PUNJAB TECHNICAL

UNIVERSITY

A
Project
On
Mutual Funds & ULIPS

In partial fulfillment of the requirement of two years full time

Masters of Business Administration (MBA) Program

(2009-2011)

Of

Asian Business School, Noida

201301

UNDER THE GUIDENCE OF: SUBMITTED BY:

 PROF.LALITHA RAVI HEERA SINGH

3rd Semester

CONTENTS

S.No. Particulars Page No.

1 Mutual Funds – An overview 1-3

2 How does Mutual fund Work? 4
3 Basic Terminologies of Mutual Funds 5-7
4 Types of MF Schemes 8-15
5 Types Of Return 16
6 NAV - Calculation 17-18
7 List OF Mutual Funds Companies In 19
India
8 Advantages of Mutual Funds 20-21
9 Disadvantages of Mutual Funds 22
10 Mutual Funds Industry In India 23-26
11 Growth of Asset Under Management 27
12 SWOT Analysis 28-29
13 Special Feature! 30-31
Unit Linked Insurance Products
 -An Introduction
15 Insurance – Industry Profile 32-33
16 Purpose & Need of Insurance 34
17 Insurance Regulatory And 35
Development Authority(IRDA)
18 Role Of Life Insurance 36-37
19 Advantages Of Life Insurance 38-39
20 Working Of ULIPs 40-41
21 Charges, Fee & Deductions In ULIPs 42-43
22 Unit Funds 44-45
23 SEBI-IRDA Tiff – Who wins who loses 46-49
24 Bibliography 50
 PREFACE

Investing money where the risk is less has always been risky to decide.

The first factor, which an investor would like to see before investing, is risk

factor. Diversification of risk gave birth to the phenomenon called Mutual

Fund. We are preparing comprehensive report of Mutual Fund industry in

India. The basic idea of assignment of this project is to augment our

knowledge about the industry in its totality and appreciate the use of an

integrated loom. It is concerned the environmental issues and tribulations.

This makes us more Conscious about Industry and its pose and makes us

capable of analyzing Industry’s position in the competitive market. This may

also enhance our logical abilities. The Mutual Fund Industry is in the

growing stage in India, which is evident from the flood of mutual funds

offered by the Banks, Financial Institutes & Private Financial Companies.

Unit linked insurance plan (ULIP) is life insurance solution that provides for

the benefits of risk protection and flexibility in investment. The investment is

denoted as units and is represented by the value that it has attained called

as Net Asset Value (NAV). The policy value at any time varies according to
the value of the underlying assets at the time. In a ULIP, the invested

amount of the premiums after deducting for all the charges and premium

for risk cover under all policies in a particular fund as chosen by the policy

holders are pooled together to form a Unit fund. A Unit is the component of

the Fund in a Unit Linked Insurance Policy. The returns in a ULIP depend

upon the performance of the fund in the capital market. ULIP investors

have the option of investing across various schemes, i.e., diversified equity

funds, balanced funds, debt funds etc. It is important to remember that in a

ULIP, the investment risk is generally borne by the investor. In a ULIP,

investors have the choice of investing in a lump sum (single premium) or

making premium payments on an annual, half-yearly, quarterly or monthly

basis. Investors also have the flexibility to alter the premium amounts

during the policy's tenure.

There are various aspects, which have been studied in detail in the project

and have been added to this project report. Hope this report would help

one understand the Mutual Fund Industry and ULIPS of India in detail.
 ACKNOWLEDGEMENT

I am indebted to a multitude of persons who have provided me

with valuable help during our endeavor of research. The project
would not have seen the illumination of the day without the efforts
of the many who managed the show in the wings. I am thankful to
all people who have put in great efforts and gave me guidance for
the successful completion of the project.

I am indeed grateful to Prof.Lalitha Ravi for providing me the

guidance, advice, constructive suggestions and faith in my ability
inspired to perform well who gave me a valuable opportunity of
involving me in studying this project. Preparing a project of this
nature is an arduous task and I am fortunate enough to get
support from a large number of people to whom we shall always
remain grateful.

Finally, I thank all those who directly and indirectly contributed to

this project.

Heera Singh
 Mutual Funds
A Mutual Fund is a body corporate that pools the savings of a number of investors and

invests the same in a variety of different financial instruments, or securities.

A mutual fund is a professionally managed type of collective investment scheme that

pools money from many investors and invests it in stocks, bonds, short-term money

market instruments, and/or other securities

Before we understand mutual funds in detail, it’s very important to know the area in

which mutual funds works, the basic understanding of stocks and bonds.

Stocks: Stocks represent shares of ownership in a public company. Examples of public

Companies include Reliance, ONGC and Infosys. Stocks are considered to be the most

Common owned investment traded on the market.

Bonds: Bonds are basically the money which you lend to the government or a

company, and in return you can receive interest on your invested amount, which is back

over predetermined amounts of time. Bonds are considered to be the most common

lending investment traded on the market. There are many other types of investments

other than stocks and bonds (including annuities, real estate, and precious metals), but

the majority of mutual funds invest in stocks and/or bonds.

What Is Mutual Fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a

group of investors to pool their money together with a predetermined investment

objective. A mutual fund is a company that pools the money of many investors to invest

in a variety of different securities. Investment may be in stocks, bonds, debentures,

money market or combination of these. These securities are professionally managed on

the behalf of investor, by the fund manager.

The mutual fund will have a fund manager who is responsible for investing the gathered

Money into specific securities (stocks or bonds). When we invest in a mutual fund, you

are buying units or portions of the mutual fund and thus on investing becomes a

shareholder or unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to

others they are very cost efficient and also easy to invest in, thus by pooling money

together in a mutual fund, investors can purchase stocks or bonds with much lower

trading costs than if they tried to do it on their own. But the biggest advantage to mutual

funds is diversification, by minimizing risk & maximizing returns.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an

Opportunity to invest in a diversified, professionally managed basket of securities at a

relatively low cost.

The flow chart below describes broadly the working of a
mutual fund.
Mutual Fund Basic Terminologies

An Asset Management Company is the fund house or the company that

manages the money.

The Mutual fund is a trust registered under the Indian Trust Act. It is

initiated by a sponsor. A sponsor is a person who acts alone or with a

corporate to establish a mutual fund. The sponsor then appoints an AMC to

manage the investment, marketing, accounting and other functions

pertaining to the fund.

Trust or Trustee Company -They form mutual funds under existing Trust

or Companies Acts.Trust managed by the Trustees and Trustee

Companies are managed by the Board of Directors.

Asset Management Company (AMC) - Undertakes the administration &

investment activities of the fund.

Custodian-He/She is an independent entity who is responsible for

safekeeping the fund’s assets.

Registrars/Transfer Agents- They handle sales and redemption related

activities of the fund.They also maintain records of the shareholders and

send the payment cheques to the investors.

Distributors-They are the funds distributors/underwriters to handle the

sales of units.The underwriters act as a wholesale selling units to the

brokers who in turn sell to the retail investors.

Functional Entities in MF Operations

Type of Mutual Fund Schemes

 BY STRUCTURE

Open Ended Schemes

An open-end 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-end schemes is liquidity.

Close Ended Schemes

A closed-end fund has a stipulated maturity period which generally ranging

from 3 to15 years. The fund is open for subscription only during a specified

period. Investors can invest in the scheme at the time of the initial public

issue and thereafter they can buy or sell the units of the scheme on the

stock exchanges where they are listed. In order to provide an exit route to

the investors, some close-ended funds give an option of selling back the

units to the Mutual Fund through periodic repurchase at NAV related

prices. SEBI Regulations stipulate that at least one of the two exit routes is

provided to the investor.

Interval Schemes

Interval Schemes are that scheme, which combines the features of open-

ended and Close-ended schemes. The units may be traded on the stock

exchange or may be open for sale or redemption during pre-determined

intervals at NAV related prices.

BY NATURE

Under this the mutual fund is categorized on the basis of Investment

Objective. By nature the mutual fund is categorized as follow:

1. Equity fund:

These funds invest a maximum part of their corpus into equities holdings.

The structure of the fund may vary different for different schemes and the

fund manager’s outlook on different stocks. The Equity Funds are sub-

classified depending upon their investment objective, as follows:

 Diversified Equity Funds

 Mid-Cap Funds

 Sector Specific Funds

  Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds

rank high on the risk-return matrix.

2. Debt funds:

The objective of these Funds is to invest in debt papers. Government

authorities, private companies, banks and financial institutions are some of

the major issuers of debt papers. By investing in debt instruments, these

funds ensure low risk and provide stable income to the investors. Debt

funds are further classified as:

 Gilt Funds: Invest their corpus in securities issued by Government,

popularly known as Government of India debt papers. These Funds

carry zero Default risk but are associated with Interest Rate risk.

These schemes are safer as they invest in papers backed by

Government.

 Income Funds: Invest a major portion into various debt instruments

such as bonds, corporate debentures and Government securities.

 MIPs: Invests maximum of their total corpus in debt instruments while

they take minimum exposure in equities. It gets benefit of both equity

and debt market. These scheme ranks slightly high on the risk-return

matrix when compared with other debt schemes.

 SIPs: Systematic Investment Plan is a vehicle offered by mutual

funds to help you save regularly. It is just like a recurring deposit with

the post office or bank where you put in a small amount every month.

The difference here is that the difference here is that the amount is

invested in a mutual fund. The minimum amount to be invested can

be as small as Rs 100 and the frequency of investment is usually

monthly or quarterly.

 Short Term Plans (STPs): Meant for investment horizon for three to

six months. These funds primarily invest in short term papers like

Certificate of Deposits (CDs) and Commercial Papers (CPs). Some

portion of the corpus is also invested in corporate debentures.

 Liquid Funds: Also known as Money Market Schemes, These funds

provides easy liquidity and preservation of capital. These schemes

invest in short-term instruments like Treasury Bills, inter-bank call

money market, CPs and CDs. These funds are meant for short-term

cash management of corporate houses and are meant for an

investment horizon of 1day to 3 months. These schemes rank low on

risk-return matrix and are considered to be the safest amongst all

categories of mutual funds.

3. Balanced funds: As the name suggest they, are a mix of both equity

and debt funds. They invest in both equities and fixed income securities,

which are in line with pre-defined investment objective of the scheme.

These schemes aim to provide investors with the best of both the worlds.

Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the

basis of investment parameter viz,

Each category of funds is backed by an investment philosophy, which is

pre-defined in the objectives of the fund. The investor can align his own

investment needs with the funds objective and invest accordingly.

 Growth Schemes: Growth Schemes are also known as equity

schemes. The aim of these schemes is to provide capital appreciation

over medium to long term. These schemes normally invest a major

part of their fund in equities and are willing to bear Short-term decline

in value for possible future appreciation.

 Income Schemes: Income Schemes are also known as debt

schemes. The aim of these schemes is to provide regular and steady

income to investors. These schemes generally invest in fixed income

securities such as bonds and corporate debentures. Capital

appreciation in such schemes may be limited.

 Balanced Schemes: Balanced Schemes aim to provide both

growth and income by periodically distributing a part of the income

and capital gains they earn. These schemes invest in both shares

and fixed income securities, in the proportion indicated in their offer

documents (normally 50:50).

 Money Market Schemes: Money Market Schemes aim to provide

easy liquidity, Preservation of capital and moderate income. These

schemes generally invest in safer, Short-term instruments, such as

treasury bills, certificates of deposit, commercial paper and inter-bank

call money.

OTHER SCHEMES

 Tax Saving Schemes: Tax-saving schemes offer tax rebates to

the investors under tax laws prescribed from time to time. Under

Sec.88 of the Income Tax Act, contributions made to any Equity

Linked Savings Scheme (ELSS) are eligible for rebate.

 Index Schemes: Index schemes attempt to replicate the

performance of a particular index such as the BSE Sensex or the

NSE 50. The portfolio of these schemes will consist of only those

stocks that constitute the index. The percentage of each stock to

the total holding will be identical to the stocks index weightage.

 Sector Specific Schemes: These are the funds/schemes which

invest in the securities of only those sectors or industries as specified

in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving

Consumer Goods (FMCG), Petroleum stocks,etc. The returns in

these funds are dependent on the performance of the respective

Sectors/industries.
Types of returns:

There are three ways, where the total returns provided by mutual funds can

be enjoyed by investors:

 Income is earned from dividends on stocks and interest on bonds. A

fund pays out nearly all income it receives over the year to fund

owners in the form of a distribution.

 If the fund sells securities that have increased in price; the fund has a

capital gain. Most funds also pass on these gains to investors in a

distribution.

 If fund holdings increase in price but are not sold by the fund

manager, the fund's Shares increase in price. You can then sell your

mutual fund shares for a profit. Funds will also usually give you a

choice either to receive a check for distributions or to reinvest the

earnings and get more shares.

NET ASSET VALUE (NAV)

The net asset value of the fund is the cumulative market value of the assets

fund net of its liabilities. In other words, if the fund is dissolved or liquidated,

by selling off all the assets in the fund, this is the amount that the

shareholders would collectively own. This gives rise to the concept of net

asset value per unit, which is the value, represented by the ownership of

one unit in the fund. It is calculated simply by dividing the net asset value of

the fund by the number of units. However, most people refer loosely to the

NAV per unit as NAV, ignoring the "per unit". We also abide by the same

convention.

Calculation of NAV

The most important part of the calculation is the valuation of the assets

owned by the fund. Once it is calculated, the NAV is simply the net value of

assets divided by the number of units outstanding. The detailed

methodology for the calculation of the asset value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued
 Amount due on unpaid asset

Expenses accrued but not paid

Details on the above items

EXAMPLE

Mr. A has invested in a regular investment SIP of Rs.100 for 10 months.

Mr. A has also paid the broker post-dated cheques to be encashed on the
10th of every month starting 10th April 2010.

The unit price of NAV is as follows starting April 2010

Rs.11.79, Rs.12.11, Rs.11.17, Rs.11.62, Rs. 13.59, Rs. 13.82, Rs.11.82,

Rs.10.30, Rs.10.38, Rs.9.74

What are the no of units acquired by Mr. A every month and also find out
the Average Unit price at the end of 10th month?

Soln.
Systematic Investment Plan statement of Mr. A
Unit Units
Regular Investment Prices acquired
(on 10th of every
month)
(No. of
(in Rs.) (in Rs.) units)
10-04-2010 100 11.79 8.48
10-05-2010 100 12.11 8.26
10-06-2010 100 11.17 8.95
10-07-2010 100 11.62 8.61
10-08-2010 100 13.59 7.36
10-09-2010 100 13.82 7.24
10-10-2010 100 11.82 8.46
10-11-2010 100 10.3 9.71
10-12-2010 100 10.38 9.63
10-01-2011 100 9.74 10.27
1000 116.34 86.96
Average Unit
Price 11.634
MUTUAL FUND COMPANIES IN INDIA

1. ABN AMRO Mutual Fund

2. Birla Sun Life Mutual Fund
3. Bank of Baroda Mutual Fund (BOB Mutual Fund)
4. HDFC Mutual Fund
5. HSBC Mutual Fund
6. ING Vysya Mutual Fund
7. Prudential ICICI Mutual Fund
8. Sahara Mutual Fund
9. State Bank of India Mutual Fund
10. Tata Mutual Fund
11. Kotak Mahindra Mutual Fund
12. Unit Trust of India Mutual Fund
13. Reliance Mutual Fund
14. Standard Chartered Mutual Fund
15. Franklin Templeton India Mutual Fund
16. Morgan Stanley Mutual Fund India
17. Escorts Mutual Fund
18. Alliance Capital Mutual Fund
19. Benchmark Mutual Fund
20. Canbank Mutual Fund
21. Chola Mutual Fund
22. GIC Mutual Fund
23. LIC Mutual Fund
24. Fidelity Mutual Fund
25. IL&FS Mutual Fund
26. DSP Merill lynch Mutual Fund
27. Sundaram Mutual Fund
28. Principal Mutual Fund
29. Taurus Mutual Fund
30. Deutsche Mutual fund
31. IDBI Investment Company Ltd.
32. Bank of India Mutual Fund
ADVANTAGES OF MUTUAL FUNDS

1. Professional Management - The basic advantage of funds is that,

they are professional managed, by well qualified professional. Investors

purchase funds because they do not have the time or the expertise to

manage their own portfolio. A mutual fund is considered to be relatively

less expensive way to make and monitor their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying

individual stocks or bonds, the investors risk is spread out and minimized

up to certain extent. The idea behind diversification is to invest in a large

number of assets so that a loss in any particular investment is minimized by

gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of

securities at a time, thus help to reducing transaction costs, and help to

bring down the average cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows

investors to liquidate their holdings as and when they want.

5. Simplicity - Investments in mutual fund is considered to be easy,

compare to other available instruments in the market, and the minimum

investment is small. Most AMC also have automatic purchase plans

whereby as little as Rs. 2000, where SIP start with just Rs.50 per month

basis.

6. Tax benefits.

We do not have to pay any taxes on dividends issued by mutual funds. We

also have the advantage of capital gains taxation. Tax-saving schemes and

pension schemes give us the added advantage of benefits under section

88.

DISADVANTAGES OF MUTUAL FUNDS:

1. Professional Management- Some funds don’t perform in neither

the market, as their management is not dynamic enough to explore the

available opportunity in the market, thus many investors debate over

whether or not the so-called professionals are any better than mutual fund

or investor himself, for picking up stocks.

2. Costs – The biggest source of AMC income is generally from the entry

& exit load which they charge from investors, at the time of purchase. The

mutual fund industries are thus charging extra cost under layers of jargon.

3.Dilution - Because funds have small holdings across different

companies, high returns from a few investments often don't make much

difference on the overall return. Dilution is also the result of a successful

fund getting too big. When money pours into funds that have had strong

success, the manager often has trouble finding a good investment for all

the new money.

4. Taxes - When making decisions about your money, fund managers

don't consider your personal tax situation.

Mutual Funds Industry in India

The origin of mutual fund industry in India is with the introduction of the

concept of mutual fund by UTI in the year 1963. Though the growth was

slow, but it accelerated from the year 1987 when non-UTI players entered

the industry.

In the past decade, Indian mutual fund industry had seen dramatic

improvements, both quality wise as well as quantity wise. Before, the

monopoly of the market had seen an ending phase; the Assets under

Management (AUM) were Rs. 67bn. The private sector entry to the fund

family rose the AUM to Rs. 470 in March 1993 and till April 2004, it reached

the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds

Industry into comparison, the total of it is less than the deposits of SBI

alone, constitute less than 11% of the total deposits held by the Indian

banking industry.

The main reason of its poor growth is that the mutual fund industry in India

is new in the country. Large sections of Indian investors are yet to be

intellectuated with the concept. Hence, it is the prime responsibility of all

mutual fund companies, to market the product correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to

the development of the sector.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament.

It was set up by the Reserve Bank of India and functioned under the

Regulatory and administrative control of the Reserve Bank of India. In 1978

UTI was de-linked from the RBI and the Industrial Development Bank of

India (IDBI) took over the regulatory and administrative control in place of

RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end

of 1988 UTI had Rs.6, 700 crores of assets under management.

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

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by

Canbank 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 in 1989 and GIC in 1990. The end of

1993 marked Rs.47, 004 as assets under management.

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.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry

now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign

mutual funds setting up funds in India and also the industry has witnessed

several mergers and acquisitions. As at the end of January 2003, there

were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit

Trust of India with Rs.44, 541 crores of assets under management was way

ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two

separate entities. One is the Specified Undertaking of the Unit Trust of

India with AUM of Rs.29, 835 crores (as on January 2003). 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 AUM 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.

 SWOT ANALYSIS

Strengths

 SEBI/AMFI has taken an active role in protecting investor’s interest

through regulations certifications and code of conduct .

 Open product architecture i.e. distributors offer a range of Mutual

fund products to choose from.

 Has often added as a counterbalance to equity market volatility and

market liquidity.

Weakness

 Limited channels of distribution i.e. banks and agent account for more

than 70% of distribution of mutual funds.

 Lack of effort of wealth managers in educating the market about the

mutual products has been the cause of low penetration

 Absence of global policies on global mutual funds

 Opportunities

 Mutual fund investment as a % of Household savings invested in

financial assets is less than 1%

 Because of the economic growth, investors are actively diversifying

their income into various funds.

 Mutual funds in India permitted to invest up to 10 % of the net assets

abroad in foreign securities

Threats

 Large number of substitutes available to Indian investor- Deposit,

equities and real estate.

 In India low risk investment products like PPF offer high returns.

 As more foreign players enter India through the JV route, investors in

India will need to educate themselves about abroad risks.

SPECIAL FEATURE:

Unit Linked Insurance Plans (ULIPs)

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life

insurance policy which provides a combination of risk cover and

investment. The dynamics of the capital market have a direct bearing on

the performance of the ULIPs.

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

closest to mutual funds in terms of their structure and functioning. ULIPs is

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 ,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.

ULIPs are a category of goal-based financial solutions that combine the

safety of insurance protection with wealth creation opportunities. In ULIPs,

a part of the investment goes towards providing you life cover. The residual

portion of the ULIP is invested in a fund which in turn invests in stocks or

bonds; the value of investments alters with the performance of the

underlying fund opted by you.

Simply put, ULIPs are structured in such that the protection element and

the savings element are distinguishable, and hence managed according to

your specific needs. In this way, the ULIP plan offers unprecedented

flexibility and transparency.

“REMEMBER THAT IN A UNIT LINKED POLICY, THE INVESTMENT

RISK IS GENERALLY BORNE BY THE INVESTOR”

INSURANCE

INDUSTRY PROFILE

Many may not be aware that the life insurance industry of India is as old as

it is in any other part of the world. The first Indian life insurance company

was the Oriental Life Insurance Company, which was started in India in

1818 at Kolkata.

A number of players (over 250 in life and about 100 in non-life) mainly with

regional focus flourished all across the country. However the government of

India, concerned by the unethical standard adopted by some player against

the consumers, nationalized the industry in two phases in 1956(life) and in

1972(non-life).The insurance business of the country was then brought

under two public sector companies, Life Insurance Corporation of India

(LIC) and General insurance Corporation of India (GIC).

In line with the economic reforms that were ushered in India in early

nineties, the Government set up a committee on reforms (popularly called

the Malhotra Committee) in April 1993 to suggest reforms in the insurance

sector. The Committee recommended throwing open the sector to private

player to usher in competition and bring more choice of the consumers.

The objective of the insurance to penetration of insurance as a percentage

of GDP, which remains low in India even compared to Insurance

Regulatory and Development Authority (IRDA) Bill in 1999. IRDA was set

up as an independent regulatory, which has put in place regulations in line

with global norms. So far it is not made public.

PURPOSE & NEED OF INSURANCE
Assets are insured, because they are likely to be destroyed, through

accidental occurrences. Such possible occurrences are called perils. Fire,

flood, breakdown, lightening, earthquake, etc. are perils. If such perils can

cause damage to the assets, we say that the asset is exposed to that risk.

Perils are the events. Risks are the consequential losses or damages.

The risk to an owner of a building, because of the peril of earthquake, may

be a few crores of rupees, depending on the cost of the building and the

contents in it.

Insurance does not protect the asset. It does not prevent its loss due to the

peril. The peril cannot be avoided through insurance. The peril can

sometimes be avoided, through better safety and damage control

management. Insurance only tries to reduce the impact of risk on the owner

of the asset and those who depend on that asset. It only compensates the

losses- and that too, not fully. Only economic consequences can be

insured. If the loss is not financial, insurance may not be possible.

Examples of non- economic losses are love and affection of parents,

leadership of managers, sentimental attachments to family heirlooms,

innovative and creative abilities, etc.

 THE INSURANCE REGULATORY AND
DEVELOPMENT AUTHORITY
Reforms in the Insurance sector were initiated with the passage of the

IRDA Bill in Parliament in December 1999. The IRDA since its

incorporation as a statutory body in April 2000 has fastidiously stuck to its

schedule of framing regulations and registering the private sector insurance

companies

The other decision taken simultaneously to provide the supporting systems

to the insurance sector and in particular the insurance companies was the

launch of the IRDA’s online services for issue and renewal of licenses to

agents.

The approval of institutions for imparting training to agents has also

ensured that the insurance companies would have a trained workforce of

insurance agents in place to sell their products, which are expected to be

introduced by early next year.

Since being set up as an independent statutory body the IRDA has put in a

framework of globally compatible regulations. In the private sector 12 life

insurance and 6 general insurance companies have been registered.

ROLE OF LIFE INSURANCE
Life insurance as “Investment”

 Insurance is an attractive option for investment. Which most people

recognize the risk hedging and tax saving potential of insurance,

many are not aware of its advantages as an investment option as

well. Insurance products yield more compared to regular investment

options.

 We cannot compare an insurance product with other investment

schemes for the simple reason that it offers financial protection from

risks, something that is missing in non-insurance products. In fact, the

premium we pay for an insurance policy is an investment against risk.

Thus before comparing with other schemes, we must accept that a

part of the total amount invested in life insurance goes towards

providing for the risk cover, while the rest is used for savings.

2. Life insurance as “Risk cover”

 First and foremost, insurance is about risk cover and protection –

financial protection, to be more precise – to help outlast life’s

unpredictable losses. By buying life insurance, you buy peace of

 mind and are prepared to face any financial demand that would hit

the family in case of an untimely demise.

 To provide such protection, insurance firms collect contributions

from many people who face the same risk. A loss claim is paid out

of the total premium collected by the insurance companies, who act

as trustees to the monies.

 Insurance also provides a safeguard in the case of accidents or a

drop in income after retirement.

3. Life insurance as “Tax planning”

 Insurance serves as an excellent tax saving mechanism too. The

Government of India has offered tax incentives to life insurance

products in order to facilitate the flow of funds into productive

assets. Under section 80(c) of Income Tax Act 1961,an individual is

entitled to a rebate of Rs.1Lakh on the annual premium payable on

his/her life and life of his/her children or adult children. The rebate is

deductible from tax payable by the individual or a Hindu Undivided

Family (HUF), the rebate is deductible from the tax liability of an

individual or a Hindu Undivided Family.

ADVANTAGES OF LIFE INSURANCE

Life insurance has no competition from any other business. Many people

think that life insurance is an investment or a means of saving. This is not a

correct view. When a person saves, the amount of funds available at any

time is equal to the amount of money set aside in the past, plus interest. If

the money is invested in buying shares and stocks, there is the risk of the

money being lost in fluctuation of the stock market even if there is no loss,

the available money at any time is the amount invested plus appreciation.

In life insurance, however the fund available is not the total of the savings

already made (premium paid),but the amount one wished to have at the

end of the saving period (which is the next 20 or 30 years).the final fund is

secure from the very beginning. One has to pay for it only as long as one

life or for a lesser period if so chosen.

There is no other scheme which provides this kind of benefit therefore life

insurance has no substitute. Even so, a comparison with other form of

saving will show that life insurance has the following advantages:-

• In the event of death, the settlement is easy. The heirs can collect the

moneys quicker, because of the facility of nomination and

assignment.

• The facility of nomination is now available for some bank accounts.

 • There is a certain amount of compulsion to go through the plan of

savings.

• In other forms, if one changes the original plan of savings, there is no

loss.

• Creditor can not claim life insurances moneys. They can be protected

against attachment by courts.

• There are text benefits, both in income tax and capital gains.

Marketability and liquidity are better. A life insurance policy is

property and can be transferred or mortgaged. Loan can be raised

against the policy.

Working of ULIPs
It is critical that you understand how your money gets invested once you

purchase a ULIP:

When we decide the amount of premium to be paid and the amount of life

cover we want from the ULIP, the insurer deducts some portion of the ULIP

premium upfront. This portion is known as the Premium Allocation charge,

and varies from product to product. The rest of the premium is invested in

the fund or mixture of funds chosen by us. Mortality charges and ULIP

administration charges are thereafter deducted on a periodic (mostly

monthly) basis by cancellation of units, whereas the ULIP fund

management charges are adjusted from NAV on a daily basis.

Since the fund of our choice has an underlying investment – either in equity

or debt or a combination of the two – our fund value will reflect the

performance of the underlying asset classes. At the time of maturity of our

plan, we are entitled to receive the fund value as at the time of maturity.
The pie-chart below illustrates the split of our ULIP premium:

One of the big advantages that a ULIP offers is that whatever be our

specific financial objective, chances are that there is a ULIP which is just

right for us.

Charges, fees and deductions in a ULIP

1. Premium Allocation Charge- This is a percentage of the

premium appropriated towards charges before allocating the

units under the policy. This charge normally includes initial and

renewal expenses apart from commission expenses.

2. Mortality Charges -These are charges to provide for the

cost of insurance coverage under the plan. Mortality charges

depend on number of factors such as age, amount of

coverage, state of health etc.

3. Fund Management Fees - These are fees levied for

management of the fund(s) and are deducted before arriving

at the Net Asset Value (NAV).

 4. Policy/ Administration Charges - These are the fees for

administration of the plan and levied by cancellation of units.

This could be flat throughout the policy term or vary at a pre-

determined rate.

5. Surrender Charges - Surrender charge may be deducted

for premature partial or full encashment of units wherever

applicable as mentioned in the policy conditions.

6. Fund Switching Charge - Generally a limited number of fund

Switches may be allowed each year without charge, with

Subsequent switches, subject to a charge.

7. Service Tax Deductions- Before allotment of the units the

applicable service tax is deducted from the risk portion of the

premium.
Unit Fund

The allocated (invested) portions of the premiums after

deducting for all the charges and premium for risk cover under all

policies in a particular fund as chosen by the policy holders

are pooled together to form a Unit fund.

Types of Funds ULIP Offer

Most insurers offer a wide range of funds to suit one’s investment

objectives, risk profile and time horizons. The following are some

of the common types of funds available along with an indication of

their risk characteristics.

1. Equity Funds Primarily invested in company stocks with the

general aim of capital appreciation, risk is Medium to High.

2. Income, Fixed Interest and Bond Funds Invested in

corporate bonds, government securities and other fixed

income instruments, risk is Medium.

3. Cash Funds Sometimes known as Money Market Funds —

invested in cash, bank deposits and money market

instruments, risk is Low.

4. Balanced Funds combining equity investment with fixed

interest instruments risk is generally medium

Flexibility of ULIPs

Most unit linked policy holders opt for ULIPs because of the flexibility

they offer. There is an option of making lump sum investment or

paying regular premiums using the systematic investment plans

(SIP). In ULIPs also one can choose from annual, half-yearly,

quarterly or monthly premium payment options to suit your financial

needs. Additionally, as a unit linked policy holder, you have the option

of investing your units across various fund options such as equity

fund, balanced fund, debt fund and secure fund. During the tenure of

your policy depending on your risk appetite you can also switch

investments from one fund to another. This gives you the flexibility of

customizing your investment plan.

Sebi-Irda tiff: who wins, who loses

The government has made the Insurance Regulatory and

Development Authority (IrDA) the sole regulator of unit-linked

insurance plans (Ulip) and amended the Acts governing other

regulators to make its intentions clear. I have two views on this

handing over of a hybrid product to one regulator instead of a

joint-regulation mechanism with the Securities and Exchange

Board of India (Sebi)—a precedent for which exists between the

banking and capital market regulators. One leads to a process of

harmonization of the market place in which investors (and the

country) win. The second leads to a situation where the investor

invests in financial products at his own risk because the

government backs institutional cheating in a country where

lobbyists with vested interests win. The consumer loses.

View one. The issue is not about which regulator wins, but does the

consumer win or lose. The consumer is indifferent to regulators, but does

want a market place that he can understand, navigate and where there is

no willful deceit in product sales. From the consumer’s point of view, the

key argument in the Irda-Sebi battle was not about turf but about mis-
selling. When the battle began, Ulips were governed by rules that were

archaic—the product was built like a trap to force investors into a lose-all or

pay-more-to-get-something-back decision. The product structure was

opaque, with multiple costs calculated in many ways and with no uniformity

across products, making the investment-linked insurance plan a textbook

case for mis-selling. Worse, the commissions were loaded on to the first

year of a 15-20 year product, with no deterrent to the seller for adopting a

hit-and-run sales strategy. Not surprisingly, most urban households have a

hit-and-run story to share.

What the open regulatory battle and the accompanying public gaze has

done is to bring about reform in insurance regulations. Though they do look

a bit knee-jerk, they are along a path that will lead to a better marketplace,

though they still need to travel some distance to come up to the standards

of transparency and investor-focus established by Sebi in mutual fund

regulations and product structure. However, there are issues that joint

regulation would have solved that need attention now. Market-linked

products (such as mutual funds and Ulips) need a basic level of hygiene

around rules on benchmarking, a simple cost structure, easy entry and exit

(unless it is a pension plan) and portability of investment. These need to be

worked upon by the insurance regulator to prove that it is really investor-

friendly and is not just reacting to the public outrage on this product and its

manner of sale.

Assuming that the marketplace is leveled, there still remain concerns of

mis-selling. Any product can be mis-sold, even a well-structured one. The

last piece that needs to fit in now is to bring in sales-side regulation. Sebi

has already taken a step in this direction and Irda is working on a format as

well. The ministry of finance needs to ensure that these regulations are the

same for the entire sales force in India. With these changes in place, the

investor may begin to trust the market again. The issue between Sebi and

Irda is less about who wins, but about using this opportunity, where

attention is on this problem, to make rules that work for the consumer. If,

along with single-point regulation of the Ulip product, the government also

nudges change to take care of the above issues, then it is irrelevant who

regulates the product. The investor really is not worried about how much

territory who has, but how safe his money is and how confident he feels

about moving from gold to a market-linked investment.

View two. If the ministry of finance has misread the depth of mis-selling in

the insurance industry and has handed over the keys to further institutional

cheating to a regulator who has done very little to show (before the battle
with Sebi began) that it spends time worrying about the investor, there is

trouble ahead for the marketplace. If insurance products continue in their

current forms without addressing the issues of product structure, cost

rationalization, traps built into the product and a lack of benchmarking,

comparability and portability, there is only more chaos ahead.

Without a process of a level playing field from the point of view of the

investor, and not in terms of net worth of companies, that allows

transparency in product choice, India would have missed a great

opportunity to harness the gains of retail money moving out of unproductive

assets to get to work. We may remain the richest country in terms of

assets, but they will be unproductive.

 BIBLIOGRAPHY!

WEBSITES

WWW.GOOGLE.COM
WWW.YAHOO.COM
WWW.WIKIPEDIA.COM
WWW.INDIAINFOLINE.COM
WWW.AMFIINDIA.COM
WWW.MONEYCONTROL.COM
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FINANCIAL INSTITUITONS AND MARKETS – L.M BHOLE
SECURITIES LAWS AND COMPLIANCES –ICSI

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