Comparitive+Analysis+of+Mutual+Funds+and+Ulips PROJECT

8/6/2019 Comparitive+Analysis+of+Mutual+Funds+and+Ulips PROJECT

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PREFACE

MBA is a stepping-stone to the management carrierand 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

its not sufficient to produce a good manager thatswhy practical knowledge is needed.

Therefore the research product is an essential

requirement for the student of MBA. This research

project not only helps the student to utilize his skills

properly learn field realities but also provides achance to the organization to find out talent among

the budding managers in the very beginning.

In accordance with the requirement of MBA course

I have summer training project on the topic

Comparitive Analysis of Mutual funds and Ulips.The main objective of the research project was to

study the two instruments and make a detailed

comparison of the two.

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For conducting the research project

sample size of 50 customers of SBIMF and SBOP

was selected. The information regarding the projectresearch was collected through the questionnaire

formed by me which was filled by the customers

there.

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INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of

the finance business.

Though it is perhaps the smallest segment of theindustry, it is also the most

glamorous in that it is a young industry where

there are changes in the rules

of the game everyday, and there are constant shifts

and upheavals.The mutual fund is structured around a fairly simple

concept, the mitigation

of risk through the spreading of investments across

multiple entities, which is

achieved by the pooling of a number of smallinvestments into a large bucket.

Yet it has been the subject of perhaps the most

elaborate and prolonged

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regulatory effort in the history of the country.

A little history:

The mutual fund industry started in India in a smallway with the UTI Act

creating what was effectively a small savings

division within the RBI. Over a

period of 25 years this grew fairly successfully and

gave investors a goodreturn, and therefore in 1989, as the next logical

step, public sector banks

and financial institutions were allowed to float

mutual funds and their success

emboldened the government to allow the privatesector to foray into this area.

The initial years of the industry also saw the

emerging years of the Indian

equity market, when a number of mistakes were

made and hence the mutualfund schemes, which invested in lesser-known

stocks and at very high levels,

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became loss leaders for retail investors. From those

days to today the retail

investor, for whom the mutual fund is actuallyintended, has not yet returned

to the industry in a big way. But to be fair, the

industry too has focused on

brining in the large investor, so that it can create a

significant base corpus,which can make the retail investor feel more

secure.

The Indian MF industry has Rs 5.67 lakh crore of

assets under management. As per data released by Association

of Mutual Funds in India,

the asset base of all mutual fund combined has

risen by 7.32% in April, the

first month of the current fiscal. As of now, there are33 fund houses in

the country including 16 joint ventures and 3

whollyowned foreign asset

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managers.

According to a recent McKinsey report, the total

AUM of the Indian mutualfund industry could grow to $350-440 billion by

2012, expanding 33%

annually. While the revenue and profit (PAT) pools

of Indian AMCs are pegged

at $542 million and $220 million respectively, it is atpar with fund houses

in developed economies. Operating profits for

AMCs in India, as a percentage

of average assets under management, were at 32

basis points in 2006-07,while the number was 12 bps in UK, 17 bps in

Germany and 18 bps in the US,

in the same time frame.

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Major players in Indian mutual fund industryand their AUM

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Mutual Fund

NameNo. of

Schemes*

As

on

Corpus

ABN AMRO M F

337 July

31,2008

7803

AIG GlobalM F

54 July

31,

2008

3513

SBI Mutual

Fund

177 July

31,

2008

29151.00

Birla Mutual Fund

343 July

31,

2008

37497.00

BOB Mutual

Fund

22 July31,

2008

56.00

Canara Robeco

Mutual Fund

54 July

31,

2008

4576.00

DBS Chola

Mutual Fund

80 July

31,

2008

1853.00

Deutsche Mutual

Fund

187 July

31,

2008

10792.0010
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=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=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=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=AM026http://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=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=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=AM046


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http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://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=AM033


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HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve

Bank. The history of mutual funds in India can be

broadly divided into four distinct phases: -

First Phase 1964-87

An Act of Parliament established Unit Trust of India

(UTI) on 1963. It was set up by the Reserve Bank

of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India.

In 1978 UTI was de-linked from the RBI and the

Industrial Development Bank of India (IDBI) took

over the regulatory and administrative control in

place of RBI. The first scheme launched by UTI

was Unit Scheme 1964. At the end of 1988 UTI had

Rs.6,700 crores of assets under management.

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http://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=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=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=AM032


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Second Phase 1987-1993 (Entry of Public

Sector Funds)

1987 marked the entry of non- UTI, public sectormutual funds set up by public sector banks and Life

Insurance Corporation of India (LIC) and General

Insurance Corporation of India (GIC). SBI Mutual

Fund was the first non- UTI Mutual Fund

established in June 1987 followed by Can bank

Mutual Fund (Dec 87), Punjab National Bank

Mutual Fund (Aug 89), Indian Bank Mutual Fund

(Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92). LIC established its mutual

fund in June 1989 while GIC had set up its mutual

fund in December 1990.

At the end of 1993, the mutual fund industry had

assets under management of Rs.47,004 crores.

Third Phase 1993-2003 (Entry of Private

Sector Funds)

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http://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=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045


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With the entry of private sector funds in 1993, a

new era started in the Indian mutual fund industry,

giving the Indian investors a wider choice of fundfamilies.

Also, 1993 was the year in which the first Mutual

Fund Regulations came into being, under which allmutual funds, except UTI were to be registered and

governed. The erstwhile Kothari Pioneer (now

merged with Franklin Templeton) was the first

private sector mutual fund registered in July 1993.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit

Trust of India Act 1963 UTI was bifurcated into two

separate entities. One is the Specified Undertaking

of the Unit Trust of India with assets under

management of Rs.29,835 crores as at the end of14


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January 2003, representing broadly, the assets of

US 64 scheme, assured return and certain other

schemes. The Specified Undertaking of Unit Trustof India, functioning under an administrator and

under the rules framed by Government of India and

does not come under the purview of the Mutual

Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored

by SBI, PNB, BOB and LIC. It is registered with

SEBI and functions under the Mutual Fund

Regulations. With the bifurcation of the erstwhile

UTI which had in March 2000 more than Rs.76,000

crores of assets under management and with the

setting up of a UTI Mutual Fund, conforming to the

SEBI Mutual Fund Regulations, and with recent

mergers taking place among different private sector

funds, the mutual fund industry has entered its

current phase of consolidation and growth. As at

the end of September, 2004, there were 29 funds,

which manage assets of Rs.153108 crores under

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GROWTH IN ASSETS UNDER MANAGEMENT

ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN

INDIA

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While the Indian mutual fund industry has grown in

size by about 320% from March, 1993 (Rs. 470

billion) to December, 2004 (Rs. 1505 billion) interms of AUM, the AUM of the sector excluding UTI

has grown over 8 times from Rs. 152 billion in

March 1999 to $ 148 billion as at March 2008.

Though India is a minor player in the global mutualfund industry, its AUM as a proportion of the global

AUM has steadily increased and has doubled over

its levels in 1999.

The growth rate of Indian mutual fund industry has

been increasing for the last few years. It was

approximately 0.12% in the year of 1999 and it is

noticed 0.25% in 2004 in terms of AUM as

percentage of global AUM.

Some facts for the growth of mutual funds in

India

100% growth in the last 6 years.17


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The most important trend in the mutual fund

industry is the aggressive expansion of the

foreign owned mutual fund companies and thedecline of the companies floated by the

nationalized banks and smaller private sector

players.

Many nationalized banks got into the mutual

fund business in the early nineties and got off

to a start due to the stock market boom was

prevailing. These banks did not really

understand the mutual fund business and they

just viewed it as another kind of banking

activity. Few hired specialized staff and

generally chose to transfer staff from the

parent organizations. The performance of most

of the schemes floated by these funds was not

good. Some schemes had offered guaranteed

returns and their parent organizations had to

bail out these AMCs by paying large amounts

of money as a difference between the

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levels were also very bad. Most of these AMCs

have not been able to retain staff, float new

schemes etc.

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TECHNOLOGICAL ENVIRONMENT

IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out

several innovations in their products and is offeringvalue added services to their investors. Some of the

value added services that are being offered are:

Electronic fund transfer facility.

Investment and re-purchase facility through

internet.

Added features like accident insurance cover,

mediclaim etc.

Holding the investment in electronic form,

doing away with the traditional form of unit

certificates.

Cheque writing facilities.

Systematic withdrawal and deposit facility.

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ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of

distribution to make it more easily accessible to an

ever increasing number of investors across thecountry. For the first time in India the mutual fund

start using the automated trading, clearing and

settlement system of stock exchanges for sale and

repurchase of open-ended de-materialized mutual

fund units.

Systematic Investment Plan (SIP) and Systematic

Withdrawal Plan (SWP) were options introduced

which have come in very handy for the investor to

maximize their returns from their investments. SIPensures that there is a regular investment that the

investor makes on specified dates making his

purchases to spread out reducing the effect of the

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short term volatility of markets. SWP was designed

to ensure that investors who wanted a regular

income or cash flow from their investments wereable to do so with a pre-defined automated form.

Today the SW facility has come in handy for the

investors to reduce their taxes.

LEGAL AND POLITICAL ENVIRONMENT

ASSOCIATION OF MUTUAL FUNDS IN INDIA

(AMFI)

With the increase in mutual fund players in India, a

need for mutual fund association in India was

generated to function as a non-profit organization.

Association of Mutual Funds in India (AMFI) wasincorporated on 22nd August 1995.

AMFI is an apex body of all Asset Management

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SEBI. Till date all the AMCs are that have launched

mutual fund schemes are its members. It functions

under the supervision and guidelines of board ofdirectors. AMFI has brought down the Indian Mutual

Fund Industry to a professional and healthy market

with ethical lines enhancing and maintaining

standards. It follows the principle of both protecting

and promoting the interest of mutual funds as wellas their unit holders.

It has been a forum where mutual funds have been

able to present their views, debate and participate

in creating their own regulatory framework. Theassociation was created originally as a body that

would lobby with the regulator to ensure that the

fund viewpoint was heard. Today, it is usually the

body that is consulted on matters long before

regulations are framed, and it often initiates manyregulatory changes that prevent malpractices that

emerge from time to time.

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AMFI works through a number of committees, some

of which are standing committees to address areas

where there is a need for constant vigil andimprovements and other which are adhoc

committees constituted to address specific issues.

These committees consist of industry professionals

from among the member mutual funds. There is

now some thought that AMFI should become a self-regulatory organization since it has worked so

effectively as an industry body.

OBJECTIVES:

To define and maintain high professional and

ethical standards in all areas of operation of mutual

fund industry

To recommend and promote best business practices and code of conduct to be followed by

members and others engaged in the activities of

mutual fund and asset management including

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agencies connected or involved in the field of

capital markets and financial services.

To interact with the Securities and Exchange

Board of India (SEBI) and to represent to SEBI on

all matters concerning the mutual fund industry.

To represent to the Government, Reserve Bank

of India and other bodies on all matters relating to

the Mutual Fund Industry.

To develop a cadre of well trained Agent

distributors and to implement a programme oftraining and certification for all intermediaries and

other engaged in the industry.

To undertake nation wide investor awareness

programme so as to promote proper understandingof the concept and working of mutual funds.

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To disseminate information on Mutual Fund

Industry and to undertake studies and research

directly and/or in association with other bodies.

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MEMBERS O F AMFI:

o Bank Sponsored

1. Joint Ventures - Predominantly Indian

1. Canara Robeco Asset Management

Company Limited

2. SBI Funds Management Private Limited

2. Others

1. Baroda Pioneer Asset Management

Company Limited2. UTI Asset Management Company Ltd

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o Institutions

1. LIC Mutual Fund Asset Management

Company Limited

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o Private Sector

1. Indian

1. Benchmark Asset Management

Company Pvt. Ltd.

2. DBS Cholamandalam Asset

Management Ltd.

3. Deutsche Asset Management (India)

Pvt. Ltd.

4. Edelweiss Asset Management Limited

5. Escorts Asset Management Limited

6. IDFC Asset Management Company

Private Limited

7. JM Financial Asset Management

Private Limited

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8. Kotak Mahindra Asset Management

Company Limited(KMAMCL)

9. Quantum Asset Management Co.Private Ltd.

10. Reliance Capital Asset

Management Ltd.

11. Sahara Asset Management

Company Private Limited12. Tata Asset Management Limited

13. Taurus Asset Management

Company Limited

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2. Foreign

1. AIG Global Asset Management

Company (India) Pvt. Ltd.

2. FIL Fund Management Private

Limited3. Franklin Templeton Asset

Management (India) Private Limited

4. Mirae Asset Global Investment

Management (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian

1. Birla Sun Life Asset Management

Company Limited

2. DSP Merrill Lynch Fund Managers

Limited

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3. HDFC Asset Management Company

Limited

4. ICICI Prudential AssetMgmt.Company Limited

5. Sundaram BNP Paribas Asset

Management Company Limited

4. Joint Ventures - Predominantly Foreign

1. ABN AMRO Asset Management

(India) Pvt. Ltd.

2. Bharti AXA Investment Managers

Private Limited

3. HSBC Asset Management (India)

Private Ltd.

4. ING Investment Management (India)

Pvt. Ltd.

5. JPMorgan Asset Management India

Pvt. Ltd.

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6. Lotus India Asset Management Co.

Private Ltd.

7. Morgan Stanley InvestmentManagement Pvt.Ltd.

8. Principal Pnb Asset Management Co.

Pvt. Ltd.

REGULATORY MEASURES BY SEBI

Like Banking & Insurance up to the nineties of the

last century, Mutual Fund industry in India was set

up and functioned exclusively in the state monopolyrepresented by the Unit Trust of India. This

monopoly was diluted in the eighties by allowing

nationalized banks and insurance companies (LIC

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& GIC) to set up their institutions under the Indian

Trusts Act to transact mutual fund business,

allowing the Indian investor the option to choosebetween different service providers. Unit Trust was

a statutory corporation governed by its own

incorporating act. There was no separate regulatory

authority up to the time SEBI was made a statutory

authority in 1992. but it was only in the year 1993,when a government took a policy decision to

deregulate Indian Economy from government

control and to transform it market oriented, that the

industry was opened to competition from private

and foreign players. By the year 2000 there cameto be established in the market 34 mutual funds

offerings a variety of about 550 schemes.

SECURITIES AND EXCHANGE BOARD OF

INDIA (MUTUAL FUNDS) REGULATIONS, 1996

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The fast growing industry is regulated by Securities

and Exchange Board of India (SEBI) since

inception of SEBI as a statutory body. SEBI initiallyformulated SECURITIES AND EXCHANGE

BOARD OF INDIA (MUTUAL FUNDS)

REGULATIONS, 1993 providing detailed

procedure for establishment, registration,

constitution, management of trustees, assetmanagement company, about schemes/products to

be designed, about investment of funds collected,

general obligation of MFs, about inspection, audit

etc. based on experience gained and feedback

received from the market SEBI revised theguidelines of 1993 and issued fresh guidelines in

1996 titled SECURITIES AND EXCHANGE

BOARD OF INDIA (MUTUAL FUNDS)

REGULATIONS, 1996. The said regulations as

amended from time to time are in force even today.

The SEBI mutual fund regulations contain ten

chapters and twelve schedules. Chapters

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containing material subjects relating to regulation

and conduct of business by Mutual Funds.

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REGISTRATION OF MUTUAL FUND:

Application for registration1. An application for registration of a mutual fund

shall be made to the Board in Form A by the

sponsor.

Application fee to accompany the application2. Every application for registration under regulation

3 shall be accompanied by nonrefundable

application fee as specified in the Second

Schedule.

Application to conform to the requirements

3. An application which is not complete in all

respects shall be liable to be rejected:

Provided that, before rejecting any such

application, the applicant shall be given anopportunity to complete such formalities within such

time as may be specified by the Board.

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Furnishing information

4. The Board may require the sponsor to furnish

such further information or clarification as may berequired by it.

Eligibility criteria

5. For the purpose of grant of a certificate of

registration, the applicant has to fulfill the following,namely :

(a) the sponsor should have a sound track record

and general reputation of fairness and integrity in all

his business transactions.

Explanation : For the purposes of this clausesound track record shall mean the

sponsor should,

(i) be carrying on business in financial services for

a period of not less than five

years; and(ii) the networth is positive in all the immediately

preceding five years; and

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(iii) the networth in the immediately preceding year

is more than the capital

contribution of the sponsor in the assetmanagement company; and

(iv) the sponsor has profits after providing for

depreciation, interest and tax in three out of the

immediately preceding five years, including the fifth

year;

(b) in the case of an existing mutual fund, such fund

is in the form of a trust and the trust deed has been

approved by the Board;

(c) the sponsor has contributed or contributes at

least 40% to the net worth of the asset

management company:

Provided that any person who holds 40% or more

of the net worth of an assetmanagement company shall be deemed to be a

sponsor and will be required to fulfill the eligibility

criteria specified in these regulations;

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(d) the sponsor or any of its directors or the

principal officer to be employed by the mutual fund

should not have been guilty of fraud or has notbeen convicted of an offence involving moral

turpitude or has not been found guilty of any

economic

offence;

(e) appointment of trustees to act as trustees for the

mutual fund in accordance with the provisions of

the regulations;

(f) appointment of asset management company tomanage the mutual fund and operate the scheme of

such funds in accordance with the provisions of

these regulations;

(g) appointment of a custodian in order to keepcustody of the securities 10[or gold and gold

related instrumentsand carry out the custodian

activities as may be authorizedby the trustees.

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Consideration of application

8. The Board, may on receipt of all informationdecide the application.

Grant of Certificate of Registration

9. The Board may register the mutual fund and

grant a certificate in Form B on the applicant payingthe registration fee as specified in Second

Schedule.

Terms and conditions of registration

10. The registration granted to a mutual fund underregulation 9, shall be subject to the following terms

and conditions:

(a) the trustees, the sponsor, the asset

management company and the custodian shall

comply with the provisions of these regulations;(b) the mutual fund shall forthwith inform the Board,

if any information or particulars previously

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submitted to the Board was misleading or false in

any material respect;

(c) the mutual fund shall forthwith inform the Board,of any material change in the

information or particulars previously furnished,

which have a bearing on the

registration granted by it;

(d) payment of fees as specified in the regulationsand the Second Schedule.

Rejection of application

11. Where the sponsor does not satisfy the

eligibility criteria mentioned in regulation 7, theBoard may reject the application and inform the

applicant of the same.

Payment of annual service fee:

12. A mutual fund shall pay before the 15th Aprileach year a service fee as specified in the Second

Schedule for every financial year from the year

following the year of registration:

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Provided that the Board may, on being satisfied

with the reasons for the delay permit the mutual

fund to pay the service fee at any time before theexpiry of two months from the commencement of

the financial year to which such fee relates.

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Failure to pay annual service fee

13. The Board may not permit a mutual fund who

has not paid service fee to launch any scheme.

CONSTITUTION AND MANAGEMENT OF ASSET

MANAGEMENT

COMPANY AND CUSTODIAN

Application by an asset management company

14. (1) The application for the approval of the asset

management company shall be made in Form D.(2) The provisions of regulations 5, 6 and 8 shall, so

far as may be, apply to the

application made under sub-regulation (1) as they

apply to the application for registration of a mutual

fund.

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convicted of any economic offence or violation of

any securities laws;

(c) the key personnel of the asset managementcompany 27[have not been found guilty of moral

turpitude or convicted of economic offence or

violation of securities laws or worked for any asset

management company or mutual fund or any

intermediary 29[during the period when its]registration has been suspended or cancelled at

any time by the Board;

(d) the board of directors of such asset

management company has at least fifty per cent

directors, who are not associate of, or associated inany manner with, the sponsor or any of its

subsidiaries or the trustees;

(e) the Chairman of the asset management

company is not a trustee of any mutual fund;

(f) the asset management company has a networthof not less than rupees ten crores :

Provided that an asset management company

already granted approval under the provisions of

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Securities and Exchange Board of India (Mutual

Funds) Regulations, 1993 shall within a period of

twelve months from the date of notification of theseregulations increase its networth to rupees ten

crores :

Provided [further] that the period specified in the

first proviso may be extended in appropriate cases

by the Board up to three years for reasons to berecorded in writing :

Provided furtherthat 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.Explanation : For the purposes of this clause,

networth means the aggregate of the paid up

capital and free reserves of the asset management

company after

deducting therefrom miscellaneous expenditure tothe extent not written off or

adjusted or deferred revenue expenditure,

intangible assets and accumulated losses.

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(2) The Board may, after considering an application

with reference to the matters

specified in sub-regulation (1), grant approval to theasset management company.

Terms and conditions to be complied with

17. The approval granted under sub-regulation (2)of regulation 21 shall be subject to the

following conditions, namely:

(a) any director of the asset management company

shall not hold the office of the

director in another asset management companyunless such person is an independent director

referred to in clause (d) of sub-regulation (1) of

regulation 21 and approval of the Board of asset

management company of which such person is a

director, has been obtained;(b) the asset management company shall forthwith

inform the Board of any material change in the

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information or particulars previously furnished,

which have a bearing on the approval granted by it;

(c) no appointment of a director of an assetmanagement company shall be made without prior

approval of the trustees;

(d) the asset management company undertakes to

comply with these regulations;

(e) no change in the controlling interest of the assetmanagement company shall be made unless,

(i) prior approval of the trustees and the Board is

obtained;

(ii) a written communication about the proposed

change is sent to each unitholder and anadvertisement is given in one English daily

newspaper having

nationwide circulation and in a newspaper

published in the language of the

region where the Head Office of the mutual fund issituated; and

(iii) the unitholders are given an option to exit on the

prevailing Net Asset Value

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without any exit load;]

(f) the asset management company shall furnish

such information and documents to the trustees asand when required by the trustees.

Procedure where approval is not granted

18. Where an application made under regulation 19for grant of approval does not satisfy the eligibility

criteria laid down in regulation 21, the Board may

reject the application.

Restrictions on business activities of the assetmanagement company

19. The asset management company shall

(1) not act as a trustee of any mutual fund;

(2) not undertake any other business activities

except activities in the nature of

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portfolio management services,] management and

advisory services to offshore funds, pension funds,

provident funds, venture capital funds,management of insurance funds, financial

consultancy and exchange of research on

commercial basis if any of such activities are not in

conflict with the activities of the mutual fund :

Provided that the asset management company

may itself or through its subsidiaries undertake

such activities if it satisfies the Board that the key

personnel of the asset management company, the

systems, back office, bank and securities accountsare segregated activity-wise and there exist

systems to prohibit access to inside information of

various activities :

Provided furtherthat asset management company

shall meet capital adequacyrequirements, if any, separately for each such

activity and obtain separate approval, if necessary

under the relevant regulations.

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(3) The asset management company shall not

invest in any of its schemes unless full disclosure of

its intention to invest has been made in the offerdocuments 34[in case of schemes launched after

the notification of these regulations :

Provided that an asset management company

shall not be entitled to charge any fees on its

investment in that scheme.

Asset management company and itsobligations

20. (1) The asset management company shall take

all reasonable steps and exercise due diligence to

ensure that the investment of funds pertaining toany scheme is not contrary to the provisions of

these regulations and the trust deed.

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(2) The asset management company shall exercise

due diligence and care in all its investment

decisions as would be exercised by other personsengaged in the same business.

(3) The asset management company shall be

responsible for the acts of commission or omission

by its employees or the persons whose services

have been procured by the asset managementcompany.

(4) The asset management company shall submit

to the trustees quarterly reports of each year on its

activities and the compliance with theseregulations.

(5) The trustees at the request of the asset

management company may terminate the

assignment of the asset management company atany time:

Provided that such termination shall become

effective only after the trustees have accepted the

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termination of assignment and communicated their

decision in writing to the asset management

company.

(6) Notwithstanding anything contained in any

contract or agreement or termination, the asset

management company or its directors or other

officers shall not be absolved of liability to themutual fund for their acts of commission or

omission, while holding such position or office.

(6A) The Chief Executive Officer (whatever his

designation may be) of the assetmanagement company shall ensure that the mutual

fund complies with all the provisions of these

regulations and the guidelines or circulars issued in

relation thereto from time to time and that the

investments made by the fund managers are in theinterest of the unit holders and shall also be

responsible for the overall risk management

function of the mutual fund.

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Explanation.For the purpose of this sub-

regulation, the words these regulations shall mean

and include the Securities and Exchange Board ofIndia (Mutual Funds) Regulations, 1996 as

amended from time to time.

(6B) The fund managers (whatever the designation

may be) shall ensure that the funds of the schemesare invested to achieve the objectives of the

scheme and in the interest of the unit holders.

(7) (a) An asset management company shall not

through any broker associated with the sponsor,purchase or sell securities, which is average of 5

per cent or more of the aggregate purchases and

sale of securities made by the mutual fund in all its

schemes :

Provided that for the purpose of this sub-regulation, the aggregate purchase and sale of

securities shall exclude sale and distribution of units

issued by the mutual fund :

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Provided that an asset management company may

utilise such services if disclosure to that effect is

made to the unitholders and the brokerage orcommission paid is also disclosed in the half-yearly

annual accounts of the mutual fund :

Provided furtherthat the mutual funds shall

disclose at the time of declaring halfyearly and

yearly results :(i) any underwriting obligations undertaken by the

schemes of the mutual funds with respect to issue

of securities associate companies,

(ii) devolvement, if any,

(iii) subscription by the schemes in the issues leadmanaged by associate companies,

(iv) subscription to any issue of equity or debt on

private placement basis where the sponsor or its

associate companies have acted as arranger or

manager.

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(9) The asset management company shall file with

the trustees the details of transactions in securities

by the key personnel of the asset managementcompany in their own name or on behalf of the

asset management company and shall also report

to the Board, as and when required by the Board.

(10) In case the asset management companyenters into any securities transactions with any of

its associates a report to that effect shall be sent to

the trustees at its next meeting.

(11) In case any company has invested more than5 per cent of the net asset value of a scheme, the

investment made by that scheme or by any other

scheme of the same mutual fund in that company

or its subsidiaries shall be brought to the notice of

the trustees by the asset management companyand be disclosed in the half-yearly and annual

accounts of the respective schemes with

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justification for such investment 40[provided the

latter

investment has been made within one year of thedate of the former investment calculated on either

side.

(12) The asset management company shall file with

the trustees and the Board(a) detailed bio-data of all its directors along with

their interest in other companies

within fifteen days of their appointment;

(b) any change in the interests of directors every six

months; and(c) a quarterly report to the trustees giving details

and adequate justification about the purchase and

sale of the securities of the group companies of the

sponsor or the asset management company, as the

case may be, by the mutual fund during the saidquarter.

(13) Each director of the asset management

company shall file the details of his transactions of

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dealing in securities with the trustees on a quarterly

basis in accordance with guidelines issued by the

Board.

(14) The asset management company shall not

appoint any person as key personnel who has been

found guilty of any economic offence or involved in

violation of securities laws.

(15) The asset management company shall appoint

registrars and share transfer agents who are

registered with the Board:

Provided if the work relating to the transfer of unitsis processed in-house, the charges at competitive

market rates may be debited to the scheme and for

rates higher than the competitive market rates, prior

approval of the trustees shall be obtained and

reasons for charging higher rates shall be disclosedin the annual accounts.

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(16) The asset management company shall abide

by the Code of Conduct as specified in the Fifth

Schedule.

Appointment of custodian

21. (1) The mutual fund shall appoint a Custodian

to carry out the custodial services for the schemesof the fund and sent intimation of the same to the

Board within fifteen days of the appointment of the

Custodian:

Provided that in case of a gold exchange traded

fund scheme, the assets of the scheme being goldor gold related instruments may be kept in custody

of a bank which is registered as a custodian with

the Board.

(2) No custodian in which the sponsor or itsassociates hold 50 per cent or more of the voting

rights of the share capital of the custodian or where

50 per cent or more of the directors of the custodian

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represent the interest of the sponsor or its

associates shall act as custodian for a mutual fund

constituted by the same sponsor or any of itsassociates or subsidiary company.

Agreement with custodian

22. The mutual fund shall enter into a custodian

agreement with the custodian, which shall contain

the clauses which are necessary for the efficient

and orderly conduct of the affairs of the custodian:

Provided that the agreement, the service contract,terms and appointment of the

custodian shall be entered into with the prior

approval of the trustees.

CHARACTERISTICS OF MUTUAL FUNDS

The ownership is in the hands of the investors

who have pooled in their funds.

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It is managed by a team of investment

professionals and other service providers.

The pool of funds is invested in a portfolio ofmarketable investments.

The investors share is denominated by units

whose value is called as Net Asset Value

(NAV) which changes everyday. The investment portfolio is created according

to the stated investment objectives of the fund.

ADVANTAGES OF MUTUAL FUNDS

The advantages of mutual funds are given below: -

Portfolio Diversification

Mutual funds invest in a number of companies.

This diversification reduces the risk because ithappens very rarely that all the stocks decline at

the same time and in the same proportion. So this

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Professional Management

Mutual funds provide the services of

experienced and skilled professionals, assisted byinvestment research team that analysis the

performance and prospects of companies and

select the suitable investments to achieve the

objectives of the scheme.

Low Costs

Mutual funds are a relatively less expensive

way to invest as compare to directly investing in a

capital markets because of less amount of

brokerage and other fees.

Liquidity

This is the main advantage of mutual fund, that

is whenever an investor needs money he can easily

get redemption, which is not possible in most of

other options of investment. In open-ended

schemes of mutual fund, the investor gets the

money back at net asset value and on the other66


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hand in close-ended schemes the units can be sold

in a stock exchange at a prevailing market price.

Transparency

In mutual fund, investors get full information of

the value of their investment, the proportion of

money invested in each class of assets and the

fund managers investment strategy

Flexibility

Flexibility is also the main advantage of mutual

fund. Through this investors can systematicallyinvest or withdraw funds according to their needs

and convenience like regular investment plans,

regular withdrawal plans, dividend reinvestment

plans etc.

Convenient Administration

Investing in a mutual fund reduces paperwork

and helps investors to avoid many problems like

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bad deliveries, delayed payments and follow up

with brokers and companies. Mutual funds save

time and make investing easy.Affordability

Investors individually may lack sufficient funds

to invest in high-grade stocks. A mutual fund

because of its large corpus allows even a smallinvestor to take the benefit of its investment

strategy.

Well Regulated

All mutual funds are registered with SEBI andthey function with in the provisions of strict

regulations designed to protect the interest of

investors. The operations of mutual funds are

regularly monitored by SEBI.

DISADVANTAGES OF MUTUAL FUNDS

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Mutual funds have their following drawbacks:

No Guarantees

No investment is risk free. If the entire stock

market declines in value, the value of mutual fund

shares will go down as well, no matter how

balanced the portfolio. Investors encounter fewer

risks when they invest in mutual funds than whenthey buy and sell stocks on their own. However,

anyone who invests through mutual fund runs the

risk of losing the money.

Fees and Commissions

All funds charge administrative fees to cover

their day to day expenses. Some funds also charge

sales commissions or loads to compensate brokers,

financial consultants, or financial planners. Even if

you dont use a broker or other financial advisor,you will pay a sales commission if you buy shares

in a Load Fund.

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Taxes

During a typical year, most actively managed

mutual funds sell anywhere from 20 to 70 percentof the securities in their portfolios. If your fund

makes a profit on its sales, you will pay taxes on

the income you receive, even you reinvest the

money you made.

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Management Risk

When you invest in mutual fund, you depend onfund manager to make the right decisions regarding

the funds portfolio. If the manager does not

perform as well as you had hoped, you might not

make as much money on your investment as you

expected. Of course, if you invest in index funds,you forego management risk because these funds

do not employ managers.

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STRUCTURE OF MUTUAL FUND

There are many entities involved and the diagram below illustrates the structure of mutual funds: -

Structure of Mutual Funds

SEBI

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The regulation of mutual funds operating in

India falls under the preview of authority of the

Securities and Exchange Board of India(SEBI). Any person proposing to set up a mutual

fund in India is required under the SEBI (Mutual

Funds) Regulations, 1996 to be registered with the

SEBI.

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Sponsor

The sponsor should contribute at least 40% tothe net worth of the AMC. However, if any person

holds 40% or more of the net worth of an AMC shall

be deemed to be a sponsor and will be required to

fulfill the eligibility criteria in the Mutual Fund

Regulations. The sponsor or any of its directors orthe principal officer employed by the mutual fund

should not be guilty of fraud or guilty of any

economic offence.

Trustees

The mutual fund is required to have an

independent Board of Trustees, i.e. two third of the

trustees should be independent persons who are

not associated with the sponsors in any manner. An

AMC or any of its officers or employees are noteligible to act as a trustee of any mutual fund. The

trustees are responsible for - inter alia ensuring

that the AMC has all its systems in place, all key

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personnel, auditors, registrar etc. have been

appointed prior to the launch of any scheme.

Asset Management Company

The sponsors or the trustees are required to

appoint an AMC to manage the assets of the

mutual fund. Under the mutual fund regulations, the

applicant must satisfy certain eligibility criteria inorder to qualify to register with SEBI as an AMC.

1. The sponsor must have at least 40% stake in

the AMC.

2. The chairman of the AMC is not a trustee of

any mutual fund.

3. The AMC should have and must at all times

maintain a minimum net worth of Cr. 100

million.

4. The director of the AMC should be a person

having adequate professional experience.

5. The board of directors of such AMC has at

least 50% directors who are not associate of or

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associated in any manner with the sponsor or

any of its subsidiaries or the trustees.

The Transfer Agents

The transfer agent is contracted by the AMC

and is responsible for maintaining the register of

investors / unit holders and every day settlementsof purchases and redemption of units. The role of a

transfer agent is to collect data from distributors

relating to daily purchases and redemption of units.

Custodian

The mutual fund is required, under the Mutual

Fund Regulations, to appoint a custodian to carry

out the custodial services for the schemes of the

fund. Only institutions with substantial

organizational strength, service capability in termsof computerization and other infrastructure facilities

are approved to act as custodians. The custodian

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must be totally delinked from the AMC and must be

registered with SEBI.

Unit Holders

They are the parties to whom the mutual fund is

sold. They are ultimate beneficiary of the income

earned by the mutual funds.

TYPES OF MUTUAL FUND SCHEMES

In India, there are many companies, both public

and private that are engaged in the trading of

mutual funds. Wide varieties of Mutual Fund

Schemes exist to cater to the needs such asfinancial position, risk tolerance and return

expectations etc. Investment can be made either in

the debt Securities or equity .The table below gives77


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an overview into the existing types of schemes in

the Industry.

TYPES OF MUTUAL FUND SCHEME

78

By structure By Investment

Objectives

Other Schemes

Open-ended

Schemes

Interval Schemes

Sector speciffund

Index Schem

Tax saving fu

Small cap

fund

Equity

Schemes

Debt

Schemes

Close EndedSchemes

MM Mutualfund

Other DebtSchemes

FMPMid capFund

Large capfund


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Generally two options are available for every

scheme regarding dividend payout and growth

option. By opting for growth option an investor can

have the benefit of long-term growth in the stock

market on the other side by opting for the dividend

option an investor can maintain his liquidity by

receiving dividend time to time. Some time people

refer dividend option as dividend fund and growth

fund. Generally decisions regarding declaration of

the dividend depend upon the performance of stock

market and performance of the fund.

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Any Other

Equity Fund


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OPTION REGARDING DIVIDEND

Systematic Investment Plan (SIP)

Systematic investment plan is like Recurring

Deposit in which investor invests in the particular80

Dividend Growth

ReinvestedPayout


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scheme on regular intervals. In the case it is

convenient for salaried class and middle-income

group. In this case on regular interval units ofspecified amount is created. An investor can make

payment by regular payments by issuing cheques,

post dated cheques, ECS, standing Mandate etc.

SIP can be started in the any open-ended fund if

there is provision of it. There are some entry and exitload barriers for discontinuation and redemption of

the fund before the said period.

According to Structure

Open Ended Funds

An open ended fund is one that is available for

subscription all through the year. These do not

have a fixed maturity. Investors can conveniently

buy and sell units at Net Asset Value (NAV) related

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prices. The key feature of open ended schemes is

liquidity.

Close Ended Funds

A close ended fund has a stipulated maturity

period which generally ranging from 3 to 15 years.

The fund is open for subscription only during a

specified period. Investors can invest in the schemeat the same time of the initial public issue and

thereafter they can buy and sell the units of the

scheme on the stock exchanges where they are

listed. In order to provide an exit route to the

investors, some close ended funds give an optionof selling back the units to the mutual fund through

periodic repurchase at NAV related prices.

Interval Funds

Interval funds combine the features of open ended and close ended schemes. They are open

for sales or redemption during pre-determined

intervals at their NAV.

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securities such as bonds, corporate

debentures and government securities. Income

funds are ideal for capital stability and regularincome.

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Balanced Funds

The aim of balanced funds is to provideboth growth and regular income. Such

schemes periodically distribute a part of their

earning and invest both in equities and fixed

income securities in the proportion indicated in

their offer documents. In a rising stock market,the NAV of these schemes may not normally

keep pace or fall equally when the market falls.

These are ideal for investors looking for a

combination of income and moderate growth.

Money Market Funds

The main aim of money market funds is to

provide easy liquidity, preservation of capital

and moderate income. These schemes

generally invest in safe short term instrumentssuch as treasury bills, certificates of deposit,

commercial paper and inter bank call money.

Returns on these schemes may fluctuate

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depending upon the interest rates prevailing in

the market. These are ideal for corporate and

individual investors as a means to park theirsurplus funds for short periods.

Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the

investors under specific provisions of the

Indian Income Tax laws as the government

offers tax incentives for investment in specified

avenues. Investments made in Equity Linked

Saving Schemes (ELSS) and Pension

Schemes are allowed as deduction u/s 88 of

the Income Tax Act, 1961. The Act also

provides opportunities to investors to save

capital gains.

Special Schemes:

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Index Schemes

Index funds attempt to replicate the

performance of a particular index such as theBSE Sensex or the NSE 50.

Sector Specific Schemes

Sector funds are those which invest

exclusively in a specified industry or a group ofindustries or various segments such as A

group shares or initial public offerings.

Bond Schemes

It seeks investment in bonds, debenturesand debt related instrument to generate regular

income flow.

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FREQUENTLY USED TERMS

Advisor - Is employed by a mutual fund

organization to give professional advice on the

funds investments and to supervise the

management of its asset.

Diversification The policy of spreading

investments among a range of different

securities to reduce the risk.

Net Asset Value (NAV) - Net Asset Value is the

market value of the assets of the scheme minus itsliabilities. The per unit NAV is the net asset value of

the scheme divided by the number of units

outstanding on the Valuation Date.

Sales Price - Is the price you pay when you investin a scheme. Also called Offer Price. It may include

a sales load.

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Repurchase Price - Is the price at which a close-

ended scheme repurchases its units and it may

include a back-end load. This is also called BidPrice.

Redemption Price - Is the price at which open-

ended schemes repurchase their units and close-

ended schemes redeem their units on maturity.

Such prices are NAV related.

Sales Load - Is a charge collected by a scheme

when it sells the units. Also called Front-end load.

Schemes that do not charge a load are called No

Load schemes.

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ULIPS

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3.1 TRADITIONAL LIFE AN OVERVIEWThe basic and widely used form of design is known

as Traditional Life Platform. It is based on the

concept of sharing . Each of the policy holder

contributes his contribution (premium) into the

common large fund is managed by the company onbehalf of the policy holders.

Administration of that common fund in the interest

of everybody was entrusted to the insurance

company .It was the responsibility of the companyto administer schemes for benefit of the

policyholders. Policyholders played a very passive

roll . In the course of time , the same concept of

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assured on the basis of this valuation.

Declaration of bonuses is not mandatory .

Based on the end objective , companies mayoffer different plans like saving plans,

investment plans etc.(e.g. Endowment ,

SPWLIP)

It helps to maintain a smooth growth and protects

against the vagaries of the market. In other words itminimizes the risk of investments for an average

individual. He shares his risk with a group of like-

minded individuals.

ULIP is the Product Innovation of theconventional Insurance product. With the

decline in the popularity of traditional Insurance

products & changing Investor needs in terms of

life protection, periodicity, returns & liquidity, it

was need of the hour to have an Instrument that

offers all these features bundled into one.

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A Unit Link Insurance Policy (ULIP) is one in which

the customer is provided with a life insurance cover

and the premium paid is invested in either debt orequity products or a combination of the two. In

other words, it enables the buyer to secure some

protection for his family in the event of his untimely

death and at the same time provides him an

opportunity to earn a return on his premium paid. Inthe event of the insured person's untimely death,

his nominees would normally receive an amount

that is the higher of the sum assured or the value of

the units (investments).

To put it simply, ULIP attempts to fulfill investment

needs of an investor with protection/insurance

needs of an insurance seeker. It saves the

investor/insurance-seeker the hassles of managing

and tracking a portfolio or products. Moreimportantly ULIPs offer investors the opportunity to

select a product which matches their risk profile.

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Unit Linked Insurance Plans came into play in the

1960s and became very popular in Western Europe

and Americas. In India The first unit linkedInsurance Plan , popularly known as ULIP Unit

Linked Insurance Plan in India was brought out by

Unit Trust Of India in the year 1971 by entering into

a group insurance arrangement with LIC o provide

for life cover to the investors , while UTI , as amutual was taking care of investing the unit holders

money in the capital market and giving them a fair

return .

Subsequently in the year 1989 , another UnitLinked Product was launched by the LIC Mutual

Fund called by the name of DHANARAKSHA

which was more or less on the line of ULIP of UTI .

Thereafter LIC itself came out with a Unit Linked

Insurance Product known by name BIMA PLUS in the year 2001-02 .

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Presently a number of private life insurance

companies have launched Unit Linked Insurance

Products with a variety of new features.

TYPES OF ULIP

There are various unit linked insurance plansavailable in the market. However, the key ones are

pension, children, group and capital guarantee

plans.

The pension plans come with two variations withand without life cover and are meant for people

who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at

taking care of their educational and other needs..Apart from unit-linked plans for individuals, group

unit linked plans are also available in the market.

The Group linked plans are basically designed for

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employers who want to offer certain benefits for

their employees such as gratuity, superannuation

and leave encashment.

The other important category of ULIPs is capital

guarantee plans. The plan promises the

policyholder that at least the premium paid will be

returned at maturity. But the guaranteed amount ispayable only when the policy's maturity value is

below the total premium paid by the individual till

maturity. However, the guarantee is not provided on

the actual premium paid but only on that portion of

the premium that is net of expenses (mortality,sales and marketing, administration).

How ULIPs work

ULIPs work on the lines of mutual funds. Thepremium paid by the client (less any charge) is

used to buy units in various funds (aggressive,

balanced or conservative) floated by the insurance

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companies. Units are bought according to the plan

chosen by the policyholder. On every additional

premium, more units are allotted to his fund. Thepolicyholder can also switch among the funds as

and when he desires. While some companies allow

any number of free switches to the policyholder,

some restrict the number to just three or four. If the

number is exceeded, a certain charge is levied.Individuals can also make additional investments

(besides premium) from time to time to increase the

savings component in their plan. This facility is

termed "top-up". The money parked in a ULIP plan

is returned either on the insured's death or in theevent of maturity of the policy. In case of the

insured person's untimely death, the amount that

the beneficiary is paid is the higher of the sum

assured (insurance cover) or the value of the units

(investments). However, some schemes pay thesum assured plus the prevailing value of the

investments.

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Premiums paid can be single, regular or

variable. The payment period too can beregular 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 benefit is not typically a fixed

amount and the maturity period can be

advanced or extended.

Investments can be made in gilt funds,

balanced funds, money market funds, growth

funds or bonds.

The policyholder can switch between schemes,

for instance, balanced to debt or gilt to equity,

etc.

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The maturity benefit is the net asset value of

the units.

The costs in ULIP are higher because there is

a life insurance component in it as well, in

addition to the investment component.

Insurance companies have the discretion todecide on their investment portfolios.

Being transparent the policyholder gets the

entire episode on the performance of his fund.

ULIP products are exempted from tax and they

provide life insurance.

Provides capital appreciation.

Investor gets an option to choose among debt,

balanced and equity funds.

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USP of ULIPS

Insurance cover plus savings

ULIPs serve the purpose of providing life insurance

combined with savings at market-linked returns. To

that extent, ULIPS can be termed as a two-in-one

plan in terms of giving an individual the twin

benefits of life insurance plus savings.Multiple investment options

ULIPS offer a lot more variety than traditional life

insurance plans. So there are multiple options at

the individuals disposal. ULIPS generally come in

three broad variants:

Aggressive ULIPS (which can typically invest

80%-100% in equities, balance in debt)

Balanced ULIPS (can typically invest around

40%-60% in equities) Conservative ULIPS (can typically invest upto

20% in equities)

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Although this is how the ULIP options are generally

designed, the exact debt/equity allocations may

vary across insurance companies. Individuals canopt for a variant based on their risk profile.

Flexibility

The flexibility with which individuals can switch

between the ULIP variants to capitalise oninvestment opportunities across the equity and debt

markets is what distinguishes it from other

instruments. Some insurance companies allow a

certain number of free switches. Switching also

helps individuals on another front. They can shiftfrom an Aggressive to a Balanced or a

Conservative ULIP as they approach retirement.

This is a reflection of the change in their risk

appetite as they grow older.

Works like an SIP

Rupee cost-averaging is another important benefit

associated with ULIPS. With an SIP, individuals

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month/quarter and dont have to worry about

timing the stock markets.

HURDLES OF ULIP

NO STANDARDIZATION

All the costs are levied in ways that do not lend to

standardisation. If one company calculatesadministration cost by a formula, another levies a

flat rate. If one company allows a range of the sum

assured (SA), another allows only a multiple of the

premium. There was also the problem of a varying

cost structure with age

LACK OF FLEXIBILITY IN LIFE COVER

ULIP is known to be more flexible in nature than the

traditional plans and, on most counts, they are.However, some insurance companies do not allow

the individual to fix the life cover that he needs.

These rely on a multiplier that is fixed by the insurer

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NOT ALL SHOW THE BENCHMARK RETURN

To talk about returns without pegging them to a

benchmark is misleading the customer. Though

most companies use Sensex, BSE 100 or the Nifty

as the benchmark, or the measuring rod of

performance, some companies are not using anybenchmark at all.

EARLY EXIT OPTIONS

The Ulip product works over the long term. The

earlier the exit, the worse off is the investor sincehe ends up redeeming a high-front-load product

and is then encouraged to move into another higher

cost product at that stage. An early exit also takes

away the benefit of compounding from insured.

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CREEPING COSTS

Since the investors are now more aware thanbefore and have begun to ask for costs, some

companies have found a way to answer that without

disclosing too much. People are now asking how

much of the premium will go to work. There are

plans that are able to say 92 per cent will beinvested, that is, will have a front load of just 8 per

cent. What they do not say is the much higher

policy administration cost that is tucked away inside

(adjusted from the fund value).

While most insurance companies charge an annual

fee of about Rs 600 as administration costs, that

stay fixed over time, there are plans that charge this

amount, but it grows by as much as 5 per cent a

year over time. There are others that charge a

multiple of this amount and that too grows

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COMPARISON BETWEEN ULIPS AND MUTUALFUNDS

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COMPARISON BETWEEN ULIPS AND MUTUAL

FUNDS:

Unit Linked Insurance Policies (ULIPs) as an

investment avenue are closest to mutual funds in

terms of their structure and functioning. As is the

case with mutual funds, investors in ULIPs are

allotted units by the insurance company and a netasset value (NAV) is declared for the same on a

daily basis.

Similarly ULIP investors have the option of

investing across various schemes similar to theones found in the mutual funds domain, i.e.

diversified equity funds, balanced funds and debt

funds to name a few. Generally speaking, ULIPs

can be termed as mutual fund schemes with an

insurance component.

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However it should not be construed that barring the

insurance element there is nothing differentiating

mutual funds from ULIPs.

Points of difference between the two:

1. Mode of investment/ investment amounts

Mutual fund investors have the option of either

making lump sum investments or investing using

the systematic investment plan (SIP) route which

entails commitments over longer time horizons. The

minimum investment amounts are laid out by thefund house.

ULIP investors also have the choice of investing in

a lump sum (single premium) or using the

conventional route, i.e. making premium paymentson an annual, half-yearly, quarterly or monthly

basis. In ULIPs, determining the premium paid is

often the starting point for the investment activity.

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This is in stark contrast to conventional insurance

plans where the sum assured is the starting pointand premiums to be paid are determined thereafter.

ULIP investors also have the flexibility to alter the

premium amounts during the policy's tenure. For

example an individual with access to surplus fundscan enhance the contribution thereby ensuring that

his surplus funds are gainfully invested; conversely

an individual faced with a liquidity crunch has the

option of paying a lower amount (the difference

being adjusted in the accumulated value of hisULIP). The freedom to modify premium payments

at one's convenience clearly gives ULIP investors

an edge over their mutual fund counterparts.

2. Expenses

In mutual fund investments, expenses charged for

various activities like fund management, sales and

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marketing, administration among others are subject

to pre-determined upper limits as prescribed by the

Securities and Exchange Board of India.

For example equity-oriented funds can charge their

investors a maximum of 2.5% per annum on a

recurring basis for all their expenses; any expense

above the prescribed limit is borne by the fundhouse and not the investors.

Similarly funds also charge their investors entry and

exit loads (in most cases, either is applicable).

Entry loads are charged at the timing of making aninvestment while the exit load is charged at the time

of sale.

Insurance companies have a free hand in levying

expenses on their ULIP products with no upperlimits being prescribed by the regulator, i.e. the

Insurance Regulatory and Development Authority.

This explains the complex and at times 'unwieldy'

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expense structures on ULIP offerings. The only

restraint placed is that insurers are required to

notify the regulator of all the expenses that will becharged on their ULIP offerings.

Expenses can have far-reaching consequences on

investors since higher expenses translate into lower

amounts being invested and a smaller corpus beingaccumulated. ULIP-related expenses have been

dealt with in detail in the article "Understanding

ULIP expenses".

3. Portfolio disclosure

Mutual fund houses are required to statutorily

declare their portfolios on a quarterly basis, albeit

most fund houses do so on a monthly basis.

Investors get the opportunity to see where theirmonies are being invested and how they have been

managed by studying the portfolio.

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There is lack of consensus on whether ULIPs are

required to disclose their portfolios. During our

interactions with leading insurers we came acrossdivergent views on this issue.

While one school of thought believes that disclosing

portfolios on a quarterly basis is mandatory, the

other believes that there is no legal obligation to doso and that insurers are required to disclose their

portfolios only on demand.

Some insurance companies do declare their

portfolios on a monthly/quarterly basis. Howeverthe lack of transparency in ULIP investments could

be a cause for concern considering that the amount

invested in insurance policies is essentially meant

to provide for contingencies and for long-term

needs like retirement; regular portfolio disclosureson the other hand can enable investors to make

timely investment decisions.

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4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual

funds segment and ULIPs segment are largely

comparable. For example plans that invest their

entire corpus in equities (diversified equity funds), a

60:40 allotment in equity and debt instruments(balanced funds) and those investing only in debt

instruments (debt funds) can be found in both

ULIPs and mutual funds.

If a mutual fund investor in a diversified equity fundwishes to shift his corpus into a debt from the same

fund house, he could have to bear an exit load

and/or entry load.

On the other hand most insurance companiespermit their ULIP inventors to shift investments

across various plans/asset classes either at a

nominal or no cost (usually, a couple of switches

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are allowed free of charge every year and a cost

has to be borne for additional switches).

Effectively the ULIP investor is given the option to

invest across asset classes as per his convenience

in a cost-effective manner.

This can prove to be very useful for investors, forexample in a bull market when the ULIP investor's

equity component has appreciated, he can book

profits by simply transferring the requisite amount to

a debt-oriented plan.

5. Tax benefits

ULIP investments qualify for deductions under

Section 80C of the Income Tax Act. This holds

good, irrespective of the nature of the plan chosenby the investor. On the other hand in the mutual

funds domain, only investments in tax-saving funds

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(also referred to as equity-linked savings schemes)

are eligible for Section 80C benefits.

Maturity proceeds from ULIPs are tax free. In case

of equity-oriented funds (for example diversified

equity funds, balanced funds), if the investments

are held for a period over 12 months, the gains are

tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @

10%.

Similarly, debt-oriented funds attract a long-term

capital gains tax @ 10%, while a short-term capitalgain is taxed at the investor's marginal tax rate.

Despite the seemingly similar structures evidently

both mutual funds and ULIPs have their unique set

of advantages to offer. As always, it is vital forinvestors to be aware of the nuances in both

offerings and make informed decisions.

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Investing in ulips? Remember

The high returns (above 20 per cent) are definitely

not sustainable over a long term, as they have been

generated during the biggest bull run in recent

stock market history.

The free hand given to ULIPs might prove risky if

the timing of exit happens to coincide with a bearish

market phase, because of the inherently high equity

component of these schemes.

While a debt-oriented ULIP scheme might be

superior to a debt option in a conventional mutual

fund due

Comparitive+Analysis+of+Mutual+Funds+and+Ulips PROJECT

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