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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
43
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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Dividend Growth
ReinvestedPayout
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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