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Mutual fund & ulips Mutual fund & ulips Document Transcript

  • A PROJECT REPORT ON “COMPARATIVE ANALYSIS OF MUTUAL FUND & ULIPS” BACHELOR OF MANAGEMENT STUDIES (B.M.S) SEM V 2010-2011 SUBMITTED BY ASIF KHAN (T.Y.B.M.S) Roll No. 22 Batch: 2010 - 2011 Oriental College of Commerce and Management, New Link Road, Adarsh Nagar, Andheri(W), Mumbai-400102 1
  • ORIENTAL COLLEGE OF COMMERCE AND MANAGEMENT, NEW LINK ROAD, ADARSH NAGAR, ANDHERI (W), MUMBAI-400102 STUDENT’S DECLARATION I hereby declare that this report submitted in partial fulfillment of the requirement of the award for the Bachelor of Management Studies to University of Mumbai is my original work and not submitted for award of any degree or diploma fellowship or for similar titles or prizes. I further certify that I have no objection and grant the rights to University of Mumbai to publish any chapter/ project if they deem fit in Journals/Magazines and newspapers etc. without my permission. Place : Mumbai Date : 6th January, 2011 Name : Khan Ubes Rafiq Class : B.M.S. Sem. – V Roll No. : 22 2
  • CERTIFICATE This is to certify that the dissertation submitted in partial fulfillment for the award of B.M.S. of Oriental College of Commerce and Management is a result of the bonafide research work carried out by ASIF KHAN under my supervision and guidance, no part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any Journals/Magazines. Date: 6th January, 2011 Project guide : Prof. Aftab Shaikh Oriental College Prof. D B Kadam (Principal) 3
  • PREFACE MBA is a stepping-stone to the management carrier and to develop good manager it is necessary that the theoretical must be supplemented with exposure to the real environment. Theoretical knowledge just provides the base and it’s not sufficient to produce a good manager that’s 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 “Comparitive Analysis of Mutual funds and Ulips”. The main objective of the research project was to study the two instruments and make a detailed comparison of the two. 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. 4
  • INDEX 1. INDUSTRY PROFILE 7 2. HISTORY OF MUTUAL FUND 9 3. ADVANTAGES OF MUTUAL FUNDS 12 4. DISADVANTAGES OF MUTUAL FUNDS 14 5. STRUCTURE OF MUTUAL FUND 16 6. FREQUENTLY USED TERMS 7. Ulips 25 26 8. TYPES OF ULIP 30 9. COMPARISON BETWEEN ULIPS AND MUTUAL FUNDS 36 10. company profile 49 11. conclusion 71 12. FINDINGS 72 13. RECOMMENDATIONS 73 14. BIBLIOGRAPHY 74 15. QUESTIONNAIRE 75 5
  • 6
  • 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 everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in 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 significant base corpus, which can make the retail investor feel more secure. 7
  • 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 33 fund houses in the country including 16 joint ventures and 3 whollyowned 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 under management, were at 32 basis points in 2006-07, while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US, in the same time frame. 8
  • 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 Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. 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. 9
  • 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 the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. 10
  • GROWTH IN ASSETS UNDER MANAGEMENT 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. 11
  • 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 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 manager’s 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, dividend reinvestment plans etc. 12
  • 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 make investing easy. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. Well Regulated All mutual funds are registered with SEBI and they function with in the provisions of strict regulations designed to protect the interest of investors. The operations of mutual funds are regularly monitored by SEBI. DISADVANTAGES OF MUTUAL FUNDS 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 of losing the money. Fees and Commissions 13
  • 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 don’t use a broker or other financial advisor, you will pay a sales commission if you buy shares in a Load Fund. Taxes 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 Risk When you invest in mutual fund, you depend on fund manager to make the right decisions regarding the fund’s 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. 14
  • STRUCTURE OF MUTUAL FUND There are many entities involved and the diagram below illustrates the structure of mutual 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. 15
  • 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 a sponsor 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 in any manner. An AMC or any of its officers or employees are 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. 16
  • 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. 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. 17
  • 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 By structure By Investment Other Schemes Objectives Open-ended Schemes Debt Schemes Close Ended Schemes MM Mutual fund Interval Schemes FMP Other Debt Schemes Tax saving fund Equity Schemes Large cap fund Sector specific fund Mid cap Fund Index Schemes Small cap fund Any Other Equity Fund 18
  • Generally two options are available for every scheme regarding dividend payout and growth option. By opting for growth option an investor can have the benefit of long-term growth in the stock market on the other side by opting for the dividend option an investor can maintain his liquidity by receiving dividend time to time. Some time people refer dividend option as dividend fund and growth fund. Generally decisions regarding declaration of the dividend depend upon the performance of stock market and performance of the fund. OPTION REGARDING DIVIDEND Dividend Payout Growth Reinvested Systematic Investment Plan (SIP) 19
  • 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 and middle-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. In order 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 20
  • 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 other investments 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 to investors. 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. 21
  • 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 equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. Money Market Funds The main aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safe short term 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 the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains. 22
  • 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. 23
  • FREQUENTLY USED TERMS Advisor - Is employed by a mutual fund organization to give professional advice on the fund’s 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. Also called 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. Also called ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. 24
  • ULIPS 25
  • 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 3.1 TRADITIONAL LIFE – AN OVERVIEW The basic and widely used form of design is known as Traditional Life Platform. It is based on the concept of sharing . Each of the policy holder contributes his contribution (premium) into the common large fund is managed by the company 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. 26
  • 3.1.1 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 policyholder’s 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. 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 an opportunity 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). 27
  • 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/insuranceseeker the hassles of managing and tracking a portfolio or products. More importantly ULIPs offer 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 Linked Insurance Products with a variety of new features. 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. 28
  • 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 in the 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). 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 29
  • 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. 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. 30
  • • ULIP products are exempted from tax and they provide life insurance. • Provides capital appreciation. • Investor gets an option to choose among debt, balanced and equity funds. 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 individual’s disposal. ULIPS generally come in three broad variants:  Aggressive ULIPS (which can typically invest 80%-100% in equities, balance in debt)  Balanced ULIPS (can typically invest around 40%-60% in equities)  Conservative ULIPS (can typically invest upto 20% in equities) Although this is how the ULIP options are generally designed, the exact debt/equity allocations 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 capitalise on investment opportunities across the equity and debt markets is what 31
  • distinguishes it from other instruments. Some insurance companies allow a certain number of ‘free’ switches. 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. 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 don’t have to worry about ‘timing’ the stock markets. HURDLES OF ULIP NO STANDARDIZATION All the costs are levied in ways that do not lend to standardisation. If one company 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, 32
  • 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 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 33
  • 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 34
  • COMPARISON BETWEEN ULIPS AND MUTUAL FUNDS 35
  • COMPARISON BETWEEN ULIPS AND MUTUAL FUNDS: Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are allotted units by the insurance company and a 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, halfyearly, quarterly or monthly basis. In ULIPs, determining the premium paid is often the starting point for the investment activity. 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. 36
  • 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 predetermined upper limits as prescribed by the Securities and Exchange Board of India. For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on a recurring basis for all their expenses; any expense above the prescribed limit is borne by the 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. Expenses can have far-reaching consequences on investors since higher expenses translate into lower amounts being invested and a smaller corpus being accumulated. 37
  • 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. 38
  • 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. This holds good, 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. 39
  • 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. 40
  • Investing in ulips? Remember ………… The high returns (above 20 per cent) are definitely not sustainable over a long term, as they have been generated during the biggest bull run in recent stock market history. The free hand given to ULIPs might prove risky if the timing of exit happens to coincide with a bearish market phase, because of the inherently high equity component of these schemes. While a debt-oriented ULIP scheme might be superior to a debt option in a conventional mutual fund due 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 indicate 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 annualised 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. 41
  • 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 IRDA (Insurance Regulatory and Development Authority) regulations. The charges are higher for a linked plan than a non-linked plan, as the former require lot more servicing than the latter, such as regular disclosure of investments, switches, re-direction of premiums, withdrawals, and so on. Insurance companies have the discretion to structure their expenses structure whereas a mutual fund does not have that luxury. The expense ratios in their case cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for a debt plan respectively. The lack of regulation on the expense front works to the detriment of investors in ULIPs. The front-loading of charges does have an impact on overall returns as we lose out on the compounding benefit. Insurance companies explain that charges get evened out over a long term. Thus we are forced to stay with the plan for a longer tenure to even out the effect of initial charges as the shorter the tenure, the lower our real returns. If we want to withdraw from the plan, you lose out, as you will have to pay withdrawal charges up to a certain number of years. In effect, when we lock in our money in a ULIP, despite the promise of flexibility and liquidity, we are stuck with one fund management style. This is all the more reason to look for an established track record before committing our hard-earned money. 42
  • Evaluate alternative options As an investor we have to evaluate alternative options that give superior returns before considering ULIPs. Insurance companies argue that comparing ULIPs with mutual funds is like comparing oranges with apples, as the objectives are different for both the products. Most ULIPs give us the choice of a minimum investment cover so that we can direct maximum premiums towards investments. Thus, both ULIPs and mutual funds target the same customers. If risk cover is your primary objective, pure insurance plans are less expensive. When we choose a mutual fund, we look for an established track record of three to five years of consistent returns across various market cycles to judge a fund's performance. It is early days for insurance companies on this score; investing substantially in linked plans might not be advisable at this juncture. 43
  • Try top-ups Insurance companies allow us to make lump-sum investments in excess of the regular premiums. These top-ups are charged at a much lower rate — usually one to two per cent. The expenses incurred on a top-up including agent commissions are much lower than regular premiums. Some companies also give a credit on top-ups. For instance, if you pay in Rs 100 as a top up, the actual allocation to units will be Rs 101. If you keep the regular premiums to the minimum and increase your top ups, you can save up on charges, enhancing returns in the long run. Reduce life cover The price of the life cover attached to a ULIP is higher than a normal term plan. Risk charges are charged on a daily or monthly basis depending on the daily amount at risk. Rates are not locked and are charged on a one-year renewal basis. Our life cover charges would depend on the accumulation in your investment account. As accumulation increases, the amount at risk for the insurance company decreases. However, with increasing age, the cost per Rs 1,000 sum assured increases, effectively increasing your overall insurance costs. A lower life cover could yield better returns. 44
  • Stay away from riders Any riders, such as accident rider or critical illness rider, are also charged on a oneyear renewal basis. Opting for these riders with a plain insurance cover could provide better value for money. ULIP's as an investment is a very good vehicle for wealth creation ,but way Unit Linked Insurance schemes are sold by insurance company representative's and insurance advisors is not correct. ULIP's usually have following charges built into it : a) Up-front Charges b) Mortality Charges ( Charges for providing the risk cover for life) c) Administrative Charges d) Fund Management Charges Mutual Fund's have the following charges : a) Up-front charges ( Marketing, Advertising, distributors fee etc.) b) Fund Management Charges ( expenses for managing your fund) 45
  • A few aspects of investing in ULIPs versus mutual funds. Liquidity ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum lockin of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years. Mutual fund investments, on the other hand, can be redeemed at any time, barring ELSS (equity-linked savings schemes). Exit loads, if applicable , are generally for six months to a year in equity funds. So mutual funds score substantially higher on liquidity. Tax efficiency ULIPs are often pitched as tax-efficient , because your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). But investments in ELSS schemes of mutual funds are also eligible for exemption under the same section .Besides the premium, the maturity amount in ULIPs is also tax-free , irrespective of whether the investment was in a balanced or debt plan. So they do have an edge on mutual funds, as debt funds are taxed at 10% without indexation benefits, and 20% with indexation benefits. The point, though, is that if you invest in a debt plan through a ULIP, despite its tax-efficiency your post-tax returns will be low, because of high front-end costs. Debt mutual funds don’t charge such costs. 46
  • Expenses Insurance agents get high commissions for ULIPs, and they get them in the initial years, not staggered over the term. So the insurer recovers most charges from you in the initial years, as it risks a loss if the policy lapses. Typically , insurers levy enormous selling charges, averaging more than 20% of the first year’s premium, and dropping to 10% and 7.5% in subsequent years. (And this is after investors balked when charges were as high as 65%!) Compare this with mutual funds’ fees of 2.25% on entry, uniform for all schemes. Different ULIPs have varying charges, often not made clear to investors. For instance, an agent who sells you a ULIP may get 25% of your first year’s premium, 10% in the second year, 7.5% in the third and fourth year and 5% thereafter. If your annual premium is Rs 10,000 and the agent’s commission in the first year is 25%, it means only Rs 7,500 of your money is invested in the first year. So even if the NAV of the fund rises, say 20%, that year, your portfolio would be worth only Rs 9,000—much lower than the Rs 10,000 you paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a 2.25% entry load, Rs 225 is deducted , and the rest is invested. If the scheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows how ULIPs work out expensive for investors. Deduct the cost of a term policy from the mutual fund returns, and you’re still left with a sizeable difference. 47
  • 48
  • Chapter – 2 SBI Mutual Fund Company Profile Awards & Achievements Products Major Funds of SBI Mutual Fund 49
  • STATE BANK OF INDIA MUTUAL FUND Proven Skills in Wealth Generation SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation. The fund traces its lineage to SBI - India’s largest banking enterprise. The institution has grown immensely since its inception and today it is India's largest bank, patronised by over 80% of the top corporate houses of the country. SBI Mutual Fund is a joint venture between the State Bank of India and Société Générale Asset Management, one of the world’s leading fund management companies that manages over US$ 500 Billion worldwide. 50
  • Exploiting expertise, compounding growth In twenty years of operation, the fund has launched 38 schemes and successfully redeemed fifteen of them. In the process it has rewarded it’s investors handsomely with consistently high returns. A total of over 5.4 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNI’s. Today, the fund manages over Rs. 31,794 crores of assets and has a diverse profile of investors actively parking their investments across 36 active schemes. The fund serves this vast family of investors by reaching out to them through network of over 130 points of acceptance, 28 investor service centers, 46 investor service desks and 56 district organisers. SBI Mutual is the first bank-sponsored fund to launch an offshore fund – Resurgent India Opportunities Fund. Growth through innovation and stable investment policies is the SBI MF credo. 51
  • KEY PERSONNEL: Mr. Achal K. Gupta Managing Director & Chief Executive Office Mr. C A Santosh Chief Manager - Customer Service. Mr. Didier Turpin Dy. Chief Executive Officer Ms. Aparna Nirgude Chief Risk Officer Mr. Ashwini Kumar Jain Chief Operating Officer Mr. Ashutosh P Vaidya Company Secretary & Compliance Officer Mr. Sanjay Sinha Chief Investment Officer Mr. Parijat Agrawal Head – Fixed Income 52
  • Awards and achievements: • SBI Mutual Fund (SBIMF) has been the proud recipient of the: ICRA Online Award - 8 times The Lipper Award (Year 2005-2006) CNBC TV - 18 Crisil Mutual Fund of the Year Award 2007 CNBC AWAAZ CONSUMER AWARDS 2007 53
  • PRODUCTS EQUITY FUNDS: The investments of these schemes will predominantly be in the stock markets and endeavor will be to provide investors the opportunity to benefit from the higher returns which stock markets can provide. However they are also exposed to the volatility and attendant risks of stock markets and hence should be chosen only by such investors who have high risk taking capacities and are willing to think long term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in various stocks across different sectors while sectoral funds which are specialized Equity Funds restrict their investments only to shares of a particular sector and hence, are riskier than Diversified Equity Funds. Index Funds invest passively only in the stocks of a particular index and the performance of such funds move with the movements of the index • Magnum COMMA Fund • Magnum Equity Fund • Magnum Global Fund • Magnum Index Fund • Magnum MidCap Fund • Magnum Multicap Fund • Magnum Multiplier Plus 1993 54
  • • Magnum Sector Funds Umbrella • MSFU - Emerging Businesses Fund • MSFU - IT Fund • MSFU - Pharma Fund • MSFU - Contra Fund • MSFU - FMCG Fund • SBI Arbitrage Opportunities Fund • SBI Blue chip Fund • SBI Infrastructure Fund - Series I • SBI Magnum Taxgain Scheme 1993 • SBI ONE India Fund • SBI TAX ADVANTAGE FUND - SERIES I DEBT SCHEMES 55
  • Debt Funds invest only in debt instruments such as Corporate Bonds, Government Securities and Money Market instruments either completely avoiding any investments in the stock markets as in Income Funds or Gilt Funds or having a small exposure to equities as in Monthly Income Plans or Children's Plan. Hence they are safer than equity funds. At the same time the expected returns from debt funds would be lower. Such investments are advisable for the risk-averse investor and as a part of the investment portfolio for other investors. • Magnum Children`s Benefit Plan • Magnum Gilt Fund • Magnum Gilt Fund (Long Term) • Magnum Gilt Fund (Short Term) • Magnum Income Fund • Magnum Income Plus Fund • Magnum Income Plus Fund (Saving Plan) • Magnum Income Plus Fund (Investment Plan) • Magnum Insta Cash Fund • Magnum InstaCash Fund -Liquid Floater Plan • Magnum Institutional Income Fund • Magnum Monthly Income Plan • Magnum Monthly Income Plan Floater 56
  • • Magnum NRI Investment Fund • SBI Capital Protection Oriented Fund - Series I • SBI Premier Liquid Fund • SBI Short Horizon Fund • SBI Short Horizon Fund - Liquid Plus Fund • SBI Short Horizon Fund - Short Term Fund 57
  • BALANCED SCHEMES Magnum Balanced Fund invest in a mix of equity and debt investments. Hence they are less risky than equity funds, but at the same time provide commensurately lower returns. They provide a good investment opportunity to investors who do not wish to be completely exposed to equity markets, but is looking for higher returns than those provided by debt funds. • Magnum Balanced Fund • Magnum NRI Investment Fund - FlexiAsset Plan 58
  • MAJOR FUNDS OF SBI MF (EQUITY FUND) Investment Objective The objective of the scheme would be to generate opportunities for growth along with possibility of consistent returns by investing predominantly in a portfolio of stocks of companies engaged in the commodity business within the following sectors - Oil& Gas, Metals, Materials & Agriculture and in debt & money market instruments Asset Allocation Instrument Equity and equity related instruments of commodity based companies Foreign Securities/ADRs/GDRs of commodity based companies Fixed/Floating Rate Debt instruments including derivatives Money Market instruments* % of Portfolio of Plan A & B Risk Profile within 65% – 100% High 0% - 10% High 0% - 30% Medium 0% - 30% Low 59
  • Scheme Highlights 1.An open-ended equity scheme investing in stocks of commodity based companies. 2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and Growth options available.Reinvestment and payout facility available. 3.Dividends will be completely tax-free. Long term capital gains to be completely tax-free. STT would be at the rate of 0.20% at the time of repurchase. Minimum Application Rs. 5000 and in multiples of Rs. 1000 1. An open-ended equity scheme investing in stocks of commodity based companies 2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and Growth options available.Reinvestment and payout facility available. 3.Dividends will be completely tax-free. Long term capital gains to be completely tax-free. STT would be at the rate of 0.20% at the time of repurchase Entry Load Exit Load Investments below Rs. Investments below Rs. 5 crore, exit within 6 months from 5 crores-2.25% the date of allotment – 1%, Investments below Rs. 5 crore, Investments of Rs.5 exit between 6 months & 12 months from the date of crores and above - NIL allotment – 0.5%, Investments below Rs. 5 crore, exit after 12 months from the date of allotment – Nil, Investments of Rs. 5 crore and above– Nil 60
  • SIP Rs.500/month - 12 months Rs.1000/month - 6months, Rs.1500/quarter - 12 months A minimum of Rs. 500 can be withdrawn every month or quarter by indicating in the application form or by issuing advance instructions to the Registrars at any time. (DEBT FUND) 61
  • Investment Objective The objective of the scheme is to provide the investors an opportunity to earn, in accordance with their requirements, through capital gains or through regular dividends, returns that would be higher than the returns offered by comparable investment avenues through investment in debt & money market securities. Asset Allocation Instrument % of Portfolio of Plan A & B Risk Profile Corporate debentures & Bonds/PSU/FI/Govt. Guaranteed Bonds / Upto 90% High Other including Securitised Debt Securitized Debt Government Securities Cash & Call Money Money Market Instruments Units of other mutual funds Not more than 10% of in debt Upto 90% Upto 25% Upto 25% Upto 5% Low High Medium Mediom Low 62
  • Scheme Highlights 1.Open ended Debt Scheme 2. Following Plans are available to the investors :(A) Growth Plan (B) Dividend Plan (C) Bonus Plan (D) Floating Rate Plan Options available under Floating Rate Plan Short Term (Growth, Dividend & Weekly Dividend)Long Term (Regular (Dividend & Growth) Long Term (Institutional (Dividend & Growth) 2. The Plans will invest their entire corpus in high quality debt (Corporate debentures, PSU/FI/Govt guaranteed bonds), Govt securities and money market instruments (commercial paper, certificates of deposit, T-bills, bills rediscounting, repos, short-term bank deposits, etc). There shall be no investment in equity. 3. The Growth Plan / Option will give returns through capital gains only. No dividends shall be declared under this Plan. The Dividend Plan will endeavour to declare regular dividends every half year, depending on the NAV at that point of time. The Dividend Option in Floating Rate Short Term Plan will endeavour to declare dividends on a monthly basis while the dividend option under the Floating Rate Plan Long Term (Regular and Institutional) Plan will declare dividends on a quarterly basis. 4 Switchover between the Plans at NAV. :Also, switchover facility at the NAV related prices to other openend schemes of SBI Mutual Fund is available. This facility of switchover to other schemes is not available to NRIs and FIIs 63
  • Entry Load Nil Exit Load Up Rs. 50 lacs : 0.5%; upto 6 months. Above Rs. 50 lacs : Nil SIP Rs.500/month - 12 months SWP Investors have the facility to switchover between the Rs.1000/month - 6months Plans at NAV. Also, switchover facility at the NAV Rs.1500/quarter - 12 related prices to other openend schemes of SBI Mutual months Fund is available. This facility of switchover to other schemes is not available to NRIs and FIIs 64
  • Magnum Balanced Fund Investment Objective To provide investors long term capital appreciation along with the liquidity of an open-ended scheme by investing in a mix of debt and equity. The scheme will invest in a diversified portfolio of equities of high growth companies and balance the risk through investing the rest in a relatively safe portfolio of debt. Asset Allocation Instrument Equities Debt Instruments like debentures, bonds,khokhas, etc. % of Portfolio of Plan A & B At least 50% Risk Profile Medium to High Up to 40% Not more than 10% Securitized Debt of investments in Medium to High Money Market Instruments debt Balance Low Scheme Highlights 1.An open-ended scheme investing in a mix of debt and equity instruments. Investors get the benefit of high expected-returns of equity investments with the safety of debt investments in one scheme. 2. On an ongoing basis, magnums will be allotted at an entry load of 2.25% to 65
  • the NAV. 3. Scheme open for Resident Indians, Trusts, Indian Corporates, on a fully repatriable basis for NRIs and, Overseas Corporate Bodies. 4. Facility to reinvest dividend proceeds into the scheme at NAV available. 5. Switchover facility to any other open-ended schemes of SBI Mutual Fund at NAV related prices. 6. The scheme will declare NAV, Sale and repurchase price on a daily basis. 7. Nomination facility available for individuals applying on their behalf either singly or jointly upto three. Entry Load Investments below Rs. 5 Exit Load Investments below Rs. 5 crore, exit within 6 months from crores - 2.25% the date of allotment – 1%, Investments below Rs. 5 Investments of Rs.5 crore, exit between 6 months & 12 months from the date crores and above - NIL of allotment – 0.5%, Investments below Rs. 5 crore, exit after 12 months from the date of allotment – Nil, Investments of Rs. 5 crore and above– Nil SIP Rs.500/month - 12 SWP Systematic Withdrawal Plan (SWP): A minimum of Rs. months Rs.1000/month - 500 can be withdrawn every month or quarter by issuing 6months Rs.1500/quarter advance instructions to the Registrars at any time. There - 12 months is also a facility of a Monthly Pension Plan, whereby investors can withdraw a minimum amount of Rs. 500/every month. 66
  • RESEARCH METHODOLOGY OBJECTIVES: • To study about the mutual funds industry. • To study the approach of investors towards mutual funds and ulips. • To study the behavior of the investors whether they prefer mutual funds or ulips? SCOPE OF THE STUDY: • Subject matter is related to the investor’s approach towards mutual funds and ulips. • People of age between 20 to 60 • Area limited to Chandigarh. • Demographics include names, age, qualification, occupation, marital status and annual income. STEPS OF RESEARCH DESIGN: • Define the information needed:- This first step states that what is the information that is actually required. Information in this case 67
  • we require is that what is the approach of investors while investing their money in mutual funds and ulips e.g. what do they consider while deciding as to invest in which of the two i.e mutual funds or ulips. Also, it studies the extent to which the investors are aware of the various costs that one bears while making any investment. So, the information sought and information generated is only possible after defining the information needed. • Design the research:- A research design is a framework or blueprint for conducting the research project. It details the procedures necessary for obtaining the information needed to solve research problems. In this project, the research design is explorative in nature. • Specify the scaling procedures:- Scaling involves creating a continuum on which measured objects are located. Both nominal and interval scales have been used for this purpose. • Construct and pretest a questionnaire:- A questionnaire is a formalized set of questions for obtaining information from respondents. Where as pretesting refers to the testing of the questionnaire on a small sample of respondents in order to identify and eliminate potential problems. Population All the clients of State bank of India and State bank of Patiala who are investing money in mutual funds and ulips, both. • Sample Unit 68
  • Investors and non-investors. • Sample Size This study involves 50 respondents. • Sampling Technique: The sample size has been taken by non-random convenience sampling technique • Data Collection: • Data has been collected both from primary as well as secondary sources as described below: • Primary sources Primary data was obtained through questionnaires filled by people and through direct communication with respondents in the form of Interview. • Secondary sources The secondary sources of data were taken from the various websites , books, journals reports, articles etc. This mainly provided information about the mutual fund and ulips industry in India. • Plan for data analysis : Analysis of data is planned with the help of mean, chi-square technique and analysis of variance. 69
  • LIMITATIONS: No study is free from limitations. The limitations of this study can be: • Sample size taken is small and may not be sufficient to predict the results with 100% accuracy. • The result is based on primary and secondary data that has it’s own limitations. • The study only covers the area of Chandigarh that may not be applicable to other areas. Conclusion 70
  • A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixes income instruments, real estate, derivatives and other assets have become mature and information driven. Today each and every person is fully aware of every kind of investment proposal. Everybody wants to invest money, which entitled of low risk, high returns and easy redemption. In my opinion before investing in mutual funds, one should be fully aware of each and everything. At the same time Ulips as an investment avenue is good for people who has interest in staying for a longer period of time, that is around 10 years and above. Also in the coming times, Ulips will grow faster. Ulips are actually being publicized more and also the other traditional endowment policies are becoming unattractive because of lower interest rate. It is good for people who were investing in ULIP policies of insurance companies as their investments earn them a better return than the other policies. FINDINGS 71
  • • Highest number of investors comes from the salaried class. • Highest number of investors comes from the age group of 25-35. • Most of the people have been investing their money n the share market belong to Rs.400000 and above income group. • Mostly investors prefer monitoring their investment on monthly basis. • Most of the people invest upto 6% of their annual income in mutual funds. • Most of the people between the age group of 25– 35 invest their money in share market. 72
  • RECOMMENDATIONS The performance of the mutual fund depends on the previous years Net Asset Value of the fund. All schemes are doing well. But the future is uncertain. So, the AMC (Asset under Management Companies) should take the following steps: 1. The people do not want to take risk. The AMC should launch more diversified funds so that the risk becomes minimum. This will lure more and more people to invest in mutual funds. 2. The expectation of the people from the mutual funds is high. So, the portfolio of the fund should be prepared taking into consideration the expectations of the people. 3. Try tp reduce fund charges, administration charges and other charges which helps to invest more funds in the security market and earn good returns. 4. Diffferent campaigns should be launched to educate people regarding mutual funds. 5. companies should give regular dividends as it depicts profitability. 6. Mutual funds should concentrate on differentiating the portfolio of their MF than their competitors MF 7. Companies should give handsome brokerage to brokers so that they get attracted towards distribution of the funds. 73
  • BIBLIOGRAPHY • www.amfiindia.com • www.principalindia.com • www.investorsguide.com • www.moneycontrol.com • www.mutualfundsindia.com • www.sbimf.com • www.sebi.co.in 74
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  • QUESTIONNAIRE I am Priyanka Manocha pursuing MBA from Gian Jyoti institute of management and technology, Mohali. As a part of the curriculum I am doing research on “COMPARATIVE ANALYSIS OF MUTUAL FUNDS AND ULIPS”. Kindly help me in the same by filling the Questionnaire. Your response would be kept strictly confidential and would be used only for academic research. Do you invest in Mutual Funds or Ulips? Yes  No  If not, then what other option(s) do you prefer to invest? Fixed deposits  post office schemes  Recurring deposits  If others, please specify. How do you get the information of the various Insurance Companies? a) Advertisement b) Agents c) Seminar d) Work shops  76
  • In which sector do you prefer to invest your money? a) Private Sector ( ) b) Government Sector ( ) At which rate do you want your investment to grow? o Steadily o At an average rate o Fast Which factor do you consider before investing in mutual fund or Ulips? (tick) • Safety of principal • Low risk • High returns • Maturity period Terms and conditions Do you invest your money in share market? Yes ( ) no( ) Imagine that stock market drops immediately after you invest in it then what will you do?  Withdraw your money  Wait and watch  Invest more in it 77
  • Do you have any other investment/insurance policy? Yes ( ) No ( ) How often do you monitor your investment? o Daily o Monthly o Occasionally What percentage of your income do you invest? 0-5% ( ) 5-10% ( ) 10-15% ( ) How long have you been investing in mutual funds? o For the last 1-5 years o For the last 5-10 years o For the last 10 – 15 years 78
  • In the past, you have invested mostly in (choose one): Savings A/cs & PO schemes ( ) Mutual funds investing in bonds ( ) Mutual funds investing in stocks ( ) Balanced mutual funds ( ) Individual stocks & bonds ( ) Ulips ( ) Other instruments like real estate, gold ( ) You would describe your financial situation as being: Very unstable. ( ) Moderately stable. Somewhat unstable ( ). ( ) Stable. ( ) Very stable ( ) Your comfort level in making investment decisions can best be described as Low ( ) moderate ( ) high ( ) If in the near future if you ever plan to invest in your money in any of the mutual fund company, which would be your choice? Sbi mutual fund ( ) Reliance mutual fund ( ) HDFC mutual fund ( ) ABN AMRO mutual fund ( ) others ( ) 79