value o mutual und shares will go down as well no matter how balanced the

portolio. #nvestors encounter ewer risks when they invest in mutual unds

than when they buy and sell stocks on their own. Gowever anyone who

invests through mutual und runs the risk o losing the money.

Fees and Commissions

All unds charge administrative ees to cover their day to day expenses.

+ome unds also charge sales commissions or loads to compensate brokers

inancial consultants or inancial planners. Fven i you don’t use a broker or

other inancial advisor you will pay a sales commission i you buy shares in a

Eoad (und.

Ta@es

During a typical year most actively managed mutual unds sell anywhere

rom 3* to 8* percent o the securities in their portolios. # your und makes a

proit on its sales you will pay taxes on the income you receive even youreinvest the money you made.

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Mana8ement Ris;

>hen you invest in mutual und you depend on und manager to make the

right decisions regarding the und’s portolio. # the manager does not perormas well as you had hoped you might not make as much money on your

investment as you expected. , course i you invest in index unds you

orego management risk because these unds do not employ managers.

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STRU#TURE OF MUTU!L FUND

There are many entities involved and the diagram below illustrates the structu

re o mutual unds1 -

Stru%ture of Mutual Funds

SEI

The regulation o mutual unds operating in #ndia alls under the preview

o authority o the $Securities and E@chan8e oard of India ?+FB#@. Any

person proposing to set up a mutual und in #ndia is re!uired under the +FB#

?Mutual (unds@ 2egulations 4557 to be registered with the +FB#.

40


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Sponsor

The sponsor should contribute at least =*: to the net worth o the AM%.

Gowever i any person holds =*: or more o the net worth o an AM% shallbe deemed to be a sponsor and will be re!uired to ulill the eligibility criteria

in the Mutual (und 2egulations. The sponsor or any o its directors or the

principal oicer employed by the mutual und should not be guilty o raud or

guilty o any economic oence.

Trustees

The mutual und is re!uired to have an independent Board o Trusteesi.e. two third o the trustees should be independent persons who are not

associated with the sponsors in any manner. An AM% or any o its oicers or

employees are not eligible to act as a trustee o any mutual und. The trustees

are responsible or - inter alia / ensuring that the AM% has all its systems in

place all key personnel auditors registrar etc. have been appointed prior to

the launch o any scheme.

Asset Mana8ement Company

The sponsors or the trustees are re!uired to appoint an AM% to manage

the assets o the mutual und. &nder the mutual und regulations the

applicant must satisy certain eligibility criteria in order to !ualiy to register

with +FB# as an AM%.

". The sponsor must have at least =*: stake in the AM%.

-. The chairman o the AM% is not a trustee o any mutual und.

). The AM% should have and must at all times maintain a minimum net

worth o %r. 4** million.

%. The director o the AM% should be a person having ade!uate

proessional experience.

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=. The board o directors o such AM% has at least )*: directors who are

not associate o or associated in any manner with the sponsor or any

o its subsidiaries or the trustees.

The Transfer A8ents

The transer agent is contracted by the AM% and is responsible or

maintaining the register o investors J unit holders and every day settlements

o purchases and redemption o units. The role o a transer agent is to collect

data rom distributors relating to daily purchases and redemption o units.

Custodian

The mutual und is re!uired under the Mutual (und 2egulations to

appoint a custodian to carry out the custodial services or the schemes o the

und. ,nly institutions with substantial organi"ational strength service

capability in terms o computeri"ation and other inrastructure acilities are

approved to act as custodians. The custodian must be totally delinked rom

the AM% and must be registered with +FB#.

4nit 3olders

They are the parties to whom the mutual und is sold. They are ultimate

beneiciary o the income earned by the mutual unds.

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TYPES OF MUTU!L FUND S#"EMES

#n #ndia there are many companies both public and private that are engaged

in the trading o mutual unds. >ide varieties o Mutual (und +chemes exist

to cater to the needs such as inancial position risk tolerance and returnexpectations etc. #nvestment can be made either in the debt +ecurities or

e!uity .The table below gives an overview into the existing types o schemes

in the #ndustry.

T7PES 1F M4T4A6 F4N5 SC3EME

43

By structure B !n"estment

#b$ect%"es

Other Schemes

#pen&ended'c(emes

!nter"al 'c(emes

'ector spec%ff)nd

!nde* 'c(em

+a* sa"%ng f)

'mall cap

f)nd

,-)%t'c(emesDebt'c(emes

lose ,nded'c(emes

// /)t)alf)nd

#t(er Debt

'c(emes

/

n #t(er

,-)%t )nd

/%d cap)nd

arge capf)nd


44/136


enerally two options are available or every scheme regarding

dividend payout and growth option. By opting or growth option an investor

can have the beneit o long-term growth in the stock market on the other side

by opting or the dividend option an investor can maintain his li!uidity by

receiving dividend time to time. +ome time people reer dividend option as

dividend und and growth und. enerally decisions regarding declaration o the dividend depend upon the perormance o stock market and perormance

o the und.

1PTI1N RE0AR5IN0 5I:I5EN5

44

D%"%dend rowt(

e%n"estedao)t


45/136


Systematic In/estment Plan SIP,

+ystematic investment plan is like 2ecurring Deposit in which investor

invests in the particular scheme on regular intervals. #n the case it isconvenient or salaried class and middle-income group. #n this case on regular

interval units o speciied amount is created. An investor can make payment by

regular payments by issuing che!ues post dated che!ues F%+ standing

Mandate etc. +# can be started in the any open-ended und i there is

provision o it. There are some entry and exit load barriers or discontinuation

and redemption o the und beore the said period.

!%%ordin2 to Stru%ture

1pen ! Ended Funds

An open / ended und is one that is available or subscription all through theyear. These do not have a ixed maturity. #nvestors can conveniently buy and

sell units at et Asset Qalue ?AQ@ related prices. The key eature o open /

ended schemes is li!uidity.

Close ! Ended Funds

A close / ended und has a stipulated maturity period which generally

ranging rom 9 to 4) years. The und is open or subscription only during aspeciied period. #nvestors can invest in the scheme at the same time o the

initial public issue and thereater they can buy and sell the units o the

scheme on the stock exchanges where they are listed. #n order to provide an

exit route to the investors some close / ended unds give an option o selling

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back the units to the mutual und through periodic repurchase at AQ related

prices.

Inter/al Funds

#nterval unds combine the eatures o open / ended and close / ended

schemes. They are open or sales or redemption during pre-determined

intervals at their AQ.

!%%ordin2 to In4estment O3je%ti4e+

0ro9th Funds

The aim o growth unds is to provide capital appreciation over the

medium to long term. +uch schemes normally invest a majority o their

corpus in e!uities. #t has been proven that returns rom stocks are

much better than the other investments had over the long term. rowth

schemes are ideal or investors having a long term outlook seekinggrowth over a period o time.

Income Funds

The aim o the income unds is to provide regular and steady

income to investors. +uch schemes generally invest in ixed incomesecurities such as bonds corporate debentures and government

securities. #ncome unds are ideal or capital stability and regular

income.

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alanced Funds

The aim o balanced unds is to provide both growth and regular

income. +uch schemes periodically distribute a part o their earningand invest both in e!uities and ixed income securities in the proportion

indicated in their oer documents. #n a rising stock market the AQ o

these schemes may not normally keep pace or all e!ually when the

market alls. These are ideal or investors looking or a combination o

income and moderate growth.

Money Mar;et Funds

The main aim o money market unds is to provide easy li!uidity

preservation o capital and moderate income. These schemes

generally invest in sae short term instruments such as treasury bills

certiicates o deposit commercial paper and inter / bank call money.

2eturns on these schemes may luctuate depending upon the interest

rates prevailing in the market. These are ideal or corporate and

individual investors as a means to park their surplus unds or shortperiods.

Oter S%emes

Ta5 Sa4in2 S%emes

These schemes oer tax rebates to the investors under speciicprovisions o the #ndian #ncome Tax laws as the government oers tax

incentives or investment in speciied avenues. #nvestments made in

F!uity Einked +aving +chemes ?FE++@ and ension +chemes are

allowed as deduction uJs 66 o the #ncome Tax Act 4574. The Act also

provides opportunities to investors to save capital gains.

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Spe%ial S%emes+

Inde@ Schemes

#ndex unds attempt to replicate the perormance o a particular

index such as the B+F +ensex or the +F )*.

Sector Specific Schemes

+ector unds are those which invest exclusively in a speciied

industry or a group o industries or various segments such as RA’ groupshares or initial public oerings.

ond Schemes

#t seeks investment in bonds debentures and debt related

instrument to generate regular income low.

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FRE8UENTLY USED TERMS

Ad/isor - #s employed by a mutual und organi"ation to give proessional

advice on the und’s investments and to supervise the management o its

asset.

5i/ersification ! The policy o spreading investments among a range o

dierent securities to reduce the risk.

Net Asset :alue NA:, & et Asset Qalue is the market value o the assets

o the scheme minus its liabilities. The per unit AQ is the net asset value o

the scheme divided by the number o units outstanding on the Qaluation

Date.

Sales Price - #s the price you pay when you invest in a scheme. Also called

,er rice. #t may include a sales load.

Repurchase Price & #s the price at which a close-ended scheme

repurchases its units and it may include a back-end load. This is also called

Bid rice.

Redemption Price - #s the price at which open-ended schemes

repurchase their units and close-ended schemes redeem their units on

maturity. +uch prices are AQ related.

Sales 6oad & #s a charge collected by a scheme when it sells the units. Also

called R(ront-end’ load. +chemes that do not charge a load are called Ro

Eoad’ schemes.

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&E#+

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P6ATF1RMS 1F 6IFE INS4RANCE& UNIT LIN9ED

INSUR!N#E PL!NS

>orld over insurance come in dierent orms and shapes . although thegeneric names may ind similar the dierence in product eatures makes one

wonder about the basis on which these products are designed .>ith

insurance market opened up #ndian customer has suddenly ound himsel in

a market place where he is bombarded with a lot o jargon as well as

marketing gimmicks with a very little knowledge o what is happening . This

module is aimed at clariying these underlying concepts and simpliying the

dierent products available in the market.

>e have many products like Fndowment >hole lie Money back etc. All

these products are based on ollowing basic platorms or structures vi".

Traditional Eie

&niversal Eie or &nit Einked olicies

)." TRA5ITI1NA6 6IFE ! AN 1:ER:IE2The basic and widely used orm o design is known as Traditional Eie

latorm. #t is based on the concept o sharing . Fach o the policy holder

contributes his contribution ?premium@ into the common large und is

managed by the company on behal o the policy holders.

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Administration o that common und in the interest o everybody was

entrusted to the insurance company .#t was the responsibility o the company

to administer schemes or beneit o the policyholders. olicyholders played a

very passive roll . #n the course o time the same concept o sharing and a

common und was extended to dierent areas like saving investment etc.

)."." FEAT4RES 1F T6 B

This is the simplest way o designing product as ar as concerned. Ge

has no other responsibility but to pay the premium regularly.

%ompany is responsible or the protection as well as maximi"ation o

the policyholder’s unds.

There is a common und where in all the premiums paid are

accumulated. Fxpenses incurred as well as claims paid are then taken

out o this und.

%ompanies carry out the valuation o the und periodically to ascertain

the position. #t is also a practice to increase the minimum possible

guarantee under a policy every year in the orm o declaring and

attaching bonuses to the sum assured on the basis o this valuation.

Declaration o bonuses is not mandatory .

Based on the end objective companies may oer dierent plans like

saving plans investment plans etc.?e.g. Fndowment +>E#@

#t helps to maintain a smooth growth and protects against the vagaries o the

market. #n other words it minimi"es the risk o investments or an average

individual. Ge shares his risk with a group o like-minded individuals.

46IP is the Product Inno/ation of the con/entional Insurance product.

2ith the decline in the popularity of traditional Insurance products

chan8in8 In/estor needs in terms of life protectionD periodicityD returns

li?uidityD it 9as need of the hour to ha/e an Instrument that offers all

these features +undled into one.

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A &nit Eink #nsurance olicy ?&E#@ is one in which the customer is provided

with a lie insurance cover and the premium paid is invested in either debt or

e!uity products or a combination o the two. #n other words it enables the

buyer to secure some protection or his amily in the event o his untimely

death and at the same time provides him an opportunity to earn a return on

his premium paid. #n the event o the insured personIs untimely death his

nominees would normally receive an amount that is the higher o the sum

assured or the value o the units ?investments@.

To put it simply &E# attempts to ulill investment needs o an investor with

protectionJinsurance needs o an insurance seeker. #t saves theinvestorJinsurance-seeker the hassles o managing and tracking a portolio or

products. More importantly &E#s oer investors the opportunity to select a

product which matches their risk proile.

&nit Einked #nsurance lans came into play in the 457*s and became very

popular in >estern Furope and Americas. #n #ndia The irst unit linked

#nsurance lan popularly known as &E# / &nit Einked #nsurance lan in#ndia was brought out by &nit Trust , #ndia in the year 4584 by entering into

a group insurance arrangement with E#% o provide or lie cover to the

investors while &T# as a mutual was taking care o investing the unit

holders money in the capital market and giving them a air return .

+ubse!uently in the year 4565 another &nit Einked roduct was launched

by the E#% Mutual (und called by the name o $DGAA2A;+GA' which was

more or less on the line o &E# o &T# . Thereater E#% itsel came out with a

&nit Einked #nsurance roduct known by name $B#MA E&+ $ in the year

3**4-*3 .

resently a number o private lie insurance companies have launched &nit

Einked #nsurance roducts with a variety o new eatures.53


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TYPES OF ULIP

There are various unit linked insurance plans available in the market.

Gowever the key ones are pensionD childrenD 8roup and capital 8uarantee

plans.

The pension plans come with two variations with and without lie cover

and are meant or people who want to generate returns or their sunset years.

The children plans on the other hand are aimed at taking care o their

educational and other needs..

Apart rom unit-linked plans or individuals group unit linked plans are also

available in the market. The roup linked plans are basically designed or

employers who want to oer certain beneits or their employees such as

gratuity superannuation and leave encashment.

The other important category o &E#s is capital guarantee plans. The planpromises the policyholder that at least the premium paid will be returned at

maturity. But the guaranteed amount is payable only when the policyIs

maturity value is below the total premium paid by the individual till maturity.

Gowever the guarantee is not provided on the actual premium paid but only

on that portion o the premium that is net o expenses ?mortality sales and

marketing administration@.

"o6 ULIPs 6or:

&E#s work on the lines o mutual unds. The premium paid by the client ?less

any charge@ is used to buy units in various unds ?aggressive balanced or

conservative@ loated by the insurance companies. &nits are bought according

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to the plan chosen by the policyholder. ,n every additional premium more

units are allotted to his und. The policyholder can also switch among the

unds as and when he desires. >hile some companies allow any number o

ree switches to the policyholder some restrict the number to just three or

our. # the number is exceeded a certain charge is levied.

#ndividuals can also make additional investments ?besides premium@ rom

time to time to increase the savings component in their plan. This acility is

termed Stop-upS. The money parked in a &E# plan is returned either on the

insuredIs death or in the event o maturity o the policy. #n case o the insured

personIs untimely death the amount that the beneiciary is paid is the higher

o the sum assured ?insurance cover@ or the value o the units ?investments@.

Gowever some schemes pay the sum assured plus the prevailing value othe investments.

ULIP ; 9EY FE!TURES

• remiums paid can be single regular or variable. The payment period

too can be regular or variable. The risk cover can be increased or

decreased.

• As in all insurance policies the risk charge ?mortality rate@ varies with

age.

• The maturity beneit is not typically a ixed amount and the maturity

period can be advanced or extended.

• #nvestments can be made in gilt unds balanced unds money market

unds growth unds or bonds.

• The policyholder can switch between schemes or instance balanced

to debt or gilt to e!uity etc.

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• The maturity beneit is the net asset value o the units.

• The costs in &E# are higher because there is a lie insurance

component in it as well in addition to the investment component.

• #nsurance companies have the discretion to decide on their investment

portolios.

• Being transparent the policyholder gets the entire episode on the

perormance o his und.

• &E# products are exempted rom tax and they provide lie insurance.

• rovides capital appreciation.

• #nvestor gets an option to choose among debt balanced and e!uity

unds.

USP of ULIPS

Insurance co/er plus sa/in8s

&E#s serve the purpose o providing lie insurance combined with savings at

market-linked returns. To that extent &E#+ can be termed as a two-in-one

plan in terms o giving an individual the twin beneits o lie insurance plus

savings.

Multiple in/estment options

&E#+ oer a lot more variety than traditional lie insurance plans. +o there

are multiple options at the individual’s disposal. &E#+ generally come in

three broad variants1

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Aggressive &E#+ ?which can typically invest 6*:-4**: in e!uities

balance in debt@

Balanced &E#+ ?can typically invest around =*:-7*: in e!uities@

%onservative &E#+ ?can typically invest upto 3*: in e!uities@

Although this is how the &E# options are generally designed the exact

debtJe!uity allocations may vary across insurance companies. #ndividuals can

opt or a variant based on their risk proile.

Fle@i+ility

The lexibility with which individuals can switch between the &E# variants tocapitalise on investment opportunities across the e!uity and debt markets is

what distinguishes it rom other instruments. +ome insurance companies

allow a certain number o Rree’ switches. +witching also helps individuals on

another ront. They can shit rom an Aggressive to a Balanced or a

%onservative &E# as they approach retirement. This is a relection o the

change in their risk appetite as they grow older.

2or;s li;e an SIP

2upee cost-averaging is another important beneit associated with &E#+.

>ith an +# individuals invest their monies regularly over time intervals o a

monthJ!uarter and don’t have to worry about Rtiming’ the stock markets.

"URDLES OF ULIP

NO ST!ND!RDI

All the costs are levied in ways that do not lend to standardisation. # one

company calculates administration cost by a ormula another levies a lat

rate. # one company allows a range o the sum assured ?+A@ another allows

only a multiple o the premium. There was also the problem o a varying cost

structure with age57


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L!#9 OF FLE,I)ILITY IN LIFE #O$ER

&E# is known to be more lexible in nature than the traditional plans and onmost counts they are. Gowever some insurance companies do not allow the

individual to ix the lie cover that he needs. These rely on a multiplier that is

ixed by the insurer

O$ERST!TIN& T"E YIELD

#nsurance companies work on illustrations. They are allowed to show you howmuch your annual premium will be worth i it grew at 4* per cent per annum.

But there are costs so each company also gives a post-cost return at the 4*

per cent illustration calling it the yield. some companies were not including

the mortality cost while calculating the yield. This amounts to overstating the

yield.

INTERN!LLY M!DE S!LES ILLUSTR!TION

During the process o collecting inormation it was ound that the sales

beneit illustration shown was not conorming to the #nsurance 2egulatory and

Development Authority ?#rda@ ormat. in many locations9* per cent return

illustrations are still rampant

NOT !LL S"O= T"E )EN#"M!R9 RETURN

To talk about returns without pegging them to a benchmark is misleading the

customer. Though most companies use +ensex B+F 4** or the ity as the

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benchmark or the measuring rod o perormance some companies are not

using any benchmark at all.

E!RLY E,IT OPTIONS

The &lip product works over the long term. The earlier the exit the worse o

is the investor since he ends up redeeming a high-ront-load product and is

then encouraged to move into another higher cost product at that stage. An

early exit also takes away the beneit o compounding rom insured.

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#REEPIN& #OSTS

+ince the investors are now more aware than beore and have begun to ask

or costs some companies have ound a way to answer that withoutdisclosing too much. eople are now asking how much o the premium will go

to work. There are plans that are able to say 53 per cent will be invested that

is will have a ront load o just 6 per cent. >hat they do not say is the much

higher policy administration cost that is tucked away inside ?adjusted rom the

und value@.

>hile most insurance companies charge an annual ee o about 2s 7** as

administration costs that stay ixed over time there are plans that charge thisamount but it grows by as much as ) per cent a year over time. There are

others that charge a multiple o this amount and that too grows

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C1MPARIS1N

ET2EEN 46IPS

AN5 M4T4A6

F4N5S

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#OMP!RISON )ET=EEN ULIPS !ND MUTU!L FUNDSB

&nit Einked #nsurance olicies ?&E#s@ as an investment avenue are closest

to mutual unds in terms o their structure and unctioning. As is the case with

mutual unds investors in &E#s are allotted units by the insurance company

and a net asset value ?AQ@ is declared or the same on a daily basis.

+imilarly &E# investors have the option o investing across various schemes

similar to the ones ound in the mutual unds domain i.e. diversiied e!uity

unds balanced unds and debt unds to name a ew. enerally speaking

&E#s can be termed as mutual und schemes with an insurance component.

Gowever it should not be construed that barring the insurance element there

is nothing dierentiating mutual unds rom &E#s.

Points of difference +et9een the t9oB

". Mode of in/estment in/estment amounts

Mutual und investors have the option o either making lump sum investments

or investing using the systematic investment plan ?+#@ route which entails

commitments over longer time hori"ons. The minimum investment amounts

are laid out by the und house.

&E# investors also have the choice o investing in a lump sum ?single

premium@ or using the conventional route i.e. making premium payments onan annual hal-yearly !uarterly or monthly basis. #n &E#s determining the

premium paid is oten the starting point or the investment activity.

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This is in stark contrast to conventional insurance plans where the sum

assured is the starting point and premiums to be paid are determined

thereater.

&E# investors also have the lexibility to alter the premium amounts during

the policyIs tenure. (or example an individual with access to surplus unds

can enhance the contribution thereby ensuring that his surplus unds are

gainully investedN conversely an individual aced with a li!uidity crunch has

the option o paying a lower amount ?the dierence being adjusted in the

accumulated value o his &E#@. The reedom to modiy premium payments at

oneIs convenience clearly gives &E# investors an edge over their mutual

und counterparts.

-. E@penses

#n mutual und investments expenses charged or various activities like und

management sales and marketing administration among others are subject

to pre-determined upper limits as prescribed by the +ecurities and Fxchange

Board o #ndia.

(or example e!uity-oriented unds can charge their investors a maximum o

3.): per annum on a recurring basis or all their expensesN any expense

above the prescribed limit is borne by the und house and not the investors.

+imilarly unds also charge their investors entry and exit loads ?in most cases

either is applicable@. Fntry loads are charged at the timing o making an

investment while the exit load is charged at the time o sale.

#nsurance companies have a ree hand in levying expenses on their &E#

products with no upper limits being prescribed by the regulator i.e. the

#nsurance 2egulatory and Development Authority. This explains the complex

and at times IunwieldyI expense structures on &E# oerings. The only63


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restraint placed is that insurers are re!uired to notiy the regulator o all the

expenses that will be charged on their &E# oerings.

Fxpenses can have ar-reaching conse!uences on investors since higher

expenses translate into lower amounts being invested and a smaller corpus

being accumulated. &E#-related expenses have been dealt with in detail in

the article S&nderstanding &E# expensesS.

). Portfolio disclosure

Mutual und houses are re!uired to statutorily declare their portolios on a

!uarterly basis albeit most und houses do so on a monthly basis. #nvestorsget the opportunity to see where their monies are being invested and how

they have been managed by studying the portolio.

There is lack o consensus on whether &E#s are re!uired to disclose their

portolios. During our interactions with leading insurers we came across

divergent views on this issue.

>hile one school o thought believes that disclosing portolios on a !uarterly

basis is mandatory the other believes that there is no legal obligation to do so

and that insurers are re!uired to disclose their portolios on

21042903 Comparitive Analysis of Mutual Funds and Ulips Project Report

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