Comparitive analsis on mutual fund and ulips in kotak final

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Comparitive analsis on mutual fund and ulips in kotak final

  1. 1. DEFINITION:Mutual fund is the pool up savings of small investors to raise funds called mutual funds.Mutual funds are invested in diversified portfolio to spread risk. While it opens aninvestment channel to small investors, it reduces risks, improves liquidity and results instable returns and better capital appreciation in the long run.CONCEPTA Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earnedthrough these investments and the capital appreciation realized are shared by its unitholders in proportion to the number of units owned by them. Thus a Mutual Fund isthe most suitable investment for the common man as it offers an opportunity to investin a diversified, professionally managed basket of securities at a relatively low cost.Mutual fund is a trust that pools money from a group of investors (sharing commonfinancial goals) and invest the money thus collected into asset classes that match thestated investment objectives of the scheme. Since the stated investment objective of amutual fund scheme generally forms the basis for an investors decision to contributemoney to the pool, a mutual fund can not deviate from its stated objectives at anypoint of time. 1
  2. 2. Every Mutual Fund is managed by a fund manager, who using his investmentmanagement skills and necessary research works ensures much better return thanwhat an investor can manage on his own. The capital appreciation and other incomesearned from these investments are passed on to the investors (also known as unitholders) in proportion of the number of units they own. 2
  3. 3. UNIT LINKED INSURANCE PLANSUnit Linked Insurance (ULIP) plans are designed to help you meet your financialgoals by ensuring you the value of your investments, or your nominee sum assured,which is the life cover of your policy. To make sure that your ULIP is truly workingto assure your goal, you should choose a life cover that provides your family withadequate finances and hence security even in your absence, so that important lifegoals of your family are always secured.Let us take the example of a 35-year-old man with 2 young children. He could beginwith a sum assured of Rs 5 lakh. As the children grow and thereby the financialliabilities increase, he might want to increase the level of protection, which can bedone by increasing his sum assured.When you decide the amount of premium to be paid and the amount of life cover youwant from the ULIP, the insurer deducts some portion of the ULIP premium upfront.This portion is known as the Premium Allocation charge, and varies from product toproduct. The rest of the premium is invested in the fund or mixture of funds chosenby you. Mortality charges and ULIP administration charges are thereafter deductedon a periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fundmanagement charges are adjusted from NAV on a daily basis.Since the fund of your choice has an underlying investment – either in equity or debtor a combination of the two – your fund value will reflect the performance of the 3
  4. 4. underlying asset classes. At the time of maturity of your plan, you are entitled toreceive the fund value as at the time of maturity.NEED AND IMPORTANCE OF THE STUDY1. Mutual funds are dynamic financial intuitions which play crucial role in aneconomy by mobilizing savings and investing them in the capital market.2. The activities of mutual funds have both short and long term impact on the savingsin the capital market and the national economy.3. Mutual funds, trust, assist the process of financial deepening & intermediation.4. To banking at the same time they also compete with banks and other financialintuitions.5. India is one of the few countries to day maintain a study growth rate is domesticsavings. 4
  5. 5. SCOPE OF THE STUDY:  Subject matter is related to the investor‘s approach towards mutual funds and Ulips.  A study on comparative analysis of mutual funds in Kotak Mutual Fund schemes, are effecting on the financial performance of the company.  People of age between 20 to 60 i.e. the range is wide  Area limited to Hyderabad  Demographics include names, age, qualification, occupation, marital status and annual income.OBJECTIVES:  To study the behavior of the investors whether they prefer mutual funds or ULIPs.  To know how the KOTAK Mutual funds are participating in the stock market.  To know how the KOTAK Mutual funds are effecting on the overall performance of the KOTAK Company.  To know the brand awareness of KOTAK and customer‘s preference towards KOTAK.  Conduct market survey on a sample selected from the entire population and derived opinion on that research.  As KOTAK well reputed company in India it‘s great chance for me to observed different product launch by other competitor companies like 5
  6. 6. LIC,TATA AIG etc. In all, it is to understand the overall working of Life insurance sector.RESEARCH METHODOLGYResearch always starts with a question or a problem. Its purpose is to questionthrough the application of the scientific method. It is a systematic and intensivestudy directed towards a more complete knowledge of the subject studied.Marketing research is the function which links the consumer, customer and public tothe marketer through information- information used to identify and define marketingopportunities and problems generate, refine, and evaluate marketing actions,monitor marketing actions, monitor marketing performance and improveunderstanding of market as a process.Research specifies the information required to address these issues, designs, and themethod for collecting information, manage and implemented the data collectionprocess, analyses the results and communicate the findings and their implication. Ihave prepared our project as descriptive type, as the objective of the study demandsthe answers of the question related to find the potentiality of Mutual Funds andUlips in Hyderabad. How much potential is there in Hyderabad. 6
  7. 7. Research Process As marketing research is a systemic and formalized process, it follows a certain sequence of research action. The marketing process has the following steps:  Formulating the problems  Developing objectives of the research  Designing an effective research plan  Data collection techniques  Evaluating the data and preparing a research reportSTEPS OF RESEARCH DESIGN:  Define the information needed: -This first step states that what the information that is actually required is. Information in this case 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 7
  8. 8. 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. Whereas presetting refers to the testing of the questionnaire on a small sample of respondents in order to identify and eliminate potential problems. Sample Unit 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: After the research methodology, research problem in marketing has been identified and selected; the next step is together the requisite data. There are two types of data collection method – primary data and secondary data. In our live project; we decided primary data collection method because our study nature does not permit to apply observational method. In survey approach we had selected a questionnaire method for taking a customer view because it is feasible from the point of view of our subject & survey purpose. Data has been collected both from primary as well as secondary sources as described below: 8
  9. 9. There are two types of data collection method use in my project report. Primary data Secondary data.For my project, I decided on primary data collection method for observingworking of company and approaching customers directly in the field, tele-calling,cold calling, campaigning and through references to know their interest in businesswith company in my project and also make questionnaire for creating database ofbusiness class people is Hyderabad city for company. I decided on Secondary datacollection method was used by referring to various websites, books, magazines,journals and daily newspapers for collecting information regarding project understudy. 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. 9
  10. 10.  Plan for data analysis: Analysis of data is planned with the help of mean and analysis of variance.LIMITATIONS Mostly the data is related to the secondary data. To collect the primary data from the company is difficult task and it is a confidential matter to the company. The product is restricted to only mutual funds. The data is only limited to financial performance of the mutual funds. The collected primary data is only from the one branch head of Hyderabad. 10
  11. 11. COMPANY PROFILEThe Kotak Mahindra Group was born in 1985 as Kotak Capital Management FinanceLimited. This company was promoted by Uday Kotak, A.A.Sidney , Pinto and Kotak& Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in1986, and thats when the company changed its name to Kotak Mahindra FinanceLimited.The Kotak Mahindra GroupKotak Mahindra is one of Indias leading financial conglomerates, offering completefinancial solutions that encompass every sphere of life. From commercial banking, tostock broking, to mutual funds, to life insurance, to investment banking, the groupcaters to the financial needs of individuals and corporates.The group has a net worth of over Rs. 6,799 crore and has a distribution network ofbranches, franchisees, representative offices and satellite offices across cities andtowns in India and offices in New York, London, San Francisco, Dubai, Mauritiusand Singapore. The Group services around 6.4 million customer accounts.Kotak Group Products & Services: Bank Life Insurance Mutual Funds Car Finance 11
  12. 12. Securities Institutional Equities Investment Banking Kotak Mahindra International Kotak Private Equity Kotak Realty FundGroup Management: Mr. Gaurang Shah - Director Mr.G Muralidhar – Managing Director Mr. Andrew Cartwright - Appointed Actuary Mr. Sudhakar Shanbag - Chief Investment Officer Mr. Sugata Dutta - Head Human Resources Mr. Suresh Agarwal - Head of Alternate channel Ms. Kirti Patil – Sr. Vice-President & Head Information Technology Mr. Anand Dewan - Head Business Impact Group (BIG) Mr. Cedric Fernandas – Sr. Vice President & Chief Financial Officer Ms. Elizabeth Venkataraman - Senior Vice President Marketing Mr. Hitesh Veera – Sr. Vice President & Head Operations, CustomerService, Underwriting , Claims Mr. Sandip Shrikhande - Head of Group Business Mr. Subhasish Ghosh - Sr. VP, Financial Institutions Group 12
  13. 13. Our Corporate IdentityKotak Mahindra Bank: The Kotak Mahindra Groups flagship company, KotakMahindra Finance Ltd which was established in 1985, was converted into a bank-Kotak Mahindra Bank Ltd in March 2003 becoming the first Indian company toconvert into a Bank. Its banking operations offer a central platform for customerrelationships across the groups various businesses. The bank has presence inCommercial Vehicles, Retail Finance, Corporate Banking, Treasury and HousingFinance.Kotak Mahindra Capital Company: Kotak Mahindra Capital Company Limited(KMCC) is Indias premier Investment Bank. KMCCs core business areas includeEquity Issuances, Mergers & Acquisitions, Structured Finance and AdvisoryServices. 13
  14. 14. Kotak Securities: Kotak Securities Ltd. is one of Indias largest brokerage andsecurities distribution houses. Over the years, Kotak Securities has been one of theleading investment broking houses catering to the needs of both institutional and non-institutional investor categories with presence all over the country through franchiseesand coordinators. Kotak Securities Ltd. offers online(throughwww.kotaksecurities.com) and offline services based on well-researchedexpertise and financial products to non-institutional investors.Kotak Mahindra Prime: Kotak Mahindra Prime Limited (KMP) (formerly known asKotak Mahindra Primus Limited) has been formed with the objective of financing theretail and wholesale trade of passenger and multi utility vehicles in India. KMP offerscustomers retail finance for both new as well as used cars and wholesale finance todealers in the automobile trade. KMP continues to be among the leading car financecompanies in India.Kotak Mahindra Asset Management Company: Kotak Mahindra AssetManagement Company Kotak Mahindra Asset Management Company (KMAMC), asubsidiary of Kotak Mahindra Bank, is the asset manager for Kotak Mahindra MutualFund (KMMF). KMMF manages funds in excess of Rs 30,000 crore and offersschemes catering to investors with varying risk-return profiles. It was the first fundhouse in the country to launch a dedicated gilt scheme investing only in governmentsecurities. 14
  15. 15. Figure 1.0Kotak Mahindra Old Mutual Life Insurance Limited: Kotak Mahindra OldMutual Life Insurance Limited is a joint venture between Kotak Mahindra Bank Ltd.and Old Mutual plc. Kotak Life Insurance helps customers to take important financialdecisions at every stage in life by offering them a wide range of innovative lifeinsurance products, to make them financially independent.Kotaks International Business With a presence outside India since 1994, theinternational subsidiaries of Kotak Mahindra Bank Ltd. operating through offices inLondon, New York, Dubai, San Francisco, Singapore and Mauritius specialize inproviding asset management services to specialist overseas investors seeking to investinto India. The offerings are differentiated India investment solutions that span allmajor asset classes including listed equity, private equity and real estate. Thesubsidiaries also lead manage and underwrite international issuances of securities.With its commendable track record, large presence on the ground and a team ofdedicated staff in India, Kotak‘s international arm is suitably positioned for managingassets in the Indian Capital markets. 15
  16. 16. Business Strategy:BUSINESS CONSULTINGThe greatest accomplishments begin with an architect plan. We believe that KOTAKGroup is the advisor that the company needs most as you begin to conceptualize thebusiness road map.Our business consulting team is the cohesive mortar that unites our variousdisciplines. By focusing on companys strategic objectives, we are able to design,develop, and implement the solutions that will produce measurable change across theenterprise.As the foundation of KOTAK Group , this business-centric philosophy permeates ourvarious discipline leaders. Whether a developer or a designer, the goal of producingcustom business solutions is paramount.DEFINING DIRECTIONSOur ability to offer guidance throughout the highest levels of leadership is cultivatedby our ability to architect and execute solutions that matter most. This focus on soundstrategic direction provides a high-level road map that can manage and expandchannels, enhance revenue, and penetrate markets that may have previously beeninaccessible. Our knowledge and use of business intelligence tools allows our clientsto make calculated decisions based on real-time data, thus providing accurate andeffective results. 16
  17. 17. FORMING A STRUCTUREOur skill in analyzing companys internal structure enables KOTAK Group toenhance business processes, operational efficiencies and manage or reduce overallcosts. By optimizing supply chain through supplier collaboration and rationalizationwe can improve the relationships that support business.EXTENDING RELATIONSHIPBy helping to orientate leadership direction and formulate operational practices,KOTAK Group can also effectively refine how company goes to market. Byimproving the ways in which the company deploy their sales force, managetraditional customer relationships and build an integrated marketing andcommunications plan, we can help the craft every touch point between the companyand customers.E-Business/Web services:E-Business is much more than buying and selling over the Web. In the simplest sense,it is the use of Internet technologies to improve core business processes. And, whiletechnology makes e-business possible, e-business isnt about technology. Its aboutconnecting core business systems and processes to customers, suppliers, andemployees—24 hours a day, 7 days a week.E-business:E-Business can help companies meet todays business challenges head-on. Whetherits increasing revenue or decreasing costs, reaching new customers or better servingexisting ones, a solid e-business infrastructure provides the foundation to deliver truevalue to stakeholders.Important reasons to become an e-business include the following: 17
  18. 18. Increase revenue Decrease costs Improve employee efficiency Expand market reach Strengthen business relationships Improve customer satisfactionAt KOTAK Group, we know that the success of our company depends on our abilityto provide world-class, e-business solutions with real business value to our clients.We understand the business impact of e-business. Our experts have helped manycompanies leverage the Internet with the following solutions:E-commerce—allows companies to buy and sell products and services online.Business intelligence—allows companies to acquire data about their customers toprovide better service.Customer relationship management—provides the ability to support and retainprofitable customers.Supply chain management—streamlines end-to-end processes associated with theflow of products.Enterprise Application IntegrationKOTAK Group development team is designed to partner with our clients to addressmany business critical issues and objectives. KOTAK Group knows how to use state-of-the-art technologies to provide targeted, world-class integration solutions thataddress unique business needs. 18
  19. 19. Integrated Marketing:Successful Integrated Marketing solutions take three key elements in order to producevalue: solid strategy, quality design, and measurability.SOLID STRATEGYBy understanding competitive landscapes, identifying audiences, and estimating thereturn on investment, KOTAK Group can help out making intelligent marketingdecisions that provide maximum returns. We analyze the company businessobjectives and determine a path of communication that will reach the consumer orclient base on a more consistent basis.QUALITY DESIGNIntegrated Marketing utilizes a variety of media and channels. It employs designersthat understand these mediums and can translate their designs into effectivecommunications. KOTAK Group designers have the expertise to match visual designwith the appropriate language and elements, essential in improving response rates andreaching near to intended audience.MEASURABILITYKOTAK Group specializes in business intelligence tools that can analyze data,response rates, and demographics. By having access to this information in real time,we can effectively tailor communications to increase response rates, measure returnon investment, and make Intel suited for your business objectives. 19
  20. 20. KOTAK Group can enable the company to take advantage of the technology andtalent that is available to drive consumer demand, sales, and the message of theorganization.IT Strategy DevelopmentOver the past few years the role of technology in business has become a criticalsuccess factor. Many organizations leverage information technology to help themdeliver their products and services. But few organizations truly realize the businessbenefits that can be achieved from an effective technology strategy. The rapid pace ofchange in technology provides companies with new, cost-effective mechanisms tocommunicate with their customers, suppliers, employees, and key business partners.Properly harnessed, technology initiatives can enrich customer relationships, shortensupply chains, and streamline a number of internal processes so that a true return oninvestment is realized. The first step is to create alignment and consensus within theorganization and build an action plan around those initiatives that will deliver thehighest return.STRATEGIC PLANNING SOLUTIONSKOTAK Group Strategic solutions leverage a proven methodology to help our clientsfundamentally align and leverage technology in order to achieve enterprise businessobjectives. We devise these strategies by examining the current position of theindividual, IT organizations, business processes, organizational behavior, and key 20
  21. 21. stakeholders. Then we align technology solutions in a way that ties these stakeholdersto the business systems and processes within the organization.Strategic Planning Service Features Aligns technology infrastructure and initiatives with high-priority business processes and organizational objectives Focuses on the needs of the key stakeholders (customers, suppliers, employees) and not on the limitations of technology. Provides qualitative and quantitative measures of the success of the strategy or business continuity plan. Creates alignment, consensus, and accountability for the prioritized initiatives among executive leadership and line of business management.Our strategic planning solutions can be used to help the organization during its annualplanning, or throughout the year as industry and market trends demand. Strategicplanning may be necessary in the following situations: When a competitive advantage is needed to demonstrate quality of service When the organization seeks to expand while maintaining existing operational infrastructure (capital and human resources) When audits have identified gaps or weaknesses in business or IT capability When structural organizational changes occur (acquisition, merger, or divestiture) When no business continuity, disaster recovery, or emergency management plan exists 21
  22. 22. Process DevelopmentKOTAK Group Business Process Improvement solutions are designed to help thecompany to streamline the processes that are critical to managing business.Organizations need to optimize the business process, but seldom do. That‘s whereKOTAK Group Business Process Improvement solutions come in.Using our proven methodology and toolsets, we deliver key business results in atimely fashion. We help to achieve improved customer service, cost reductions, andcapacity expansion.ONSITE MAINTAINENCEIn this approach, the KOTAK Group team at onsite will carry out all the maintenanceand support for the application. However the offshore team based at KOTAK Groupdevelopment center will be extending the support for the onsite team on any technicalissues that they may have. They act as a backup and in the event of any emergency;can immediately act as a replacement.OFFSHORE / REMOTE MAINTAINENCEThe remote maintenance approach adopted by KOTAK Group. to carry out themaintenance is explained below.Receiving the issue: The onsite technical support team receives the issue from clienteither through any of the following media like e-mail, telephone, mobile phone or 22
  23. 23. instant messenger services. A ticket number generated would help the offsite teamidentify each issue.Study and Analysis: Once the problem Ticket issue is received, the Onsite technicalteam makes a careful study of the issue and analyzes its complexity.Estimation: After a through analysis the work estimation is made and it is placedbefore the client through an offsite support Manager. Based on the estimated time andpriority, the issue is then scheduled to be resolved either by the onsite team or by theoffshore team.Scheduling: Identify the best suitable team member(s) for solving the issue andassign the tasks to that particular resource(s).Solution: The assigned team member(s) provides the solution as specified in thegiven task document in a scheduled time adhering to the quality standards, he alsoprovides a standard document describing the work done.Testing: Test the changed code as per the Maintenance Manual. Update thedocumentation as requiredLog Maintenance: Logs will be maintained for future use by the offsite as well asoffshore team for all the support issues that have come up.Our Value Proposition KOTAK Group Strategic Partnership with the client would help the client leverage our Technology and Development facilities, quickly build resource pools consisting of focused R & D teams for new initiatives in specific technologies 23
  24. 24. Our dedicated Technology labs for the clients R&D division acts as Virtual Extension in terms of Vision, People, and Infrastructure Protect clients Intellectual Property Rights (IPR) by following established processes for secure communication and protection Our strong focus is towards the quality of solution we deliver and support we offer to our client Our extensive skills in developing re-usable components, frameworks and expertise in executing complex solutions gives advantage of high-quality, cost-effective development to our customers We make sure that our work is towards minimizing the business risks and speeding up the entry of new products in the market.Inbound TeleservicesOur call handling and inbound telemarketing services for business-to-business andbusiness-to-consumer campaigns will help drive customer acquisition, increasecustomer retention, improve sales and rapidly expand your markets. Our inboundsupports include:Help Desk: 24 Hours /Day, 365 Days /YearTechnical Support Requests For Maintenance SupportRequests For Maintenance SupportInbound Telemarketing / Up-Selling & Cross-SellingRequests for Samples 24
  25. 25. Order Status: Customers can check on the status of their order at any timeDealer Locate: Callers are given information on the store or dealer nearest to them.Ticketing SalesSubscriptionsFundraisingAdvertising Co-Op Claim ProcessingRebate ProcessingInsurance Claims ProcessingProduct Recall ManagementCustomized Interactive Voice ServicesOverflow, Off-Hour And Weekend Call HandlingFax on Demand: An access channel for those customers who need documentedanswers or written confirmation.Outbound TeleservicesOur tele-professionals help out to turn the company prospects into customers, andthen our customers into advocates. We focus on building a relationship that lasts byusing a personalized approach that provides the value addition necessary to maintainand grow your client base. Our outbound capabilities include:Telemarketing and Sales: We use predictive dialing to connect to customers. Our tele-sales techniques also include:Reactivation: Approaching your expired customers with the right offerTargeting: Isolating key decision-makers and discovering their budgets before youspend resources on more costly mail or sales calls 25
  26. 26. New Movers: Tapping people who have just moved residence, for example, andasking them to pre-register for your service or organizationRenewals: for publishing and finance, telemarketing is by far the most efficient wayto secure repeat buyersAftermarket Sales: Contacting new customers and securing additional sales, evenwhen other products are seemingly unrelated.PRODUCTSTerm PlansKotak Term Assurance PlanKotak Preferred Term PlanEndowment PlansKotak Endowment PlanKotak Money Back PlanKotak Child Advantage PlanKotak Capital Multiplier PlanKotak Retirement Income PlanKotak Premium Return PlanUnit Linked PlansKotak Retirement Income Plan (Unit-linked)Kotak Safe Investment Plan II 26
  27. 27. Kotak Flexi PlanKotak Easy Growth PlanKotak Privilege Assurance PlanGroupEmployee BenefitsKotak Term GrouplanKotak Credit-Term GrouplanKotak Complete Cover GrouplanKotak Gratuity GrouplanKotak Superannuation Group PlanRuralKotak Gramin Bima Yojana 27
  28. 28. INTRODUCTION OF MUTUAL FUNDSA Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earnedthrough these investments and the capital appreciation realized is shared by its unitholders in proportion to the number of units owned by them. Thus a Mutual Fund isthe most suitable investment for the common man as it offers an opportunity toinvest in a diversified, professionally managed basket of securities at a relativelylow cost. The flow chart below describes broadly the working of mutual funds. Figure 1.1Mutual fund is a mechanism for pooling the resources by issuing units to theinvestors and investing funds in securities in accordance with objectives asdisclosed in offer document. 28
  29. 29. Investments in securities are spread across a wide cross-section of industries andsectors and thus the risk is reduced. Diversification reduces the risk because allstocks may not move in the same direction in the same proportion at the same time.Mutual fund issues units to the investors in accordance with quantum of moneyinvested by them. Investors of mutual funds are known as unit holders.The investors in proportion to their investments share the profits or losses. Themutual funds normally come out with a number of schemes with differentinvestment objectives that are launched from time to time. A mutual fund is requiredto be registered with Securities and Exchange Board of India (SEBI), whichregulates securities markets before it can collect funds from the public.Different investment avenues are available to investors. Mutual funds also offergood investment opportunities to the investors. Like all investments, they also carrycertain risks. The investors should compare the risks and expected yields afteradjustment of tax on various instruments while taking investment decisions.History of the Indian Mutual FundThe Indian mutual fund industry is dominated by the Unit Trust of India, which hasa total corpus of Rs700bn collected from more than 20 million investors. The UTIhas many funds/schemes in all categories i.e. equity, balanced, income etc withsome being open-ended and some being closed-ended. The Unit Scheme 1964commonly referred to as US 64, which is a balanced fund, is the biggest schemewith a corpus of about Rs200bn. Most of its investors believe that the UTI is 29
  30. 30. government owned and controlled, which, while legally incorrect, is true for all practical purposes. The second largest category of mutual funds is the ones floated by nationalized banks. Can bank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. 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 – 1964-87An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up bythe Reserve Bank of India and functioned under the Regulatory and administrativecontrol of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI andthe Industrial Development Bank of India (IDBI) took over the regulatory andadministrative control in place of RBI. The first scheme launched by UTI was UnitScheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets undermanagement.Second Phase – 1987-1993 (Entry of Public Sector Funds)1987 marked the entry of non- UTI, public sector mutual funds set up by public sectorbanks and Life Insurance Corporation of India (LIC) and General Insurance 30
  31. 31. Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fundestablished in June 1987 followed by Can bank Mutual Fund (Dec 87), PunjabNational Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank ofIndia (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutualfund in June 1989 while GIC had set up its mutual fund in December 1990. At theend of 1993, the mutual fund industry had assets under management of Rs.47, 004cores.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 mutualfund industry, giving the Indian investors a wider choice of fund families. Also, 1993was the year in which the first Mutual Fund Regulations came into being, underwhich all mutual funds, except UTI were to be registered and governed. The erstwhileKothari Pioneer (now merged with Franklin Templeton) was the first private sectormutual fund registered in July 1993. Fourth Phase – since February 2003In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI wasbifurcated into two separate entities. One is the Specified Undertaking of the UnitTrust of India with assets under management of Rs.29, 835 crores as at the end ofJanuary 2003, representing broadly, the assets of US 64 scheme, assured return andcertain other schemes. The Specified Undertaking of Unit Trust of India, functioningunder an administrator and under the rules framed by Government of India and doesnot come under the purview of the Mutual Fund Regulations. 31
  32. 32. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations. With thebifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000crores 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 takingplace among different private sector funds, the mutual fund industry has entered itscurrent phase of consolidation and growth. As at the end of September, 2004, therewere 29 funds, which manage assets of Rs.153108 crores under 421 schemes.STRUCTURE OF MUTUAL FUND There are many entities involved and the diagram below illustrates the structure Figure 1.2 32
  33. 33. SEBI The regulation of mutual funds operating in India falls under the preview ofauthority of the ―Securities and Exchange Board of India” (SEBI). Any personproposing to set up a mutual fund in India is required under the SEBI (Mutual Funds)Regulations, 1996 to be registered with the SEBISponsor 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 bedeemed to be a sponsor and will be required to fulfill the eligibility criteria in theMutual Fund Regulations. The sponsor or any of its directors or the principal officeremployed by the mutual fund should not be guilty of fraud or guilty of any economicoffence.Trustees The mutual fund is required to have an independent Board of Trustees, i.e. twothird of the trustees should be independent persons who are not associated with thesponsors in any manner. An AMC or any of its officers or employees is not eligible toact 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. 33
  34. 34. Asset Management Company The sponsors or the trustees are required to appoint an AMC to manage the assetsof the mutual fund. Under the mutual fund regulations, the applicant must satisfycertain eligibility criteria in order to qualify to register with SEBI as an AMC. 1. The sponsor must have at least 40% stake in the AMC. 2. The chairman of the AMC is not a trustee of any mutual fund. 3. The AMC should have and must at all times maintain a minimum net worth of Cr. 100 million. 4. The director of the AMC should be a person having adequate professional experience. 5. The board of directors of such AMC has at least 50% directors who are not associate of or associated in any manner with the sponsor or any of its subsidiaries or the trustees.The Transfer Agents The transfer agent is contracted by the AMC and is responsible for maintainingthe register of investors / unit holders and every day settlements of purchases andredemption of units. The role of a transfer agent is to collect data from distributorsrelating to daily purchases and redemption of units. 34
  35. 35. Custodian The mutual fund is required, under the Mutual Fund Regulations, to appoint acustodian to carry out the custodial services for the schemes of the fund. Onlyinstitutions with substantial organizational strength, service capability in terms ofcomputerization and other infrastructure facilities are approved to act as custodians.The custodian must be totally delinked from the AMC and must be registered withSEBI.Unit Holders They are the parties to whom the mutual fund is sold. They are ultimatebeneficiary of the income earned by the mutual funds. 35
  36. 36. Some of the AMCs operating currently are: Table 1.0Name of the AMC Nature of ownershipAlliance Capital Asset Management (I) Private Limited Private foreignBirla Sun Life Asset Management Company Limited Private IndianBank of Baroda Asset Management Company Limited BanksBank of India Asset Management Company Limited BanksCan bank Investment Management Services Limited BanksCholamandalam Cazenove Asset Management Company Limited Private foreignDundee Asset Management Company Limited Private foreignDSP Merrill Lynch Asset Management Company Limited Private foreignEscorts Asset Management Limited Private IndianFirst India Asset Management Limited Private IndianGIC Asset Management Company Limited InstitutionsIDBI Investment Management Company Limited InstitutionsIndfund Management Limited BanksING Investment Asset Management Company Private Limited Private foreignJ M Capital Management Limited Private IndianJardine Fleming (I) Asset Management Limited Private foreignKotak Mahindra Asset Management Company Limited Private IndianKothari Pioneer Asset Management Company Limited Private IndianJeevan Bima Sahayog Asset Management Company Limited InstitutionsMorgan Stanley Asset Management Company Private Limited Private foreignPunjab National Bank Asset Management Company Limited BanksReliance Capital Asset Management Company Limited Private IndianState Bank of India Funds Management Limited BanksShriram Asset Management Company Limited Private IndianSun F and C Asset Management (I) Private Limited Private foreignSundaram Newton Asset Management Company Limited Private foreignTata Asset Management Company Limited Private IndianCredit Capital Asset Management Company Limited Private IndianTempleton Asset Management (India) Private Limited Private foreignUnit Trust of India InstitutionsZurich Asset Management Company (I) Limited Private foreign 36
  37. 37. ADVANTAGES:The benefits on offer are many with good post-tax returns and reasonable safetybeing the hallmark that we normally associate with them. Some of the other majorbenefits of investing in them are:Number of available optionsMutual funds invest according to the underlying investment objective as specified atthe time of launching a scheme. So, we have equity funds, debt funds, gilt funds andmany others that cater to the different needs of the investor. The availability of theseoptions makes them a good option. While equity funds can be as risky as the stockmarkets themselves, debt funds offer the kind of security that aimed at the time ofmaking investments. Money market funds offer the liquidity that desired by biginvestors who wish to park surplus funds for very short-term periods. The onlypertinent factor here is that the fund has to selected keeping the risk profile of theinvestor in mind because the products listed above have different risks associatedwith them. So, while equity funds are a good bet for a long term, they may not findfavor with corporate or High Net worth Individuals (HNIs) who have short-termneeds.DiversificationInvestments spread across a wide cross-section of industries and sectors and so therisk is reduced. Diversification reduces the risk because not all stocks move in thesame direction at the same time. One can achieve this diversification through aMutual Fund with far less money than one can on his own. 37
  38. 38. Professional ManagementMutual Funds employ the services of skilled professionals who have years ofexperience to back them up. They use intensive research techniques to analyze eachinvestment option for the potential of returns along with their risk levels to come upwith the figures for performance that determine the suitability of any potentialinvestment.Potential of ReturnsReturns in the mutual funds are generally better than any other option in any otheravenue over a reasonable period. People can pick their investment horizon and stayput in the chosen fund for the duration. Equity funds can outperform most otherinvestments over long periods by placing long-term calls on fundamentally goodstocks. The debt funds too will outperform other options such as banks.Get FocusedI will admit that investing in individual stocks can be fun because each company hasa unique story. However, it is important for people to focus on making money.Investing is not a game. Your financial future depends on where you put you hard-earned dollars and it should not take lightly.EfficiencyBy pooling investors monies together, mutual fund companies can take advantageof economies of scale. With large sums of money to invest, they often tradecommission-free and have personal contacts at the brokerage firms.Ease of UseCan you imagine keeping track of a portfolio consisting of hundreds of stocks? Thebookkeeping duties involved with stocks are much more complicated than owning a 38
  39. 39. mutual fund. If you are doing your own taxes, or are short on time, this can be a bigdeal.Wealthy stock investors get special treatment from brokers and wealthy bankaccount holders get special treatment from the banks, but mutual funds are non-discriminatory. It doesnt matter whether you have $50 or $500,000; you are gettingthe exact same manager, the same account access and the same investment.RiskIn general, mutual funds carry much lower risk than stocks. This is primarily due todiversification (as mentioned above). Certain mutual funds can be riskier thanindividual stocks, but you have to go out of your way to find them.With stocks, one worry is that the company you are investing in goes bankrupt.With mutual funds, that chance is next to nil. Since mutual funds, typically holdanywhere from 25-5000 companies, all of the companies that it holds would have togo bankrupt.I will not argue that you should not ever invest in individual stocks, but I do hopeyou see the advantages of using mutual funds and make the right choice for themoney that you really care about.DISADVANTAGESMutual funds have their drawbacks and may not be for everyone:No Guarantees: No investment is risk free. If the entire stock market declines invalue, the value of mutual fund shares will go down as well, no matter howbalanced the portfolio. Investors encounter fewer risks when they invest in mutualfunds than when they buy and sell stocks on their own. However, anyone whoinvests through a mutual fund runs the risk of losing money. 39
  40. 40. Fees and commissions: All funds charge administrative fees to cover their day-to- day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you dont use a broker or other financial adviser, 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 if you reinvest the money you made. Management risk: When you invest in a mutual fund, you depend on the funds manager to make the right decisions regarding the funds portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.TYPES OF MUTUAL FUND SCHEMESIn India, there are many companies, both public and private that are engaged in thetrading of mutual funds. Wide varieties of Mutual Fund Schemes exist to cater to theneeds such as financial position, risk tolerance and return expectations etc.Investment can be made either in the debt Securities or equity .The table below givesan overview into the existing types of schemes in the Industry. 40
  41. 41. Figure 1.31. Equity Funds Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: 41
  42. 42. a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds.b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future.c. Specialty Funds - Specialty Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of specialty funds: i. Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors. 42
  43. 43. ii. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500crores but more than Rs.500 crores) and Small-Cap companies have market capitalization of less than Rs. 500crores. Market Capitalization of a company can be calculated by multiplying the market price of the companys share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large- Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.iv. Option Income Funds*: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors. 43
  44. 44. D.)Diversified Equity Funds - Except for a small portion ofinvestment in liquid money market, diversified equity funds invest mainlyin equities without any concentration on a particular sector(s). These fundsare well diversified and reduce sector-specific or company-specific risk.However, like all other funds diversified equity funds too are exposed toequity market risk. One prominent type of diversified equity fund in Indiais Equity Linked Savings Schemes (ELSS). As per the mandate, aminimum of 90% of investments by ELSS should be in equities at alltimes. ELSS investors are eligible to claim deduction from taxable income(up to Rs 1 lakh) at the time of filing the income tax return. ELSS usuallyhas a lock-in period and in case of any redemption by the investor beforethe expiry of the lock-in period makes him liable to pay income tax onsuch income(s) for which he may have received any tax exemption(s) inthe past.e.)Equity Index Funds - Equity Index Funds have the objective to matchthe performance of a specific stock market index. The portfolio of thesefunds comprises of the same companies that form the index and isconstituted in the same proportion as the index. Equity index funds thatfollow broad indices (like S&P CNX Nifty, Sensex) are less risky thanequity index funds that follow narrow sectored indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversifiedand therefore, are more risky. 44
  45. 45. f) Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or specialty funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced. g) Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.2. Debt / Income Funds Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to 45
  46. 46. generate fixed current income (and not capital appreciation) to investors. Inorder to ensure regular income to investors, debt (or income) funds distributelarge fraction of their surplus to investors. Although debt securities aregenerally less risky than equities, they are subject to credit risk (risk ofdefault) by the issuer at the time of interest or principal payment. To minimizethe risk of default, debt funds usually invest in securities from issuers who arerated by credit rating agencies and are considered to be of "InvestmentGrade". Debt funds that target high returns are more risky. Based on differentinvestment objectives, there can be following types of debt funds: a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to 46
  47. 47. diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.c. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured 47
  48. 48. return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTIs payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible. e) Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.3. Gilt FundsAlso known as Government Securities in India, Gilt Funds invest ingovernment papers (named dated securities) having medium to long termmaturity period. Issued by the Government of India, these investments havelittle credit risk (risk of default) and provide safety of principal to theinvestors. However, like all debt funds, gilt funds too are exposed to interestrate risk. Interest rates and prices of debt securities are inversely related andany change in the interest rates results in a change in the NAV of debt/giltfunds in an opposite direction. 48
  49. 49. 4. Money Market / Liquid Funds Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). 5. Hybrid Funds As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:a. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. 49
  50. 50. b. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends. 6.Commodity Funds Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a 50
  51. 51. diversified commodity fund and bears less risk than a specialized commodityfund. "Precious Metals Fund" and Gold Funds (that invest in gold, goldfutures or shares of gold mines) are common examples of commodity funds.7. Real Estate FundsFunds that invest directly in real estate or lend to real estate developers orinvest in shares/securitized assets of housing finance companies, are known asSpecialized Real Estate Funds. The objective of these funds may be togenerate regular income for investors or capital appreciation.8. Exchange Traded Funds (ETF)Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stockmarket indices and are traded on stock exchanges like a single stock at indexlinked prices. The biggest advantage offered by these funds is that they offerdiversification, flexibility of holding a single share (tradable at index linkedprices) at the same time. Recently introduced in India, these funds are quitepopular abroad.9. Fund of FundsMutual funds that do not invest in financial or physical assets, but do invest inother mutual fund schemes offered by different AMCs, are known as Fund ofFunds. Fund of Funds maintain a portfolio comprising of units of other mutualfund schemes, just like conventional mutual funds maintain a portfoliocomprising of equity/debt/money market instruments or non financial assets. 51
  52. 52. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.Risk Hierarchy of Different Mutual FundsThus, different mutual fund schemes are exposed to different levels of risk andinvestors should know the level of risks associated with these schemes beforeinvesting. The graphical representation hereunder provides a clearer picture of therelationship between mutual funds and levels of risk associated with these funds: 52
  53. 53. Figure 1.4FREQUENTLY USED TERMSAdvisor - Is employed by a mutual fund organization to give professional advice onthe fund‘s investments and to supervise the management of its asset.Diversification – The policy of spreading investments among a range of differentsecurities to reduce the risk.Net Asset Value (NAV) - Net Asset Value is the market value of the assets of thescheme minus its liabilities. The per unit NAV is the net asset value of the schemedivided by the number of units outstanding on the Valuation Date. 53
  54. 54. Sales Price - Is the price you pay when you invest in a scheme. Also called OfferPrice. It may include a sales load.Repurchase Price - Is the price at which a close-ended scheme repurchases its unitsand 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 unitsand close-ended schemes redeem their units on maturity. Such prices are NAVrelated.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. 54
  55. 55. The Insurance Regulatory and Developmet Authority (IRDA)The Insurance Act,1938 had provided for setting up of the Controller of Insurance toact as a strong and powerful supervisory and regulatory authority for insurance. Postnationalization, the role of Controller of Insurance diminished considerably insignificance since the Government owned the insurance companies.But the scenario changed with the private and foreign companies foraying in to theinsurance sector. This necessitated the need for a strong, independent andautonomous Insurance Regulatory Authority was felt. As the enacting of legislationwould have taken time, the then Government constituted through a Governmentresolution an Interim Insurance Regulatory Authority pending the enactment of acomprehensive legislation.The Insurance Regulatory and Development Authority Act,1999 is an act to providefor the establishment of an Authority to protect the interests of holders of insurancepolicies, to regulate , promote and ensure orderly growth of the insurance industryand for matters connected therewith or incidental thereto and further to amend theInsurance Act,1938, the Life Insurance Corporation Act, 1956 and the General 55
  56. 56. Insurance Business (Nationalization) Act,1972 to end the monopoly of the LifeInsurance Corporation of India ( for life insurance business) and General InsuranceCorporation and its subsidiaries ( for general insurance business).The act extends to the whole of India and will come into force on such date as theCentral Government may, by notification in the Official Gazette specify. Differentdates may be appointed for different provisions of this Act.The Act has defined certain terms ; some of the most important ones are as followsAppointed day means the date on which the authority is establishes under the act.Authority means the establishes under this Act. Interim Insurance RegulatoryAuthority means the Insurance Regulatory Authority setup by the CentralGovernment through Resolution No . 17(2)/94-Ins-V dated the 23rd January, 1996.Words and Expressions used and not defined in this Act but defined in the insuranceAct, 1938 or the Life Insurance Corporation Act, 1956 or the General InsuranceBusiness (Nationalization) Act, 1972 shall have the meanings respectively assigned tothem in those Acts.A New definition of ―Indian Insurance Company‖ has been inserted. ―IndianInsurance Company‖ means any insurer being a company : (a)Which is formed andregistered under the companies Act,1956 .(b) In which the aggregate holdings of equity shares by a foreign company, either byitself or through its subsidiary companies or its nominees , do not exceed twenty-sixpercent (26 %). Paid-up capital in such Indian Insurance Company. 56
  57. 57. (c) Whose sole purpose is to carry on life insurance business , general insurancebusiness or re-insurance business.INTRODUCTION OF ULIPSULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a lifeinsurance policy which provides a combination of risk cover and investment. Thedynamics of the capital market have a direct bearing on the performance of theULIPs. REMEMBER THAT IN A UNIT LINKED POLICY; THEINVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.Unit linked insurance plan (ULIP) is life insurance solution that provides for thebenefits of risk protection and flexibility in investment. The investment is denoted asunits and is represented by the value that it has attained called as Net Asset Value(NAV). The policy value at any time varies according to the value of the underlyingassets at the time.In a ULIP, the invested amount of the premiums after deducting for all the chargesand premium for risk cover under all policies in a particular fund as chosen by thepolicy holders are pooled together to form a Unit fund. A Unit is the component ofthe Fund in a Unit Linked Insurance Policy. 57
  58. 58. The returns in a ULIP depend upon the performance of the fund in the capital market.ULIP investors have the option of investing across various schemes, i.e, diversifiedequity funds, balanced funds, debt funds etc. It is important to remember that in aULIP, the investment risk is generally borne by the investor.In a ULIP, investors have the choice of investing in a lump sum (single premium) ormaking premium payments on an annual, half-yearly, quarterly or monthly basis.Investors also have the flexibility to alter the premium amounts during the policystenure. For example, if an individual has surplus funds, he can enhance thecontribution in ULIP. Conversely an individual faced with a liquidity crunch has theoption of paying a lower amount (the difference being adjusted in the accumulatedvalue of his ULIP). ULIP investors can shift their investments across variousplans/asset classes (diversified equity funds, balanced funds, debt funds) either at anominal or no cost.Ulips vs. Traditional life insurance plans Unit-linked insurance plans, popularly known as Ulips are life insurance policies which offer a mix of investment and insurance similar to traditional life insurance policies such as endowment, money-back and whole-life, but with one major difference. Unlike traditional policies, in Ulips investment risk lies with the insured (i.e., policy holder) and not with the insurance company. Put another way, in case of adverse market conditions, you can even lose your capital invested. 58
  59. 59. 1. Potential for better returns: Under IRDA guidelines, traditional plans have toinvest at least 85% in debt instruments which results in low returns. On the otherhand, Ulips invest in market linked instruments with varying debt and equityproportions and if you wish you can even choose 100% equity option.2. Greater transparency: Unlike Ulips, in a traditional life insurance policy you‘renot aware of how your money is invested, where it is invested and what is the valueof your investment.3. Flexibility in investment: The top most advantage which Ulips offer overtraditional plans is the flexibility offered to you to customized the product accordingto your needs:a. Flexibility to invest the money the way you want: Unlike traditional plans,Ulips allow you full discretion to choose the fund option most appropriate to yourrisk appetite.b. Flexibility to change the fund allocation: Ulips also give you the option tochange the fund allocation at a later stage through fund switching facility.c. Flexibility to invest more via top-Ups: Unlike traditional plans where you‘ve toinvest a ‗FIXED‘ premium every year, Ulips allow you flexibility to invest morethan the regular premium via top-ups which are additional investments over and 59
  60. 60. above the regular premium. To understand the significance and mystery of top-ups,For the purpose of tax deduction under section 80C, there‘s no difference betweenregular premium and top-ups. In other words, top-ups are also allowed deductionunder section 80C.d. Flexibility to skip premium: In case of traditional plans, you‘ve to pay premiumfor the entire duration of the plan. And if by chance you skip even a single premium,your policy lapses. Whereas Ulips allow you the flexibility to stop paying premiumusually after three policy years. Your life cover continues by deducting the mortalitycharges from the existing investment corpus.4. Flexibility in insurance coverage:a. Option to choose coverage: While in case of traditional insurance plans, thepremium is calculated based on sum assured, for Ulips premium payment is the keycomponent based on which you can decide about the insurance coverage. Putsimply, on the basis of premium, Ulips allow you to opt for any amount of sumassured within the specified range of minimum and maximum life coverage.b. Option to increase risk cover: Unlike traditional plans where you‘ve to buy anew policy each time you want to increase your risk cover, Ulips allow you toincrease your insurance cover anytime. 60
  61. 61. 5. Higher Liquidity (Better exit options): The possibility to withdraw your money before maturity (through surrender or partial withdrawals) is higher in case of Ulips as compared to traditional plans and also the exit costs are lower. TYPES OF ULIPS One of the big advantages that a ULIP offers is that whatever be your specific financial objective, chances are that there is a ULIP which is just right for you. The figure below gives a general guide to the different goals that people have at various age-groups and thus, various life-stages. Depending on your specific life-stage and the corresponding goal, there is a ULIP which can help you plan for itType I and Type II Ulips Ulips are life insurance policies where the insurance cover is bundled with investment. Unlike traditional insurance-cum-investment policies such as endowment and money-back policies which offer very low returns, Ulips offer market-linked returns. There are 2 types of ULIP plans. Type 1 is a ULIP where Sum Assured or Fund Value whichever is higher is paid. In case of Type 2 of a ULIP, both Sum Assured and Fund Value are paid. However, to derive the full benefit of such plans, an investor needs to compare important points like structure, costs and benefits. Below is a brief comparison for the same. 61
  62. 62. A Comparison of Term Plan + ELSS and ULIP Type 2 will give the best: Table 1.1 ULIP Type 2 ELSS + Term Good for More than 10 Years Less than 10 years Investments investments. On Maturity Fund Value Fund Value will be paid by ELSS and No Survival Benefit on Term On Death Fund Value + Death Fund Value and Term Benefit will be paid Life Sum assured will be paid Long Term Costs Good for long term Mutual Funds charge investing as there are high close to 2.25% of Annual upfront charges. In the Fund Management charge Long term total charges till you remain invested. are lower than Mutual Funds Switching Costs During a Mostly ULIPs have 3 Switches are charged at 3- long tenure of investment, Switches Free 4%. switching funds is very important. Switching Tax Costs No Tax Implication Profits on switching are charged at 10% Discipline Compulsion of No Compulsion. Planning Investment every year. to be implemented by Helps you plan you you. child‘s future or retirement. Tax All profits are tax free Tax payable on short term gains 62
  63. 63. Most insurance agents peddle Ulips by telling the investor that he is free to exit fromthe plan after three years. But it is only after three years that the real benefit of a Ulipkicks in. These long-term investment products have high initial charges so an earlyexit isn‘t usually a sensible decision. With Free Switching option and Tax freereturns it is a good investment for the Long Term. 63
  64. 64. Figure 1.5 64
  65. 65. TYPES OF FUNDS IN ULIPSWhen you will buy any ULIP, the insurer will give you various options ofinvestment funds and will also allow some free swaps between these funds within ayear. Generally there are four types of funds, each insurer gives the name differentlyto them, you can check out with you insurer before investing. The basic four type offunds in which ULIP‘s invest are: Table 1.2GENERAL NATURE OF INVESTMENT RISKDISCRIPTION CATEGORYEquity Funds Primarily invested in company Medium to High stocks with the general aim of capital appreciationDebt Funds Invested in pure debt market LowMoney market Invested in Money market and govt LowFund institutionsBalanced Funds Combining equity investment with Medium fixed interest instrumentsEquity Funds: In this type the investment component of your premium is investedinto a pure equity fund. As the fund invests only in equity the risk is high but ifmarkets perform well the returns are outstanding. As ULIP‘s are a long terminstrument you can safely invest into equity funds as it has been proved that over along term equities give best returns than any other investment instrument. 65
  66. 66. Balanced Funds: In this type the investment is made in a mix of equity and debt.The ratio of investment will be available with the insurer. A person who is notwilling to take much risk but still wants decent returns can opt for this type.Debt Funds: This type of fund invests in pure debt instruments. The risk is verylow and so are returns from such funds.Money Market Funds: Few insurers provide this kind of fund. These fundsgenerally invest into money market which is a short term debt market mainlygoverned by institutions. Apart from these insurers can mix and provide other typesof funds for Ulips. With taking into interest your risk appetite and the goal for whichyou want to invest you can opt the right fund.IRDA GUIDELINES FOR ULIPSAs IRDA is a regulating authority for Insurance, so it has its total control over thebusiness of all Insurance companies. On July 1, 2006, the IRDA introduced revisedULIP guidelines. The following are the provisions of the latest guidelines:  Term/Tenure The 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 the client. For example if the client is opting for ULIP at the age of 30 then the policy term would be 40 years. The ULIP must have a minimum tenure of 5 years. 66
  67. 67.  Sum Assured On the same lines, now there is a sum assured that clients can associate with.The minimum 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 is treated as sacred under the new guidelines; it cannot bereduced at any point during the term of the policy except under certainconditions - like a partial withdrawal within two years of death or all partialwithdrawals after 60 years of age. This way the client is at ease with regardsto the sum assured at his disposal. Premium paymentsIf less than first 3 years premiums are paid, the life cover will lapse and policywill be terminated by paying the surrender value. However, if at least first 3years premiums have been paid, then the life cover would have to continue atthe option of the client. Surrender value The surrender value would be payable only after completion of 3 policy years. Top-ups Insurance companies can accept top-ups only if the client has paid regular premiums till date. If the top-up amount exceeds 25% of total basic regular premiums paid till date, then the client has to be given a certain 67
  68. 68. percentage of sum assured on the excess amount. Top-ups have a lock-in of 3 years (unless the top-up is made in the last 3 years of the policy). Partial withdrawals The client can make partial withdrawals only after 3 policy years. Settlement The client has the option to claim the amount accumulated in his account after maturity of the term of the policy up to a maximum of 5 years. For instance, if the ULIP matures on January 1, 2007, the client has the option to claim the ULIP monies till as late as December 31, 2012. However, life cover will not be available during the extended period. Loans No loans will be granted under the new ULIP. Charges The insurance company must state the ULIP charges explicitly. They must also give the method of deduction of charges. Benefit Illustrations The client must necessarily sign on the sales benefit illustrations. These illustrations are shown to the client by the agent to give him an idea about the returns on his policy. Agents are bound by guidelines to show illustrations based on an optimistic estimate of 10% and a conservative estimate of 6%. Now clients will have to sign on these illustrations, because agents were violating these guidelines and projecting higher returns. 68
  69. 69.  Benefits of UlipsUnit Linked Plans offer unique opportunity to combine protection with investments.Some special features of Unit Linked Life Insurance Policies (ULIPs) are: o Provides flexibility in investments  ULIPs offer a complete selection of high, medium and low risk investment options under the same policy. You can choose an appropriate policy according to your risk taking appetite, coupled with the opportunity to switch between fund options without any additional expense. ULIPs provide the flexibility to choose the sum assured and investment ratio in the annual targeted premium. It also offers the flexibility of one time increase in investment portfolio, through top-ups to avail investment opportunity offered by external environment or own income flows. o Transparency  The charge structure, value of investment and expected IRR based on 6% and 10% rate of returns, for the complete tenure of the policy are shared with you before you buy a product. Similarly, the annual account statement, quarterly investment portfolio and daily NAV reporting, ensures that you are aware of the status of your investment portfolio at all times. Most companies publish latest NAVs on their respective websites. 69
  70. 70. o Liquidity To cope with unforeseen circumstances, ULIPs offer the benefit of partial withdrawal; wherein after 3 years you can withdraw funds from our Unit Linked account, retaining only the stipulated minimum amount. o Disciplined and regular savings  ULIPs help you inculcate a regular saving habit. Also, the average unit costs tend to be lower than one time investment. o Multiple benefits bundled in one product  ULIP is an outstanding solution for risk cover, long term investments with the benefit of various investment opportunities, coupled with tax benefits. o Spread of risk  ULIPS are ideal for those investors who wish to avail the benefit of market linked growth without actually participating in the stock market, with the added benefit of risk-cover. 70
  71. 71. ULIP‘s Offer:1.PERSONAL ACCOUNT BENEFIT2. FLEXIBILITY3.LIFE PROTECTION4.TRANSPARENCY5.SAVINGS6.TAX BENEFIT7.CHOICE8.INVESTMENT9.LIQUIDITYCHARGES, FEES, DEDUCTIONS IN ULIPSUlips offered by different insurers have varying charge structures. Broadly, thedifferent types of fees and charges are given below. However it may be noted thatinsurers have the right to revise fees and charges over a period of time. Figure 1.6 71
  72. 72.  Premium Allocation ChargeThis is a percentage of the premium appropriated towards charges beforeallocating the units under the policy. This charge normally includes initial andrenewal expenses apart from commission expenses. Mortality ChargesThese are charges to provide for the cost of insurance coverage under the plan.Mortality charges depend on number of factors such as age, amount of coverage,state of health etc Fund Management FeesThese are fees levied for management of the fund(s) and are deducted beforearriving at the Net Asset Value (NAV). Policy/ Administration ChargesThese are the fees for administration of the plan and levied by cancellation ofunits. This could be flat throughout the policy term or vary at a pre-determinedrate. Surrender ChargesA surrender charge may be deducted for premature partial or full encashment ofunits wherever applicable, as mentioned in the policy conditions. 72
  73. 73.  Fund Switching Charge Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.  Service Tax Deductions Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing unitsCOMPARISON BETWEEN ULIPS ANDMUTUAL FUNDS:Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest tomutual funds in terms of their structure and functioning. As is the cases with mutualfunds, investors in ULIPs are allotted units by the insurance company and a netasset value (NAV) is declared for the same on a daily basis.Similarly ULIP investors have the option of investing across various 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. 73

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