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  1. 1. PREFACEMBA is a stepping-stone to the management carrier and to develop goodmanager it is necessary that the theoretical must be supplemented withexposure to the real environment. Theoretical knowledge just provides the base and it’s not sufficient toproduce a good manager that’s why practical knowledge is needed.Therefore the research product is an essential requirement for the student ofMBA. This research project not only helps the student to utilize his skillsproperly learn field realities but also provides a chance to the organization tofind out talent among the budding managers in the very beginning.In accordance with the requirement of MBA course I have summer trainingproject on the topic “Comparitive Analysis of Mutual funds and Ulips”. Themain objective of the research project was to study the two instruments andmake a detailed comparison of the two. For conducting the research project sample size of 50 customersof SBIMF and SBOP was selected. The information regarding the projectresearch was collected through the questionnaire formed by me which wasfilled by the customers there. 1
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  4. 4. INDUSTRY PROFILEThe mutual fund industry is a lot like the film star of the finance business.Though it is perhaps the smallest segment of the industry, it is also the mostglamorous – in that it is a young industry where there are changes in the rulesof the game everyday, and there are constant shifts and upheavals.The mutual fund is structured around a fairly simple concept, the mitigationof risk through the spreading of investments across multiple entities, which isachieved by the pooling of a number of small investments into a large bucket.Yet it has been the subject of perhaps the most elaborate and prolongedregulatory effort in the history of the country.A little history:The mutual fund industry started in India in a small way with the UTI Actcreating what was effectively a small savings division within the RBI. Over aperiod of 25 years this grew fairly successfully and gave investors a goodreturn, and therefore in 1989, as the next logical step, public sector banksand financial institutions were allowed to float mutual funds and their successemboldened the government to allow the private sector to foray into this area.The initial years of the industry also saw the emerging years of the Indianequity market, when a number of mistakes were made and hence the mutualfund schemes, which invested in lesser-known stocks and at very high levels,became loss leaders for retail investors. From those days to today the retailinvestor, for whom the mutual fund is actually intended, has not yet returnedto the industry in a big way. But to be fair, the industry too has focused onbrining in the large investor, so that it can create a significant base corpus,which can make the retail investor feel more secure. 4
  5. 5. The Indian MF industry has Rs 5.67 lakh crore of assets undermanagement. As per data released by Association of Mutual Funds in India,the asset base of all mutual fund combined has risen by 7.32% in April, thefirst month of the current fiscal. As of now, there are 33 fund houses inthe country including 16 joint ventures and 3 whollyowned foreign assetmanagers.According to a recent McKinsey report, the total AUM of the Indian mutualfund industry could grow to $350-440 billion by 2012, expanding 33%annually. While the revenue and profit (PAT) pools of Indian AMCs arepeggedat $542 million and $220 million respectively, it is at par with fund housesin developed economies. Operating profits for AMCs in India, as a percentageof average assets under management, were at 32 basis points in 2006-07,while the number was 12 bps in UK, 17 bps in Germany and 18 bps in theUS,in the same time frame. 5
  6. 6. No. ofMutual Fund Name As on Schemes* Corpus 337 July 31, 7803ABN AMRO M F 2008 54 July 31, 3513AIG GlobalM F 2008 177 July 31, 29151.00SBI Mutual Fund 2008 343 July 31, 37497.00Birla Mutual Fund 2008 22 July 31, 56.00BOB Mutual Fund 2008 Major 54 July 31, 4576.00Canara Robeco Mutual Fund 2008 players in 80 July 31, 1853.00DBS Chola Mutual Fund 2008 Indian 187 July 31, 10792.00Deutsche Mutual Fund 2008 mutualDSP Merrill Lynch Mutual Fund 211 Feb 29, 2008 19483.00Escorts Mutual Fund 26 Feb 29, 2008 177.00 fundFidelity Mutual Fund 39 Mar 31, 2008 7464.00Franklin Templeton 230 July 31, 24441.00 industryInvestments 2008 371 July 31, 50,752.00 and theirHDFC Mutual Fund 2008 221 July 31, 16,385.00 AUMHSBC Mutual Fund 2008 431 July 31, 55,161.00ICICI Prudential Mutual Fund 2008 262 July 31, 7091.00ING Mutual Fund 2008 9 July 31, 3054.00JPMorgan Mutual Fund 2008 185 July 31, 18,782.00Kotak Mahindra Mutual Fund 2008 112 July 31, 17,499.00LIC Mutual Fund 2008 216 July 31, 7831.00Lotus India Mutual Fund 2008 3 July 31, 2,814.00Morgan Stanley Mutual Fund 2008 151 July 31, 11,359.00PRINCIPAL Mutual Fund 2008 6 July 31, 66.00Quantum Mutual Fund 2008 345 July 31, 84,564.00Reliance Mutual Fund 2008 45 July 31, 175.00Sahara Mutual Fund 2008 255 July 31, 2546.00Mirae asset mutual fund 2008 219 July 31, 11,898.00Sundaram Mutual Fund 2008 389 July 31, 20,443.00Tata Mutual Fund 2008 6 14 July 31, 289.00Taurus Mutual Fund 2008 315 July 31, 46,120.00UTI Mutual Fund 2008
  7. 7. HISTORY OF MUTUAL FUNDThe mutual fund industry in India started in 1963 with the formation of UnitTrust 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 distinctphases: -First Phase – 1964-87An Act of Parliament established Unit Trust of India (UTI) on 1963. It was setup by the Reserve Bank of India and functioned under the Regulatory andadministrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) tookover the regulatory and administrative control in place of RBI. The firstscheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI hadRs.6,700 crores of assets under management.Second Phase – 1987-1993 (Entry of Public Sector Funds) 7
  8. 8. 1987 marked the entry of non- UTI, public sector mutual funds set up bypublic sector banks and Life Insurance Corporation of India (LIC) and GeneralInsurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTIMutual Fund established in June 1987 followed by Can bank Mutual Fund(Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank MutualFund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).LIC established its mutual fund in June 1989 while GIC had set up its mutualfund in December 1990.At the end of 1993, the mutual fund industry had assets under managementof Rs.47,004 crores.Third Phase – 1993-2003 (Entry of Private Sector Funds)With the entry of private sector funds in 1993, a new era started in the Indianmutual fund industry, giving the Indian investors a wider choice of fundfamilies.Also, 1993 was the year in which the first Mutual Fund Regulations came intobeing, under which all mutual funds, except UTI were to be registered andgoverned. The erstwhile Kothari Pioneer (now merged with FranklinTempleton) was the first private sector mutual fund registered in July 1993.Fourth Phase – since February 2003In February 2003, following the repeal of the Unit Trust of India Act 1963 UTIwas bifurcated into two separate entities. One is the Specified Undertaking of 8
  9. 9. the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.GROWTH IN ASSETS UNDER MANAGEMENT 9
  10. 10. ECONOMIC ENVIRONMENT GROWTH OF MUTUAL FUND INDUSTRY IN INDIAWhile the Indian mutual fund industry has grown in size by about 320% fromMarch, 1993 (Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms ofAUM, the AUM of the sector excluding UTI has grown over 8 times from Rs.152 billion in March 1999 to $ 148 billion as at March 2008. 10
  11. 11. Though India is a minor player in the global mutual fund industry, its AUM asa proportion of the global AUM has steadily increased and has doubled overits levels in 1999.The growth rate of Indian mutual fund industry has been increasing for thelast few years. It was approximately 0.12% in the year of 1999 and it isnoticed 0.25% in 2004 in terms of AUM as percentage of global AUM .Some facts for the growth of mutual funds in India • 100% growth in the last 6 years. • Number of foreign AMC’s is in the queue to enter the Indian markets. • Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. • We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion. • Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. • SEBI allowing the MFs to launch commodity mutual funds. • Emphasis on better corporate governance. • Trying to curb the late trading practices. • Introduction of Financial Planners who can provide need based advice. Recent trends in mutual fund industry The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by the nationalized banks and smaller private sector players. 11
  12. 12. Many nationalized banks got into the mutual fund business in the earlynineties and got off to a start due to the stock market boom wasprevailing. These banks did not really understand the mutual fundbusiness and they just viewed it as another kind of banking activity.Few hired specialized staff and generally chose to transfer staff fromthe parent organizations. The performance of most of the schemesfloated by these funds was not good. Some schemes had offeredguaranteed returns and their parent organizations had to bail out theseAMCs by paying large amounts of money as a difference between theguaranteed and actual returns. The service levels were also very bad.Most of these AMCs have not been able to retain staff, float newschemes etc. 12
  13. 13. TECHNOLOGICAL ENVIRONMENTIMPACT OF TECHNOLOGYMutual fund, during the last one decade brought out several innovations intheir products and is offering value added services to their investors. Some ofthe value added services that are being offered are: • Electronic fund transfer facility. • Investment and re-purchase facility through internet. • Added features like accident insurance cover, mediclaim etc. • Holding the investment in electronic form, doing away with the traditional form of unit certificates. • Cheque writing facilities. • Systematic withdrawal and deposit facility. ONLINE MUTUAL FUND TRADINGThe innovation the industry saw was in the field of distribution to make it moreeasily accessible to an ever increasing number of investors across thecountry. For the first time in India the mutual fund start using the automatedtrading, clearing and settlement system of stock exchanges for sale andrepurchase of open-ended de-materialized mutual fund units. 13
  14. 14. Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP)were options introduced which have come in very handy for the investor tomaximize their returns from their investments. SIP ensures that there is aregular investment that the investor makes on specified dates making hispurchases to spread out reducing the effect of the short term volatility ofmarkets. SWP was designed to ensure that investors who wanted a regularincome or cash flow from their investments were able to do so with a pre-defined automated form. Today the SW facility has come in handy for theinvestors to reduce their taxes.LEGAL AND POLITICAL ENVIRONMENT ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)With the increase in mutual fund players in India, a need for mutual fundassociation in India was generated to function as a non-profit organization.Association of Mutual Funds in India (AMFI) was incorporated on 22 nd August1995.AMFI is an apex body of all Asset Management Companies (AMC), which hasbeen registered with SEBI. Till date all the AMCs are that have launchedmutual fund schemes are its members. It functions under the supervision andguidelines of board of directors. AMFI has brought down the Indian MutualFund Industry to a professional and healthy market with ethical linesenhancing and maintaining standards. It follows the principle of bothprotecting and promoting the interest of mutual funds as well as their unitholders. 14
  15. 15. It has been a forum where mutual funds have been able to present theirviews, debate and participate in creating their own regulatory framework. Theassociation was created originally as a body that would lobby with theregulator to ensure that the fund viewpoint was heard. Today, it is usually thebody that is consulted on matters long before regulations are framed, and itoften initiates many regulatory changes that prevent malpractices thatemerge from time to time.AMFI works through a number of committees, some of which are standingcommittees to address areas where there is a need for constant vigil andimprovements and other which are adhoc committees constituted to addressspecific issues. These committees consist of industry professionals fromamong the member mutual funds. There is now some thought that AMFIshould become a self-regulatory organization since it has worked soeffectively as an industry body.OBJECTIVES:O To define and maintain high professional and ethical standards in all areasof operation of mutual fund industry To recommend and promote best business practices and code of conductto be followed by members and others engaged in the activities of mutualfund and asset management including agencies connected or involved in thefield of capital markets and financial services. To interact with the Securities and Exchange Board of India (SEBI) and torepresent to SEBI on all matters concerning the mutual fund industry. To represent to the Government, Reserve Bank of India and other bodieson all matters relating to the Mutual Fund Industry. 15
  16. 16. To develop a cadre of well trained Agent distributors and to implement aprogramme of training and certification for all intermediaries and otherengaged in the industry. To undertake nation wide investor awareness programme so as topromote proper understanding of the concept and working of mutual funds. To disseminate information on Mutual Fund Industry and to undertakestudies and research directly and/or in association with other bodies. 16
  17. 17. MEMBERS OF AMFI:o Bank Sponsored 1. Joint Ventures - Predominantly Indian 1. Canara Robeco Asset Management Company Limited 2. SBI Funds Management Private Limited 2. Others 1. Baroda Pioneer Asset Management Company Limited 2. UTI Asset Management Company Ltdo Institutions 1. LIC Mutual Fund Asset Management Company Limited 17
  18. 18. o Private Sector1. Indian 1. Benchmark Asset Management Company Pvt. Ltd. 2. DBS Cholamandalam Asset Management Ltd. 3. Deutsche Asset Management (India) Pvt. Ltd. 4. Edelweiss Asset Management Limited 5. Escorts Asset Management Limited 6. IDFC Asset Management Company Private Limited 7. JM Financial Asset Management Private Limited 8. Kotak Mahindra Asset Management Company Limited(KMAMCL) 9. Quantum Asset Management Co. Private Ltd. 10. Reliance Capital Asset Management Ltd. 11. Sahara Asset Management Company Private Limited 12. Tata Asset Management Limited 13. Taurus Asset Management Company Limited 18
  19. 19. 2. Foreign 1. AIG Global Asset Management Company (India) Pvt. Ltd. 2. FIL Fund Management Private Limited 3. Franklin Templeton Asset Management (India) Private Limited 4. Mirae Asset Global Investment Management (India) Pvt. Ltd.3. Joint Ventures - Predominantly Indian 1. Birla Sun Life Asset Management Company Limited 2. DSP Merrill Lynch Fund Managers Limited 3. HDFC Asset Management Company Limited 4. ICICI Prudential Asset Mgmt.Company Limited 5. Sundaram BNP Paribas Asset Management Company Limited4. Joint Ventures - Predominantly Foreign 1. ABN AMRO Asset Management (India) Pvt. Ltd. 2. Bharti AXA Investment Managers Private Limited 3. HSBC Asset Management (India) Private Ltd. 19
  20. 20. 4. ING Investment Management (India) Pvt. Ltd. 5. JPMorgan Asset Management India Pvt. Ltd. 6. Lotus India Asset Management Co. Private Ltd. 7. Morgan Stanley Investment Management Pvt.Ltd. 8. Principal Pnb Asset Management Co. Pvt. Ltd. REGULATORY MEASURES BY SEBILike Banking & Insurance up to the nineties of the last century, Mutual Fundindustry in India was set up and functioned exclusively in the state monopolyrepresented by the Unit Trust of India. This monopoly was diluted in theeighties by allowing nationalized banks and insurance companies (LIC & GIC)to set up their institutions under the Indian Trusts Act to transact mutual fundbusiness, allowing the Indian investor the option to choose between differentservice providers. Unit Trust was a statutory corporation governed by its ownincorporating act. There was no separate regulatory authority up to the timeSEBI was made a statutory authority in 1992. but it was only in the year 1993,when a government took a policy decision to deregulate Indian Economy fromgovernment control and to transform it market oriented, that the industry wasopened to competition from private and foreign players. By the year 2000there came to be established in the market 34 mutual funds offerings a varietyof about 550 schemes. 20
  21. 21. SECURITIES AND EXCHANGE BOARD OF INDIA(MUTUAL FUNDS) REGULATIONS, 1996The fast growing industry is regulated by Securities and Exchange Board ofIndia (SEBI) since inception of SEBI as a statutory body. SEBI initiallyformulated “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUALFUNDS) REGULATIONS, 1993” providing detailed procedure forestablishment, registration, constitution, management of trustees, assetmanagement company, about schemes/products to be designed, aboutinvestment of funds collected, general obligation of MFs, about inspection,audit etc. based on experience gained and feedback received from themarket SEBI revised the guidelines of 1993 and issued fresh guidelines in1996 titled “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUALFUNDS) REGULATIONS, 1996”. The said regulations as amended from timeto time are in force even today.The SEBI mutual fund regulations contain ten chapters and twelve schedules.Chapters containing material subjects relating to regulation and conduct ofbusiness by Mutual Funds. 21
  22. 22. REGISTRATION OF MUTUAL FUND:Application for registration1. An application for registration of a mutual fund shall be made to the Boardin Form A by the sponsor.Application fee to accompany the application2. Every application for registration under regulation 3 shall be accompaniedby nonrefundable application fee as specified in the Second Schedule.Application to conform to the requirements3. An application which is not complete in all respects shall be liable to berejected:Provided that, before rejecting any such application, the applicant shall begiven an opportunity to complete such formalities within such time as may bespecified by the Board.Furnishing information4. The Board may require the sponsor to furnish such further information orclarification as may be required by it.Eligibility criteria5. For the purpose of grant of a certificate of registration, the applicant has tofulfill the following, namely :—(a) the sponsor should have a sound track record and general reputation offairness and integrity in all his business transactions.Explanation : For the purposes of this clause “sound track record” shall meanthesponsor should,—(i) be carrying on business in financial services for a period of not less thanfive 22
  23. 23. years; and(ii) the networth is positive in all the immediately preceding five years; and(iii) the networth in the immediately preceding year is more than the capitalcontribution of the sponsor in the asset management company; and(iv) the sponsor has profits after providing for depreciation, interest and tax inthree out of the immediately preceding five years, including the fifth year;(b) in the case of an existing mutual fund, such fund is in the form of a trustand the trust deed has been approved by the Board;(c) the sponsor has contributed or contributes at least 40% to the net worth ofthe asset management company:Provided that any person who holds 40% or more of the net worth of anassetmanagement company shall be deemed to be a sponsor and will be requiredto fulfill the eligibility criteria specified in these regulations;(d) the sponsor or any of its directors or the principal officer to be employedby the mutual fund should not have been guilty of fraud or has not beenconvicted of an offence involving moral turpitude or has not been found guiltyof any economicoffence;(e) appointment of trustees to act as trustees for the mutual fund inaccordance with the provisions of the regulations;(f) appointment of asset management company to manage the mutual fundand operate the scheme of such funds in accordance with the provisions ofthese regulations;(g) appointment of a custodian in order to keep custody of the securities 10[orgold and gold related instruments and carry out the custodian activities asmay be authorized by the trustees. 23
  24. 24. Consideration of application8. The Board, may on receipt of all information decide the application.Grant of Certificate of Registration9. The Board may register the mutual fund and grant a certificate in Form Bon the applicant paying the registration fee as specified in Second Schedule.Terms and conditions of registration10. The registration granted to a mutual fund under regulation 9, shall besubject to the following terms and conditions:(a) the trustees, the sponsor, the asset management company and thecustodian shall comply with the provisions of these regulations;(b) the mutual fund shall forthwith inform the Board, if any information orparticulars previously submitted to the Board was misleading or false in anymaterial respect;(c) the mutual fund shall forthwith inform the Board, of any material change intheinformation or particulars previously furnished, which have a bearing on theregistration granted by it;(d) payment of fees as specified in the regulations and the Second Schedule.Rejection of application11. Where the sponsor does not satisfy the eligibility criteria mentioned inregulation 7, the Board may reject the application and inform the applicant ofthe same.Payment of annual service fee:12. A mutual fund shall pay before the 15th April each year a service fee asspecified in the Second Schedule for every financial year from the yearfollowing the year of registration: 24
  25. 25. Provided that the Board may, on being satisfied with the reasons for thedelay permit the mutual fund to pay the service fee at any time before theexpiry of two months from the commencement of the financial year to whichsuch fee relates. 25
  26. 26. Failure to pay annual service fee13. The Board may not permit a mutual fund who has not paid service fee tolaunch any scheme.CONSTITUTION AND MANAGEMENT OF ASSETMANAGEMENTCOMPANY AND CUSTODIANApplication by an asset management company14. (1) The application for the approval of the asset management companyshall be made in Form D.(2) The provisions of regulations 5, 6 and 8 shall, so far as may be, apply totheapplication made under sub-regulation (1) as they apply to the application forregistration of a mutual fund.Appointment of an asset management company15. (1) The sponsor or, if so authorised by the trust deed, the trustee, shallappoint an asset management company, which has been approved by theBoard under sub-regulation(2) of regulation 21.(2) The appointment of an asset management company can be terminated bymajority of the trustees or by seventy-five per cent of the unitholders of thescheme.(3) Any change in the appointment of the asset management company shallbe subject to prior approval of the Board and the unitholders. 26
  27. 27. Eligibility criteria for appointment of asset management company16. (1) For grant of approval of the asset management company the applicanthas to fulfill the following :—(a) in case the asset management company is an existing asset managementcompany it has a sound track record, general reputation and fairness intransactions.Explanation: For the purpose of this clause sound track record shall meanthenetworth and the profitability of the asset management company;(aa) the asset management company is a fit and proper person;(b) the directors of the asset management company are persons havingadequate professional experience in finance and financial services relatedfield and not found guilty of moral turpitude or convicted of any economicoffence or violation of any securities laws;(c) the key personnel of the asset management company 27[have not beenfound guilty of moral turpitude or convicted of economic offence or violation ofsecurities laws or worked for any asset management company or mutual fundor any intermediary 29[during the period when its] registration has beensuspended or cancelled at any time by the Board;(d) the board of directors of such asset management company has at leastfifty per cent directors, who are not associate of, or associated in any mannerwith, the sponsor or any of its subsidiaries or the trustees;(e) the Chairman of the asset management company is not a trustee of anymutual fund;(f) the asset management company has a networth of not less than rupeesten crores :Provided that an asset management company already granted approvalunder the provisions of Securities and Exchange Board of India (MutualFunds) Regulations, 1993 shall within a period of twelve months from the dateof notification of these regulations increase its networth to rupees ten crores : 27
  28. 28. Provided [further] that the period specified in the first proviso may beextended in appropriate cases by the Board up to three years for reasons tobe recorded in writing :Provided further that no new schemes shall be allowed to be launched ormanaged by such asset management company till the networth has beenraised to rupees ten crores.Explanation : For the purposes of this clause, “networth” means theaggregate of the paid up capital and free reserves of the asset managementcompany afterdeducting therefrom miscellaneous expenditure to the extent not written off oradjusted or deferred revenue expenditure, intangible assets and accumulatedlosses.(2) The Board may, after considering an application with reference to themattersspecified in sub-regulation (1), grant approval to the asset managementcompany.Terms and conditions to be complied with17. The approval granted under sub-regulation (2) of regulation 21 shall besubject to thefollowing conditions, namely:—(a) any director of the asset management company shall not hold the office ofthedirector in another asset management company unless such person is anindependent director referred to in clause (d) of sub-regulation (1) ofregulation 21 and approval of the Board of asset management company ofwhich such person is a director, has been obtained;(b) the asset management company shall forthwith inform the Board of anymaterial change in the information or particulars previously furnished, whichhave a bearing on the approval granted by it; 28
  29. 29. (c) no appointment of a director of an asset management company shall bemade without prior approval of the trustees;(d) the asset management company undertakes to comply with theseregulations;(e) no change in the controlling interest of the asset management companyshall be made unless,—(i) prior approval of the trustees and the Board is obtained;(ii) a written communication about the proposed change is sent to eachunitholder and an advertisement is given in one English daily newspaperhavingnationwide circulation and in a newspaper published in the language of theregion where the Head Office of the mutual fund is situated; and(iii) the unitholders are given an option to exit on the prevailing Net AssetValuewithout any exit load;](f) the asset management company shall furnish such information anddocuments to the trustees as and when required by the trustees.Procedure where approval is not granted18. Where an application made under regulation 19 for grant of approval doesnot satisfy the eligibility criteria laid down in regulation 21, the Board mayreject the application.Restrictions on business activities of the asset management company19. The asset management company shall—(1) not act as a trustee of any mutual fund;(2) not undertake any other business activities except activities in the natureofportfolio management services,] management and advisory services tooffshore funds, pension funds, provident funds, venture capital funds,management of insurance funds, financial consultancy and exchange of 29
  30. 30. research on commercial basis if any of such activities are not in conflict withthe activities of the mutual fund :Provided that the asset management company may itself or through itssubsidiaries undertake such activities if it satisfies the Board that the keypersonnel of the asset management company, the systems, back office, bankand securities accounts are segregated activity-wise and there exist systemsto prohibit access to inside information of various activities :Provided further that asset management company shall meet capitaladequacyrequirements, if any, separately for each such activity and obtain separateapproval, if necessary under the relevant regulations.(3) The asset management company shall not invest in any of its schemesunless full disclosure of its intention to invest has been made in the offerdocuments 34[in case of schemes launched after the notification of theseregulations :Provided that an asset management company shall not be entitled to chargeany fees on its investment in that scheme.Asset management company and its obligations20. (1) The asset management company shall take all reasonable steps andexercise due diligence to ensure that the investment of funds pertaining toany scheme is not contrary to the provisions of these regulations and the trustdeed.(2) The asset management company shall exercise due diligence and care inall its investment decisions as would be exercised by other persons engagedin the same business. 30
  31. 31. (3) The asset management company shall be responsible for the acts ofcommission or omission by its employees or the persons whose serviceshave been procured by the asset management company.(4) The asset management company shall submit to the trustees quarterlyreports of each year on its activities and the compliance with theseregulations.(5) The trustees at the request of the asset management company mayterminate the assignment of the asset management company at any time:Provided that such termination shall become effective only after the trusteeshave accepted the termination of assignment and communicated theirdecision in writing to the asset management company.(6) Notwithstanding anything contained in any contract or agreement ortermination, the asset management company or its directors or other officersshall not be absolved of liability to the mutual fund for their acts ofcommission or omission, while holding such position or office.(6A) The Chief Executive Officer (whatever his designation may be) of theassetmanagement company shall ensure that the mutual fund complies with all theprovisions of these regulations and the guidelines or circulars issued inrelation thereto from time to time and that the investments made by the fundmanagers are in the interest of the unit holders and shall also be responsiblefor the overall risk management function of the mutual fund.Explanation.—For the purpose of this sub-regulation, the words “theseregulations” shall mean and include the Securities and Exchange Board ofIndia (Mutual Funds) Regulations, 1996 as amended from time to time. 31
  32. 32. (6B) The fund managers (whatever the designation may be) shall ensure thatthe funds of the schemes are invested to achieve the objectives of thescheme and in the interest of the unit holders.(7) (a) An asset management company shall not through any brokerassociated with the sponsor, purchase or sell securities, which is average of 5per cent or more of the aggregate purchases and sale of securities made bythe mutual fund in all its schemes :Provided that for the purpose of this sub-regulation, the aggregate purchaseand sale of securities shall exclude sale and distribution of units issued by themutual fund :Provided further that the aforesaid limit of 5 per cent shall apply for a blockof any three months.(b) An asset management company shall not purchase or sell securitiesthrough any broker [other than a broker referred to in clause (a) of sub-regulation (7) which is average of 5 per cent or more of the aggregatepurchases and sale of securities made by the mutual fund in all its schemes,unless the asset management company has recorded in writing thejustification for exceeding the limit of 5 per cent and reports of all suchinvestments are sent to the trustees on a quarterly basis :Provided that the aforesaid limit shall apply for a block of three months.(8) An asset management company shall not utilise the services of thesponsor or any of its associates, employees or their relatives, for the purposeof any securities transaction and distribution and sale of securities :Provided that an asset management company may utilise such services ifdisclosure to that effect is made to the unitholders and the brokerage orcommission paid is also disclosed in the half-yearly annual accounts of themutual fund :Provided further that the mutual funds shall disclose at the time of declaringhalfyearly and yearly results : 32
  33. 33. (i) any underwriting obligations undertaken by the schemes of the mutualfunds with respect to issue of securities associate companies,(ii) devolvement, if any,(iii) subscription by the schemes in the issues lead managed by associatecompanies,(iv) subscription to any issue of equity or debt on private placement basiswhere the sponsor or its associate companies have acted as arranger ormanager.(9) The asset management company shall file with the trustees the details oftransactions in securities by the key personnel of the asset managementcompany in their own name or on behalf of the asset management companyand shall also report to the Board, as and when required by the Board.(10) In case the asset management company enters into any securitiestransactions with any of its associates a report to that effect shall be sent tothe trustees at its next meeting.(11) In case any company has invested more than 5 per cent of the net assetvalue of a scheme, the investment made by that scheme or by any otherscheme of the same mutual fund in that company or its subsidiaries shall bebrought to the notice of the trustees by the asset management company andbe disclosed in the half-yearly and annual accounts of the respectiveschemes with justification for such investment 40[provided the latterinvestment has been made within one year of the date of the formerinvestment calculated on either side.(12) The asset management company shall file with the trustees and theBoard—(a) detailed bio-data of all its directors along with their interest in othercompanieswithin fifteen days of their appointment; 33
  34. 34. (b) any change in the interests of directors every six months; and(c) a quarterly report to the trustees giving details and adequate justificationabout the purchase and sale of the securities of the group companies of thesponsor or the asset management company, as the case may be, by themutual fund during the said quarter.(13) Each director of the asset management company shall file the details ofhis transactions of dealing in securities with the trustees on a quarterly basisin accordance with guidelines issued by the Board.(14) The asset management company shall not appoint any person as keypersonnel who has been found guilty of any economic offence or involved inviolation of securities laws.(15) The asset management company shall appoint registrars and sharetransfer agents who are registered with the Board:Provided if the work relating to the transfer of units is processed in-house,the charges at competitive market rates may be debited to the scheme andfor rates higher than the competitive market rates, prior approval of thetrustees shall be obtained and reasons for charging higher rates shall bedisclosed in the annual accounts.(16) The asset management company shall abide by the Code of Conduct asspecified in the Fifth Schedule.Appointment of custodian21. (1) The mutual fund shall appoint a Custodian to carry out the custodialservices for the schemes of the fund and sent intimation of the same to theBoard within fifteen days of the appointment of the Custodian:Provided that in case of a gold exchange traded fund scheme, the assets ofthe scheme being gold or gold related instruments may be kept in custody ofa bank which is registered as a custodian with the Board. 34
  35. 35. (2) No custodian in which the sponsor or its associates hold 50 per cent ormore of the voting rights of the share capital of the custodian or where 50 percent or more of the directors of the custodian represent the interest of thesponsor or its associates shall act as custodian for a mutual fund constitutedby the same sponsor or any of its associates or subsidiary company.Agreement with custodian22. The mutual fund shall enter into a custodian agreement with thecustodian, which shall contain the clauses which are necessary for theefficient and orderly conduct of the affairs of the custodian:Provided that the agreement, the service contract, terms and appointment ofthecustodian shall be entered into with the prior approval of the trustees.CHARACTERISTICS OF MUTUAL FUNDS • The ownership is in the hands of the investors who have pooled in their funds. • It is managed by a team of investment professionals and other service providers. • The pool of funds is invested in a portfolio of marketable investments. • The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday. • The investment portfolio is created according to the stated investment objectives of the fund. 35
  36. 36. ADVANTAGES OF MUTUAL FUNDSThe advantages of mutual funds are given below: -Portfolio Diversification Mutual funds invest in a number of companies. This diversificationreduces the risk because it happens very rarely that all the stocks decline atthe same time and in the same proportion. So this is the main advantage ofmutual funds.Professional Management Mutual funds provide the services of experienced and skilledprofessionals, assisted by investment research team that analysis theperformance and prospects of companies and select the suitable investmentsto achieve the objectives of the scheme.Low Costs Mutual funds are a relatively less expensive way to invest as compare todirectly investing in a capital markets because of less amount of brokerageand other fees.Liquidity This is the main advantage of mutual fund, that is whenever an investorneeds money he can easily get redemption, which is not possible in most ofother options of investment. In open-ended schemes of mutual fund, theinvestor gets the money back at net asset value and on the other hand inclose-ended schemes the units can be sold in a stock exchange at aprevailing market price. 36
  37. 37. Transparency In mutual fund, investors get full information of the value of theirinvestment, the proportion of money invested in each class of assets and thefund manager’s investment strategyFlexibility Flexibility is also the main advantage of mutual fund. Through thisinvestors can systematically invest or withdraw funds according to their needsand convenience like regular investment plans, regular withdrawal plans,dividend reinvestment plans etc.Convenient Administration Investing in a mutual fund reduces paperwork and helps investors toavoid many problems like bad deliveries, delayed payments and follow upwith brokers and companies. Mutual funds save time and make investingeasy.Affordability Investors individually may lack sufficient funds to invest in high-gradestocks. A mutual fund because of its large corpus allows even a smallinvestor to take the benefit of its investment strategy.Well Regulated All mutual funds are registered with SEBI and they function with in theprovisions of strict regulations designed to protect the interest of investors.The operations of mutual funds are regularly monitored by SEBI. 37
  38. 38. DISADVANTAGES OF MUTUAL FUNDSMutual funds have their following drawbacks:No Guarantees No investment is risk free. If the entire stock market declines in value, thevalue of mutual fund shares will go down as well, no matter how balanced theportfolio. Investors encounter fewer risks when they invest in mutual fundsthan when they buy and sell stocks on their own. However, anyone whoinvests through mutual fund runs the risk of losing the money.Fees and Commissions All funds charge administrative fees to cover their day to day expenses.Some funds also charge sales commissions or loads to compensate brokers,financial consultants, or financial planners. Even if you don’t use a broker orother financial advisor, you will pay a sales commission if you buy shares in aLoad Fund.Taxes During a typical year, most actively managed mutual funds sell anywherefrom 20 to 70 percent of the securities in their portfolios. If your fund makes aprofit on its sales, you will pay taxes on the income you receive, even youreinvest the money you made. 38
  39. 39. Management RiskWhen you invest in mutual fund, you depend on fund manager to make theright decisions regarding the fund’s portfolio. If the manager does not performas well as you had hoped, you might not make as much money on yourinvestment as you expected. Of course, if you invest in index funds, youforego management risk because these funds do not employ managers. 39
  40. 40. STRUCTURE OF MUTUAL FUNDThere are many entities involved and the diagram below illustrates the structure of mutual funds: - Structure of Mutual FundsSEBI The regulation of mutual funds operating in India falls under the previewof authority of the “Securities and Exchange Board of India” (SEBI). Anyperson proposing to set up a mutual fund in India is required under the SEBI(Mutual Funds) Regulations, 1996 to be registered with the SEBI. 40
  41. 41. Sponsor The sponsor should contribute at least 40% to the net worth of the AMC.However, if any person holds 40% or more of the net worth of an AMC shallbe deemed to be a sponsor and will be required to fulfill the eligibility criteriain the Mutual Fund Regulations. The sponsor or any of its directors or theprincipal officer employed by the mutual fund should not be guilty of fraud orguilty of any economic offence.Trustees The mutual fund is required to have an independent Board of Trustees,i.e. two third of the trustees should be independent persons who are notassociated with the sponsors in any manner. An AMC or any of its officers oremployees are not eligible to act as a trustee of any mutual fund. The trusteesare responsible for - inter alia – ensuring that the AMC has all its systems inplace, all key personnel, auditors, registrar etc. have been appointed prior tothe launch of any scheme.Asset Management Company The sponsors or the trustees are required to appoint an AMC to managethe assets of the mutual fund. Under the mutual fund regulations, theapplicant must satisfy certain eligibility criteria in order to qualify to registerwith 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. 41
  42. 42. 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 formaintaining the register of investors / unit holders and every day settlementsof purchases and redemption of units. The role of a transfer agent is to collectdata from distributors relating to daily purchases and redemption of units.Custodian The mutual fund is required, under the Mutual Fund Regulations, toappoint a custodian to carry out the custodial services for the schemes of thefund. Only institutions with substantial organizational strength, servicecapability in terms of computerization and other infrastructure facilities areapproved to act as custodians. The custodian must be totally delinked fromthe AMC and must be registered with SEBI.Unit Holders They are the parties to whom the mutual fund is sold. They are ultimatebeneficiary of the income earned by the mutual funds. 42
  43. 43. TYPES OF MUTUAL FUND SCHEMES In India, there are many companies, both public and private that are engaged in the trading of mutual funds. Wide varieties of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. Investment can be made either in the debt Securities or equity .The table below gives an overview into the existing types of schemes in the Industry. TYPES OF MUTUAL FUND SCHEMEBy structure By Investment Other Schemes Objectives Tax saving fund Open-ended Debt Equity Schemes Schemes Schemes Close Ended MM Mutual Large cap Sector specific Schemes fund fund fund Interval Schemes FMP Mid cap Index Schemes Fund Other Debt Schemes Small cap fund Any Other Equity Fund 43
  44. 44. Generally two options are available for every scheme regardingdividend payout and growth option. By opting for growth option an investorcan have the benefit of long-term growth in the stock market on the other sideby opting for the dividend option an investor can maintain his liquidity byreceiving dividend time to time. Some time people refer dividend option asdividend fund and growth fund. Generally decisions regarding declaration ofthe dividend depend upon the performance of stock market and performanceof the fund. OPTION REGARDING DIVIDEND Dividend Growth Payout Reinvested 44
  45. 45. Systematic Investment Plan (SIP) Systematic investment plan is like Recurring Deposit in which investorinvests in the particular scheme on regular intervals. In the case it isconvenient for salaried class and middle-income group. In this case on regularinterval units of specified amount is created. An investor can make payment byregular payments by issuing cheques, post dated cheques, ECS, standingMandate etc. SIP can be started in the any open-ended fund if there isprovision of it. There are some entry and exit load barriers for discontinuationand redemption of the fund before the said period.According to StructureOpen – Ended FundsAn open – ended fund is one that is available for subscription all through theyear. These do not have a fixed maturity. Investors can conveniently buy andsell units at Net Asset Value (NAV) related prices. The key feature of open –ended schemes is liquidity.Close – Ended Funds A close – ended fund has a stipulated maturity period which generallyranging from 3 to 15 years. The fund is open for subscription only during aspecified period. Investors can invest in the scheme at the same time of theinitial public issue and thereafter they can buy and sell the units of thescheme on the stock exchanges where they are listed. In order to provide anexit route to the investors, some close – ended funds give an option of selling 45
  46. 46. back the units to the mutual fund through periodic repurchase at NAV relatedprices.Interval Funds Interval funds combine the features of open – ended and close – endedschemes. They are open for sales or redemption during pre-determinedintervals at their NAV.According to Investment Objective: Growth Funds The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks are much better than the other investments had over the long term. Growth schemes are ideal for investors having a long term outlook seeking growth over a period of time. Income Funds The aim of the income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and government securities. Income funds are ideal for capital stability and regular income. 46
  47. 47. Balanced Funds The aim of balanced funds is to provide both growth and regularincome. Such schemes periodically distribute a part of their earningand invest both in equities and fixed income securities in the proportionindicated in their offer documents. In a rising stock market, the NAV ofthese schemes may not normally keep pace or fall equally when themarket falls. These are ideal for investors looking for a combination ofincome and moderate growth.Money Market Funds The main aim of money market funds is to provide easy liquidity,preservation of capital and moderate income. These schemesgenerally invest in safe short term instruments such as treasury bills,certificates of deposit, commercial paper and inter – bank call money.Returns on these schemes may fluctuate depending upon the interestrates prevailing in the market. These are ideal for corporate andindividual investors as a means to park their surplus funds for shortperiods.Other SchemesTax Saving Schemes These schemes offer tax rebates to the investors under specificprovisions of the Indian Income Tax laws as the government offers taxincentives for investment in specified avenues. Investments made inEquity Linked Saving Schemes (ELSS) and Pension Schemes areallowed as deduction u/s 88 of the Income Tax Act, 1961. The Act alsoprovides opportunities to investors to save capital gains. 47
  48. 48. Special Schemes:Index Schemes Index funds attempt to replicate the performance of a particularindex such as the BSE Sensex or the NSE 50.Sector Specific Schemes Sector funds are those which invest exclusively in a specifiedindustry or a group of industries or various segments such as ‘A’ groupshares or initial public offerings.Bond Schemes It seeks investment in bonds, debentures and debt relatedinstrument to generate regular income flow. 48
  49. 49. FREQUENTLY USED TERMSAdvisor - Is employed by a mutual fund organization to give professionaladvice on the fund’s investments and to supervise the management of itsasset.Diversification – The policy of spreading investments among a range ofdifferent securities to reduce the risk.Net Asset Value (NAV) - Net Asset Value is the market value of theassets of the scheme minus its liabilities. The per unit NAV is the net assetvalue of the scheme divided by the number of units outstanding on theValuation Date.Sales Price - Is the price you pay when you invest in a scheme. Also calledOffer Price. It may include a sales load.Repurchase Price - Is the price at which a close-ended schemerepurchases its units and it may include a back-end load. This is also calledBid Price.Redemption Price - Is the price at which open-ended schemesrepurchase their units and close-ended schemes redeem their units onmaturity. Such prices are NAV related.Sales Load - Is a charge collected by a scheme when it sells the units. Alsocalled ‘Front-end’ load. Schemes that do not charge a load are called ‘NoLoad’ schemes. 49
  50. 50. ULIPS 50
  51. 51. PLATFORMS OF LIFE INSURANCE- UNIT LINKEDINSURANCE PLANSWorld over , insurance come in different forms and shapes . although thegeneric names may find similar , the difference in product features makes onewonder about the basis on which these products are designed .Withinsurance market opened up , Indian customer has suddenly found himself ina market place where he is bombarded with a lot of jargon as well asmarketing gimmicks with a very little knowledge of what is happening . Thismodule is aimed at clarifying these underlying concepts and simplifying thedifferent products available in the market.We have many products like Endowment , Whole life , Money back etc. Allthese products are based on following basic platforms or structures viz.  Traditional Life  Universal Life or Unit Linked Policies3.1 TRADITIONAL LIFE – AN OVERVIEWThe basic and widely used form of design is known as Traditional LifePlatform. It is based on the concept of sharing . Each of the policy holdercontributes his contribution (premium) into the common large fund ismanaged by the company on behalf of the policy holders. 51
  52. 52. Administration of that common fund in the interest of everybody wasentrusted to the insurance company .It was the responsibility of the companyto administer schemes for benefit of the policyholders. Policyholders played avery passive roll . In the course of time , the same concept of sharing and acommon fund was extended to different areas like saving , investment etc.3.1.1 FEATURES OF TL :  This is the simplest way of designing product as far as concerned. He has no other responsibility but to pay the premium regularly.  Company is responsible for the protection as well as maximization of the policyholder’s funds.  There is a common fund where in all the premiums paid are accumulated. Expenses incurred as well as claims paid are then taken out of this fund.  Companies carry out the valuation of the fund periodically to ascertain the position. It is also a practice to increase the minimum possible guarantee under a policy every year in the form of declaring and attaching bonuses to the sum assured on the basis of this valuation. Declaration of bonuses is not mandatory .  Based on the end objective , companies may offer different plans like saving plans, investment plans etc.(e.g. Endowment , SPWLIP)It helps to maintain a smooth growth and protects against the vagaries of themarket. In other words it minimizes the risk of investments for an averageindividual. He shares his risk with a group of like-minded individuals.ULIP is the Product Innovation of the conventional Insurance product.With the decline in the popularity of traditional Insurance products &changing Investor needs in terms of life protection, periodicity, returns& liquidity, it was need of the hour to have an Instrument that offers allthese features bundled into one. 52
  53. 53. A Unit Link Insurance Policy (ULIP) is one in which the customer is providedwith a life insurance cover and the premium paid is invested in either debt orequity products or a combination of the two. In other words, it enables thebuyer to secure some protection for his family in the event of his untimelydeath and at the same time provides him an opportunity to earn a return onhis premium paid. In the event of the insured persons untimely death, hisnominees would normally receive an amount that is the higher of the sumassured or the value of the units (investments).To put it simply, ULIP attempts to fulfill investment needs of an investor withprotection/insurance needs of an insurance seeker. It saves theinvestor/insurance-seeker the hassles of managing and tracking a portfolio orproducts. More importantly ULIPs offer investors the opportunity to select aproduct which matches their risk profile.Unit Linked Insurance Plans came into play in the 1960s and became verypopular in Western Europe and Americas. In India The first unit linkedInsurance Plan , popularly known as ULIP – Unit Linked Insurance Plan inIndia was brought out by Unit Trust Of India in the year 1971 by entering intoa group insurance arrangement with LIC o provide for life cover to theinvestors , while UTI , as a mutual was taking care of investing the unitholders money in the capital market and giving them a fair return .Subsequently in the year 1989 , another Unit Linked Product was launchedby the LIC Mutual Fund called by the name of “DHANARAKSHA” which wasmore or less on the line of ULIP of UTI . Thereafter LIC itself came out with aUnit Linked Insurance Product known by name “BIMA PLUS “ in the year2001-02 .Presently a number of private life insurance companies have launched UnitLinked Insurance Products with a variety of new features. 53
  54. 54. TYPES OF ULIPThere are various unit linked insurance plans available in the market.However, the key ones are pension, children, group and capital guaranteeplans.The pension plans come with two variations — with and without life cover —and are meant for people who want to generate returns for their sunset years.The children plans, on the other hand, are aimed at taking care of theireducational and other needs..Apart from unit-linked plans for individuals, group unit linked plans are alsoavailable in the market. The Group linked plans are basically designed foremployers who want to offer certain benefits for their employees such asgratuity, superannuation and leave encashment.The other important category of ULIPs is capital guarantee plans. The planpromises the policyholder that at least the premium paid will be returned atmaturity. But the guaranteed amount is payable only when the policysmaturity value is below the total premium paid by the individual till maturity.However, the guarantee is not provided on the actual premium paid but onlyon that portion of the premium that is net of expenses (mortality, sales andmarketing, administration).How ULIPs workULIPs work on the lines of mutual funds. The premium paid by the client (lessany charge) is used to buy units in various funds (aggressive, balanced orconservative) floated by the insurance companies. Units are bought according 54
  55. 55. to the plan chosen by the policyholder. On every additional premium, moreunits are allotted to his fund. The policyholder can also switch among thefunds as and when he desires. While some companies allow any number offree switches to the policyholder, some restrict the number to just three orfour. If the number is exceeded, a certain charge is levied.Individuals can also make additional investments (besides premium) fromtime to time to increase the savings component in their plan. This facility istermed "top-up". The money parked in a ULIP plan is returned either on theinsureds death or in the event of maturity of the policy. In case of the insuredpersons untimely death, the amount that the beneficiary is paid is the higherof the sum assured (insurance cover) or the value of the units (investments).However, some schemes pay the sum assured plus the prevailing value ofthe investments.ULIP - KEY FEATURES • Premiums paid can be single, regular or variable. The payment period too can be regular or variable. The risk cover can be increased or decreased. • As in all insurance policies, the risk charge (mortality rate) varies with age. • The maturity benefit is not typically a fixed amount and the maturity period can be advanced or extended. • Investments can be made in gilt funds, balanced funds, money market funds, growth funds or bonds. • The policyholder can switch between schemes, for instance, balanced to debt or gilt to equity, etc. 55
  56. 56. • The maturity benefit is the net asset value of the units. • The costs in ULIP are higher because there is a life insurance component in it as well, in addition to the investment component. • Insurance companies have the discretion to decide on their investment portfolios. • Being transparent the policyholder gets the entire episode on the performance of his fund. • ULIP products are exempted from tax and they provide life insurance. • Provides capital appreciation. • Investor gets an option to choose among debt, balanced and equity funds.USP of ULIPSInsurance cover plus savingsULIPs serve the purpose of providing life insurance combined with savings atmarket-linked returns. To that extent, ULIPS can be termed as a two-in-oneplan in terms of giving an individual the twin benefits of life insurance plussavings.Multiple investment optionsULIPS offer a lot more variety than traditional life insurance plans. So thereare multiple options at the individual’s disposal. ULIPS generally come inthree broad variants: 56
  57. 57.  Aggressive ULIPS (which can typically invest 80%-100% in equities, balance in debt)  Balanced ULIPS (can typically invest around 40%-60% in equities)  Conservative ULIPS (can typically invest upto 20% in equities)Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. Individuals can optfor a variant based on their risk profile.FlexibilityThe flexibility with which individuals can switch between the ULIP variants tocapitalise on investment opportunities across the equity and debt markets iswhat distinguishes it from other instruments. Some insurance companiesallow a certain number of ‘free’ switches. Switching also helps individuals onanother front. They can shift from an Aggressive to a Balanced or aConservative ULIP as they approach retirement. This is a reflection of thechange in their risk appetite as they grow older.Works like an SIPRupee cost-averaging is another important benefit associated with ULIPS.With an SIP, individuals invest their monies regularly over time intervals of amonth/quarter and don’t have to worry about ‘timing’ the stock markets.HURDLES OF ULIPNO STANDARDIZATIONAll the costs are levied in ways that do not lend to standardisation. If onecompany calculates administration cost by a formula, another levies a flatrate. If one company allows a range of the sum assured (SA), another allowsonly a multiple of the premium. There was also the problem of a varying coststructure with age 57
  58. 58. LACK OF FLEXIBILITY IN LIFE COVERULIP is known to be more flexible in nature than the traditional plans and, onmost counts, they are. However, some insurance companies do not allow theindividual to fix the life cover that he needs. These rely on a multiplier that isfixed by the insurerOVERSTATING THE YIELDInsurance companies work on illustrations. They are allowed to show you howmuch your annual premium will be worth if it grew at 10 per cent per annum.But there are costs, so each company also gives a post-cost return at the 10per cent illustration, calling it the yield. some companies were not includingthe mortality cost while calculating the yield. This amounts to overstating theyield.INTERNALLY MADE SALES ILLUSTRATIONDuring the process of collecting information, it was found that the salesbenefit illustration shown was not conforming to the Insurance Regulatory andDevelopment Authority (Irda) format. in many locations30 per cent returnillustrations are still rampantNOT ALL SHOW THE BENCHMARK RETURNTo talk about returns without pegging them to a benchmark is misleading thecustomer. Though most companies use Sensex, BSE 100 or the Nifty as the 58
  59. 59. benchmark, or the measuring rod of performance, some companies are notusing any benchmark at all.EARLY EXIT OPTIONSThe Ulip product works over the long term. The earlier the exit, the worse offis the investor since he ends up redeeming a high-front-load product and isthen encouraged to move into another higher cost product at that stage. Anearly exit also takes away the benefit of compounding from insured. 59
  60. 60. CREEPING COSTSSince the investors are now more aware than before and have begun to askfor costs, some companies have found a way to answer that withoutdisclosing too much. People are now asking how much of the premium will goto work. There are plans that are able to say 92 per cent will be invested, thatis, will have a front load of just 8 per cent. What they do not say is the muchhigher policy administration cost that is tucked away inside (adjusted from thefund value).While most insurance companies charge an annual fee of about Rs 600 asadministration costs, that stay fixed over time, there are plans that charge thisamount, but it grows by as much as 5 per cent a year over time. There areothers that charge a multiple of this amount and that too grows 60
  62. 62. COMPARISON BETWEEN ULIPS AND MUTUAL FUNDS:Unit Linked Insurance Policies (ULIPs) as an investment avenue are closestto mutual funds in terms of their structure and functioning. As is the case withmutual funds, investors in ULIPs are allotted units by the insurance companyand 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 equityfunds, balanced funds and debt funds to name a few. Generally speaking,ULIPs can be termed as mutual fund schemes with an insurance component.However it should not be construed that barring the insurance element thereis nothing differentiating mutual funds from ULIPs.Points of difference between the two:1. Mode of investment/ investment amountsMutual fund investors have the option of either making lump sum investmentsor investing using the systematic investment plan (SIP) route which entailscommitments over longer time horizons. The minimum investment amountsare laid out by the fund house.ULIP investors also have the choice of investing in a lump sum (singlepremium) or using the conventional route, i.e. making premium payments onan annual, half-yearly, quarterly or monthly basis. In ULIPs, determining thepremium paid is often the starting point for the investment activity. 62
  63. 63. This is in stark contrast to conventional insurance plans where the sumassured is the starting point and premiums to be paid are determinedthereafter.ULIP investors also have the flexibility to alter the premium amounts duringthe policys tenure. For example an individual with access to surplus fundscan enhance the contribution thereby ensuring that his surplus funds aregainfully invested; conversely an individual faced with a liquidity crunch hasthe option of paying a lower amount (the difference being adjusted in theaccumulated value of his ULIP). The freedom to modify premium payments atones convenience clearly gives ULIP investors an edge over their mutualfund counterparts.2. ExpensesIn mutual fund investments, expenses charged for various activities like fundmanagement, sales and marketing, administration among others are subjectto pre-determined upper limits as prescribed by the Securities and ExchangeBoard of India.For example equity-oriented funds can charge their investors a maximum of2.5% per annum on a recurring basis for all their expenses; any expenseabove the prescribed limit is borne by the fund house and not the investors.Similarly funds also charge their investors entry and exit loads (in most cases,either is applicable). Entry loads are charged at the timing of making aninvestment while the exit load is charged at the time of sale.Insurance companies have a free hand in levying expenses on their ULIPproducts with no upper limits being prescribed by the regulator, i.e. theInsurance Regulatory and Development Authority. This explains the complexand at times unwieldy expense structures on ULIP offerings. The only 63
  64. 64. restraint placed is that insurers are required to notify the regulator of all theexpenses that will be charged on their ULIP offerings.Expenses can have far-reaching consequences on investors since higherexpenses translate into lower amounts being invested and a smaller corpusbeing accumulated. ULIP-related expenses have been dealt with in detail inthe 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. Investorsget the opportunity to see where their monies are being invested and howthey have been managed 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 acrossdivergent views on this issue.While one school of thought believes that disclosing portfolios on a quarterlybasis is mandatory, the other believes that there is no legal obligation to do soand that insurers 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 acause for concern considering that the amount invested in insurance policiesis essentially meant to provide for contingencies and for long-term needs likeretirement; regular portfolio disclosures on the other hand can enableinvestors to make timely investment decisions. 64
  65. 65. 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 entirecorpus in equities (diversified equity funds), a 60:40 allotment in equity anddebt instruments (balanced funds) and those investing only in debtinstruments (debt funds) can be found in both ULIPs and mutual funds.If a mutual fund investor in a diversified equity fund wishes to shift his corpusinto a debt from the same fund house, he could have to bear an exit load and/or entry load.On the other hand most insurance companies permit their ULIP inventors toshift investments across various plans/asset classes either at a nominal or nocost (usually, a couple of switches are allowed free of charge every year anda cost has to be borne for additional switches).Effectively the ULIP investor is given the option to invest across asset classesas per his convenience in a cost-effective manner.This can prove to be very useful for investors, for example in a bull marketwhen the ULIP investors equity component has appreciated, he can bookprofits by simply 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 good, irrespective of the nature of the plan chosen by theinvestor. On the other hand in the mutual funds domain, only investments intax-saving funds (also referred to as equity-linked savings schemes) areeligible for Section 80C benefits. 65
  66. 66. Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds(for example diversified equity funds, balanced funds), if the investments areheld for a period over 12 months, the gains are tax free; converselyinvestments sold within a 12-month period attract short-term capital gains tax@ 10%.Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%,while a short-term capital gain is taxed at the investors marginal tax rate.Despite the seemingly similar structures evidently both mutual funds andULIPs have their unique set of advantages to offer. As always, it is vital forinvestors to be aware of the nuances in both offerings and make informeddecisions. 66
  67. 67. Investing in ulips? Remember …………The high returns (above 20 per cent) are definitely not sustainable over along term, as they have been generated during the biggest bull run in recentstock market history.The free hand given to ULIPs might prove risky if the timing of exit happens tocoincide with a bearish market phase, because of the inherently high equitycomponent of these schemes.While a debt-oriented ULIP scheme might be superior to a debt option in aconventional mutual fund due to tax concessions that insurance companiesenjoy, such tax incentives may not last.Look beyond NAVsThe appreciation in the net asset value (NAV) of ULIPs barely indicate theactual returns earned on your investment. The various charges on your policyare deducted either directly from premiums before investing in units orcollected on a monthly basis by knocking off units.Either way, the charges do not affect the NAV; but the number of units in youraccount suffers. You might have access to daily NAVs but your real returnsmay be substantially lower.A rough calculation shows that if our investments earn a 12 per centannualised return over a 20-year period in a growth fund, when measured bythe change in NAV, the real pre- tax returns might be only 9 per cent. Theshorter the term, the lower the real returns. 67
  68. 68. How charges dent returnsAn initial allocation charge is deducted from our premiums for selling,marketing and broker commissions. These charges could be as high as 65per cent of the first year premiums. Premium allocation charges are usuallyvery high (5-65 per cent) in the first couple of years, but taper off later. Thehigh initial charges mainly go towards funding agent commissions, whichcould be as high as 40 per cent of the initial premium as per IRDA (InsuranceRegulatory and Development Authority) regulations.The charges are higher for a linked plan than a non-linked plan, as the formerrequire lot more servicing than the latter, such as regular disclosure ofinvestments, switches, re-direction of premiums, withdrawals, and so on.Insurance companies have the discretion to structure their expenses structurewhereas a mutual fund does not have that luxury. The expense ratios in theircase cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for adebt plan respectively. The lack of regulation on the expense front works tothe detriment of investors in ULIPs.The front-loading of charges does have an impact on overall returns as welose out on the compounding benefit. Insurance companies explain thatcharges get evened out over a long term. Thus we are forced to stay with theplan for a longer tenure to even out the effect of initial charges as the shorterthe tenure, the lower our real returns.If we want to withdraw from the plan, you lose out, as you will have to paywithdrawal charges up to a certain number of years. 68
  69. 69. In effect, when we lock in our money in a ULIP, despite the promise offlexibility and liquidity, we are stuck with one fund management style. This isall the more reason to look for an established track record before committingour hard-earned money.Evaluate alternative optionsAs an investor we have to evaluate alternative options that give superiorreturns before considering ULIPs.Insurance companies argue that comparing ULIPs with mutual funds is likecomparing oranges with apples, as the objectives are different for both theproducts.Most ULIPs give us the choice of a minimum investment cover so that we candirect maximum premiums towards investments.Thus, both ULIPs and mutual funds target the same customers. If riskcover is your primary objective, pure insurance plans are less expensive.When we choose a mutual fund, we look for an established track record ofthree to five years of consistent returns across various market cycles to judgea funds performance.It is early days for insurance companies on this score; investing substantiallyin linked plans might not be advisable at this juncture. 69
  70. 70. Try top-upsInsurance companies allow us to make lump-sum investments in excess ofthe regular premiums. These top-ups are charged at a much lower rate —usually one to two per cent. The expenses incurred on a top-up includingagent commissions are much lower than regular premiums.Some companies also give a credit on top-ups. For instance, if you pay in Rs100 as a top up, the actual allocation to units will be Rs 101. If you keep theregular premiums to the minimum and increase your top ups, you can saveup on charges, enhancing returns in the long run.Reduce life coverThe price of the life cover attached to a ULIP is higher than a normal termplan. Risk charges are charged on a daily or monthly basis depending on thedaily amount at risk. Rates are not locked and are charged on a one-yearrenewal basis.Our life cover charges would depend on the accumulation in your investmentaccount. As accumulation increases, the amount at risk for the insurancecompany decreases. However, with increasing age, the cost per Rs 1,000sum assured increases, effectively increasing your overall insurance costs. Alower life cover could yield better returns. 70
  71. 71. Stay away from ridersAny riders, such as accident rider or critical illness rider, are also charged ona one-year renewal basis. Opting for these riders with a plain insurance covercould provide better value for money.ULIPs as an investment is a very good vehicle for wealth creation ,but wayUnit Linked Insurance schemes are sold by insurance companyrepresentatives and insurance advisors is not correct.ULIPs usually have following charges built into it :a) Up-front Chargesb) Mortality Charges ( Charges for providing the risk cover for life)c) Administrative Chargesd) Fund Management ChargesMutual Funds have the following charges :a) Up-front charges ( Marketing, Advertising, distributors fee etc.)b) Fund Management Charges ( expenses for managing your fund) 71
  72. 72. A few aspects of investing in ULIPs versus mutual funds.LiquidityULIPs score low on liquidity. According to guidelines of the InsuranceRegulatory and Development Authority (IRDA), ULIPs have a minimum termof five years and a minimum lockin of three years. You can make partialwithdrawals after three years. The surrender value of a ULIP is low in theinitial years, since the insurer deducts a large part of your premium asmarketing and distribution costs. ULIPs are essentially long-term productsthat make sense only if your time horizon is 10 to 20 years.Mutual fund investments, on the other hand, can be redeemed at any time,barring ELSS (equity-linked savings schemes). Exit loads, if applicable , aregenerally for six months to a year in equity funds. So mutual funds scoresubstantially higher on liquidity.Tax efficiencyULIPs are often pitched as tax-efficient , because your investment is eligiblefor exemption under Section 80C of the Income Tax Act (subject to a limit ofRs 1 lakh). But investments in ELSS schemes of mutual funds are alsoeligible for exemption under the same section .Besides the premium, thematurity amount in ULIPs is also tax-free , irrespective of whether theinvestment was in a balanced or debt plan. So they do have an edge onmutual funds, as debt funds are taxed at 10% without indexation benefits, and20% with indexation benefits. The point, though, is that if you invest in a debtplan through a ULIP, despite its tax-efficiency your post-tax returns will below, because of high front-end costs. Debt mutual funds don’t charge suchcosts. 72
  73. 73. ExpensesInsurance agents get high commissions for ULIPs, and they get them in theinitial years, not staggered over the term. So the insurer recovers mostcharges from you in the initial years, as it risks a loss if the policy lapses.Typically , insurers levy enormous selling charges, averaging more than 20%of the first year’s premium, and dropping to 10% and 7.5% in subsequentyears. (And this is after investors balked when charges were as high as 65%!)Compare this with mutual funds’ fees of 2.25% on entry, uniform for allschemes. Different ULIPs have varying charges, often not made clear toinvestors.For instance, an agent who sells you a ULIP may get 25% of your first year’spremium, 10% in the second year, 7.5% in the third and fourth year and 5%thereafter. If your annual premium is Rs 10,000 and the agent’s commissionin the first year is 25%, it means only Rs 7,500 of your money is invested inthe first year. So even if the NAV of the fund rises, say 20%, that year, yourportfolio would be worth only Rs 9,000—much lower than the Rs 10,000 youpaid. On the other hand, if you invest Rs 10,000 in an equity scheme with a2.25% entry load, Rs 225 is deducted , and the rest is invested. If thescheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows howULIPs work out expensive for investors. Deduct the cost of a term policy fromthe mutual fund returns, and you’re still left with a sizeable difference. 73
  74. 74. 74
  75. 75. Chapter – 2SBI Mutual FundCompany ProfileAwards & AchievementsProductsMajor Funds of SBI Mutual Fund 75
  76. 76. STATE BANK OF INDIA MUTUAL FUNDProven Skills in Wealth GenerationSBI Mutual Fund is India’s largest bank sponsored mutual fund and has anenviable track record in judicious investments and consistent wealth creation.The fund traces its lineage to SBI - India’s largest banking enterprise. Theinstitution has grown immensely since its inception and today it is Indiaslargest bank, patronised by over 80% of the top corporate houses of thecountry.SBI Mutual Fund is a joint venture between the State Bank of India andSociété Générale Asset Management, one of the world’s leadingfund management companies that manages over US$ 500 Billionworldwide. 76
  77. 77. Exploiting expertise, compounding growthIn twenty years of operation, the fund has launched 38 schemes andsuccessfully redeemed fifteen of them. In the process it has rewarded it’sinvestors handsomely with consistently high returns.A total of over 5.4 million investors have reposed their faith in the wealthgeneration expertise of the Mutual Fund.Schemes of the Mutual fund have consistently outperformed benchmarkindices and have emerged as the preferred investment for millions ofinvestors and HNI’s.Today, the fund manages over Rs. 31,794 crores of assets and has a diverseprofile of investors actively parking their investments across 36 activeschemes.The fund serves this vast family of investors by reaching out to them throughnetwork of over 130 points of acceptance, 28 investor service centers, 46investor service desks and 56 district organisers.SBI Mutual is the first bank-sponsored fund to launch an offshore fund –Resurgent India Opportunities Fund.Growth through innovation and stable investment policies is the SBI MFcredo. 77
  78. 78. KEY PERSONNEL:Mr. Achal K. GuptaManaging Director & Chief Executive Office Mr. C A SantoshChief Manager - Customer Service.Mr. Didier TurpinDy. Chief Executive OfficerMs. Aparna NirgudeChief Risk OfficerMr. Ashwini Kumar JainChief Operating OfficerMr. Ashutosh P VaidyaCompany Secretary & Compliance OfficerMr. Sanjay SinhaChief Investment OfficerMr. Parijat AgrawalHead – Fixed Income 78
  79. 79. Awards and achievements:• SBI Mutual Fund (SBIMF) has been the proud recipient of the: ICRA Online Award - 8 times The Lipper Award (Year 2005-2006) CNBC TV - 18 Crisil Mutual Fund of the Year Award 2007 CNBC AWAAZ CONSUMER AWARDS 2007 79
  80. 80. PRODUCTSEQUITY FUNDS:The investments of these schemes will predominantly be in the stock marketsand endeavor will be to provide investors the opportunity to benefit from thehigher returns which stock markets can provide. However they are alsoexposed to the volatility and attendant risks of stock markets and henceshould be chosen only by such investors who have high risk taking capacitiesand are willing to think long term. Equity Funds include diversified EquityFunds, Sectoral Funds and Index Funds. Diversified Equity Funds invest invarious stocks across different sectors while sectoral funds which arespecialized Equity Funds restrict their investments only to shares of aparticular sector and hence, are riskier than Diversified Equity Funds. IndexFunds invest passively only in the stocks of a particular index and theperformance of such funds move with the movements of the index • Magnum COMMA Fund • Magnum Equity Fund • Magnum Global Fund • Magnum Index Fund • Magnum MidCap Fund • Magnum Multicap Fund • Magnum Multiplier Plus 1993 • Magnum Sector Funds Umbrella • MSFU - Emerging Businesses Fund • MSFU - IT Fund • MSFU - Pharma Fund 80