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  1. 1. CHAPTER – I 1.1INTRODUCTIONStarting out as an industry with a single player, the UTI, in 1963, the mutual fundindustry in India has come a long way since then. Today, close to 30 players,offering over 460 schemes, dot the industry landscape. A mutual fund is vehicle pool money from investors, with a promise thatprofessional managers who are expected to honour the promise would invest themoney in a particular manner.In four decades of its existence in India, the mutual fund industry has gonethrough several structural changes. From the days of UTI’s monopoly to 1987,when the industry was opened first to other public sector enterprises, and then toprivate sector players in 1993, It has come a long way. The entry of private playerhas galvanized the sector as on product innovation, market penetration, identifyingnew channels of distribution, and last but not the least, improving investor service.Further, the emergence of India as a major investment destination has done aworld of good to the mutual fund industry in the country as it is witnessing entryof many big names in the global players like Morgan Stanley, Principal, Sun life,and Fidelity, while Vanguard is mulling over its India debut, augurs well for theindustry as not only these global investment management firms bring with themthe expertise gained internationally but also bring the best international practicesin terms of performances and investor services which will benefit the industry andwill go a long way in helping it catch up with its counter parts in developedmarkets like US and the UK. 1
  2. 2. 1.2 Company ProfileAbout the company: SPA Group was promoted by a team of finance professionals in 1995 with an objective to provide value added financial services. In January 2000, the Group expanded its operations and the range of services. Today, SPA provides services for securities broking, merchant banking, wealth management, financial advisory, corporate finance, risk management and insurance broking.1.2.1 VISION SPA believes in attaining customer satisfaction, on continuing basis, byproviding highest standard of financial services in India.The basic work theme at SPA is: 1. Dedicated, competent and honest team of professionals 2. Customer centric work environment 3. Insight of customers’ perspectives 4. Strong research base 5. Clear understanding of applicable laws 6. Consistency and passion to excel1.2.2 PROMOTERS  Mr. Kamal Somani, FCA, is a senior finance professional with over 30 years of experience in investment banking, securities broking and corporate finance.  Mr. Sandeep Parwal, B.Com (Hons), FCA, has over 20 years of experience in various aspects of financial services. 2
  3. 3. 1.2.3 INDUSTRY PROFILE  The flagship company of the group provides investment advisory services.  The company has mobilized more than Rs.7 trillion for various Mutual Funds during the last 7 years and is currently having Asset under Management of over Rs.50 billion with satisfied customers.  It provides advisory services for alternate investment options like portfolio management services in equity, debt and commodities  Equity broking is empanelled with all the major domestic institutional players and has achieved a turnover of over Rs. 1,600 crores.  The company is catering to existing customers of the group by providing research based commodity broking services.1.2.4 GROUP OF COMPANIES  SPA Securities ltd  SPA Merchant Bankers ltd  SPA Insurance Broking Services ltd  SPA Com Trade ltd 3
  4. 4. 1.2.5 SERVICES  Investment • Mutual fund • Fixed deposits • Capital gains & Other Bonds  Brokering Services • Equity Broking(NSE & BSE) • Depositary Service(CDSL) • Currency derivative  Insurance • Life Insurance • General Insurance  Loan & Mortgages • Housing Loan • Personal Loan  Taxation o Income tax planning & Advisory o Income tax Filing & Assessment o Services for PAN 4
  5. 5. 1.3 Objective of the Study:1) To exploring the investor’s preference towards the Mutual Fund and ULIP.2) To evaluate the risk and return in Mutual Fund and ULIP.3) To gain the in depth knowledge about the Indian Mutual Fund and ULIP Industry.4) To identify the investor’s confidence in Mutual Fund and ULIP.5) To offer few suggestions based on the findings of the study. 5
  6. 6. CHAPTER – II 2.1 REVIEW OF LITERATURE2.1 MUTUAL FUND AN OVERVIEW A Mutual fund is a trust that pools the savings of a number of investors whoshare a common financial goal. It is essentially a diversified portfolio of financialinstruments - these could be equities, debentures / bonds or money marketinstruments. The corpus of the fund is then deployed in investment alternativesthat help to meet predefined investment objectives. The income earned throughthese investments and the capital appreciation realised are shared by its unitholders in proportion to the number of units owned by them. Thus a Mutual fundis a suitable investment for the common man as it offers an opportunity to investin a diversified, professionally managed basket of securities at a relatively lowcost. 6
  7. 7. ORGANISATION OF A MUTUAL FUNDThere are many entities involved and the diagram below illustrates theorganisational set up of a mutual fund:You could make money from a Mutual fund in three ways:1) Income is earned from dividends declared by Mutual fund schemes from time totime.2) If the fund sells securities that have increased in price, the fund has a capitalgain. This is reflected in the price of each unit. When investors sell these units atprices higher than their purchase price, they stand to make a gain.3) If fund holdings increase in price but are not sold by the fund manager, thefunds unit price increases. You can then sell your Mutual fund units for a profit.This is tantamount to a valuation gain. 7
  8. 8. TYPES OF MUTUAL FUNDSMutual fund schemes may be classified on the basis of their structure and theirinvestment objective: Types of Mutual Fund Other EquityBy Structure By Investment Objective Related SchemesOpen Close Growth Income Balanced Money IndexEnded Ended Funds Funds Funds Market SchemesFunds Funds Funds Tax Saving Sectoral Schemes SchemesBy StructureOpen-ended FundsAn open-ended fund or scheme is one that is available for subscription andrepurchase on a continuous basis. These schemes do not have a fixed maturityperiod. Investors can conveniently buy and sell units at Net Asset Value (NAV)related prices, which are declared on a daily basis. The key feature of open-endschemes is liquidity.Close-ended FundsA close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. Thefund is open for subscription only during a specified period at the time of launch 8
  9. 9. of the scheme. Investors can invest in the scheme at the time of the initial publicissue and thereafter they can buy or sell the units of the scheme on the stockexchanges where the units are listed. In order to provide an exit route to theinvestors, some close-ended funds give an option of selling back the units to theMutual fund through periodic repurchase at NAV related prices. SEBI Regulationsstipulate that at least one of the two exit routes is provided to the investor i.e.either repurchase facility or through listing on stock exchanges. These mutualfunds schemes disclose NAV generally on weekly basis.By Investment ObjectiveGrowth FundsThe aim of growth funds is to provide capital appreciation over the medium tolong- term. Such schemes normally invest a major part of their corpus in equities.Such funds have comparatively high risks. These schemes provide differentoptions to the investors like dividend option, capital appreciation, etc. and theinvestors may choose an option depending on their preferences. The investorsmust indicate the option in the application form. The mutual funds also allow theinvestors to change the options at a later date. Growth schemes are good forinvestors having a long-term outlook seeking appreciation over a period of time.Income / Debt Oriented SchemeThe aim of income funds is to provide regular and steady income to investors.Such schemes generally invest in fixed income securities such as bonds, corporatedebentures, Government securities and money market instruments. Such funds areless risky compared to equity schemes. These funds are not affected because offluctuations in equity markets. However, opportunities of capital appreciation arealso limited in such funds. The NAVs of such funds are affected because ofchange in interest rates in the country. If the interest rates fall, NAVs of suchfunds are likely to increase in the short run and vice versa. However, long-terminvestors may not bother about these fluctuations.Balanced FundsThe aim of Balanced Funds is to provide both growth and regular income. Suchschemes periodically distribute a part of their earning and invest both in equitiesand fixed income securities in the proportion indicated in their offer documents.This proportion affects the risks and the returns associated with the balanced fund 9
  10. 10. - in case equities are allocated a higher proportion, investors would be exposed torisks similar to that of the equity market.Balanced funds with equal allocation to equities and fixed income securities areideal for investors looking for a combination of income and moderate growth.Money Market FundsThe aim of Money Market Funds is to provide easy liquidity, preservation ofcapital and moderate income. These schemes generally invest in safer short-terminstruments such as Treasury Bills, Certificates of Deposit, Commercial Paper andInter-Bank Call Money. Returns on these schemes may fluctuate depending uponthe interest rates prevailing in the market.These are ideal for corporate and individual investors as a means to park theirsurplus funds for short periods.Gilt FundThese funds invest exclusively in government securities. Government securitieshave no default risk. NAVs of these schemes also fluctuate due to change ininterest rates and other economic factors as are the case with income or debtoriented schemes.Other Equity Related SchemesTax Saving SchemesThese schemes offer tax rebates to the investors under specific provisions of theIndian Income Tax laws, as the Government offers tax incentives for investment inspecified avenues.Investments made in Equity Linked Savings Schemes (ELSS) and PensionSchemes are allowed as deduction under Section 88 of the Indian Income TaxAct, 1961. 10
  11. 11. Index SchemesIndex Funds attempt to replicate the performance of a particular index such as theBSE Sensex or the NSE S&P CNX 50.Sectoral SchemesSectoral Funds are those, which invest, exclusively in specified sector(s) such asFMCG, Information Technology, Pharmaceuticals, etc. These schemes carryhigher risk as compared to general equity schemes as the portfolio is lessdiversified, i.e. restricted to specific sector(s) / industry (ies).Sector specific funds / schemesThese are the funds/schemes, which invest in the securities of only those sectors orindustries as specified in the offer documents. E.g. Pharmaceuticals, Software,Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns inthese funds are dependent on the performance of the respective sectors/industries.While these funds may give higher returns, they are more risky compared todiversified funds. Investors need to keep a watch on the performance of thosesectors/industries and must exit at an appropriate time. They may also seek adviceof an expert.Load or no-load FundA Load Fund is one that charges a percentage of NAV for entry or exit. That is,each time one buys or sells units in the fund, a charge will be payable. This chargeis used by the Mutual fund for marketing and distribution expenses. Suppose theNAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then theinvestors who buy would be required to pay Rs.10.10 and those who offer theirunits for repurchase to the Mutual fund will get only Rs.9.90 per unit. Theinvestors should take the loads into consideration while making investment asthese affect their yields/returns. However, the investors should also consider theperformance track record and service standards of the mutual fund, which aremore important. Efficient funds may give higher returns in spite of loads.A no-load fund is one that does not charge for entry or exit. It means the investorscan enter the fund/scheme at NAV and no additional charges are payable onpurchase or sale of units. 11
  12. 12. Assured return schemeAssured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.A scheme cannot promise returns unless such returns are fully guaranteed by thesponsor or AMC and this is required to be disclosed in the offer document.Investors should carefully read the offer document whether return is assured forthe entire period of the scheme or only for a certain period. Some schemes assurereturns one year at a time and they review and change it at the beginning of thenext year. DIFFERENT PLANS IN MUTUAL FUNDSTo cater to different investment needs, Mutual Funds offer various investmentoptions. Some of the important investment options include:Growth OptionDividend is not paid-out under a Growth Option and the investor realizes only thecapital appreciation on the investment (by an increase in NAV).Dividend Payout OptionDividends are paid-out to investors under the Dividend Payout Option. However,the NAV of the Mutual fund scheme falls to the extent of the dividend payout.Dividend Re-investment OptionHere the dividend accrued on mutual funds is automatically re-invested inpurchasing additional units in open-ended funds. In most cases mutual funds offerthe investor an option of collecting dividends or re-investing the same.Retirement Pension Option 12
  13. 13. Some schemes are linked with retirement pension. Individuals participate in theseoptions for themselves, and corporate participate for their employees.Insurance OptionCertain Mutual Funds offer schemes that provide insurance cover to investors asan added benefit.Systematic Investment Plan (SIP)Here the investor is given the option of preparing a pre-determined number ofpost-dated cheques in favour of the fund. The investor is allotted units on apredetermined date specified in the offer document at the applicable NAV.Systematic Encashment Plan (SEP)As opposed to the Systematic Investment Plan, the Systematic Encashment Planallows the investor the facility to withdraw a pre-determined amount / units fromhis fund at a pre-determined interval. The investors units will be redeemed at theapplicable NAV as on that day. EXPENSES AND TERMS Mutual funds bear expenses similar to other companies. The fee structure ofa Mutual fund can be divided into two or three main components: managementfee, non-management expense, and 12b-1/non-12b-1 fees. All expenses areexpressed as a percentage of the average daily net assets of the fund.Management FeesThe management fee for the fund is usually synonymous with the contractualinvestment advisory fee charged for the management of a funds investments.However, as many fund companies include administrative fees in the advisory feecomponent, when attempting to compare the total management expenses ofdifferent funds, it is helpful to define management fee as equal to the contractualadvisory fee + the contractual administrator fee. This "levels the playing field"when comparing management fee components across multiple funds. 13
  14. 14. Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single feecharged to the fund, regardless of the asset size of the fund. However, many fundshave contractual fees, which include breakpoints, so that as the value of a fundsassets increases, the advisory fee paid decreases. Another way in which theadvisory fees remain competitive is by structuring the fee so that it is based on thevalue of all of the assets of a group or a complex of funds rather than those of asingle fund.Non-management ExpensesApart from the management fee, there are certain non-management expenses,which most funds must pay. Some of the more significant (in terms of amount)non-management expenses are: transfer agent expenses (this is usually the personyou get on the other end of the phone line when you want to purchase/sell sharesof a fund), custodian expense (the funds assets are kept in custody by a bankwhich charges a custody fee), legal/audit expense, fund accounting expense,registration expense (the SEC charges a registration fee when funds fileregistration statements with it), board of directors/trustees expense (thedisinterested members of the board who oversee the fund are usually paid a fee fortheir time spent at board meetings), and printing and postage expense (incurredwhen printing and delivering shareholder reports)Fees and Expenses Borne by the Investor (not the Fund)Fees and expenses borne by the investor vary based on the arrangement made withthe investors broker. Sales loads (or contingent deferred sales loads (CDSL)) arenot included in the funds total expense ratio (TER) because they do not passthrough the statement of operations for the fund. Additionally, funds may chargeearly redemption fees to discourage investors from swapping money into and outof the fund quickly, which may force the fund to make bad trades to obtain thenecessary liquidity. For example, Fidelity Diversified International Fund (FDIVX)charges a 1 percent fee on money removed from the fund in less than 30 days.Brokerage CommissionsAn additional expense, which does not pass through the statement of operationsand cannot be controlled by the investor, is brokerage commissions. Brokeragecommissions are incorporated into the price of the fund and are reported usually 3months after the funds annual report in the statement of additional information.Brokerage commissions are directly related to portfolio turnover (portfolio 14
  15. 15. turnover refers to the number of times the funds assets are bought and sold overthe course of a year). Usually the higher the rate of the portfolio turnover, thehigher the brokerage commissions. The advisors of Mutual fund companies arerequired to achieve "best execution" through brokerage arrangements so that thecommissions charged to the fund will not be excessive. TYPES OF RISK Risk is an inherent aspect of every form of investment. For Mutual fundinvestments, risks would include variability, or period-by-period fluctuations intotal return. The value of the schemes investments may be affected by factorsaffecting capital markets such as price and volume volatility in the stock markets,interest rates, currency exchange rates, foreign investment, changes in governmentpolicy, political, economic or other developments.Market Risk At times the prices or yields of all the securities in a particular market rise or falldue to broad outside influences. When this happens, the stock prices of both anoutstanding, highly profitable company and a fledgling corporation may beaffected. This change in price is due to "market risk".Inflation RiskSometimes referred to as "loss of purchasing power." Whenever the rate ofinflation exceeds the earnings on your investment, you run the risk that youllactually be able to buy less, not more.Credit RiskIn short, how stable is the company or entity to which you lend your money whenyou invest? How certain are you that it will be able to pay the interest you arepromised, or repay your principal when the investment matures?Interest Rate Risk 15
  16. 16. Changing interest rates affect both equities and bonds in many ways. Movementsin the interest rates influence Bond prices in the financial system. Generally, wheninterest rates rise, prices of the securities fall and when interest rates drop, theprices increase. Interest rate movements in the Indian debt markets can be volatileleading to the possibility of large price movements up or down in debt and moneymarket securities and thereby to possibly large movements in the NAV.Investment RisksIn the sectoral fund schemes, investments will be predominantly in equities ofselect companies in the particular sectors. Accordingly, the NAV of the schemesare linked to the equity performance of such companies and may be more volatilethan a more diversified portfolio of equities.Liquidity Risk Thinly traded securities carry the danger of not being easily saleable at or near their realvalues. The fund manager may therefore be unable to quickly sell an illiquid bond andthis might affect the price of the fund unfavorably. Liquidity risk is characteristic of theIndian fixed income market. 16
  17. 17. BENEFITS OF INVESTING IN MUTUAL FUND1. Access to professional money managersExperienced fund managers using advanced quantitative and mathematicaltechniques manage your money.2. DiversificationMutual funds aim to reduce the volatility of returns through diversification byinvesting in a number of companies across a broad section of industries andsectors. It prevents an investor from putting "all eggs in one basket". Thisinherently minimizes risk. Thus with a small investible surplus an investor canachieve diversification which would have otherwise not been possible.3. LiquidityOpen-ended mutual funds are priced daily and are always willing to buy backunits from investors. This mean that investors can sell their holdings in Mutualfund investments anytime without worrying about finding a buyer at the rightprice. In the case of other investment avenues such as stocks and bonds, buyers arenot necessarily available and therefore these investment avenues are less liquidcompared to open-ended schemes of mutual funds.4.Tax Efficiency(i) Equity FundsCurrently, dividends are tax-free in the hands of the investor. There is nodistribution tax payable by the Mutual fund on dividends distributed. There is notax deduction at source on dividends as well. Investments for over 12 monthsqualify for long-term capital gains. Moreover for resident investors there is noTDS on redemption of the units. The recently introduced Securities TransactionTax is applicable to equity fund investments. 17
  18. 18. (ii) Debt FundsCurrently, dividends are tax-free in the hands of the investor. However, there isdistribution tax together with surcharge and education cess, as may be applicable,payable by the Mutual fund on dividends distributed. There is no tax deduction atsource on dividends as well. Investments for over 12 months qualify for long-termcapital gains. For resident investors there is no TDS on redemption of the units.Low transaction costs - Since mutual funds are a pool of money of manyinvestors, the amount of investment made in securities is large. This thereforeresults in paying lower brokerage due to economies of scale.Transparency - Prices of open-ended mutual funds are declared daily. Regularupdates on the value of your investment are available. The portfolio is alsodisclosed regularly with the fund managers investment strategy and outlook.Well-regulated industry - All the mutual funds are registered with SEBI and theyfunction under strict regulations designed to protect the interests of investors.Convenience of small investments - Under normal circumstances, an individualinvestor would not be able to diversify his investments (and thus minimize risk)across a wide array of securities due to the small size of his investments andinherently higher transaction costs. A Mutual fund on the other hand allows evenindividual investors to hold a diversified array of securities due to the fact that itinvests in a portfolio of stocks. A Mutual fund therefore permits riskdiversification without an investor having to invest large amounts of money. DISADVANTAGES OF MUTUAL FUND 18
  19. 19. Professional Management Did you notice how we qualified the advantage of professional management withthe word "theoretically"? Many investors debate over whether or not the so-calledprofessionals are any better than you or I at picking stocks. Management is by nomeans infallible, and, even if the fund loses money, the manager still takes his/hercut. Well talk about this in detail in a later section.CostsMutual funds dont exist solely to make your life easier--all funds are in it for aprofit. The mutual fund industry is masterful at burying costs under layers ofjargon. These costs are so complicated that in this tutorial we have devoted anentire section to the subject.DilutionIts possible to have too much diversification (this is explained in our articleentitled "Are You Over-Diversified?"). Because funds have small holdings in somany different companies, high returns from a few investments often dont makemuch difference on the overall return. Dilution is also the result of a successfulfund getting too big. When money pours into funds that have had strong success,the manager often has trouble finding a good investment for all the new money.TaxesWhen making decisions about your money, fund managers dont consider yourpersonal tax situation. For example, when a fund manager sells a security, acapital-gain tax is triggered, which affects how profitable the individual is fromthe sale. It might have been more advantageous for the individual to defer thecapital gains liability. FREQUENTLY USED TERMS 19
  20. 20. Net Asset Value (NAV)Net Asset Value is the market value of the assets of the scheme minus itsliabilities. The per unit NAV is the net asset value of the scheme divided by thenumber of units outstanding on the Valuation Date.Sale PriceIs the price you pay when you invest in a scheme. Also called Offer Price. It mayinclude a sales load.Repurchase PriceIs the price at which a close-ended scheme repurchases its units and it may includea back-end load. This is also called Bid Price.Redemption PriceIs the price at which open-ended schemes repurchase their units and close-endedschemes redeem their units on maturity. Such prices are NAV related.Sales LoadIs 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.Repurchase or ‘Back-end’ LoadIs a charge collected by a scheme when it buys back the units from the unitholders. 2.2 UNIT LINKED INSURANCE PLAN (ULIP’s) 20
  21. 21. Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest tomutual funds in terms of their structure and functioning. As is the case wit mutualfunds, the insurance company allots units investors in ULIPs 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 schemessimilar 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 betermed as Mutual fund schemes with an insurance component.However it should not be construed that barring the insurance element there isnothing differentiating mutual funds from ULIPs.Unit-linked insurance plans, ULIPs, are distinct from the more familiar ‘withprofits’ policies sold for decades by the Life Insurance Corporation.‘With profits’ policies are called so because investment gains (profits) aredistributed to policyholders in the form of a bonus announced every year.ULIPs also serve the same function of providing insurance protection againstdeath and provision of long-term savings, but they are structured differently.In ‘with profits’ policies, the insurance company credits the premium to a commonpool called the ‘life fund,’ after setting aside funds for the risk premium on lifeinsurance and management expenses.Every year, the insurer calculates how much has to be paid to settle death andmaturity claims. The surplus in the life fund left after meeting these liabilities iscredited to policyholders’ accounts in the form of a bonus.In a ULIP too, the insurer deducts charges towards life insurance (mortalitycharges), administration charges and fund management charges.The rest of the premium is used to invest in a fund that invests money in stocks orbonds.The number of units represents the policyholder’s share in the fund. 21
  22. 22. The value of the unit is determined by the total value of all the investments madeby the fund divided by the number of units.If the insurance company offers a range of funds, the insured can direct thecompany to invest in the fund of his choice. Insurers usually offer three choices —an equity (growth) fund, balanced fund and a fund, which invests in bonds. In both ‘with profits’ policies as well as unit-linked policies, a large part of thefirst year premium goes towards paying the agents’ commissions. 22
  23. 23. KEY FEATURES OF ULIPs Insurers love ULIPs for several reasons. Most important of all, insurers cansell these policies with less capital of their own than what would be required ifthey sold traditional policies.In traditional ‘with profits’ policies, the insurance company bears the investmentrisk to the extent of the assured amount. In ULIPs, the policyholder bears most ofthe investment risk.Since ULIPs are devised to mobilise savings, they give insurance companies anopportunity to get a large chunk of the asset management business, which has beentraditionally dominated by mutual funds.1. Term/TenureThe ULIP client must have the option to choose a term/tenure.If no term is defined, then the term will be defined as 70 minus the age of theclient. For example if the client is opting for ULIP at the age of 30 then the policyterm would be 40 years.The ULIP must have a minimum tenure of 5 years.2. Sum AssuredOn the same lines, now there is a sum assured that clients can associate with. Theminimum sum assured is calculated as: (Term/2 * Annual Premium) or (5 *Annual Premium) whichever is higher.There is no clarity with regards to the maximum sum assured.The sum assured istreated as sacred under the new guidelines; it cannot be reduced at any pointduring the term of the policy except under certain conditions - like a partialwithdrawal within two years of death or all partial withdrawals after 60 years ofage. This way the client is at ease with regards to the sum assured at his disposal.3. Premium payments 23
  24. 24. If less than first 3 years premiums are paid, the life cover will lapse and policy willbe terminated by paying the surrender value. However, if at least first 3 yearspremiums have been paid, then the life cover would have to continue at the optionof the client.4. Surrender valueThe surrender value would be payable only after completion of 3 policy years.5. Top-upsInsurance companies can accept top-ups only if the client has paid regularpremiums till date. If the top-up amount exceeds 25% of total basic regularpremiums paid till date, then the client has to be given a certain percentage of sumassured on the excess amount. Top-ups have a lock-in of 3 years (unless the top-upis made in the last 3 years of the policy).6. Partial withdrawalsThe client can make partial withdrawals only after 3 policy years.7. SettlementThe client has the option to claim the amount accumulated in his account aftermaturity of the term of the policy up to a maximum of 5 years. For instance, if theULIP matures on January 1, 2007, the client has the option to claim the ULIPmonies till as late as December 31, 2012. However, life cover will not be availableduring the extended period.8. LoansNo loans will be granted under the new ULIP.9. ChargesThe insurance company must state the ULIP charges explicitly. They must alsogive the method of deduction of charges.10. Benefit Illustrations 24
  25. 25. The client must necessarily sign on the sales benefit illustrations. Theseillustrations are shown to the client by the agent to give him an idea about thereturns on his policy.Agents are bound by guidelines to show illustrations based on an optimisticestimate of 10% and a conservative estimate of 6%. Now clients will have to signon these illustrations, because agents were violating these guidelines andprojecting higher returns.While what the IRDA has done is commendable, a lot more needs to be done. AtPersonalfn, we have our own wish list with regards to ULIP portfolios:Regular disclosure of detailed ULIP portfolios. This is a problem with theindustry; for all their talk on being just like (or even better than) mutual funds,ULIP portfolios are nowhere near their Mutual fund counterparts in frequency aswell as in transparency.On the same lines, other data points like portfolio turnover ratios need to bementioned clearly so clients have an idea on whether the fund manager isinvesting or punting.ULIPs (especially the aggressive options) need to mention their investmentmandate, is it going to aim for aggressive capital appreciation or steady growth. Inother words will it be managed aggressively or conservatively? Will it invest inlarge caps, mid caps or across both segments? Will it be managed with the growthstyle or the value style?Exposure to a stock/sector in a ULIP portfolio must be defined. Diversified equityfunds have a limit to how much they can invest in a stock/sector. Investmentguidelines for ULIPs must also be crystallised.Our interaction with insurance companies indicates that there is little clarity onthis front; we believe that since ULIPs invest so heavily in stock markets theymust have very clear-cut investment guidelines. 25
  26. 26. ARE ULIP’S SIMILAR TO MUTUAL FUNDS?In structure, yes; in objective, no. Because of the high first-year charges, mutualfunds are a better option if you have a five-year horizon.But if you have a horizon of 10 years or more, then ULIPs have an edge. Toexplain this further a ULIP has high first-year charges towards acquisition(including agents’ commissions).As a result, they find it difficult to outperform mutual funds in the first five years.But in the long-term, ULIP managers have several advantages over Mutual fundmanagers.Since policyholder premiums come at regular intervals, investments can beplanned out more evenly.Mutual fund managers cannot take a similar long-term view because they havebulk investors who can move money in and out of schemes at short notice. 26
  27. 27. COMPARISON, UNIT LINKED OR “WITH PROFITS”The two strong arguments in favour of unit-linked plans are that — the investorknows exactly what is happening to his money and two, it allows the investor tochoose the assets into which he wants his funds invested.A traditional ‘with profits,’ on the other hand, is a black box and a policyholderhas little knowledge of what is happening. An investor in a ULIP knows howmuch he is paying towards mortality, management and administration charges.He also knows where the insurance company has invested the money. The investorgets exactly the same returns that the fund earns, but he also bears the investmentrisk.The transparency makes the product more competitive. So if you are willing tobear the investment risks in order to generate a higher return on your retirementfunds, ULIPs are for you.Traditional ‘with profits’ policies too invest in the market and generate the samereturns prevailing in the market. But here the insurance company evens out returnsto ensure that policyholders do not lose money in a bad year. In that sense they aresafer.ULIPs also offer flexibility. For instance, a policyholder can ask the insurancecompany to liquidate units in his account to meet the mortality charges if he isunable to pay any premium installment.This eats into his savings, but ensures that the policy will continue to cover hislife. 27
  28. 28. FIVE STEPS OF SELECTING THE RIGHT ULIP1. Understand the concept of ULIPsDo as much homework as possible before investing in an ULIP. This way you willbe fully aware of what you are getting into and make an informed decision.More importantly, it will ensure that you are not faced with any unpleasantsurprises at a later stage. Our experience suggests that investors on most occasionsfail to realize what they are getting into and unscrupulous agents should get a lotof credit for the same.Gather information on ULIPs, the various options available and understand theirworking. Read ULIP-related information available on financial Web sites,newspapers and sales literature circulated by insurance companies.2. Focus on your need and risk profileIdentify a plan that is best suited for you (in terms of allocation of money betweenequity and debt instruments). Your risk appetite should be the deciding criterion inchoosing the plan.As a result if you have a high-risk appetite, then an aggressive investment optionwith a higher equity component is likely to be more suited. Similarly your existinginvestment portfolio and the equity-debt allocation therein also need to be givendue importance before selecting a plan.Opting for a plan that is lop-sided in favour of equities, only with the objective ofclocking attractive returns can and does spell disaster in most cases.3. Compare ULIP products from various insurance companiesCompare products offered by various insurance companies on parameters likeexpenses, premium payments and performance among others. For example,information on premium payments will help you get a better picture of theminimum outlay since ULIPs work on premium payments as opposed to sumassured in the case of conventional insurance products. 28
  29. 29. Compare the ULIPs performance i.e. find out how the debt, equity and balancedschemes are performing; also study the portfolios of various plans. Expenses are asignificant factor in ULIPs, hence an assessment on this parameter is warranted aswell.Enquire about the top-up facility offered by ULIPs i.e. additional lump suminvestments, which can be made to enhance the policys savings portion. Thisoption enables policyholders to increase the premium amounts, thereby providingpresenting an opportunity to gainfully invest any surplus funds available.Find out about the number of times you can make free switches (i.e. change theasset allocation of your ULIP account) from one investment plan to another. Someinsurance companies offer multiple free switches every year while others do soonly after the completion of a stipulated period.4. Go for an experienced insurance advisorSelect an advisor who is not only conversant with the functioning of debt andequity markets, but also independent and unbiased. Ask for references of clients hehas serviced earlier and crosscheck his service standards.When your agent recommends a ULIP from a given company, put forth someproduct-related questions to test him and also ask him why the products from otherinsurers should not be considered.Insurance advice at all times must be unbiased and independent; also your agentmust be willing to inform you about the pros and cons of buying a particular plan.His job should not be restricted to doing paper work like filling forms anddelivering receipts; instead he should keep track of your plan and offer you adviceon a regular basis.5. Does your ULIP offer a minimum guarantee?In a market-linked product, protecting the investments downside can be a hugeadvantage. Find out if the ULIP you are considering offers a minimum guaranteeand what costs have to be borne for the same. 29
  30. 30. 2.3 ULIP’s Versus MUTUAL FUNDS1. Mode of investment/ investment amountsMutual fund investors have the option of either making lump sum investments orinvesting using the systematic investment plan (SIP) route, which entailscommitments over longer time horizons. The fund house lays out the minimuminvestment amounts.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 isoften the starting point for the investment activity.This is in stark contrast to conventional insurance plans where the sum assured isthe starting point and premiums to be paid are determined thereafter.ULIP investors also have the flexibility to alter the premium amounts during thepolicys tenure. For example an individual with access to surplus funds canenhance the contribution thereby ensuring that his surplus funds are gainfullyinvested; conversely an individual faced with a liquidity crunch has the option ofpaying a lower amount (the difference being adjusted in the accumulated value ofhis ULIP). The freedom to modify premium payments at ones convenience clearlygives ULIP investors an edge over their Mutual fund counterparts.2. ExpensesIn Mutual fund investments, expenses charged for various activities like fundmanagement, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board ofIndia.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 theprescribed limit is borne by the fund house and not the investors. 30
  31. 31. Similarly funds also charge their investors entry and exit loads (in most cases,either is applicable). Entry loads are charged at the timing of making aninvestment while the exit load is charged at the time of sale.Insurance companies have a free hand in levying expenses on their ULIP productswith no upper limits being prescribed by the regulator, i.e. the InsuranceRegulatory and Development Authority. This explains the complex and at timesunwieldy expense structures on ULIP offerings. The only restraint placed is thatinsurers are required to notify the regulator of all the expenses that will be chargedon their ULIP offerings.Expenses can have far-reaching consequences on investors since higher expensestranslate into lower amounts being invested and a smaller corpus beingaccumulated. ULIP-related expenses have been dealt with in detail in the article"Understanding ULIP expenses".3. Portfolio disclosureMutual fund houses are required to statutorily declare their portfolios on aquarterly basis, albeit most fund houses do so on a monthly basis. Investors get theopportunity to see where their monies are being invested and how they have beenmanaged by studying the portfolio.There is lack of consensus on whether ULIPs are required to disclose theirportfolios. During our interactions with leading insurers we came across divergentviews on this issue.While one school of thought believes that disclosing portfolios on a quarterly basisis mandatory, the other believes that there is no legal obligation to do so and thatinsurers are required to disclose their portfolios only on demand.Some insurance companies do declare their portfolios on a monthly/quarterlybasis. However the lack of transparency in ULIP investments could be a cause forconcern considering that the amount invested in insurance policies is essentiallymeant to provide for contingencies and for long-term needs like retirement;regular portfolio disclosures on the other hand can enable investors to make timelyinvestment decisions. 31
  32. 32. ULIP’s vs. Mutual Funds ULIPs Mutual Funds Minimum investment amounts Determined by the investor are determined by the fundInvestment amounts and can be modified as well house No upper limits, expenses Upper limits for expenses determined by the insurance chargeable to investors haveExpenses company been set by the regulator Quarterly disclosures arePortfolio disclosure Not mandatory* mandatory Generally permitted for free Entry/exit loads have to beModifying asset allocation or at a nominal cost borne by the investor Section 80C benefits are Section 80C benefits are available on all ULIP available only on investmentsTax benefits investments in tax-saving funds* There is lack of consensus on whether ULIPs are required to disclose theirportfolios. While some insurers claim that disclosing portfolios on a quarterlybasis is mandatory, others state that there is no legal obligation to do so.4. Flexibility in altering the asset allocationAs was stated earlier, offerings in both the mutual funds segment and ULIPssegment are largely comparable. For example plans that invest their entire corpusin equities (diversified equity funds), a 60:40 allotment in equity and debtinstruments (balanced funds) and those investing only in debt instruments (debtfunds) can be found in both ULIPs and mutual funds.If a Mutual fund investor in a diversified equity fund wishes to shift his corpusinto a debt from the same fund house, he could have to bear an exit load and/orentry load.On the other hand most insurance companies permit their ULIP inventors to shiftinvestments 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 hasto be borne for additional switches).Effectively the ULIP investor is given the option to invest across asset classes asper his convenience in a cost-effective manner. 32
  33. 33. This can prove to be very useful for investors, for example in a bull market whenthe ULIP investors equity component has appreciated, he can book profits bysimply transferring the requisite amount to a debt-oriented plan.5. Tax benefitsULIP investments qualify for deductions under Section 80C of the Income TaxAct. This holds 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-savingfunds (also referred to as equity-linked savings schemes) are eligible for Section80C benefits.Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (forexample diversified equity funds, balanced funds), if the investments are held for aperiod over 12 months, the gains are tax free; conversely investments sold within a12-month period attract short-term capital gains tax @ 10%.Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while ashort-term capital gain is taxed at the investors marginal tax rate.Despite the seemingly similar structures evidently both mutual funds and ULIPshave their unique set of advantages to offer. As always, it is vital for investors tobe aware of the nuances in both offerings and make informed decisions CHAPTER – III 3.1 Research Methodology: 33
  34. 34. 1) A questionnaire has been prepared which consist of 14 questions and it has been administered on the investor’s of Chennai. 35-35 respondents have been chosen from Mutual Funds and ULIP holders in SPA Capital services Pvt Ltd.2) Sampling Technique: - Simple Random Sampling.3) Sampling Unit: - Respondents are from Chennai (T.N).4) Tools for Analysis: - Z-test, Factor Analysis.5) Hypothesis for Z-test: - H0 =There is no significant difference in perception of customer for products offered by Mutual Funds companies and ULIP companies H1 = There is a significant difference in perception of customer for products offered by Mutual Funds companies and ULIP companies . CHAPTER – IV 34
  35. 35. 4.1 Results and Interpretation Hypothesis (Z Test) Z test Comparative series test Z test is based on the normal probability distribution and is used for judging thesignificance of several statistical measures, particularly the mean. The relevant teststatistics is worked out and compared with its probable value (to be read from tableshowing area under normal curve) at a specified level of significance from the judgingthe significance of the measures concerns. This is most frequently used in research study.The test used even when binominal distributions or t distribution is applicable on thepresumption that such a distribution tends to approximate normal distribution as Vbecomes larger. Z test is generally used for comparing the mean of a sample to sum –hypothesized means for the population in case of large sample or when populationvariance is known. Z test is also used for judging the significance of difference betweenmeans of two independent samples in case of large samples or when the population’svariance is known. Z test is also used for comparing the sample proportion to atheoretical value o population or for finding the difference in proportions of 2independent samples when n happens to large. Besides this test may be used for judgingthe significance of median, mode, coefficient of correlation and several other measures.In this study I have used this tool to evaluate the HFC’s pre and post performance afterliberalization, has it improved or reduced.The hypothesis is taken as : -Ho.: There is no significant difference in perception of customer for productsoffered by Mutual Funds companies and ULIP companies.H1: There is significant difference in perception of customer for productsoffered by Mutual Funds companies and ULIP companies.The Z test was applied to test the significance at 5% level of significance. 35
  36. 36. Factors Mutual Funds Factor Of Investors Preference For Mutual Fund F1 F2 F3 F4 F5Investment Core Product Risk Return Transparency Tax FreeFlexibility Factor Factor IncomeLock In Period Less benefit Market Risk Information Tax rebatesDeath Benefit Term Insurance Fewer Returns Charges Less Flexible More Risky Less AssuredLess Safe Returns Short TermInvestment Flexibility Investment flexibility gives options to choose from various plans available,and gives investor facility to switch between the plans even after investing, thismakes it easy for the investor to switch between the plans in the term as whichplan providing high returns and NAV. Death benefit in case of ULIP makesinvestors money more secure. It is measured by item 11,14,9 and these variablesare “Lock In Period”, “Death Benefit” and “Less Safe” Variable 11 is the strongestand explains 17.5289 per cent variance and has a total factor load of 2.851039.Core Product FactorWorks under “high risk high return”, the investment long or short termed, providereturns, and side by side, covers the insurance Factor; this provides double benefitto the investor as he gets the returns and growth of both i.e. the investment and theinsurance cover at the time of maturity. It is measured by item 10, 12, 1, 5 andthese variables are “Less benefit”, “Term Insurance”, “More Risky” and “ShortTerm” Variable 10 is the strongest and explains 14.2961 per cent variance and hasa total factor load of 2.236417783. 36
  37. 37. Risk Return FactorThe returns covers all the possible risk, provide the minimum “sum assured”, theNAV goes according to the market but never falls too short of providing a goodreturns, and if for a time period it falls short then the losses can be covered thenext moment the NAV climbs up, thus making the “sum assured” returns in thedespite of Market risk involved. It is measured by item 6,8,13 and these variablesare “Market Risk”, “Fewer Returns” and “Less Assured Returns” Variable 06 isthe strongest and explains 12.76165 per cent variance and has a total factor load of0.519326.TransparencyThe investors are provided with all the details of the plans available, making themeasy to choose accordingly, i.e. which plan is providing high rates of returns,which plan is having the high NAV in the market, that can be decided by theinvestors before investing their hard earned money, it is measured by item 2,3 andthese variables are “Information” and “Charges” Variable 02 is the strongest andexplains 12.42219 per cent variance and has a total factor load of 0.126049.Tax Free IncomeAll the returns which the investors get are totally tax free, i.e. they are not taxableunder any head of income tax, this makes the investors save all the tax on thegrowth provided by the available plans, all the funds so generated are termed“white” and gives the investors the chance to use the way freely as they like. It ismeasured by item 4,7 and these variables are “Tax rebates” and “Less Flexible” ULIP (Unit Linked Insurance Plan) 37
  38. 38. INVESTORS PROTECTION Tax saving option as all the returns are tax free, insurance cover also goes side by side thus covering the risk involved, this insures that the returns provided by the F1 F2 F3 F4 F5 Ff6 F7Investors Cost and Security Risk Informatio Term Riding theProtection Time Options Management n Flow Analysis Yeild Curve EffectiveTax Market Less Safe Less benefit Death Short AssuredRebates Risk Benefit Term ReturnsTerm Charges Flexible More Risky Information Fewer ReturnsInsurance plan can be used by the way investor likes, and at the time of maturity the returns thus provided are of both, the fund invested and the insurance benefit. It is measured by item 4, 12 and these variables are “Tax Rebates” and “Term Insurance” Variable 04 is the strongest and explains 12.48766 per cent variance and has a total factor load of 1.643967. COST AND TIME EFFECTIVE No hidden charges, all the charges are clearly mentioned in it, the market risk so involved gets minimized by the lock in period provided, the lock in period insures minimum time period for which the fund is invested and it provides the return thus making the fund grow in that period of time, and at the time of maturity into a handsome amount. It is measured by item 6, 3, 11 and these variables are “Market Risk” and “Charges” Variable 06 is the strongest and explains 12.37681 per cent variance and has a total factor load of 0.684604. 38
  39. 39. SECURITY OPTIONSVarious security and flexibility options insures proper and safe management offunds, the funds so invested goes to the invested market according to the portfoliodesigned, this insures safe and sound growth of funds as they are invested invarious area and not in the same place. It is measured by item 9,7 and thesevariables are “Less Safe” and “Flexible” Variable 09 is the strongest and explains12.18735 per cent variance and has a total factor load of -0.27762.RISK MANAGEMENTInvestment in the said plans provides the facility of switching and insurance i.e.the money so invested never goes out in the same place, minimizing the risk ofgetting less returns, investments in the places according to the portfolio designedhelps to compensate the losses, if arise from the other place from where theinvestor is getting higher returns thus minimizing the risks in every possible way.It is measured by item 10, 1 and these variables are “Less benefit” and “MoreRisky” Variable 10 is the strongest and explains 11.87087 per cent variance andhas a total factor load of 1.522173.INFORMATION FLOWAll the needed information is given resulting proper fund management andinvestment, the factors and the details are clearly mentioned thus making it easyfor the investor to invest accordingly to the right plan of his choice. It is measuredby item 14,2 and these variables are “Death Benefit” and “Information” Variable14 is the strongest and explains 11.82194 per cent variance and has a total factorload of 1.432328TERM ANALYSISShort term results in high returns in less period of time, while giving out all thebenefits of a long termed plan. This results in the growth in short span giving theinvestor the choice of reinvesting the growth in another plan after the maturity in 39
  40. 40. short period of time, It is measured by item 5 and the variable is “Short Term”Variable 5 is the strongest and explains 9.314896 per cent variance and has a totalfactor load of 0.897818.RIDING THE YIELD CURVEThe term for which the money is invested is known as the lock in period, it insuresthe money to grow in the beat possible way while covering all the risks involved,this results in the assured sum of returns, in the short period of time. It is measuredby item 13,8 and these variables are “Assured Returns” and “Fewer Returns”Variable 13 is the strongest and explains 8.770282 per cent variance and has atotal factor load of 0.373159. 40
  41. 41. CHAPTER – V 5. FINDINGS OF THE STUDYMutual funds 1) This makes it easy for the investor to switch between the plans in the term as which plan providing high returns and NAV. 2) This provides double benefit to the investor as he gets the returns and growth of both. 3) The returns covers all the possible risk, provide the minimum “sum assured”, the NAV goes according to the market but never falls too short of providing a good returns 4) The investors are provided with all the details of the plans available, making them easy to choose accordingly 5) All the returns which the investors get are totally tax free. 41
  42. 42. IN ULIP’s 1) Tax saving option as all the returns are tax free, insurance cover also goes side by side thus covering the risk involved, the fund invested and the insurance benefit. 2) The market risk so involved gets minimized by the lock in period provided, the lock in period insures minimum time period for which the fund is invested and it provides the return thus making the fund grow in that period of time, and at the time of maturity into a handsome amount. 3) This insures safe and sound growth of funds as they are invested in various area and not in the same place. 4) Investment in the said plans provides the facility of switching and insurance. 5) This results in the growth in short span giving the investor the choice of reinvesting the growth in another plan after the maturity in short period of time, 6) This results in the assured sum of returns, in the short period of time 42
  43. 43. CHAPTER – VI 6. Conclusion1. The study shows that information of both the investment options is easily available.2. The investment done by investor’s is according to their needs i.e. the term of the plan, returns, tax rebates, flexibility and risk.3. From the study done we can easily draw an inference that the number of Mutual Fund investor and ULIP investors are equal.4. Both investments have provided assured returns to investors. 43
  44. 44. CHAPTER –VII 7. BIBLIOGRAPHY1) Sisodiya, A. (2006). “Mutual Fund Industry in India: An Introduction”. TheICFAI Material.2) Pandian, Punithavathy (2007). Security Analysis and Portfolio Management.Vikas Publishing House PVT LTD.3) Hugonnier; Julien; kaniel and Ron (June 27, 2007). Mutual Fund PortfolioChoice in the Presence of Dynamic Flows.4) Sethu; Baid and Rachana. Trends and Structure of the Indian Mutual FundIndustry.5) Sisodiya, Singh; Reddy; Santhosh; Zaheer and Feroz. On a Growth Trail.6) Kurien and A P. Investor Education – AMFI, Playing An Important Role.7) Singh and Kumar. Mutual Fund Regulations: The Journey So Far.8) www.amfiindia.com9) www.moneycontrol.com10) www.icicidirect.com12) www.bseindia.com13) CHAPTER – VIII 44
  45. 45. Annexure Customer Preference For ULIP Versus Mutual FundDear Respondent, I am the students of MBA (VIBA) - 3rd Semester and undertaken summerInternship project on ULIP Vs Mutual Fund - A Comparative Study in SPA CapitalServices Pvt Ltd. In this questionnaire various factors are enumerated which highlights thecustomers interest towards these two products. I assure you that the information provides by you are used for the academicpurpose only & will be kept confidential.Name :Designation :Organization : Give your response for the statements by encircling the appropriate 5-pt.scale as given below.1 2 3 4 5Strongly Agree Neither agree Disagree StronglyAgree Nor Disagree Disagree1 Do you agree that investing in Mutual fund is more risky as 12345 compare to in ULIP?2 Do you think that information about Mutual Fund is more 12345 available as compare to ULIP?3 Do you agree that Charges in Mutual fund are more than ULIP? 123454 Do you think that Tax rebates in Mutual Funds are less as 12345 Compared to ULIP?5 Do you think investment done in Mutual Funds is for short term 12345 as compared to ULIP?6 Do your agree that market risk is more in mutual fund 12345 investments as compared to ULIP? 45
  46. 46. 7 Do you agree that Mutual fund is less flexible as compared to 1 2 3 4 5 ULIP?8 Do you think that Mutual funds provide fewer returns than 1 2 3 4 5 ULIP?9 Do you think that money invested is less safe in Mutual Funds as 1 2 3 4 5 compared to ULIP?10 Do you agree that Mutual Funds provide less benefit than ULIP? 1 2 3 4 511 Do you think Lock in period in Mutual Fund is more than ULIP? 1234512 Do you agree that Mutual Funds do not provide term insurance 12345 while ULIP has an option of Insurance?13 Do you think that Mutual Funds provide less assured returns as 12345 compared to ULIP?14 Do you agree that Mutual Funds do not provide death benefit 12345 while ULIP provides? 46