Mutual Funds vs ULIPS

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CONTENTS TABLE

CHAPTER NO. CHAPTER NAME PAGE NO.

1 INDUSTRIAL PROFILE 3

2 MUTUAL FUNDS 20

3 ULIPS 47

4 COMPARISION BETWEEN MUTUAL

FUNDS AND ULIPS

57

5 COMPANY PROFILE 70

6 RESEARCH METHODOLOGY 88

7 DATA ANALYSIS AND

INTERPRETATIONS

93

8 CONCLUSIONS 117

FINDINGS 118

RECOMMENDATIONS 119

BIBLIOGRAPHY ANDANNEXURES 120, 121

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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 realenvironment.

Theoretical knowledge just provides the base and its not sufficient to produce a good

manager thats why 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 a chance 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 Comparative 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.

For conducting the research project sample size of 50 customers of SBIMF and

SBOP was selected. The information regarding the project research 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 the industry, it is also the most glamorous

in that it is a young industry where there are changes in the rules of the game every day,

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 small investments into a large bucket.

Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effortin the history of the country.

A little history:

The mutual fund industry started in India in a small way 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 good return, 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 private sector 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 mutual fund schemes, which

invested in lesser-known stocks and at very high levels, became loss leaders for retail

investors. From those days to today the retail investor, for whom the mutual fund is

actually intended, 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 significantbase corpus, which can make the retail investor feel more secure.

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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 are more than 33 fund houses in thecountry including 16 joint ventures and 3 wholly owned foreign asset managers.

According to a recent McKinsey report, the total AUM of the Indian mutual

fund 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 at par with fund houses in developed

economies. Operating profits for AMCs in India, as a percentage of average assets undermanagement, 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 industry and their AUM

Mutual Fund NameNo. of

Schemes*

As on Corpus

ABN AMRO M F 337 Till end of 2009 7803AIG Global M F 54 Till end of 2009 3513SBI Mutual Fund 177 Till end of 2009 29151.00Birla Mutual Fund 343 Till end of 2009 37497.00BOB Mutual Fund 22 Till end of 2009 56.00Canara Robeco Mutual Fund 54 Till end of 2009 4576.00DBS Chola Mutual Fund 80 Till end of 2009 1853.00Deutsche Mutual Fund 187 Till end of 2009 10792.00DSP Merrill Lynch Mutual

Fund

211 Till end of 2009 19483.00

Escorts Mutual Fund 26 Till end of 2009 177.00Fidelity Mutual Fund 39 Till end of 2009 7464.00

Franklin Templeton Investments 230 Till end of 2009 24441.00HDFC Mutual Fund 371 Till end of 2009 50,752.00HSBC Mutual Fund 221 Till end of 2009 16,385.00ICICI Prudential Mutual Fund 431 Till end of 2009 55,161.00

ING Mutual Fund 262 Till end of 2009 7091.00

JPMorgan Mutual Fund 9 Till end of 2009 3054.00Kotak Mahindra Mutual Fund 185 Till end of 2009 18,782.00LIC Mutual Fund 112 Till end of 2009 17,499.00Lotus India Mutual Fund 216 Till end of 2009 7831.00Morgan Stanley Mutual Fund 3 Till end of 2009 2,814.00PRINCIPAL Mutual Fund 151 Till end of 2009 11,359.00Quantum Mutual Fund 6 Till end of 2009 66.00Reliance Mutual Fund 345 Till end of 2009 84,564.00

Sahara Mutual Fund 45 Till end of 2009 175.00Mirae asset mutual fund 255 Till end of 2009 2546.00Sundaram Mutual Fund 219 Till end of 2009 11,898.00Tata Mutual Fund 389 Till end of 2009 20,443.00Taurus Mutual Fund 14 Till end of 2009 289.00UTI Mutual Fund 315 Till end of 2009 46,120.00

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HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with 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 IndustrialDevelopment 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.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual 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.

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Third Phase 1993-2003 (Entry of Private Sector Funds)

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 fund families.

Also, 1993 was the year in which the first Mutual Fund Regulations came into being,

under which all mutual 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 of January

2003, representing broadly, the assets of US 64 scheme, assured return and certain other

schemes. The Specified Undertaking of Unit Trust of 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 theend of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under

421 schemes.

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GROWTH IN ASSETS UNDER MANAGEMENT

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ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

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) in terms of AUM, the AUM

of the sector excluding UTI has grown over 8 times from Rs. 152 billion in March 1999

to more than $ 150 billion as at end of year 2009.

Though India is a minor player in the global mutual fund 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.

Number of foreign AMCs is in the queue to enter the Indian markets.

Our saving rate is over 23%, highest in the world. Only channelizing these

savings in mutual funds sector is required.

We have approximately 29 mutual funds which are much less than US havingmore than 800. There is a big scope for expansion.

Mutual fund can penetrate rural like the Indian insurance industry with simple and

limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.13

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Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive expansion

of the foreign owned mutual fund companies and the decline 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 were prevailing. These banksdid 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 guaranteed and actual

returns. The service levels were also very bad. Most of these AMCs have not beenable 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 offering value 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, Medi-claim etc.

Holding the investment in electronic form, doing away with the traditional form

of unit certificates.

Cheque writing facilities.

Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more easilyaccessible to an ever increasing number of investors across the country. 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. SIP ensures that there is a regular investment that the investormakes on specified dates making his purchases to spread out reducing the effect of the

short term volatility of markets. SWP was designed to ensure that investors who wanted a

regular income or cash flow from their investments were able to do so with a pre-defined

automated form. Today the SW facility has come in handy for the investors to reduce

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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) was incorporated on 22nd Aug 1995.

AMFI is an apex body of all Asset Management Companies (AMC), which has been

registered with 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 of directors.

AMFI has brought down the Indian Mutual Fund Industry to a professional and healthymarket with ethical lines enhancing and maintaining standards. It follows the principle of

both protecting and promoting the interest of mutual funds as well as 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. The association 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 beforeregulations are framed, and it often initiates many regulatorychanges that preventmalpractices that emerge from time to time.

AMFI works through a number of committees, some of which are standing committees to

address areas where there is a need for constant vigil and improvements 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.

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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 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 representto 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

of training and certification for all intermediaries and other engaged in the industry.

To undertake nationwide investor awareness programme so as to promote proper

understanding of the concept and working of mutual funds.

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 OF 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 Limited

2. UTI Asset Management Company Ltd

o Institutions

1. LIC Mutual Fund Asset Management Company Limited

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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

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 Limited

12. Tata Asset Management Limited

13. Taurus Asset Management Company Limited

2. Foreign

1. AIG Global Asset Management Company (India) Pvt. Ltd.

2. FIL Fund Management Private Limited

3. Franklin Templeton Asset Management (India) Private Limited

4. Mirae Asset Global Investment Management (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian

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1. Birla Sun Life Asset Management Company Limited

2. DSP Merrill Lynch Fund Managers Limited

3. HDFC Asset Management Company Limited4. ICICI Prudential Asset Mgmt.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.

6. Lotus India Asset Management Co. Private Ltd.

7. Morgan Stanley Investment Management Pvt.Ltd.8. Principal PNB Asset Management Co. Pvt. Ltd.

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REGULATORY MEASURES BY SEBI

Like Banking & Insurance up to the nineties of the last century, Mutual Fund industry inIndia was set up and functioned exclusively in the state monopoly represented by the Unit

Trust of India. This monopoly was diluted in the eighties by allowing nationalized banks

and insurance companies (LIC & GIC) to set up their institutions under the Indian Trusts

Act to transact mutual fund business, allowing the Indian investor the option to choose

between 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 came to be established in the market 34 mutual funds offerings a variety of

about 550 schemes.

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SECURITIES AND EXCHANGE BOARD OF INDIA

(MUTUAL FUNDS) REGULATIONS, 1996

The fast growing industry is regulated by Securities and Exchange Board of India (SEBI)

since inception of SEBI as a statutory body. SEBI initially formulated SECURITIES

AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1993

providing detailed procedure for establishment, registration, constitution, management of

trustees, asset management 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

containing material subjects relating to regulation and conduct of business by Mutual

Funds.

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Chapter II

Mutual

Funds

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REGISTRATION OF MUTUAL FUND:

Application for registration

1. 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 application

2. 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 an

opportunity to complete such formalities within such time as may be specified by the

Board.

Furnishing information

4. The Board may require the sponsor to furnish such further information or clarification

as may be required 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 clause sound 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 Net-worth is positive in all the immediately preceding five years; and

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(iii) The Net-worth in the immediately preceding year is more than the capital

contribution of the sponsor in the asset management 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 asset

management company shall be deemed to be a sponsor and will be required to fulfill theeligibility criteria specified in these regulations;

(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 not been 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 to manage 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 keep custody of the securities 10[or gold and

gold related instrumentsand carry out the custodian activities as may be authorizedby

the trustees.

Consideration of application

8. The Board may on receipt of all information decide the application.

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Grant of Certificate of Registration

9. The Board may register the mutual fund and grant a certificate in Form B on the

applicant paying the registration fee as specified in Second Schedule.

Terms and conditions of registration

10. The registration granted to a mutual fund under regulation 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) t-e mutual fund shall forthwith inform the Board, if any information or particulars

previously submitted to the Board was misleading or false in any material respect;(c) t-e 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 regulations and the Second Schedule.

Rejection of application

11. Where the sponsor does not satisfy the eligibility criteria mentioned in regulation 7,

the Board 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 April each year a service fee as specified in

the Second Schedule for every financial year from the year following the year of

registration:

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 the expiry of two months from thecommencement 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 that 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.

Appointment of an asset management company

15. (1) The sponsor or, if so authorized by the trust deed, the trustee, shall appoint anasset management company, which has been approved by the Board under sub-

regulation(2) of regulation 21.

(2) The appointment of an asset management company can be terminated by majority of

the trustees or by seventy-five per cent of the unit holders of the scheme.

(3) Any change in the appointment of the asset management company shall be subject toprior approval of the Board and the unit holders.

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Eligibility criteria for appointment of asset management company

16. (1) For grant of approval of the asset management company the applicant has to fulfill

the following:

(a) In case the asset management company is an existing asset management company ithas a sound track record, general reputation and fairness in transactions.

Explanation: For the purpose of this clause sound track record shall mean the net worth

and the profitability of the asset management company;

(a) The asset management company is a fit and proper person;

(b) the directors of the asset management company are persons having adequate

professional experience in finance and financial services related field and not found

guilty of moral turpitude or convicted of any economic offence or violation of anysecurities laws;

(c) the key personnel of the asset management company 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 in any 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 Net-worth of not less than rupees ten crores:

Provided that an asset management company already granted approval under the

provisions of Securities and Exchange Board of India (Mutual Funds) Regulations, 1993

shall within a period of twelve months from the date of notification of these regulations

increase its Net-worth 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 be recorded in writing:

Provided further that no new schemes shall be allowed to be launched or managed by

such asset management company till the Net-worth has been raised to rupees ten crores.

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Explanation: For the purposes of this clause, Net-worth means the aggregate of the

paid up capital and free reserves of the asset management company after deducting there

from miscellaneous expenditure to the extent not written off or adjusted or deferred

revenue expenditure, intangible assets and accumulated losses.

(2) The Board may, after considering an application with reference to the matters

specified in sub-regulation (1), grant approval to the asset 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 thedirector in another asset management company unless 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 information or particulars previously furnished, which have a bearing on

the approval granted by it;(c) No appointment of a director of an asset management 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 asset management 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 unit holder and

an advertisement 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 is situated; and

(iii) The unit holders are given an option to exit on the prevailing Net Asset Value

without any exit load;]

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(f) The asset management company shall furnish such information and documents to the

trustees as and when required by the trustees.

Procedure where approval is not granted

18. Where an application made under regulation 19 for 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 asset management 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 portfoliomanagement 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 assetmanagement company, the systems, back office, bank and securities accounts are

segregated activity-wise and there exist systems to prohibit access to inside information

of various activities :

Provided further that Asset Management Company shall meet capital adequacy

requirements, if any, separately for each such activity and obtain separate approval, if

necessary under the relevant regulations.

(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 offer documents 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.

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Asset management company and its obligations

20. (1) The asset management company shall take all reasonable steps and exercise due

diligence to ensure that the investment of funds pertaining to any scheme is not contrary

to the provisions of these regulations and the trust deed.

(2) 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.

(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

management company.

(4) The asset management company shall submit to the trustees quarterly reports of each

year on its activities and the compliance with these regulations.

(5) The trustees at the request of the asset management company may terminate the

assignment of the asset management company at any time:

Provided that such termination shall become effective only after the trustees have

accepted the termination of assignment and communicated their decision in writing to theasset 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 the mutual 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 asset

management 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 the interest of the unit

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holders and shall also be responsible for the overall risk management function of the

mutual fund.

Explanation.For the purpose of this sub-regulation, the words these regulations shall

mean and include the Securities and Exchange Board of India (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 schemes are 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 theaggregate 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:

Provided further that the aforesaid limit of 5 per cent shall apply for a block of any

three months.

(b) An asset management company shall not purchase or sell securities through any

broker [other than a broker referred to in clause(a)

of sub-regulation (7) which is averageof 5 per cent or more of the aggregate purchases and sale of securities made by the

mutual fund in all its schemes, unless the asset management company has recorded in

writing the justification for exceeding the limit of 5 per cent and reports of all such

investments are sent to the trustees on a quarterly basis:

Provided that the aforesaid limit shall apply for a block of three months.

(8) An asset management company shall not utilize the services of the sponsor or any of

its associates, employees or their relatives, for the purpose of any securities transaction

and distribution and sale of securities:

Provided that an asset management company may utilize such services if disclosure to

that effect is made to the unit holders and the brokerage or commission paid is also

disclosed in the half-yearly annual accounts of the mutual fund:

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Provided further that the mutual funds shall disclose at the time of declaring half yearly

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 lead managed 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.

(9) The asset management company shall file with the trustees the details of transactions

in securities by the key personnel of the asset management company in their own name or

on behalf of the asset management company and shall also report to the Board, as andwhen required by the Board.

(10) In case the asset management company enters 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 than 5 per cent of the net asset value of a

scheme, the investment made by that scheme or by any other scheme of the same mutualfund in that company or its subsidiaries shall be brought to the notice of the trustees by

the asset management company and be disclosed in the half-yearly and annual accounts

of the respective schemes with justification for such investment 40[provided the latter

investment has been made within one year of the date 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

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(13) Each director of the asset management company shall file the details of his

transactions of 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 units is 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 forcharging higher rates shall be disclosed in the annual accounts.

(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 schemes of 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 gold or 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 its associates 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 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 its associates or

subsidiary company.

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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.

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CHARACTERISTICS OF MUTUAL FUNDS

The ownership is in the hands of the investors who have pooled in their funds.

It is managed by a team of investment professionals and other service providers.

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

The investors share is denominated by units whose value is called as Net Asset

Value (NAV) which changes every day.

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 it happens very rarely that all the stocks decline at the same time and in the same

proportion. So this is the main advantage of mutual funds.

Professional Management

Mutual funds provide the services of experienced and skilled professionals, assisted

by investment research team that analysis the performance and prospects of companies

and select the suitable investments to achieve the objectives of the scheme.

Low Costs

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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 other 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

systematically invest or withdraw funds according to their needs and convenience like

regular investment plans, regular withdrawal plans, and dividend reinvestment plans etc.

Convenient Administration

Investing in a mutual fund reduces paperwork and helps investors to avoid many

problems like bad deliveries, delayed payments and follow up with brokers and

companies. Mutual funds save time and makeinvesting easy.

Affordability

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Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the benefit of

its investment strategy.

Well Regulated

All mutual funds are registered with SEBI and they function within 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

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 when they buy and sell

stocks on their own. However, anyone who invests through mutual fund runs the risk oflosing 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.

Taxes

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During a typical year, most actively managed mutual funds sell anywhere from 20 to

70 percent of 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.

Management of Risk

When you invest in mutual fund, you depend on fund 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 ofmutual funds: -

Structure of Mutual Funds

SEBI

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% to the 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 asponsor and will be required to fulfill the eligibility criteria in the Mutual Fund

Regulations. The sponsor or any of its directors or the 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 inany manner. An AMC or any of its officers or employees is not eligible 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 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 in order 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 associated in any manner with the sponsor or any of its subsidiaries

or the trustees.

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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 settlements of 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 terms of computerization

and other infrastructure facilities are approved to act as custodians. The custodian 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.

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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 as financial position, risk tolerance and return expectations etc. Investment

can be made either in the debt Securities or equity .The table below gives an overview

into the existing types of schemes in the Industry.

TYPES OF MUTUAL FUND SCHEME

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By structure By Investment

Objectives

Other Schemes

Open-ended

Schemes

Interval Schemes

Sectorspecificfund

IndexScheme

Taxsaving

Small capfund

Equity

Schemes

Debt

Schemes

Close EndedSchemes

MM Mutualfund

Other DebtSchemes

FMP

Any Other Equity Fund

Mid 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 aninvestor 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.

OPTION REGARDING DIVIDEND

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Systematic Investment Plan (SIP)

Systematic investment plan is like Recurring Deposit in which investor invests in

the particular scheme on regular intervals. In the case it is convenient for salaried class andmiddle-income group. In this case on regular interval units of specified 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 exit load 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 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 scheme at 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. Inorder to provide an exit route to the investors, some close ended funds give an option of

selling back the units to the mutual fund through periodic repurchase at NAV related

prices.

Interval Funds

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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.

According to Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to

long term. Such schemes normally invest a majority of their corpus in equities. It

has been proven that returns from stocks are much better than the otherinvestments had over the long term. Growth schemes are ideal for investors

having a long term outlook seeking growth over a period of time.

Income Funds

The aim of the income funds is to provide regular and steady income toinvestors. Such schemes generally invest in fixed income securities such as bonds,

corporate debentures and government securities. Income funds are ideal for

capital stability and regular income.

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Balanced Funds

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

schemes periodically distribute a part of their earning and invest both in equitiesand 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, preservationof capital and moderate income. These schemes generally invest in safe short term

instruments such as treasury bills, certificates of deposit, commercial paper and

inter bank call money. Returns on these schemes may fluctuate depending upon

the interest rates prevailing in the market. These are ideal for corporate and

individual investors as a means to park their surplus 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 theIncome Tax Act, 1961. The Act also provides opportunities to investors to save

capital gains.

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SPECIAL SCHEMES:

Index Schemes

Index funds attempt to replicate the performance of a particular index such as

the BSE Sensex or the NSE 50.

Sector Specific Schemes

Sector funds are those which invest exclusively in a specified industry or a

group of industries or various segments such as A group shares or initial public

offerings.

Bond Schemes

It seeks investment in bonds, debentures and 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 its liabilities. 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 invest in a scheme. It is also called as Offer

Price. It may include a sales load.

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 Bid Price.

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. It is also called

as Front-end load. Schemes that do not charge a load are called No Load schemes.

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Chapter-III

ULIPS

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PLATFORMS OF LIFE INSURANCE- UNIT LINKED INSURANCE

PLANS

World over, insurance come in different forms and shapes. although the generic names

may find similar, the difference in product features makes one wonder about the basis on

which these products are designed .With insurance market opened up, Indian customer

has suddenly found himself in a market place where he is bombarded with a lot of jargon

as well as marketing gimmicks with a very little knowledge of what is happening. This

module is aimed at clarifying these underlying concepts and simplifying the different

products available in the market.

We have many products like Endowment, Whole life, Money back etc. All these products

are based on following basic platforms or structures viz.

Traditional Life

Universal Life or Unit Linked Policies

TRADITIONAL LIFE AN OVERVIEW

The basic and widely used form of design is known as Traditional Life Platform. It isbased on the concept of sharing. Each of the policy holder contributes his contribution

(premium) into the common large fund is managed by the company on behalf 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 company to administer schemes for

benefit of the policyholders. Policyholders played a very passive roll. In the course of

time, the same concept of sharing and a common fund was extended to different areas

like saving, investment etc.

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FEATURES OF TL:

This is the simplest way of designing product as far as concerned. He has no other

responsibility but to pay the premium regularly.

Company is responsible for the protection as well as maximization of the

policyholders funds.

There is a common fund where in all the premiums paid are accumulated.

Expenses incurred as well as claims paid are then taken out of this fund.

Companies carry out the valuation of the fund periodically to ascertain the

position. It is also a practice to increase the minimum possible guarantee under a

policy every year in the form of declaring and attaching bonuses to the sum

assured on the basis of this valuation. Declaration of bonuses is not mandatory.

Based on the end objective , companies may offer 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 it minimizes 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 the conventional 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 or equity 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 anopportunity to earn a return on his premium paid. In the 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. More importantly ULIPsoffer investors the opportunity to select a product which matches their risk profile.

Unit Linked Insurance Plans came into play in the 1960s and became very popular in

Western Europe and Americas. In India The first unit linked Insurance 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 a mutual 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 Unit Linked 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.

Presently a number of private life insurance companies have launched Unit LinkedInsurance Products with a variety of new features.

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TYPES OF ULIP

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

ones are pension, Children, group and capital guarantee plans.

The pension plans come with two variations with and 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 inthe market. The Group linked plans are basically designed for 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 is payable 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).

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How ULIPs work

ULIPs work on the lines of mutual funds. The premium paid by the client (less any

charge) is used to buy units in various funds (aggressive, balanced or conservative)

floated by the insurance companies. Units are bought according to the plan chosen by the

policyholder. On every additional premium, more units are allotted to his fund. The

policyholder 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 the event 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 the sum assured plus the prevailing

value of the investments.

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ULIP - KEY FEATURES

Premiums 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 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.

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 to decide 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.

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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 up to 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equityallocations may vary across insurance companies. Individuals can opt for a variant based

on their risk profile.

Flexibility

The flexibility with which individuals can switch between the ULIP variants to capitalize

on investment opportunities across the equity and debt markets is what distinguishes it

from other instruments. Some insurance companies allow a certain number of freeswitches. Switching also helps individuals on another front. They can shift from 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.

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Works like an SIP

Rupee cost-averaging is another important benefit associated with ULIPS. With an SIP,

individuals invest their monies regularly over time intervals of a 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

standardization. If one company calculates administration 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

OVERSTATING THE YIELD: Insurance companies work on illustrations. They are

allowed to show you how much your annual premium will be worth if it grew at 10 per

cent per annum. But there are costs, so each company also gives a post-cost return at the

10 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.

INTERNALLY MADE SALES ILLUSTRATION: During the process of collecting

information, it was found that the sales benefit illustration shown was not conforming to

the Insurance Regulatory and Development Authority (IRDA) format. In many

locations30 per cent return illustrations are still rampant

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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 any benchmark at all.

EARLY EXIT OPTIONS

The ULIP product works over the long term. The earlier the exit, the worse off is the

investor since he 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.

CREEPING COSTS

Since the investors are now more aware than before 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 be invested, 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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Chapter - 4

COMPARISON

BETWEEN ULIPS

AND MUTUAL

FUNDS

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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 cases with mutual funds,

investors in ULIPs are allotted units by the insurance company and a net asset value

(NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to

the ones 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.

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 the fund

house.

ULIP investors also have the choice of investing in a lump sum (single premium) or

using the conventional route, i.e. making premium payments on 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 point and 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 funds can 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 his ULIP). 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 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 limitis borne by the fund house 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 an investment 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 upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and

Development Authority. This explains the complex and at times 'unwieldy' expense

structures on ULIP offerings. The only restraint placed is that insurers are required to

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

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Expenses can have far-reaching consequences on investors since higher expenses

translate into lower amounts being invested and a smaller corpus being accumulated.

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 their monies are being invested and how they have been managed by studying the

portfolio.

There is lack of consensus on whether ULIPs are required to disclose their portfolios.

During our interactions with leading insurers we came across divergent 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 do so and that insurers

are required to disclose their portfolios only on demand.

Some insurance companies do declare their portfolios on a monthly/quarterly basis.

However the 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 disclosures on

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 fund wishes 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 companies permit their ULIP inventors to shift

investments across various plans/asset classes either at a nominal or no cost (usually, a

couple of switches 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, for example 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. Thisholds well, irrespective of the nature of the plan chosen by the investor. On the other

hand in the mutual funds domain, only investments in tax-saving funds (also referred to

as equity-linked savings schemes) are eligible for Section 80C benefits.

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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 capital gain 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 for investors 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 conventionalmutual fund due to tax concessions that insurance companies enjoy, such tax incentives

may not last.

Look beyond NAVs

The appreciation in the net asset value (NAV) of ULIPs barely indicates the actual

returns earned on your investment. The various charges on your policy are deducted

either directly from premiums before investing in units or collected on a monthly basis by

knocking off units.

Either way, the charges do not affect the NAV; but the number of units in your account

suffers. You might have access to daily NAVs but your real returns may be substantially

lower.

A rough calculation shows that if our investments earn a 12 per cent annualized return

over a 20-year period in a growth fund, when measured by the change in NAV, the real

pre- tax returns might be only 9 per cent. The shorter the term, the lower the real returns

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How charges dent returns

An initial allocation charge is deducted from our premiums for selling, marketing and

broker commissions. These charges could be as high as 65 per cent of the first year

premiums. Premium allocation charges are usually very high (5-65 per cent) in the first

couple of years, but taper off later. The high initial charges mainly go towards funding

agent commissions, which could be as high as 40 per cent of the initial premium as per