comparitive analysis of mutual funds and ulips - project report

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PREFACE

MBA is a stepping-stone to the management carrier and to develop good

manager it is necessary that the theoretical must be supplemented with

exposure to the real environment.

Theoretical knowledge just provides the base and it’s not sufficient to

produce a good manager that’s why practical knowledge is needed.

Therefore the research product is an essential requirement for the student of

MBA. This research project not only helps the student to utilize his skills

properly learn field realities but also provides a chance to the organization to

find out talent among the budding managers in the very beginning.

In accordance with the requirement of MBA course I have summer training

project on the topic “Comparitive Analysis of Mutual funds and Ulips”. The

main objective of the research project was to study the two instruments and

make a detailed comparison of the two.

For conducting the research project sample size of 50 customers

of SBIMF and SBOP was selected. The information regarding the project

research was collected through the questionnaire formed by me which was

filled by the customers there.

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INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business.

Though it is perhaps the smallest segment of the industry, it is also the most

glamorous – in that it is a young industry where there are changes in the rules

of the game everyday, and there are constant shifts and upheavals.

The mutual fund is structured around a fairly simple concept, the mitigation

of risk through the spreading of investments across multiple entities, which is

achieved by the pooling of a number of small investments into a large bucket.

Yet it has been the subject of perhaps the most elaborate and prolonged

regulatory effort in the history of the country.

A little history:

The mutual fund industry started in India in a small way with the UTI Act

creating what was effectively a small savings division within the RBI. Over a

period of 25 years this grew fairly successfully and gave investors a good

return, and therefore in 1989, as the next logical step, public sector banks

and financial institutions were allowed to float mutual funds and their success

emboldened the government to allow the private sector to foray into this area.

The initial years of the industry also saw the emerging years of the Indian

equity market, when a number of mistakes were made and hence the mutual

fund schemes, which invested in lesser-known stocks and at very high levels,

became loss leaders for retail investors. From those days to today the retail

investor, for whom the mutual fund is actually intended, has not yet returned

to the industry in a big way. But to be fair, the industry too has focused on

brining in the large investor, so that it can create a significant base corpus,

which can make the retail investor feel more secure.

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The Indian MF industry has Rs 5.67 lakh crore of assets under

management. As per data released by Association of Mutual Funds in India,

the asset base of all mutual fund combined has risen by 7.32% in April, the

first month of the current fiscal. As of now, there are 33 fund houses in

the country including 16 joint ventures and 3 whollyowned foreign asset

managers.

According to a recent McKinsey report, the total AUM of the Indian mutual

fund industry could grow to $350-440 billion by 2012, expanding 33%

annually. While the revenue and profit (PAT) pools of Indian AMCs are

pegged

at $542 million and $220 million respectively, it is at par with fund houses

in developed economies. Operating profits for AMCs in India, as a percentage

of average assets under management, were at 32 basis points in 2006-07,

while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the

US,

in the same time frame.

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Major

players in

Indian

mutual

fund

industry

and their

AUM

Mutual Fund NameNo. of

Schemes*

As on Corpus

ABN AMRO M F337 July 31,

2008

7803

AIG GlobalM F 54 July 31,

2008

3513

SBI Mutual Fund 177 July 31,

2008

29151.00

Birla Mutual Fund 343 July 31,

2008

37497.00

BOB Mutual Fund 22 July 31,

2008

56.00

Canara Robeco Mutual Fund 54 July 31,

2008

4576.00

DBS Chola Mutual Fund 80 July 31,

2008

1853.00

Deutsche Mutual Fund 187 July 31,

2008

10792.00

DSP Merrill Lynch Mutual Fund 211 Feb 29, 2008 19483.00

Escorts Mutual Fund 26 Feb 29, 2008 177.00

Fidelity Mutual Fund 39 Mar 31, 2008 7464.00

Franklin Templeton Investments 230 July 31,

2008

24441.00

HDFC Mutual Fund 371 July 31,

2008

50,752.0

0

HSBC Mutual Fund 221 July 31,

2008

16,385.0

0

ICICI Prudential Mutual Fund 431 July 31,

2008

55,161.0

0

ING Mutual Fund 262 July 31,

2008

7091.00

JPMorgan Mutual Fund 9 July 31,

2008

3054.00

Kotak Mahindra Mutual Fund 185 July 31,

2008

18,782.0

0

LIC Mutual Fund 112 July 31,

2008

17,499.0

0

Lotus India Mutual Fund 216 July 31,

2008

7831.00

Morgan Stanley Mutual Fund 3 July 31,

2008

2,814.00

PRINCIPAL Mutual Fund 151 July 31,

2008

11,359.0

0

Quantum Mutual Fund 6 July 31,

2008

66.00

Reliance Mutual Fund 345 July 31,

2008

84,564.0

0

Sahara Mutual Fund 45 July 31,

2008

175.00

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http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046























HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit

Trust of India, at the initiative of the Government of India and Reserve Bank.

The history of mutual funds in India can be broadly divided into four distinct

phases: -

First Phase – 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set

up by the Reserve Bank of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-

linked from the RBI and the Industrial Development Bank of India (IDBI) took

over the regulatory and administrative control in place of RBI. The first

scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had

Rs.6,700 crores of assets under management.

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Second Phase – 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by

public sector banks and Life Insurance Corporation of India (LIC) and General

Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI

Mutual Fund established in June 1987 followed by Can bank Mutual Fund

(Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual

Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).

LIC established its mutual fund in June 1989 while GIC had set up its mutual

fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management

of Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian

mutual fund industry, giving the Indian investors a wider choice of fund

families.

Also, 1993 was the year in which the first Mutual Fund Regulations came into

being, under which all mutual funds, except UTI were to be registered and

governed. The erstwhile Kothari Pioneer (now merged with Franklin

Templeton) was the first private sector mutual fund registered in July 1993.

Fourth Phase – since February 2003

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In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI

was bifurcated into two separate entities. One is the Specified Undertaking of

the Unit Trust of India with assets under management of Rs.29,835 crores as

at the end of January 2003, representing broadly, the assets of US 64

scheme, assured return and certain other schemes. The Specified

Undertaking of Unit Trust of India, functioning under an administrator and

under the rules framed by Government of India and does not come under the

purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and

LIC. It is registered with SEBI and functions under the Mutual Fund

Regulations. With the bifurcation of the erstwhile UTI which had in March

2000 more than Rs.76,000 crores of assets under management and with the

setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund

Regulations, and with recent mergers taking place among different private

sector funds, the mutual fund industry has entered its current phase of

consolidation and growth. As at the end of September, 2004, there were 29

funds, which manage assets of Rs.153108 crores under 421 schemes.

GROWTH IN ASSETS UNDER MANAGEMENT

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ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

While the Indian mutual fund industry has grown in size by about 320% from

March, 1993 (Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms of

AUM, the AUM of the sector excluding UTI has grown over 8 times from Rs.

152 billion in March 1999 to $ 148 billion as at March 2008.

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Though India is a minor player in the global mutual fund industry, its AUM as

a proportion of the global AUM has steadily increased and has doubled over

its levels in 1999.

The growth rate of Indian mutual fund industry has been increasing for the

last few years. It was approximately 0.12% in the year of 1999 and it is

noticed 0.25% in 2004 in terms of AUM as percentage of global AUM.

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign 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 MF's 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.

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Many nationalized banks got into the mutual fund business in the early

nineties and got off to a start due to the stock market boom was

prevailing. These banks did not really understand the mutual fund

business and they just viewed it as another kind of banking activity.

Few hired specialized staff and generally chose to transfer staff from

the parent organizations. The performance of most of the schemes

floated by these funds was not good. Some schemes had offered

guaranteed returns and their parent organizations had to bail out these

AMCs by paying large amounts of money as a difference between the

guaranteed and actual returns. The service levels were also very bad.

Most of these AMCs have not been able to retain staff, float new

schemes etc.

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TECHNOLOGICAL ENVIRONMENT

IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out several innovations in

their products and is offering value added services to their investors. Some of

the value added services that are being offered are:

Electronic fund transfer facility.

Investment and re-purchase facility through internet.

Added features like accident insurance cover, 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 TRADING

The innovation the industry saw was in the field of distribution to make it more

easily accessible to an ever increasing number of investors across the

country. For the first time in India the mutual fund start using the automated

trading, clearing and settlement system of stock exchanges for sale and

repurchase of open-ended de-materialized mutual fund units.

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Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP)

were options introduced which have come in very handy for the investor to

maximize their returns from their investments. SIP ensures that there is a

regular investment that the investor makes on specified dates making his

purchases to spread out reducing the effect of the short term volatility of

markets. SWP was designed to ensure that investors who wanted a regular

income or cash flow from their investments were able to do so with a pre-

defined automated form. Today the SW facility has come in handy for the

investors to reduce 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 fund

association in India was generated to function as a non-profit organization.

Association of Mutual Funds in India (AMFI) was incorporated on 22nd August

1995.

AMFI is an apex body of all Asset Management Companies (AMC), which has

been registered with SEBI. Till date all the AMCs are that have launched

mutual fund schemes are its members. It functions under the supervision and

guidelines of board of directors. AMFI has brought down the Indian Mutual

Fund Industry to a professional and healthy market with ethical lines

enhancing and maintaining standards. It follows the principle of both

protecting and promoting the interest of mutual funds as well as their unit

holders.

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It has been a forum where mutual funds have been able to present their

views, debate and participate in creating their own regulatory framework. The

association was created originally as a body that would lobby with the

regulator to ensure that the fund viewpoint was heard. Today, it is usually the

body that is consulted on matters long before regulations are framed, and it

often initiates many regulatory changes that prevent malpractices that

emerge from time to time.

AMFI works through a number of committees, some of which are standing

committees to address areas where there is a need for constant vigil and

improvements and other which are adhoc committees constituted to address

specific issues. These committees consist of industry professionals from

among the member mutual funds. There is now some thought that AMFI

should become a self-regulatory organization since it has worked so

effectively as an industry body.

OBJECTIVES:

To define and maintain high professional and ethical standards in all areas

of operation of mutual fund industry

To recommend and promote best business practices and code of conduct

to be followed by members and others engaged in the activities of mutual

fund and asset management including agencies connected or involved in the

field of capital markets and financial services.

To interact with the Securities and Exchange Board of India (SEBI) and to

represent to SEBI on all matters concerning the mutual fund industry.

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To represent to the Government, Reserve Bank of India and other bodies

on all matters relating to the Mutual Fund Industry.

To develop a cadre of well trained Agent distributors and to implement a

programme of training and certification for all intermediaries and other

engaged in the industry.

To undertake nation wide investor awareness programme so as to

promote proper understanding of the concept and working of mutual funds.

To disseminate information on Mutual Fund Industry and to undertake

studies and research directly and/or in association with other bodies.

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MEMBERS OF AMFI:

o Bank Sponsored

1. Joint Ventures - Predominantly Indian

1. Canara Robeco Asset Management Company Limited

2. SBI Funds Management Private Limited

2. Others

1. Baroda Pioneer Asset Management Company Limited

2. UTI Asset Management Company Ltd

o Institutions

1. LIC Mutual Fund Asset Management Company Limited

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o Private Sector

1. Indian

1. Benchmark Asset Management Company Pvt. Ltd.

2. DBS Cholamandalam Asset Management Ltd.

3. Deutsche Asset Management (India) Pvt. Ltd.

4. Edelweiss Asset Management Limited

5. Escorts Asset Management Limited

6. IDFC Asset Management Company Private Limited

7. JM Financial Asset Management Private Limited

8. Kotak Mahindra Asset Management Company

Limited(KMAMCL)

9. Quantum Asset Management Co. Private Ltd.

10.Reliance Capital Asset Management Ltd.

11.Sahara Asset Management Company Private Limited

12.Tata Asset Management Limited

13.Taurus Asset Management Company Limited

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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

Limited

4. Joint Ventures - Predominantly Foreign

1. ABN AMRO Asset Management (India) Pvt. Ltd.

2. Bharti AXA Investment Managers Private Limited

3. HSBC Asset Management (India) Private Ltd.

4. ING Investment Management (India) Pvt. Ltd.

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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 SEBI

Like Banking & Insurance up to the nineties of the last century, Mutual Fund

industry in India was set up and functioned exclusively in the state monopoly

represented by the Unit Trust of India. This monopoly was diluted in the

eighties by allowing nationalized banks and insurance companies (LIC & GIC)

to set up their institutions under the Indian Trusts Act to transact mutual fund

business, allowing the Indian investor the option to choose between different

service providers. Unit Trust was a statutory corporation governed by its own

incorporating act. There was no separate regulatory authority up to the time

SEBI was made a statutory authority in 1992. but it was only in the year 1993,

when a government took a policy decision to deregulate Indian Economy from

government control and to transform it market oriented, that the industry was

opened to competition from private and foreign players. By the year 2000

there came to be established in the market 34 mutual funds offerings a variety

of about 550 schemes.

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SECURITIES AND EXCHANGE BOARD OF INDIA

(MUTUAL FUNDS) REGULATIONS, 1996

The fast growing industry is regulated by Securities and Exchange Board of

India (SEBI) since inception of SEBI as a statutory body. SEBI initially

formulated “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL

FUNDS) REGULATIONS, 1993” providing detailed procedure for

establishment, registration, constitution, management of trustees, asset

management company, about schemes/products to be designed, about

investment of funds collected, general obligation of MFs, about inspection,

audit etc. based on experience gained and feedback received from the

market SEBI revised the guidelines of 1993 and issued fresh guidelines in

1996 titled “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL

FUNDS) REGULATIONS, 1996”. The said regulations as amended from time

to time are in force even today.

The SEBI mutual fund regulations contain ten chapters and twelve schedules.

Chapters containing material subjects relating to regulation and conduct of

business by Mutual Funds.

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REGISTRATION OF MUTUAL FUND:

Application for registration

1. An application for registration of a mutual fund shall be made to the Board

in Form A by the sponsor.

Application fee to accompany the application

2. Every application for registration under regulation 3 shall be accompanied

by nonrefundable application fee as specified in the Second Schedule.

Application to conform to the requirements

3. An application which is not complete in all respects shall be liable to be

rejected:

Provided that, before rejecting any such application, the applicant shall be

given an opportunity to complete such formalities within such time as may be

specified by the Board.

Furnishing information

4. The Board may require the sponsor to furnish such further information or

clarification as may be required by it.

Eligibility criteria

5. For the purpose of grant of a certificate of registration, the applicant has to

fulfill the following, namely :—

(a) the sponsor should have a sound track record and general reputation of

fairness and integrity in all his business transactions.

Explanation : For the purposes of this clause “sound track record” shall mean

the

sponsor should,—

(i) be carrying on business in financial services for a period of not less than

five

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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 capital

contribution of the sponsor in the asset management company; and

(iv) the sponsor has profits after providing for depreciation, interest and tax in

three out of the immediately preceding five years, including the fifth year;

(b) in the case of an existing mutual fund, such fund is in the form of a trust

and the trust deed has been approved by the Board;

(c) the sponsor has contributed or contributes at least 40% to the net worth of

the asset management company:

Provided that any person who holds 40% or more of the net worth of an

asset

management company shall be deemed to be a sponsor and will be required

to fulfill the eligibility criteria specified in these regulations;

(d) the sponsor or any of its directors or the principal officer to be employed

by the mutual fund should not have been guilty of fraud or has not been

convicted of an offence involving moral turpitude or has not been found guilty

of any economic

offence;

(e) appointment of trustees to act as trustees for the mutual fund in

accordance with the provisions of the regulations;

(f) appointment of asset management company to manage the mutual fund

and operate the scheme of such funds in accordance with the provisions of

these regulations;

(g) appointment of a custodian in order to keep custody of the securities 10[or

gold and gold related instruments and carry out the custodian activities as

may be authorized by the trustees.23


Consideration of application

8. The Board, may on receipt of all information decide the application.

Grant of Certificate of Registration

9. The Board may register the mutual fund and grant a certificate in Form B

on the applicant paying the registration fee as specified in Second Schedule.

Terms and conditions of registration

10. The registration granted to a mutual fund under regulation 9, shall be

subject to the following terms and conditions:

(a) the trustees, the sponsor, the asset management company and the

custodian shall comply with the provisions of these regulations;

(b) the mutual fund shall forthwith inform the Board, if any information or

particulars previously submitted to the Board was misleading or false in any

material respect;

(c) the mutual fund shall forthwith inform the Board, of any material change in

the

information or particulars previously furnished, which have a bearing on the

registration granted by it;

(d) payment of fees as specified in the regulations and the Second Schedule.

Rejection of application

11. Where the sponsor does not satisfy the eligibility criteria mentioned in

regulation 7, the Board may reject the application and inform the applicant of

the same.

Payment of annual service fee:

12. A mutual fund shall pay before the 15th April each year a service fee as

specified in the Second Schedule for every financial year from the year

following the year of registration:

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Provided that the Board may, on being satisfied with the reasons for the

delay permit the mutual fund to pay the service fee at any time before the

expiry of two months from the commencement of the financial year to which

such fee relates.

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Failure to pay annual service fee

13. The Board may not permit a mutual fund who has not paid service fee to

launch any scheme.

CONSTITUTION AND MANAGEMENT OF ASSET

MANAGEMENT

COMPANY AND CUSTODIAN

Application by an asset management company

14. (1) The application for the approval of the asset management company

shall be made in Form D.

(2) The provisions of regulations 5, 6 and 8 shall, so far as may be, apply to

the

application made under sub-regulation (1) as they apply to the application for

registration of a mutual fund.

Appointment of an asset management company

15. (1) The sponsor or, if so authorised by the trust deed, the trustee, shall

appoint an asset management company, which has been approved by the

Board under sub-regulation(2) of regulation 21.

(2) The appointment of an asset management company can be terminated by

majority of the trustees or by seventy-five per cent of the unitholders of the

scheme.

(3) Any change in the appointment of the asset management company shall

be subject to prior approval of the Board and the unitholders.

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Eligibility criteria for appointment of asset management company

16. (1) For grant of approval of the asset management company the applicant

has to fulfill the following :—

(a) in case the asset management company is an existing asset management

company it has a sound track record, general reputation and fairness in

transactions.

Explanation: For the purpose of this clause sound track record shall mean

the

networth 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 having

adequate professional experience in finance and financial services related

field and not found guilty of moral turpitude or convicted of any economic

offence or violation of any securities laws;

(c) the key personnel of the asset management company 27[have not been

found guilty of moral turpitude or convicted of economic offence or violation of

securities laws or worked for any asset management company or mutual fund

or any intermediary 29[during the period when its] registration has been

suspended or cancelled at any time by the Board;

(d) the board of directors of such asset management company has at least

fifty per cent directors, who are not associate of, or associated in any manner

with, the sponsor or any of its subsidiaries or the trustees;

(e) the Chairman of the asset management company is not a trustee of any

mutual fund;

(f) the asset management company has a networth of not less than rupees

ten crores :

Provided that an asset management company already granted approval

under the provisions of Securities and Exchange Board of India (Mutual

Funds) Regulations, 1993 shall within a period of twelve months from the date

of notification of these regulations increase its networth to rupees ten crores :

27


Provided [further] that the period specified in the first proviso may be

extended in appropriate cases by the Board up to three years for reasons to

be recorded in writing :

Provided further that no new schemes shall be allowed to be launched or

managed by such asset management company till the networth has been

raised to rupees ten crores.

Explanation : For the purposes of this clause, “networth” means the

aggregate of the paid up capital and free reserves of the asset management

company after

deducting therefrom miscellaneous expenditure to the extent not written off or

adjusted or deferred revenue expenditure, intangible assets and accumulated

losses.

(2) The Board may, after considering an application with reference to the

matters

specified in sub-regulation (1), grant approval to the asset management

company.

Terms and conditions to be complied with

17. The approval granted under sub-regulation (2) of regulation 21 shall be

subject to the

following conditions, namely:—

(a) any director of the asset management company shall not hold the office of

the

director in another asset management company unless such person is an

independent director referred to in clause (d) of sub-regulation (1) of

regulation 21 and approval of the Board of asset management company of

which such person is a director, has been obtained;

(b) the asset management company shall forthwith inform the Board of any

material change in the information or particulars previously furnished, which

have a bearing on the approval granted by it;

28


(c) no appointment of a director of an asset management company shall be

made without prior approval of the trustees;

(d) the asset management company undertakes to comply with these

regulations;

(e) no change in the controlling interest of the asset management company

shall be made unless,—

(i) prior approval of the trustees and the Board is obtained;

(ii) a written communication about the proposed change is sent to each

unitholder and an advertisement is given in one English daily newspaper

having

nationwide circulation and in a newspaper published in the language of the

region where the Head Office of the mutual fund is situated; and

(iii) the unitholders are given an option to exit on the prevailing Net Asset

Value

without any exit load;]

(f) the asset management company shall furnish such information and

documents to the trustees as and when required by the trustees.

Procedure where approval is not granted

18. Where an application made under regulation 19 for grant of approval does

not satisfy the eligibility criteria laid down in regulation 21, the Board may

reject the application.

Restrictions on business activities of the asset management company

19. The asset management company shall—

(1) not act as a trustee of any mutual fund;

(2) not undertake any other business activities except activities in the nature

of

portfolio management services,] management and advisory services to

offshore funds, pension funds, provident funds, venture capital funds,

management of insurance funds, financial consultancy and exchange of 29


research on commercial basis if any of such activities are not in conflict with

the activities of the mutual fund :

Provided that the asset management company may itself or through its

subsidiaries undertake such activities if it satisfies the Board that the key

personnel of the asset management company, the systems, back office, bank

and securities accounts are segregated activity-wise and there exist systems

to prohibit access to inside information of various activities :

Provided further that asset management company shall meet capital

adequacy

requirements, if any, separately for each such activity and obtain separate

approval, if necessary under the relevant regulations.

(3) The asset management company shall not invest in any of its schemes

unless full disclosure of its intention to invest has been made in the offer

documents 34[in case of schemes launched after the notification of these

regulations :

Provided that an asset management company shall not be entitled to charge

any fees on its investment in that scheme.

Asset management company and its obligations

20. (1) The asset management company shall take all reasonable steps and

exercise due diligence to ensure that the investment of funds pertaining to

any scheme is not contrary to the provisions of these regulations and the trust

deed.

(2) The asset management company shall exercise due diligence and care in

all its investment decisions as would be exercised by other persons engaged

in the same business.

30


(3) The asset management company shall be responsible for the acts of

commission or omission by its employees or the persons whose services

have been procured by the asset management company.

(4) The asset management company shall submit to the trustees quarterly

reports of each year on its activities and the compliance with these

regulations.

(5) The trustees at the request of the asset management company may

terminate the assignment of the asset management company at any time:

Provided that such termination shall become effective only after the trustees

have accepted the termination of assignment and communicated their

decision in writing to the asset management company.

(6) Notwithstanding anything contained in any contract or agreement or

termination, the asset management company or its directors or other officers

shall not be absolved of liability to the mutual fund for their acts of

commission or omission, while holding such position or office.

(6A) The Chief Executive Officer (whatever his designation may be) of the

asset

management company shall ensure that the mutual fund complies with all the

provisions of these regulations and the guidelines or circulars issued in

relation thereto from time to time and that the investments made by the fund

managers are in the interest of the unit holders and shall also be responsible

for the overall risk management function of the mutual fund.

Explanation.—For the purpose of this sub-regulation, the words “these

regulations” shall mean and include the Securities and Exchange Board of

India (Mutual Funds) Regulations, 1996 as amended from time to time.

31


(6B) The fund managers (whatever the designation may be) shall ensure that

the funds of the schemes are invested to achieve the objectives of the

scheme and in the interest of the unit holders.

(7) (a) An asset management company shall not through any broker

associated with the sponsor, purchase or sell securities, which is average of 5

per cent or more of the aggregate purchases and sale of securities made by

the mutual fund in all its schemes :

Provided that for the purpose of this sub-regulation, the aggregate purchase

and sale of securities shall exclude sale and distribution of units issued by the

mutual fund :

Provided further that the aforesaid limit of 5 per cent shall apply for a block

of any three months.

(b) An asset management company shall not purchase or sell securities

through any broker [other than a broker referred to in clause (a) of sub-

regulation (7) which is average of 5 per cent or more of the aggregate

purchases and sale of securities made by the mutual fund in all its schemes,

unless the asset management company has recorded in writing the

justification for exceeding the limit of 5 per cent and reports of all such

investments are sent to the trustees on a quarterly basis :

Provided that the aforesaid limit shall apply for a block of three months.

(8) An asset management company shall not utilise the services of the

sponsor or any of its associates, employees or their relatives, for the purpose

of any securities transaction and distribution and sale of securities :

Provided that an asset management company may utilise such services if

disclosure to that effect is made to the unitholders and the brokerage or

commission paid is also disclosed in the half-yearly annual accounts of the

mutual fund :

Provided further that the mutual funds shall disclose at the time of declaring

halfyearly and yearly results :

32


(i) any underwriting obligations undertaken by the schemes of the mutual

funds with respect to issue of securities associate companies,

(ii) devolvement, if any,

(iii) subscription by the schemes in the issues lead managed by associate

companies,

(iv) subscription to any issue of equity or debt on private placement basis

where the sponsor or its associate companies have acted as arranger or

manager.

(9) The asset management company shall file with the trustees the details of

transactions in securities by the key personnel of the asset management

company in their own name or on behalf of the asset management company

and shall also report to the Board, as and when required by the Board.

(10) In case the asset management company enters into any securities

transactions with any of its associates a report to that effect shall be sent to

the trustees at its next meeting.

(11) In case any company has invested more than 5 per cent of the net asset

value of a scheme, the investment made by that scheme or by any other

scheme of the same mutual fund in that company or its subsidiaries shall be

brought to the notice of the trustees by the asset management company and

be disclosed in the half-yearly and annual accounts of the respective

schemes with justification for such investment 40[provided the latter

investment has been made within one year of the date of the former

investment calculated on either side.

(12) The asset management company shall file with the trustees and the

Board—

(a) detailed bio-data of all its directors along with their interest in other

companies

within fifteen days of their appointment;33


(b) any change in the interests of directors every six months; and

(c) a quarterly report to the trustees giving details and adequate justification

about the purchase and sale of the securities of the group companies of the

sponsor or the asset management company, as the case may be, by the

mutual fund during the said quarter.

(13) Each director of the asset management company shall file the details of

his transactions of dealing in securities with the trustees on a quarterly basis

in accordance with guidelines issued by the Board.

(14) The asset management company shall not appoint any person as key

personnel who has been found guilty of any economic offence or involved in

violation of securities laws.

(15) The asset management company shall appoint registrars and share

transfer agents who are registered with the Board:

Provided if the work relating to the transfer of units is processed in-house,

the charges at competitive market rates may be debited to the scheme and

for rates higher than the competitive market rates, prior approval of the

trustees shall be obtained and reasons for charging higher rates shall be

disclosed in the annual accounts.

(16) The asset management company shall abide by the Code of Conduct as

specified in the Fifth Schedule.

Appointment of custodian

21. (1) The mutual fund shall appoint a Custodian to carry out the custodial

services for the schemes of the fund and sent intimation of the same to the

Board within fifteen days of the appointment of the Custodian:

Provided that in case of a gold exchange traded fund scheme, the assets of

the scheme being gold or gold related instruments may be kept in custody of

a bank which is registered as a custodian with the Board.34


(2) No custodian in which the sponsor or its associates hold 50 per cent or

more of the voting rights of the share capital of the custodian or where 50 per

cent or more of the directors of the custodian represent the interest of the

sponsor or its associates shall act as custodian for a mutual fund constituted

by the same sponsor or any of its associates or subsidiary company.

Agreement with custodian

22. The mutual fund shall enter into a custodian agreement with the

custodian, which shall contain the clauses which are necessary for the

efficient and orderly conduct of the affairs of the custodian:

Provided that the agreement, the service contract, terms and appointment of

the

custodian shall be entered into with the prior approval of the trustees.

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


ADVANTAGES OF MUTUAL FUNDS

The advantages of mutual funds are given below: -

Portfolio Diversification

Mutual funds invest in a number of companies. This diversification

reduces the risk because it happens very rarely that all the stocks decline at

the same time and in the same proportion. So this is the main advantage of

mutual funds.

Professional Management

Mutual funds provide the services of experienced and skilled

professionals, assisted by investment research team that analysis the

performance and prospects of companies and select the suitable investments

to achieve the objectives of the scheme.

Low Costs

Mutual funds are a relatively less expensive way to invest as compare to

directly investing in a capital markets because of less amount of brokerage

and other fees.

Liquidity

This is the main advantage of mutual fund, that is whenever an investor

needs money he can easily get redemption, which is not possible in most of

other options of investment. In open-ended schemes of mutual fund, the

investor gets the money back at net asset value and on the other hand in

close-ended schemes the units can be sold in a stock exchange at a

prevailing market price.

36


Transparency

In mutual fund, investors get full information of the value of their

investment, the proportion of money invested in each class of assets and the

fund manager’s investment strategy

Flexibility

Flexibility is also the main advantage of mutual fund. Through this

investors can systematically invest or withdraw funds according to their needs

and convenience like regular investment plans, regular withdrawal plans,

dividend reinvestment plans etc.

Convenient Administration

Investing in a mutual fund reduces paperwork and helps investors to

avoid many problems like bad deliveries, delayed payments and follow up

with brokers and companies. Mutual funds save time and make investing

easy.

Affordability

Investors individually may lack sufficient funds to invest in high-grade

stocks. A mutual fund because of its large corpus allows even a small

investor to take the benefit of its investment strategy.

Well Regulated

All mutual funds are registered with SEBI and they function with in the

provisions of strict regulations designed to protect the interest of investors.

The operations of mutual funds are regularly monitored by SEBI.

37


DISADVANTAGES OF MUTUAL FUNDS

Mutual funds have their following drawbacks:

No Guarantees

No investment is risk free. If the entire stock market declines in value, the

value of mutual fund shares will go down as well, no matter how balanced the

portfolio. Investors encounter fewer risks when they invest in mutual funds

than when they buy and sell stocks on their own. However, anyone who

invests through mutual fund runs the risk of losing the money.

Fees and Commissions

All funds charge administrative fees to cover their day to day expenses.

Some funds also charge sales commissions or loads to compensate brokers,

financial consultants, or financial planners. Even if you don’t use a broker or

other financial advisor, you will pay a sales commission if you buy shares in a

Load Fund.

Taxes

During a typical year, most actively managed mutual funds sell anywhere

from 20 to 70 percent of the securities in their portfolios. If your fund makes a

profit on its sales, you will pay taxes on the income you receive, even you

reinvest the money you made.

38


Management Risk

When you invest in mutual fund, you depend on fund manager to make the

right decisions regarding the fund’s portfolio. If the manager does not perform

as well as you had hoped, you might not make as much money on your

investment as you expected. Of course, if you invest in index funds, you

forego management risk because these funds do not employ managers.

39


STRUCTURE OF MUTUAL FUND

There are many entities involved and the diagram below illustrates the structu

re of mutual funds: -

Structure of Mutual Funds

SEBI

The regulation of mutual funds operating in India falls under the preview

of authority of the “Securities and Exchange Board of India” (SEBI). Any

person proposing to set up a mutual fund in India is required under the SEBI

(Mutual Funds) Regulations, 1996 to be registered with the SEBI.

40


Sponsor

The sponsor should contribute at least 40% to the net worth of the AMC.

However, if any person holds 40% or more of the net worth of an AMC shall

be deemed to be a sponsor and will be required to fulfill the eligibility criteria

in the Mutual Fund Regulations. The sponsor or any of its directors or the

principal officer employed by the mutual fund should not be guilty of fraud or

guilty of any economic offence.

Trustees

The mutual fund is required to have an independent Board of Trustees,

i.e. two third of the trustees should be independent persons who are not

associated with the sponsors in any manner. An AMC or any of its officers or

employees are not eligible to act as a trustee of any mutual fund. The trustees

are responsible for - inter alia – ensuring that the AMC has all its systems in

place, all key personnel, auditors, registrar etc. have been appointed prior to

the launch of any scheme.

Asset Management Company

The sponsors or the trustees are required to appoint an AMC to manage

the assets of the mutual fund. Under the mutual fund regulations, the

applicant must satisfy certain eligibility criteria in order to qualify to register

with SEBI as an AMC.

1. The sponsor must have at least 40% stake in the AMC.

2. The chairman of the AMC is not a trustee of any mutual fund.

3. The AMC should have and must at all times maintain a minimum net

worth of Cr. 100 million.

4. The director of the AMC should be a person having adequate

professional experience.

41


5. The board of directors of such AMC has at least 50% directors who are

not associate of or associated in any manner with the sponsor or any

of its subsidiaries or the trustees.

The Transfer Agents

The transfer agent is contracted by the AMC and is responsible for

maintaining the register of investors / unit holders and every day settlements

of purchases and redemption of units. The role of a transfer agent is to collect

data from distributors relating to daily purchases and redemption of units.

Custodian

The mutual fund is required, under the Mutual Fund Regulations, to

appoint a custodian to carry out the custodial services for the schemes of the

fund. Only institutions with substantial organizational strength, service

capability in terms of computerization and other infrastructure facilities are

approved to act as custodians. The custodian must be totally delinked from

the AMC and must be registered with SEBI.

Unit Holders

They are the parties to whom the mutual fund is sold. They are ultimate

beneficiary of the income earned by the mutual funds.

42


TYPES OF MUTUAL FUND SCHEMES

In India, there are many companies, both public and private that are engaged

in the trading of mutual funds. Wide varieties of Mutual Fund Schemes exist

to cater to the needs such as financial position, risk tolerance and return

expectations etc. Investment can be made either in the debt Securities or

equity .The table below gives an overview into the existing types of schemes

in the Industry.

TYPES OF MUTUAL FUND SCHEME

43

By structure By Investment

Objectives

Other Schemes

Open-ended Schemes

Interval Schemes

Sector specific fund

Index Schemes

Tax saving fund

Small cap fund

Equity Schemes

Debt Schemes

Close Ended Schemes

MM Mutual fund

Other Debt Schemes

FMP

Any Other Equity Fund

Mid cap Fund

Large cap fund


Generally two options are available for every scheme regarding

dividend payout and growth option. By opting for growth option an investor

can have the benefit of long-term growth in the stock market on the other side

by opting for the dividend option an investor can maintain his liquidity by

receiving dividend time to time. Some time people refer dividend option as

dividend fund and growth fund. Generally decisions regarding declaration of

the dividend depend upon the performance of stock market and performance

of the fund.

OPTION REGARDING DIVIDEND

44

Dividend Growth

ReinvestedPayout


Systematic Investment Plan (SIP)

Systematic investment plan is like Recurring Deposit in which investor

invests in the particular scheme on regular intervals. In the case it is

convenient for salaried class and middle-income group. In this case on regular

interval units of specified amount is created. An investor can make payment by

regular payments by issuing cheques, post dated cheques, ECS, standing

Mandate etc. SIP can be started in the any open-ended fund if there is

provision of it. There are some entry and exit load barriers for discontinuation

and redemption of the fund before the said period.

According to Structure

Open – Ended Funds

An open – ended fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy and

sell units at Net Asset Value (NAV) related prices. The key feature of open –

ended schemes is liquidity.

Close – Ended Funds

A close – ended fund has a stipulated maturity period which generally

ranging from 3 to 15 years. The fund is open for subscription only during a

specified period. Investors can invest in the scheme at the same time of the

initial public issue and thereafter they can buy and sell the units of the

scheme on the stock exchanges where they are listed. In order to provide an

exit route to the investors, some close – ended funds give an option of selling

45


back the units to the mutual fund through periodic repurchase at NAV related

prices.

Interval Funds

Interval funds combine the features of open – ended and close – ended

schemes. They are open for sales or redemption during pre-determined

intervals at their NAV.

According to Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the

medium to long term. Such schemes normally invest a majority of their

corpus in equities. It has been proven that returns from stocks are

much better than the other investments had over the long term. Growth

schemes are ideal for investors having a long term outlook seeking

growth over a period of time.

Income Funds

The aim of the income funds is to provide regular and steady

income to investors. Such schemes generally invest in fixed income

securities such as bonds, corporate debentures and government

securities. Income funds are ideal for capital stability and regular

income.

46


Balanced Funds

The aim of balanced funds is to provide both growth and regular

income. Such schemes periodically distribute a part of their earning

and invest both in equities and fixed income securities in the proportion

indicated in their offer documents. In a rising stock market, the NAV of

these schemes may not normally keep pace or fall equally when the

market falls. These are ideal for investors looking for a combination of

income and moderate growth.

Money Market Funds

The main aim of money market funds is to provide easy liquidity,

preservation of capital and moderate income. These schemes

generally invest in safe short term instruments such as treasury bills,

certificates of deposit, commercial paper and inter – bank call money.

Returns on these schemes may fluctuate depending upon the interest

rates prevailing in the market. These are ideal for corporate and

individual investors as a means to park their surplus funds for short

periods.

Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific

provisions of the Indian Income Tax laws as the government offers tax

incentives for investment in specified avenues. Investments made in

Equity Linked Saving Schemes (ELSS) and Pension Schemes are

allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also

provides opportunities to investors to save capital gains.

47


Special Schemes:

Index Schemes

Index funds attempt to replicate the performance of a particular

index such as the BSE Sensex or the NSE 50.

Sector Specific Schemes

Sector funds are those which invest exclusively in a specified

industry or a group of industries or various segments such as ‘A’ group

shares or initial public offerings.

Bond Schemes

It seeks investment in bonds, debentures and debt related

instrument to generate regular income flow.

48


FREQUENTLY USED TERMS

Advisor - Is employed by a mutual fund organization to give professional

advice on the fund’s investments and to supervise the management of its

asset.

Diversification – The policy of spreading investments among a range of

different securities to reduce the risk.

Net Asset Value (NAV) - Net Asset Value is the market value of the

assets of the scheme minus its liabilities. The per unit NAV is the net asset

value of the scheme divided by the number of units outstanding on the

Valuation Date.

Sales Price - Is the price you pay when you invest in a scheme. Also called

Offer Price. It may include a sales load.

Repurchase Price - Is the price at which a close-ended scheme

repurchases its units and it may include a back-end load. This is also called

Bid Price.

Redemption Price - Is the price at which open-ended schemes

repurchase their units and close-ended schemes redeem their units on

maturity. Such prices are NAV related.

Sales Load - Is a charge collected by a scheme when it sells the units. Also

called ‘Front-end’ load. Schemes that do not charge a load are called ‘No

Load’ schemes.

49


ULIPS

50


PLATFORMS OF LIFE INSURANCE- UNIT LINKED

INSURANCE PLANS

World over , insurance come in different forms and shapes . although the

generic names may find similar , the difference in product features makes one

wonder about the basis on which these products are designed .With

insurance market opened up , Indian customer has suddenly found himself in

a market place where he is bombarded with a lot of jargon as well as

marketing gimmicks with a very little knowledge of what is happening . This

module is aimed at clarifying these underlying concepts and simplifying the

different products available in the market.

We have many products like Endowment , Whole life , Money back etc. All

these products are based on following basic platforms or structures viz.

Traditional Life

Universal Life or Unit Linked Policies

3.1 TRADITIONAL LIFE – AN OVERVIEW

The basic and widely used form of design is known as Traditional Life

Platform. It is based on the concept of sharing . Each of the policy holder

contributes his contribution (premium) into the common large fund is

managed by the company on behalf of the policy holders.

51


Administration of that common fund in the interest of everybody was

entrusted to the insurance company .It was the responsibility of the company

to administer schemes for benefit of the policyholders. Policyholders played a

very passive roll . In the course of time , the same concept of sharing and a

common fund was extended to different areas like saving , investment etc.

3.1.1 FEATURES OF TL :

This is the simplest way of designing product as far as concerned. He

has no other responsibility but to pay the premium regularly.

Company is responsible for the protection as well as maximization of

the policyholder’s funds.

There is a common fund where in all the premiums paid are

accumulated. Expenses incurred as well as claims paid are then taken

out of this fund.

Companies carry out the valuation of the fund periodically to ascertain

the position. It is also a practice to increase the minimum possible

guarantee under a policy every year in the form of declaring and

attaching bonuses to the sum assured on the basis of this valuation.

Declaration of bonuses is not mandatory .

Based on the end objective , companies may offer different plans like

saving plans, investment plans etc.(e.g. Endowment , SPWLIP)

It helps to maintain a smooth growth and protects against the vagaries of the

market. In other words it minimizes the risk of investments for an average

individual. He shares his risk with a group of like-minded individuals.

ULIP is the Product Innovation of the conventional Insurance product.

With the decline in the popularity of traditional Insurance products &

changing Investor needs in terms of life protection, periodicity, returns

& liquidity, it was need of the hour to have an Instrument that offers all

these features bundled into one.

52


A Unit Link Insurance Policy (ULIP) is one in which the customer is provided

with a life insurance cover and the premium paid is invested in either debt or

equity products or a combination of the two. In other words, it enables the

buyer to secure some protection for his family in the event of his untimely

death and at the same time provides him an opportunity to earn a return on

his premium paid. In the event of the insured person's untimely death, his

nominees would normally receive an amount that is the higher of the sum

assured or the value of the units (investments).

To put it simply, ULIP attempts to fulfill investment needs of an investor with

protection/insurance needs of an insurance seeker. It saves the

investor/insurance-seeker the hassles of managing and tracking a portfolio or

products. More importantly ULIPs offer investors the opportunity to select a

product which matches their risk profile.

Unit Linked Insurance Plans came into play in the 1960s and became very

popular in Western Europe and Americas. In India The first unit linked

Insurance Plan , popularly known as ULIP – Unit Linked Insurance Plan in

India was brought out by Unit Trust Of India in the year 1971 by entering into

a group insurance arrangement with LIC o provide for life cover to the

investors , while UTI , as a mutual was taking care of investing the unit

holders money in the capital market and giving them a fair return .

Subsequently in the year 1989 , another Unit Linked Product was launched

by the LIC Mutual Fund called by the name of “DHANARAKSHA” which was

more or less on the line of ULIP of UTI . Thereafter LIC itself came out with a

Unit Linked Insurance Product known by name “BIMA PLUS “ in the year

2001-02 .

Presently a number of private life insurance companies have launched Unit

Linked Insurance Products with a variety of new features.53


TYPES OF ULIP

There are various unit linked insurance plans available in the market.

However, the key ones are pension, children, group and capital guarantee

plans.

The pension plans come with two variations — with and without life cover —

and are meant for people who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at taking care of their

educational and other needs..

Apart from unit-linked plans for individuals, group unit linked plans are also

available in the market. The Group linked plans are basically designed for

employers who want to offer certain benefits for their employees such as

gratuity, superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan

promises the policyholder that at least the premium paid will be returned at

maturity. But the guaranteed amount is payable only when the policy's

maturity value is below the total premium paid by the individual till maturity.

However, the guarantee is not provided on the actual premium paid but only

on that portion of the premium that is net of expenses (mortality, sales and

marketing, administration).

How ULIPs work

ULIPs work on the lines of mutual funds. The premium paid by the client (less

any charge) is used to buy units in various funds (aggressive, balanced or

conservative) floated by the insurance companies. Units are bought according

54


to the plan chosen by the policyholder. On every additional premium, more

units are allotted to his fund. The policyholder can also switch among the

funds as and when he desires. While some companies allow any number of

free switches to the policyholder, some restrict the number to just three or

four. If the number is exceeded, a certain charge is levied.

Individuals can also make additional investments (besides premium) from

time to time to increase the savings component in their plan. This facility is

termed "top-up". The money parked in a ULIP plan is returned either on the

insured's death or in the event of maturity of the policy. In case of the insured

person's untimely death, the amount that the beneficiary is paid is the higher

of the sum assured (insurance cover) or the value of the units (investments).

However, some schemes pay the sum assured plus the prevailing value of

the investments.

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


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 ULIPS

Insurance cover plus savings

ULIPs serve the purpose of providing life insurance combined with savings at

market-linked returns. To that extent, ULIPS can be termed as a two-in-one

plan in terms of giving an individual the twin benefits of life insurance plus

savings.

Multiple investment options

ULIPS offer a lot more variety than traditional life insurance plans. So there

are multiple options at the individual’s disposal. ULIPS generally come in

three broad variants:

56


Aggressive ULIPS (which can typically invest 80%-100% in equities,

balance in debt)

Balanced ULIPS (can typically invest around 40%-60% in equities)

Conservative ULIPS (can typically invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact

debt/equity allocations may vary across insurance companies. Individuals can

opt for a variant based on their risk profile.

Flexibility

The flexibility with which individuals can switch between the ULIP variants to

capitalise on investment opportunities across the equity and debt markets is

what distinguishes it from other instruments. Some insurance companies

allow a certain number of ‘free’ switches. Switching also helps individuals on

another front. They can shift from an Aggressive to a Balanced or a

Conservative ULIP as they approach retirement. This is a reflection of the

change in their risk appetite as they grow older.

Works like an SIP

Rupee cost-averaging is another important benefit associated with ULIPS.

With an SIP, individuals invest their monies regularly over time intervals of a

month/quarter and don’t have to worry about ‘timing’ the stock markets.

HURDLES OF ULIP

NO STANDARDIZATION

All the costs are levied in ways that do not lend to standardisation. If one

company calculates administration cost by a formula, another levies a flat

rate. If one company allows a range of the sum assured (SA), another allows

only a multiple of the premium. There was also the problem of a varying cost

structure with age

57


LACK OF FLEXIBILITY IN LIFE COVER

ULIP is known to be more flexible in nature than the traditional plans and, on

most counts, they are. However, some insurance companies do not allow the

individual to fix the life cover that he needs. These rely on a multiplier that is

fixed by the insurer

OVERSTATING THE YIELD

Insurance companies work on illustrations. They are allowed to show you how

much your annual premium will be worth if it grew at 10 per cent per annum.

But there are costs, so each company also gives a post-cost return at the 10

per cent illustration, calling it the yield. some companies were not including

the mortality cost while calculating the yield. This amounts to overstating the

yield.

INTERNALLY MADE SALES ILLUSTRATION

During the process of collecting information, it was found that the sales

benefit illustration shown was not conforming to the Insurance Regulatory and

Development Authority (Irda) format. in many locations30 per cent return

illustrations are still rampant

NOT ALL SHOW THE BENCHMARK RETURN

To talk about returns without pegging them to a benchmark is misleading the

customer. Though most companies use Sensex, BSE 100 or the Nifty as the

58


benchmark, or the measuring rod of performance, some companies are not

using any benchmark at all.

EARLY EXIT OPTIONS

The Ulip product works over the long term. The earlier the exit, the worse off

is the investor since he ends up redeeming a high-front-load product and is

then encouraged to move into another higher cost product at that stage. An

early exit also takes away the benefit of compounding from insured.

59


CREEPING COSTS

Since the investors are now more aware than before and have begun to ask

for costs, some companies have found a way to answer that without

disclosing too much. People are now asking how much of the premium will go

to work. There are plans that are able to say 92 per cent will be invested, that

is, will have a front load of just 8 per cent. What they do not say is the much

higher policy administration cost that is tucked away inside (adjusted from the

fund value).

While most insurance companies charge an annual fee of about Rs 600 as

administration costs, that stay fixed over time, there are plans that charge this

amount, but it grows by as much as 5 per cent a year over time. There are

others that charge a multiple of this amount and that too grows

60


COMPARISON

BETWEEN ULIPS

AND MUTUAL

FUNDS

61


COMPARISON BETWEEN ULIPS AND MUTUAL FUNDS :

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest

to mutual funds in terms of their structure and functioning. As is the case with

mutual funds, investors in ULIPs are allotted units by the insurance company

and a net asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes

similar to the ones found in the mutual funds domain, i.e. diversified equity

funds, balanced funds and debt funds to name a few. Generally speaking,

ULIPs can be termed as mutual fund schemes with an insurance component.

However it should not be construed that barring the insurance element there

is nothing differentiating mutual funds from ULIPs.

Points of difference between the two:

1. Mode of investment/ investment amounts

Mutual fund investors have the option of either making lump sum investments

or investing using the systematic investment plan (SIP) route which entails

commitments over longer time horizons. The minimum investment amounts

are laid out by the fund house.

ULIP investors also have the choice of investing in a lump sum (single

premium) or using the conventional route, i.e. making premium payments on

an annual, half-yearly, quarterly or monthly basis. In ULIPs, determining the

premium paid is often the starting point for the investment activity.

62


This is in stark contrast to conventional insurance plans where the sum

assured is the starting point and premiums to be paid are determined

thereafter.

ULIP investors also have the flexibility to alter the premium amounts during

the policy's tenure. For example an individual with access to surplus funds

can enhance the contribution thereby ensuring that his surplus funds are

gainfully invested; conversely an individual faced with a liquidity crunch has

the option of paying a lower amount (the difference being adjusted in the

accumulated value of his ULIP). The freedom to modify premium payments at

one's convenience clearly gives ULIP investors an edge over their mutual

fund counterparts.

2. Expenses

In mutual fund investments, expenses charged for various activities like fund

management, sales and marketing, administration among others are subject

to pre-determined upper limits as prescribed by the Securities and Exchange

Board of India.

For example equity-oriented funds can charge their investors a maximum of

2.5% per annum on a recurring basis for all their expenses; any expense

above the prescribed limit is borne by the fund house and not the investors.

Similarly funds also charge their investors entry and exit loads (in most cases,

either is applicable). Entry loads are charged at the timing of making an

investment while the exit load is charged at the time of sale.

Insurance companies have a free hand in levying expenses on their ULIP

products with no upper limits being prescribed by the regulator, i.e. the

Insurance Regulatory and Development Authority. This explains the complex

and at times 'unwieldy' expense structures on ULIP offerings. The only 63


restraint placed is that insurers are required to notify the regulator of all the

expenses that will be charged on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher

expenses translate into lower amounts being invested and a smaller corpus

being accumulated. ULIP-related expenses have been dealt with in detail in

the article "Understanding ULIP expenses".

3. Portfolio disclosure

Mutual fund houses are required to statutorily declare their portfolios on a

quarterly basis, albeit most fund houses do so on a monthly basis. Investors

get the opportunity to see where their monies are being invested and how

they have been managed by studying the portfolio.

There is lack of consensus on whether ULIPs are required to disclose their

portfolios. During our interactions with leading insurers we came across

divergent views on this issue.

While one school of thought believes that disclosing portfolios on a quarterly

basis is mandatory, the other believes that there is no legal obligation to do so

and that insurers are required to disclose their portfolios only on demand.

Some insurance companies do declare their portfolios on a monthly/quarterly

basis. However the lack of transparency in ULIP investments could be a

cause for concern considering that the amount invested in insurance policies

is essentially meant to provide for contingencies and for long-term needs like

retirement; regular portfolio disclosures on the other hand can enable

investors to make timely investment decisions.

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4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and ULIPs

segment are largely comparable. For example plans that invest their entire

corpus in equities (diversified equity funds), a 60:40 allotment in equity and

debt instruments (balanced funds) and those investing only in debt

instruments (debt funds) can be found in both ULIPs and mutual funds.

If a mutual fund investor in a diversified equity fund wishes to shift his corpus

into a debt from the same fund house, he could have to bear an exit load

and/or entry load.

On the other hand most insurance companies permit their ULIP inventors to

shift investments across various plans/asset classes either at a nominal or no

cost (usually, a couple of switches are allowed free of charge every year and

a cost has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset classes

as per his convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market

when the ULIP investor's equity component has appreciated, he can book

profits by simply transferring the requisite amount to a debt-oriented plan.

5. Tax benefits

ULIP investments qualify for deductions under Section 80C of the Income Tax

Act. This holds good, irrespective of the nature of the plan chosen by the

investor. On the other hand in the mutual funds domain, only investments in

tax-saving funds (also referred to as equity-linked savings schemes) are

eligible for Section 80C benefits.65


Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds

(for example diversified equity funds, balanced funds), if the investments are

held for a period over 12 months, the gains are tax free; conversely

investments sold within a 12-month period attract short-term capital gains tax

@ 10%.

Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%,

while a short-term capital gain is taxed at the investor's marginal tax rate.

Despite the seemingly similar structures evidently both mutual funds and

ULIPs have their unique set of advantages to offer. As always, it is vital for

investors to be aware of the nuances in both offerings and make informed

decisions.

66


Investing in ulips? Remember …………

The high returns (above 20 per cent) are definitely not sustainable over a

long term, as they have been generated during the biggest bull run in recent

stock market history.

The free hand given to ULIPs might prove risky if the timing of exit happens to

coincide with a bearish market phase, because of the inherently high equity

component of these schemes.

While a debt-oriented ULIP scheme might be superior to a debt option in a

conventional mutual fund due to tax concessions that insurance companies

enjoy, such tax incentives may not last.

Look beyond NAVs

The appreciation in the net asset value (NAV) of ULIPs barely indicate the

actual returns earned on your investment. The various charges on your policy

are deducted either directly from premiums before investing in units or

collected on a monthly basis by knocking off units.

Either way, the charges do not affect the NAV; but the number of units in your

account suffers. You might have access to daily NAVs but your real returns

may be substantially lower.

A rough calculation shows that if our investments earn a 12 per cent

annualised return over a 20-year period in a growth fund, when measured by

the change in NAV, the real pre- tax returns might be only 9 per cent. The

shorter the term, the lower the real returns.

67


How charges dent returns

An initial allocation charge is deducted from our premiums for selling,

marketing and broker commissions. These charges could be as high as 65

per cent of the first year premiums. Premium allocation charges are usually

very high (5-65 per cent) in the first couple of years, but taper off later. The

high initial charges mainly go towards funding agent commissions, which

could be as high as 40 per cent of the initial premium as per IRDA (Insurance

Regulatory and Development Authority) regulations.

The charges are higher for a linked plan than a non-linked plan, as the former

require lot more servicing than the latter, such as regular disclosure of

investments, switches, re-direction of premiums, withdrawals, and so on.

Insurance companies have the discretion to structure their expenses structure

whereas a mutual fund does not have that luxury. The expense ratios in their

case cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for a

debt plan respectively. The lack of regulation on the expense front works to

the detriment of investors in ULIPs.

The front-loading of charges does have an impact on overall returns as we

lose out on the compounding benefit. Insurance companies explain that

charges get evened out over a long term. Thus we are forced to stay with the

plan for a longer tenure to even out the effect of initial charges as the shorter

the tenure, the lower our real returns.

If we want to withdraw from the plan, you lose out, as you will have to pay

withdrawal charges up to a certain number of years.

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In effect, when we lock in our money in a ULIP, despite the promise of

flexibility and liquidity, we are stuck with one fund management style. This is

all the more reason to look for an established track record before committing

our hard-earned money.

Evaluate alternative options

As an investor we have to evaluate alternative options that give superior

returns before considering ULIPs.

Insurance companies argue that comparing ULIPs with mutual funds is like

comparing oranges with apples, as the objectives are different for both the

products.

Most ULIPs give us the choice of a minimum investment cover so that we can

direct maximum premiums towards investments.

Thus, both ULIPs and mutual funds target the same customers. If risk

cover is your primary objective, pure insurance plans are less expensive.

When we choose a mutual fund, we look for an established track record of

three to five years of consistent returns across various market cycles to judge

a fund's performance.

It is early days for insurance companies on this score; investing substantially

in linked plans might not be advisable at this juncture.

69


Try top-ups

Insurance companies allow us to make lump-sum investments in excess of

the regular premiums. These top-ups are charged at a much lower rate —

usually one to two per cent. The expenses incurred on a top-up including

agent commissions are much lower than regular premiums.

Some companies also give a credit on top-ups. For instance, if you pay in Rs

100 as a top up, the actual allocation to units will be Rs 101. If you keep the

regular premiums to the minimum and increase your top ups, you can save

up on charges, enhancing returns in the long run.

Reduce life cover

The price of the life cover attached to a ULIP is higher than a normal term

plan. Risk charges are charged on a daily or monthly basis depending on the

daily amount at risk. Rates are not locked and are charged on a one-year

renewal basis.

Our life cover charges would depend on the accumulation in your investment

account. As accumulation increases, the amount at risk for the insurance

company decreases. However, with increasing age, the cost per Rs 1,000

sum assured increases, effectively increasing your overall insurance costs. A

lower life cover could yield better returns.

70


Stay away from riders

Any riders, such as accident rider or critical illness rider, are also charged on

a one-year renewal basis. Opting for these riders with a plain insurance cover

could provide better value for money.

ULIP's as an investment is a very good vehicle for wealth creation ,but way

Unit Linked Insurance schemes are sold by insurance company

representative's and insurance advisors is not correct.

ULIP's usually have following charges built into it :

a) Up-front Charges

b) Mortality Charges ( Charges for providing the risk cover for life)

c) Administrative Charges

d) Fund Management Charges

Mutual Fund's have the following charges :

a) Up-front charges ( Marketing, Advertising, distributors fee etc.)

b) Fund Management Charges ( expenses for managing your fund)

71


A few aspects of investing in ULIPs versus mutual funds.

Liquidity

ULIPs score low on liquidity. According to guidelines of the Insurance

Regulatory and Development Authority (IRDA), ULIPs have a minimum term

of five years and a minimum lockin of three years. You can make partial

withdrawals after three years. The surrender value of a ULIP is low in the

initial years, since the insurer deducts a large part of your premium as

marketing and distribution costs. ULIPs are essentially long-term products

that make sense only if your time horizon is 10 to 20 years.

Mutual fund investments, on the other hand, can be redeemed at any time,

barring ELSS (equity-linked savings schemes). Exit loads, if applicable , are

generally for six months to a year in equity funds. So mutual funds score

substantially higher on liquidity.

Tax efficiency

ULIPs are often pitched as tax-efficient , because your investment is eligible

for exemption under Section 80C of the Income Tax Act (subject to a limit of

Rs 1 lakh). But investments in ELSS schemes of mutual funds are also

eligible for exemption under the same section .Besides the premium, the

maturity amount in ULIPs is also tax-free , irrespective of whether the

investment was in a balanced or debt plan. So they do have an edge on

mutual funds, as debt funds are taxed at 10% without indexation benefits, and

20% with indexation benefits. The point, though, is that if you invest in a debt

plan through a ULIP, despite its tax-efficiency your post-tax returns will be

low, because of high front-end costs. Debt mutual funds don’t charge such

costs.

72


Expenses

Insurance agents get high commissions for ULIPs, and they get them in the

initial years, not staggered over the term. So the insurer recovers most

charges from you in the initial years, as it risks a loss if the policy lapses.

Typically , insurers levy enormous selling charges, averaging more than 20%

of the first year’s premium, and dropping to 10% and 7.5% in subsequent

years. (And this is after investors balked when charges were as high as 65%!)

Compare this with mutual funds’ fees of 2.25% on entry, uniform for all

schemes. Different ULIPs have varying charges, often not made clear to

investors.

For instance, an agent who sells you a ULIP may get 25% of your first year’s

premium, 10% in the second year, 7.5% in the third and fourth year and 5%

thereafter. If your annual premium is Rs 10,000 and the agent’s commission

in the first year is 25%, it means only Rs 7,500 of your money is invested in

the first year. So even if the NAV of the fund rises, say 20%, that year, your

portfolio would be worth only Rs 9,000—much lower than the Rs 10,000 you

paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a

2.25% entry load, Rs 225 is deducted , and the rest is invested. If the

scheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows how

ULIPs work out expensive for investors. Deduct the cost of a term policy from

the mutual fund returns, and you’re still left with a sizeable difference.

73


74


75

Chapter – 2

SBI Mutual Fund

Company Profile

Awards & Achievements

Products

Major Funds of SBI Mutual Fund


STATE BANK OF INDIA MUTUAL FUND

Proven Skills in Wealth Generation

SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an

enviable track record in judicious investments and consistent wealth creation.

The fund traces its lineage to SBI - India’s largest banking enterprise. The

institution has grown immensely since its inception and today it is India's

largest bank, patronised by over 80% of the top corporate houses of the

country.

SBI Mutual Fund is a joint venture between the State Bank of India and

Société Générale Asset Management, one of the world’s leading

fund management companies that manages over US$ 500 Billion

worldwide.

76


Exploiting expertise, compounding growth

In twenty years of operation, the fund has launched 38 schemes and

successfully redeemed fifteen of them. In the process it has rewarded it’s

investors handsomely with consistently high returns.

A total of over 5.4 million investors have reposed their faith in the wealth

generation expertise of the Mutual Fund.

Schemes of the Mutual fund have consistently outperformed benchmark

indices and have emerged as the preferred investment for millions of

investors and HNI’s.

Today, the fund manages over Rs. 31,794 crores of assets and has a diverse

profile of investors actively parking their investments across 36 active

schemes.

The fund serves this vast family of investors by reaching out to them through

network of over 130 points of acceptance, 28 investor service centers, 46

investor service desks and 56 district organisers.

SBI Mutual is the first bank-sponsored fund to launch an offshore fund –

Resurgent India Opportunities Fund.

Growth through innovation and stable investment policies is the SBI MF

credo.

77


KEY PERSONNEL:

Mr. Achal K. Gupta

Managing Director & Chief Executive Office

Mr. C A Santosh

Chief Manager - Customer Service.

Mr. Didier Turpin

Dy. Chief Executive Officer

Ms. Aparna Nirgude

Chief Risk Officer

Mr. Ashwini Kumar Jain

Chief Operating Officer

Mr. Ashutosh P Vaidya

Company Secretary & Compliance Officer

Mr. Sanjay Sinha

Chief Investment Officer

Mr. Parijat Agrawal

Head – Fixed Income

78


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


PRODUCTS

EQUITY FUNDS:

The investments of these schemes will predominantly be in the stock markets

and endeavor will be to provide investors the opportunity to benefit from the

higher returns which stock markets can provide. However they are also

exposed to the volatility and attendant risks of stock markets and hence

should be chosen only by such investors who have high risk taking capacities

and are willing to think long term. Equity Funds include diversified Equity

Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in

various stocks across different sectors while sectoral funds which are

specialized Equity Funds restrict their investments only to shares of a

particular sector and hence, are riskier than Diversified Equity Funds. Index

Funds invest passively only in the stocks of a particular index and the

performance of such funds move with the movements of the index

Magnum COMMA Fund

Magnum Equity Fund

Magnum Global Fund

Magnum Index Fund

Magnum MidCap Fund

Magnum Multicap Fund

Magnum Multiplier Plus 1993

80


Magnum Sector Funds Umbrella

MSFU - Emerging Businesses Fund

MSFU - IT Fund

MSFU - Pharma Fund

MSFU - Contra Fund

MSFU - FMCG Fund

SBI Arbitrage Opportunities Fund

SBI Blue chip Fund

SBI Infrastructure Fund - Series I

SBI Magnum Taxgain Scheme 1993

SBI ONE India Fund

SBI TAX ADVANTAGE FUND - SERIES I

DEBT SCHEMES

Debt Funds invest only in debt instruments such as Corporate Bonds,

Government Securities and Money Market instruments either completely

81


avoiding any investments in the stock markets as in Income Funds or Gilt

Funds or having a small exposure to equities as in Monthly Income Plans or

Children's Plan. Hence they are safer than equity funds. At the same time the

expected returns from debt funds would be lower. Such investments are

advisable for the risk-averse investor and as a part of the investment portfolio

for other investors.

Magnum Children`s Benefit Plan

Magnum Gilt Fund

Magnum Gilt Fund (Long Term)

Magnum Gilt Fund (Short Term)

Magnum Income Fund

Magnum Income Plus Fund

Magnum Income Plus Fund (Saving Plan)

Magnum Income Plus Fund (Investment Plan)

Magnum Insta Cash Fund

Magnum InstaCash Fund -Liquid Floater Plan

Magnum Institutional Income Fund

Magnum Monthly Income Plan

Magnum Monthly Income Plan Floater

Magnum NRI Investment Fund

82


SBI Capital Protection Oriented Fund - Series I

SBI Premier Liquid Fund

SBI Short Horizon Fund

SBI Short Horizon Fund - Liquid Plus Fund

SBI Short Horizon Fund - Short Term Fund

83


BALANCED SCHEMES

Magnum Balanced Fund invest in a mix of equity and debt investments.

Hence they are less risky than equity funds, but at the same time provide

commensurately lower returns. They provide a good investment opportunity

to investors who do not wish to be completely exposed to equity markets, but

is looking for higher returns than those provided by debt funds.

Magnum Balanced Fund

Magnum NRI Investment Fund - FlexiAsset Plan

84


MAJOR FUNDS OF SBI MF

(EQUITY FUND)

Investment Objective

The objective of the scheme would be to generate opportunities for growth

along with possibility of consistent returns by investing predominantly in a

portfolio of stocks of companies engaged in the commodity business within

the following sectors - Oil& Gas, Metals, Materials & Agriculture and in debt &

money market instruments

Asset Allocation

Instrument % of Portfolio of

Plan A & B Risk Profile

Equity and equity related instruments of

commodity based companieswithin 65% – 100% High

Foreign Securities/ADRs/GDRs of

commodity based companies0% - 10% High

Fixed/Floating Rate Debt instruments

including derivatives0% - 30% Medium

Money Market instruments* 0% - 30% Low

85


Scheme Highlights

1.An open-ended equity scheme investing in stocks of commodity based

companies.

2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and

Growth options available.Reinvestment and payout facility available.

3.Dividends will be completely tax-free. Long term capital gains to be

completely tax-free. STT would be at the rate of 0.20% at the time of

repurchase.

Minimum Application

Rs. 5000 and in multiples of Rs. 1000

1. An open-ended equity scheme investing in stocks of commodity based

companies

2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and

Growth options available.Reinvestment and payout facility available.

3.Dividends will be completely tax-free. Long term

capital gains to be completely tax-free. STT would be

at the rate of 0.20% at the time of repurchase

Entry Load Exit Load

Investments below

Rs. 5 crores-2.25%

Investments of Rs.5

crores and above -

Investments below Rs. 5 crore, exit within 6 months

from the date of allotment – 1%, Investments below

Rs. 5 crore, exit between 6 months & 12 months from

the date of allotment – 0.5%, Investments below Rs.

86


NIL 5 crore, exit after 12 months from the date of

allotment – Nil, Investments of Rs. 5 crore and

above– Nil

SIP

Rs.500/month - 12 months

Rs.1000/month - 6months,

Rs.1500/quarter - 12 months

A minimum of Rs. 500 can be withdrawn every month or quarter by

indicating in the application form or by issuing advance instructions to

the Registrars at any time.

87


(DEBT FUND)


The objective of the scheme is to provide the investors an opportunity to earn,

in accordance with their requirements, through capital gains or through

regular dividends, returns that would be higher than the returns offered by

comparable investment avenues through investment in debt & money market

securities.

Asset Allocation



Corporate debentures &

Bonds/PSU/FI/Govt. Guaranteed

Bonds / Other including Securitised

Debt

Upto 90% High

Securitized DebtNot more than 10%

of in debtLow

Government Securities Upto 90% High

Cash & Call Money Upto 25% Medium

Money Market Instruments Upto 25% Mediom

Units of other mutual funds Upto 5% Low

88


Scheme Highlights

1.Open ended Debt Scheme 2. Following Plans are available to the

investors :(A) Growth Plan (B) Dividend Plan (C) Bonus Plan (D) Floating

Rate Plan Options available under Floating Rate Plan Short Term (Growth,

Dividend & Weekly Dividend)Long Term (Regular (Dividend & Growth) Long

Term (Institutional (Dividend & Growth)

2. The Plans will invest their entire corpus in high quality debt (Corporate

debentures, PSU/FI/Govt guaranteed bonds), Govt securities and money

market instruments (commercial paper, certificates of deposit, T-bills,

bills rediscounting, repos, short-term bank deposits, etc). There shall be

no investment in equity.

3. The Growth Plan / Option will give returns through capital gains only. No

dividends shall be declared under this Plan. The Dividend Plan will endeavour

to declare regular dividends every half year, depending on the NAV at that

point of time. The Dividend Option in Floating Rate Short Term Plan will

endeavour to declare dividends on a monthly basis while the dividend option

under the Floating Rate Plan Long Term (Regular and Institutional) Plan will

declare dividends on a quarterly basis.

4 Switchover between the Plans at NAV. :Also, switchover facility at the

NAV related prices to other openend schemes of SBI Mutual Fund is

available. This facility of switchover to other schemes is not available to NRIs

and FIIs

89



Nil Up Rs. 50 lacs : 0.5%; upto 6 months. Above Rs.

50 lacs : Nil

SIPSWP

Rs.500/month - 12 months

Rs.1000/month - 6months

Rs.1500/quarter - 12

months

Investors have the facility to switchover between

the Plans at NAV. Also, switchover facility at the

NAV related prices to other openend schemes of

SBI Mutual Fund is available. This facility of

switchover to other schemes is not available to

NRIs and FIIs

90


Magnum Balanced Fund


To provide investors long term capital appreciation along with the liquidity of

an open-ended scheme by investing in a mix of debt and equity. The scheme

will invest in a diversified portfolio of equities of high growth companies and

balance the risk through investing the rest in a relatively safe portfolio of debt.

Asset Allocation



Equities At least 50% Medium to High

Debt Instruments like debentures,

bonds,khokhas, etc. Up to 40%

Securitized Debt

Not more than 10%

of investments in

debt

Medium to High

Money Market Instruments Balance Low

Scheme Highlights

1.An open-ended scheme investing in a mix of debt and equity instruments.

Investors get the benefit of high expected-returns of equity investments with

the safety of debt investments in one scheme.

91


2. On an ongoing basis, magnums will be allotted at an entry load of 2.25% to

the NAV.

3. Scheme open for Resident Indians, Trusts, Indian Corporates, on a fully

repatriable basis for NRIs and, Overseas Corporate Bodies.

4. Facility to reinvest dividend proceeds into the scheme at NAV available.

5. Switchover facility to any other open-ended schemes of SBI Mutual Fund at

NAV related prices.

6. The scheme will declare NAV, Sale and repurchase price on a daily basis.

7. Nomination facility available for individuals applying on their behalf either

singly or jointly upto three.


Investments below Rs. 5

crores - 2.25%

Investments of Rs.5

crores and above - NIL

Investments below Rs. 5 crore, exit within 6

months from the date of allotment – 1%,

Investments below Rs. 5 crore, exit between 6

months & 12 months from the date of allotment –

0.5%, Investments below Rs. 5 crore, exit after 12

months from the date of allotment – Nil,

Investments of Rs. 5 crore and above– Nil

SIPSWP

Rs.500/month - 12

months Rs.1000/month -

6months

Rs.1500/quarter - 12

months

Systematic Withdrawal Plan (SWP): A minimum of

Rs. 500 can be withdrawn every month or quarter

by issuing advance instructions to the Registrars

at any time. There is also a facility of a Monthly

Pension Plan, whereby investors can withdraw a

minimum amount of Rs. 500/- every month.

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93


RESEARCH METHODOLOGY

OBJECTIVES:

To study about the mutual funds industry.

To study the approach of investors towards mutual funds and ulips.

To study the behavior of the investors whether they prefer mutual

funds or ulips?

SCOPE OF THE STUDY:

Subject matter is related to the investor’s approach towards mutual

funds and ulips.

People of age between 20 to 60

Area limited to Chandigarh.

Demographics include names, age, qualification, occupation, marital

status and annual income.

STEPS OF RESEARCH DESIGN:

Define the information needed:- This first step states

that what is the information that is actually required.

94


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 obtaining the information needed

to solve research problems. In this project, the research

design is explorative in nature.

Specify the scaling procedures:- Scaling involves

creating a continuum on which measured objects are

located. Both nominal and interval scales have been used

for this purpose.

Construct and pretest a questionnaire:- A

questionnaire is a formalized set of questions for obtaining

information from respondents. Where as pretesting refers

to the testing of the questionnaire on a small sample of

respondents in order to identify and eliminate potential

problems.

Population

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All the clients of State bank of India and State bank of Patiala

who are investing money in mutual funds and ulips, both.

Sample Unit

Investors and non-investors.

Sample Size

This study involves 50 respondents.

Sampling Technique:

The sample size has been taken by non-random convenience

sampling technique

Data Collection:

Data has been collected both from primary as well as

secondary sources as described below:

Primary sources

Primary data was obtained through questionnaires filled by

people and through direct communication with respondents in

the form of Interview.

Secondary sources

The secondary sources of data were taken from the various

websites , books, journals reports, articles etc. This mainly

provided information about the mutual fund and ulips industry in

India.

Plan for data analysis : Analysis of data is planned with

the help of mean, chi-square technique and analysis of

variance.

96


LIMITATIONS :

No study is free from limitations. The limitations of this study can be:

Sample size taken is small and may not be sufficient to predict the

results with 100% accuracy.

The result is based on primary and secondary data that has it’s own

limitations.

The study only covers the area of Chandigarh that may not be

applicable to other areas.

97


98


COMPARATIVE ANALYSIS OF MUTUAL FUNDS

AND ULIPS : What do investors prefer?

Do you invest in Mutual Funds ?

response Frequenc

y

Percentage

Yes 19 62%

No 31 38%

total 50 100

38%

62%

yes

no

INTERPRETATION:

62% of the people invest in mutual funds.

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If not, then what other option(s) do you prefer to invest?

Fixed deposits post office schemes

Recurring deposits

If others, please specify.

Options frequency percentages

Fixed deposits 11 45.83

Post office schemes 9 37.5

Recurring deposits 4 16.66

Total 24 100

Others: 7

.

100


what is the mode of information that you use for insurance

companies?

a) Advertisement b) Agents c) Seminar d) Work shops

options Frequenc

y

(observed-

expected

(observed-

expected)²

(observed-

expected)²/e

Advertisement

s

22 9.5 90.25 7.22

Agents 12 -.5 .25 .02

Seminar 7 -5.5 30.25 2.42

Workshop 9 -3.5 12.25 .98

Total 50 133 10.64

expected frequency= 50/4= 12.5

chi square= ∑ │observed-expected│² = 10.64

expected

Options Frequency percentage

Advertisement

s

22 44%

Agents 12 24%

Seminar 7 14%

Workshop 9 18%

total 50 100

101


at 3 degree of freedom, df(3)=7.815, thus the calculated value is greater than

the table value. Hence, H0 is rejected

44%

24%

14%

18%

advertisement

agents

seminar

workshops

Interpretation: It means that all the modes of information are not the

same. Advertisement is more popular

102


In which sector do you prefer to invest your money?

frequency

54%

46%government sector

private sector

Options Frequenc

y

Percentages

Government

sector

27 54

Private sector 23 46

total 50 100

Options Frequenc

y

Observed-

expected

(Observed-

expected)²

(observed-

expected)²/e

Government

sector

27 2 4 0.16

Private

sector

23 -2 4 0.16

total 50 -2 8 0.32

103



expected

at df(1), the table value is 3.841 which is greater than the calculated value.

Hence, H0 is accepted.

.

Interpretation: People prefer both the sectors equally.

At which rate do you want your investment to grow?

options frequenc

y

percentage

s

Steadily 17 34

At an average rate 13 26

fast 20 40

total 50 100

104


frequency

34%

26%

40% steadily

at an average rate

fast

interpretation: 40% of the respondents want their investments to grow

fastly

105

frequency

28%

30%

28%

8% 6%safety of principal

low risk

high returns

maturity period

terms and conditions


Which factor do you consider before investing in mutual fund or

Ulips (tick)

Options frequency percentage

s

Safety of

principal

14 28

Low risk 15 30

Higher

returns

14 28

Maturity

period

4 8

Terms and

conditions

3 6

Total 50 100

106


chi square=

∑

│observed-

expected│²

= 14.2

expected

at df(4), the table value is 9.488 which is less than the calculated value.

Hence , H0 is rejected

Interpretation: people prefer low risk as the most important factor

before investing in mutual funds or ulips.

Options frequenc

y

Observed-

expected

(Observed-

expected)²

(observed-

expected)²/e

Safety of

principal

14 4 16 1.6

Low risk 15 5 25 2.5

Higher

returns

14 4 16 1.6

Maturity

period

4 -6 36 3.6

Terms

and

conditions

3 -7 49 4.9

total 50 142 14.2

107


108


Imagine that stock market drops immediately after you invest

in it then what will you do?

Options frequency

Withdraw your money 8

Wait and watch 26

Invest more in it 16

frequency

16%

52%

32%withdraw your money

wait and watch

invest more in it

Interpretation: 26% of the respondents will wait and watch even if the

share market drops.

109


A. Do you have any other investment/insurance policy?

Options frequency Percentages

Yes 34 68

No 16 32

total 50 100

frequency

68%

32%

Yes

No

Interpretation: 68 % of the people had bought other investment

policies.

110


How often do you monitor your investment?

Options frequency

Daily 15

Monthly 25

Occasionally 10

frequency

30%

50%

20%

daily

monthly

occasionally

Options frequencyPercentages

Daily 1530

Monthly 2550

Occasionally 1020

total 50 100

111


Interpretation: It shows that most of the people .i.e. 50% prefer

monitoring their investment on monthly basis.

20% of the people monitor their investment occasionally.

Do you invest your money in share market?

Annual

Income

Total

Below

1,50,000

1,50,000-

2,50,000

2,50,000-

4,00,000

Above

4,00,000

Share

Market

No 12 3 3 6 24

Yes 3 4 6 13 26

Total 15 7 9 19 50

Annual

income

Frequency(yes) Observed-

expected

(Observed-

expected)²

(observed-

expected)²/e

Below

1,50,000

3 -3.5 12.25 1.884

1,50,000-

2,50,000

4 -2.5 6.25 0.961

2,50,000-

4,00,000

6 -.5 0.25 0.038

Above

4,00,000

13 6.5 42.25 6.5

total 26 0 61 9.383

Expected=26/4= 6.5

112



expected

at df(3), the table value is 7.815 which is less than the calculated value.

Hence, H0 is rejected.

Interpretation: it states that with the rise in income, the percentage of

people investing in share market also increases.

What percentage of your income do you invest?

Options Frequenc

y

percentage

s

0- 5% 26 52

5-10% 13 26

10-15% 11 22

total 50 100

113


frequency

52%

26%

22%

upto 5%

5-10%

10% % above

Options Frequency Mv Dx=MV-7.5/5 FdX

0-5 26 2.5 -1 -26

5-10 13 7.5 0 0

10-15 11 12.5 1 11

total 50 -15

MEAN= 7.5+ -15/20 * 5= 6%

INTERPRETATION: people invest around 6% of their income.

114


115


How long have you been investing in mutual funds

frequency

44%

34%

22%

1-5 years

5-10 years

10-15 years

Options Frequenc

y

Observed-

expected(Observed-

expected)²

(observed-

expected)²/e

1-5 years 9 2.67 7.1289 1.126

5-10

years

7 0.67 0.4489 0.0709

10-15

years

3 3.33 11.0889 1.751

total 19 18.6667 2.9479

Options Frequenc

y

Percentages

1-5 years 22 44

5-10 years 17 34

10-15 years 11 12

total 50 100

116



expected

at df(2), the table value is 5.991 which is greater than the calculated value.


Interpretation: This shows that people normally tend to invest for longer

term. There’s not much of a difference between the various time

periods.

In the past, you have invested mostly in (choose one):

options frequency Percentages

Savings A/cs & PO schemes 18 36

Mutual funds investing in bonds 6 12

Mutual funds investing in stocks 3 6

Balanced mutual funds 1 2

Individual stocks & bonds 5 10

Ulips 4 8

Other instruments like real estate,

gold

13 26

total 50 100

117


frequency

18%

6%

3%1%5%

4%

13%

50%

Savings A/cs &PO schemes

Mutual fundsinvesting in bonds

Mutual fundsinvesting in stocks

Balanced mutualfunds

Individual stocks &bonds

Ulips

Other instrumentslike real estate,gold

Interpretation: In the past maximum percentage of the respondents i.e

36% of the respondents have invested in saving a/c’s and po’s.

118


You would describe your financial situation as being:

Very unstable. Somewhat unstable.

Moderately stable. Stable.

Very stable

Options (X) Frequency ( ƒ) ƒ X ƒ x²

Very unstable(1) 11 11 11

Somewhat

unstable(2)

12 24 48

Moderately

stable(3)

9 27 81

Stable(4) 10 40 160

Very stable(5) 8 40 200

total 50 142 500

Sample mean = ∑Fx = 142 = 2.84

∑f 50

Standard deviation, σ = √ ∑ ƒ x² - ∑ƒx = 2.675

∑ ƒ ∑ƒ

Standard error = standard deviation = 2.675 = 0.3783

√n 7.07

Z= │Xs - Xp│= │2.84-3│= 0.4229

S.E 0.3783

119

frequency

32%

41%

27%

Low

Moderate

high


SINCE THE CALCULATED VALUE IS LESSER THAN THE TABLE VALUE

AT (.05) i.e 1.96,

Ho is accepted.

INTERPRETATION: the financial situation is moderately stable.

Your comfort level in making investment decisions can best be described

as:

options frequenc

y

Percentages

Low 14 32

Moderat

e

18 41

high 12 27

total 50 100

120


INTERPRETATION: 41% of the respondents are moderately

comfortable in making investment decisions.

If in the near future if you ever plan to invest in your money in any of

the mutual fund company, which would be your choice?

frequency

14%

16%

28%

22%

20% Sbi mutual fund

HDFC mutual fund

Reliance mutual fund

ABN AMRO mutual fund

others

Options frequenc

y

percentage

s

Sbi mutual fund 7 14

HDFC mutual fund 8 16

Reliance mutual fund 14 28

ABN AMRO mutual fund 11 22

others 10 20

total 50 100

Options Frequency (O) (O-E) (O-E)² (O-E)²/E

Sbi mutual fund 7 -3 9 0.9

HDFC mutual fund 8 -2 4 0.4

Reliance mutual fund 14 4 16 1.6

ABN AMRO mutual fund 11 1 1 0.1

others 10 0 0 -

total 50 0 30 3.0

121



expected

At df(4), the table value is 9.488 which is greater than the calculated value.


Interpretation : People mostly prefer all the brands equally for their

future investments.

122


DEMOGRAPHICS

58% of people belong to 25-35 age group and on the other hand only

17% of people belong to above 40 age group.

17% of the people are under graduate.

52% of the people are graduates, and

31% of the people are post graduates.

55% of the people are married

45% of the people are unmarried.

31% of the people are having their own business.

31% of the people are salaried.

25% are professionals.

8% are housewives.

5% are retired.

24% of the people belong to below 1,50,000 income group.

123


36% of the people belong to1,50,000 – 2,50,000 income group.

33% of the people belong to 2,50,000 – 4,00,000 income group.

Only 7% of the people belong to above 4,00,000 income group.

124


125


A mutual fund is the ideal investment vehicle for today’s complex and

modern financial scenario. Markets for equity shares, bonds and

other fixes income instruments, real estate, derivatives and other

assets have become mature and information driven. Today each and

every person is fully aware of every kind of investment proposal.

Everybody wants to invest money, which entitled of low risk, high

returns and easy redemption. In my opinion before investing in

mutual funds, one should be fully aware of each and everything.

At the same time Ulips as an investment avenue is good for people

who has interest in staying for a longer period of time, that is around

10 years and above. Also in the coming times, Ulips will grow faster.

Ulips are actually being publicized more and also the other traditional

endowment policies are becoming unattractive because of lower

interest rate. It is good for people who were investing in ULIP policies

of insurance companies as their investments earn them a better

return than the other policies.

126


FINDINGS

Highest number of investors comes from the salaried class.

Highest number of investors comes from the age group of 25-

35.

Most of the people have been investing their money n the

share market belong to Rs.400000 and above income group.

Mostly investors prefer monitoring their investment on monthly

basis.

Most of the people invest upto 6% of their annual income in

mutual funds.

Most of the people between the age group of 25– 35 invest

their money in share market.

127


RECOMMENDATIONS

The performance of the mutual fund depends on the previous years Net Asset

Value of the fund. All schemes are doing well. But the future is uncertain. So,

the AMC (Asset under Management Companies) should take the following

steps: -

1. The people do not want to take risk. The AMC should launch

more diversified funds so that the risk becomes minimum. This

will lure more and more people to invest in mutual funds.

2. The expectation of the people from the mutual funds is high. So,

the portfolio of the fund should be prepared taking into

consideration the expectations of the people.

3. Try tp reduce fund charges, administration charges and other

charges which helps to invest more funds in the security market

and earn good returns.

4. Diffferent campaigns should be launched to educate people

regarding mutual funds.

5. companies should give regular dividends as it depicts

profitability.

6. Mutual funds should concentrate on differentiating the portfolio

of their MF than their competitors MF

7. Companies should give handsome brokerage to brokers so that

they get attracted towards distribution of the funds.

128


BIBLIOGRAPHY

www.amfiindia.com

www.principalindia.com

www.investorsguide.com

www.moneycontrol.com

www.mutualfundsindia.com

www.sbimf.com

www.sebi.co.in

129


130


QUESTIONNAIRE

I am Priyanka Manocha pursuing MBA from Gian Jyoti institute of

management and technology, Mohali. As a part of the curriculum I

am doing research on “COMPARATIVE ANALYSIS OF MUTUAL

FUNDS AND ULIPS”. Kindly help me in the same by filling the

Questionnaire. Your response would be kept strictly confidential and

would be used only for academic research.

Do you invest in Mutual Funds or Ulips?

Yes No

If not, then what other option(s) do you prefer to invest?

Fixed deposits post office schemes

Recurring deposits

If others, please specify.

How do you get the information of the various Insurance

Companies?

a) Advertisement b) Agents c) Seminar d) Work shops

131


In which sector do you prefer to invest your money?

a) Private Sector ( ) b) Government Sector ( )

At which rate do you want your investment to grow?

o Steadily

o At an average rate

o Fast

Which factor do you consider before investing in mutual fund or

Ulips? (tick)

Safety of principal

Low risk

High returns

Maturity period

Terms and conditions

Do you invest your money in share market?

Yes ( ) no( )

Imagine that stock market drops immediately after you invest in it

then what will you do?

Withdraw your money

Wait and watch

Invest more in it

132


Do you have any other investment/insurance policy?

Yes ( ) No ( )

How often do you monitor your investment?

o Daily

o Monthly

o Occasionally

What percentage of your income do you invest?

0-5% ( ) 5-10% ( ) 10-15% ( )

How long have you been investing in mutual funds?

o For the last 1-5 years

o For the last 5-10 years

o For the last 10 – 15 years

133


In the past, you have invested mostly in (choose one):

Savings A/cs & PO schemes ( ) Mutual funds investing in bonds ( )

Mutual funds investing in stocks ( ) Balanced mutual funds ( )

Individual stocks & bonds ( ) Ulips ( )

Other instruments like real estate, gold ( )

You would describe your financial situation as being:

Very unstable. ( ) Somewhat unstable ( ).

Moderately stable. ( ) Stable. ( )

Very stable ( )

Your comfort level in making investment decisions can best be described as

Low ( ) moderate ( ) high ( )

If in the near future if you ever plan to invest in your money in any of

the mutual fund company, which would be your choice?

Sbi mutual fund ( ) HDFC mutual fund ( )

Reliance mutual fund ( ) ABN AMRO mutual fund ( )

others ( )

134


PERSONAL DETAILS

Name: ………………………………………………………………

Age Group:

Below 20

Between 20-30

Between 30-40

Above 40

Qualification:

Under graduate Graduate

Post graduate Other:_______________

Occupation:

Salaried Business Housewife

Professional Retired Other: _________

Marital status: Single Married

Annual income:

Below Rs 1,50,000 Rs 1,50,000-

Rs2,50,000 135


Rs 2,50,000-Rs 4,00,000 Above Rs 4,00,000

136

Date post:	02-Dec-2015
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