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INDEAPTH STUDY OF THE INSURANCE
WITH THE HELP OF Comparison of ULIPS vs MF
Words are tools of expression, but they fail miserably when it comes to thanks giving. I am indebted to so many persons that a complete acknowledgement would be encyclopedic. The successful completion of any research project required guidance and help from a number of people. I was fortunate to have all the support from the employees of ING Vysya life insurance, where I was placed for the training project. Hence, I take this opportunity to express my profound sense of gratitude to all those who extended their wholehearted support for carrying out the project work. I wish to express my deepest gratitude to Mr. Pradeep Sharma, (Branch Manager) of Udaipur Branch for his timely guidance which was a immense importance. I would also like to thank Mr. Ashwini Dadhich, (Sr. Sales Manager) under whose guidance the project was completed. I am thankful for his guidance and support. I would also like to thank Mr. Kanwar Singh Gurjar, (Assistant Training Manager) for his time and concern, guidance and support which helped me a lot during the project. In the end I wish to thank all those names who have directly or indirectly helped me in various ways in carrying out this project successfully. PREETI UPADHYAYA MBA PART II
The main motive behind the summer training of the MBA program is to provide the practical aspect of the organizations working environment. The study is the out come of my project that has been produced as partial fulfillment of the Masters of Business Administration from Geetanjali Institute Of Management, Udaipur. This training has helped to visualize and realize about the congruency between the theoretical learning in the college and the actual practices of management. This overall project has given me an insight into the actual corporate world apart from the theoretical environment. It has allowed me to face the world full of ups and downs and to get a glance of the future corporate world in which we are going to enter My summer training project at ING VYSYA LIFE INSURANCE is a complete experience in itself and it has become an inspirable part of my knowledge of management being learned in MBA programme. This project is based on to make comparision between unit linked insurance plan and mutual funds.
As a part of MBA I completed my summer training at ING Vysys Life Insurance company Limited (Udaipur Branch) for 6 weeks. ING Vysya Life Insurance Company Limited a part of the ING Group the world’s largest financial services provider which entered the private life insurance industry in India in September 2001.Headquartered at Bangalore, ING Vysya Life is currently present in 246 cities and has a network of over 300 branches. ING is a global financial institution of Dutch origin offering banking, insurance and asset management to over 60 million private, corporate and institutional clients in over 50 countries. ING operates through three businesses in India, ING Vysya Life Insurance, ING Vysya Bank and ING Investment Management. ING Vysya Bank is a premier private sector bank with over 76-year heritage and 1.5 million satisfied customers. ING Investment Management comprises of two operations: ING Fund - a mid sized asset management company with a retail investor focus and Optimix - a fund of funds business. Firstly I obtained knowledge regarding the Life Insurance market, terms used in it, and various kinds of transaction running in the market. After having an overview of Life Insurance market I was assigned the project on “comparision of unit linked Insurance market vs mutual funds” During the survey it was found that most of the customer did not have proper knowledge regarding Life Insurance concepts, so due to lack of knowledge, they hesitated to buy the Life Insurance policy, especially that of private sector . Life style of people is changing rapidly and every person wants to safe guard their future by minimizing risk. So the customers should get proper knowledge about Life Insurance so that they can minimize their risk
Finally, it was a learning experience for me. I came in close contact with the market trends and learned about the various technicalities. It was a great corporate exposure for me to introduce myself to the corporate world. In order to fulfill the objectives of the research the following research methodology was used 1. Sample universe – the sample universe selected was Udaipur 2. Sample unit – the sample unit selected were residents of Udaipur. The sample unit were segregated into four segments : A. Businessmen: All the people who are running their own business i.e. owners of shoe business, readymade garments, departmental & general stores, etc. were approached. B. Professionals: All the people who have a professional degree & practicing their own profession i.e. Professionals like CA, doctors, engineers, lawyers, architects etc. were approached. C. Govt. employees: All the people who are employed either by the central or state governments of India i.e. employees who are working in RSMM Ltd., PWD, AVVNL, BSNL, Education department (Govt. Schools & colleges), etc. were approached. D. Private Employees: All the people who are employed by privately owned organizations of India i.e. employees who are working in various private banks (HDFC, ICICI, IndusInd, and IDBI) & other private firms & companies were approached.
1. Research type : the research type selected here was exploratory type research. Exploratory research is that research in which facts and figures are found pertaining to that study of topic which has never being researched before. It was concerns with investigating an entirely new area of study. Here the objectives of the study are kept In mind and details fulfilling these objective are explore using different sources of primary data. 2. Nature of data collection: Primary data was used over here. This is a data specifically collected for a purpose. There are various sources of primary data like questionnaires, interviews etc. 3. Research instruments: primary data has to be collected through various research instruments. Questionnaires interviews were the research instruments selected here.
Topic Acknowledgement Preface Executive Summary Contents
Page No. i ii iii iv
1. 2. 3. 4. 5. 6. 7.
Introduction & Scope of the project Company profile Introduction to insurance Introduction to ULIPS Introduction to mutual funds Comparision of ULIPS vs MF Research Methodology a) What is Research? b) Objectives c) Research Design d) Data Sources e) Data Collection Techniques f) Market Segmentation g) Fieldwork & Sample Design
8. 9. 10. 11. 12. 13.
Data Analysis & Interpretation Comparative Study Results Conclusions Suggestions/Recommendations Limitations of the study Bibliography Annexur
SCOPE OF THE PROJECT
The scope of the project may be summarized in following points: 1. The topic of the study is “Comparision of unit linked plans with Mutual Funds”. The topic itself signifies the importance & scope of the project study. 2. This study is aimed to have the first hand idea about the savings/ investments of people in various avenues. 3. This study is also aimed to know the general criteria/motive/objective of investments by the people. 4. This project report will help the organisation in assessing the awareness of various occupational segments (Businessmen, Professionals, Govt. employees, Private employees) about Mutual Funds &ULIP. This awareness is estimated in the form of percentage. 5. This project report will also indicate that in which investment avenue people like to invest the most. 6. This study will also include the comparative analysis of various investment avenues available to a prospective investor. 7. The present project report will assist the organisation in knowing the tastes & preferences of the people for their investments. 8. There may be a number of topics under this subject, which can further be studied. Some of them are as follows: i. ii. iii. To find out the correlation between income of the people & their choice of investment. To find out the awareness of SIP (Systematic Investment Plan) in Mutual Fund among the investors. To compare the ELSS (Equity Linked Savings Schemes) with other Tax Saving Instruments.
About ING Group
ING Group is known for its philosophy of ‘keeping it simple’. This thought is the result of ING Group’s 150 years of understanding of customers’ needs and fulfilling them.
ING is a global financial institution of Dutch origin. It has 150 years of experience, and provides a wide array of banking, insurance and asset management services in over 50 countries and is trusted by over 60 million customers. Its 1,13,000 employees work daily to satisfy a broad customer base – individuals, families, small businesses , large corporations, institutions and governments. The ING Group has gone from strength to strength year after year and is the world's 13th largest company*. The ING Group is the world's largest financial institution* with over US $ 1 trillion# in assets and profits of US $ 8.5 billion in 2005#.
Over the last 150 years, ING Group has grown to become the largest insurer in the world*. Today it touches the lives of millions of people across 50 countries.
ING Group has wide and deep experience in setting up companies in new markets, which require substantial investments underlining ING's long-term commitment. In the last 20 years, ING Group has established successful life insurance companies in 15 countries contributing to the development of insurance services in these countries successfully.
Fortune 500, July 2007 has ranked ING Group as the world’s thirteenth largest company. As per the ranking, ING Group is the world’s largest financial service provider.
The Annual Interbrand Report 2007 which ranks global brands across all categories has ranked ING among the top 100 global brands. ING’s ranking has risen from 85 to 81 compared to last year.
ING Group’s Presence in India ING operates through three businesses in India, ING Vysya Life Insurance, ING Vysya Bank and ING Investment Management. ING Vysya Bank is a premier private sector bank with over 76-year heritage and 1.5 million satisfied customers. ING
Investment Management comprises of two operations: ING Fund - a mid sized asset management company with a retail investor focus and Optimix - a fund of funds business. ING Vysya Life - An Overview ING Vysya Life Insurance Company Limited a part of the ING Group the world’s largest financial services provider^ entered the private life insurance industry in India in September 2001. Headquartered at Bangalore, ING Vysya Life is currently present in 246 cities and has a network of over 300 branches, staffed by 7,000 employees and over 51,000 advisors, serving over 5.5 lakh customers. Product Portfolio ING Vysya Life follows a “customer centric approach” while designing its products. The Company’s product portfolio offers products that cater to every financial requirement, at all life stages.
In fact, the company has developed the LifeMaker a simple tool which can be used to choose a plan most suitable to a specific customer based on his needs, requirements and current life stage. This tool helps you build a complete financial plan for life at every lifestage, whether the requirement is Protection, Savings, Investment or Retirement. Suitable products from ING Vysya Life Insurance’s product portfolio for each such requirement, makes selection of your plan an easy exercise.
The Company aims to make customers look at life insurance afresh, not just as a tax saving device but as a means to live life to the fullest. It believes in enhancing the very quality of life, in addition to safeguarding an individual's security. Distribution Channels
ING Vysya Life has a diversified distribution platform. While Tied Agency remains the strongest channel, the Alternate Channels business within ING Vysya Life is one of the fastest growing distribution channels. ING Vysya Life has strengthened its position as the unparallel leader in the life insurance industry in cooperative banks tie ups. The company currently has tie ups with 130 cooperative banks across the country. The Alternate Channels division has Bancassurance, ING Vysya Bank, Corporate Agents and SMINCE. The Brand Positioning In 2008, ING Vysya Life developed its unique brand positioning ‘Mera farz’. This positioning means, ING Vysya Life helps its customers fulfill their responsibilities towards themselves and their families. This powerful positioning has helped ING Vysya Life create a distinct identity for itself. The latest brand campaign with a very catchy jingle dwells on how a little planning and a helping hand from ING Vysya life can help lighten the burden of responsibilities that often come with happy moments and let you enjoy your life without any worries. About ING Vysya ING Vysya (a group terminology) has 3 businesses in India, ING Vysya Life Insurance, ING Vysya Bank and ING Vysya Mutual Fund. ING Vysya Bank is a premier private sector bank with a 70-year heritage and 1.5 million satisfied customers. ING Vysya Mutual Fund is a mid sized asset management company with a retail investor focus
ING VYSYA LIFE INSURANCE The world’s largest life insurance company The world’s largest financial services company It has got assets of 6200000 crores
It has got 150 years of financial expertise and six crores customers in more than 50 country The mission of the company is to have the best and the most productive advisors force. The core values are: Professional Entrepreneurial Trustworthy Approachable ING IN INDIA Shareholders of ING vysya life insurance are: Gujarat ambuja cement with 14.87% Exide industries ltd.With 50 % ENAM group with 9.13% The rest 26 % remains with ING ING entered India in 1991 1994- ING barings NV offering investment banking ,corporate finance and other financial services. 1997- ING insurance representative office 1999- ING investment management pvt. Ltd. Providing mutual fund products 2000- ING venture capital 2001- ING vysya life launched 2002- ING buys 44 % stake in vysya bank and merges ING Barings with vysya bank 2003- ING vysya financial services launched The opportunities in front of ING life insurance is As many as 71 % Indians are not financially protected against major ailments Annualized growth of 19 %
ING’S Mission “To set the standard in helping our customers manage their financial future”.
Life insurance players in India LIC BAJAJ ALLIANZ LIFE INSURANCE COMPANY LTD. BIRLA SUN LIFE INSURANCE COMPANY LTD. HDFC STANDARD LIFE INSURANCE COMPANY LTD. ICICI PRUDENTIAL LIFE INSURANCE COMPANY LTD. MAX NEWYORK LIFE INSURANCE COMPANY LTD MET LIFE INSURANCE COMPANY LTD KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE COMPANY LTD SBI LIFE INSURANCE COMPANY LTD ING VYSYA LIFE INSURANCE COMPANY LTD TATA AIG LIFE INSURANCE COMPANY LTD AVIVA LIFE INSURANCE COMPANY PVT. LTD RELIANCE LIFE INSURANCE COMPANY LTD SAHARA LIFE INSURANCE COMPANY LTD BHARTI AXA LIFE INSURANCE COMPANY LTD
INTRODUCTION TO INSURANCE
After opening up of Indian economy in 1991 there was a huge potential available in every industry or business. Just like other industry liberalization of the Indian insurance market was recommended indicating that market should be to the private sector competition and ultimately to the foreign private sector competition. WHAT IS INSURANCE? The business of insurance is related to the protection of economic value of assets .Every asset has a value. The asset have been created through the efforts of owner in the expectation that either through the income generated there from or some other output some of his needs would be met in the case of a factory or a cow, the production is sold and income is generated . There is no direct income. There is a normally expected life time for the asset during which time is expected to perform. The owner aware of this can so manage of his affairs that by the end of the life time, a substitute is made available to ensure that the value or income is not lost. However if the asset gets lost earlier being destroyed or made non functional through an accident or other unfortunate event, the owner and those deriving benefits there from, suffer insurance is a mechanism that helps to reduce such adverse consequences. Insurance provides us with a sense of financial support especially during that time of crisis irrespective of the fluctuation in the stock market. It provides for our career goals right from your childhood years life insurance is all about making sure that our family has adequate financial resources to make their plans and dreams come true. It provides financial protection to help your family or business after your death. Insurance is basically a sharing device. The losses to assets resulting from natural calamities (like fire, flood, earthquake, accidents, etc.) are met out of common pool contributed by a large number of people who is exposed to similar risks. CLASSIFICATION OF INSURANCE 1. Life insurance- Life insurance is concerned with making provision for a specific event happening to the in individual such as death.
2. Non life insurance- Non life insurance is commonly concerned with the provision for a specific event, which affects a property such as fire, flood, theft etc. INDIAN SCENARIO India has traditionally been a high savings oriented country being on par with the thrifty Japan. Insurance sector in the United States of America is as big in size as the banking industry. This gives us an idea of how important the sector is. Insurance sector channelises the savings of people for long term investment. In India this sector will bring the nation’s own money for the nation. The global life insurance stands at $1,521.2 billion, while the non life insurance market is placed at $922.4 billion. India takes the 22nd position with US $ 9.93 billion annual premium collections. Out of one billion people in India only 35 million people are covered by insurance. Indian insurance market is set to touch $ 25 billion by 2010, on the assumption of 7% annual growth in GDP. This has made the sector the hottest one in India after IT. With social security and security to the public at large being the agenda for opening the sector, the role of the regulator becomes more serious and that would be carefully watched at every step. HISTORY OF INSURANCE A brief history of the Insurance sector: The business of life insurance in India in its existing from started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are: 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enable the government to collect statistical information about both life and non-life insurance businesses.
1938: Earlier legislation was consolidated and amended by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and Foreign insurers and provident societies were taken over by the Central government and nationalized. LIC formed by an Act of parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 corers from the government of India.
THE BENEFITS OF INSURANCE Replacement of income One prime reason for buying life insurance is to complete the income lost in the event of untimely death of the life insured. When this regular income stops, the proceeds from a life insurance policy can be used to support the family members. Maintenance of lifestyle In case of the death life insured, family members are often hard pressed trying to arrange for funds that can maintain lifestyle. Life insurance offers protection against such an unfortunate eventuality.
Expenses due to premature death Life insurance can play a crucial role to pay off any debt left behind by the person insured. For example car loans, medical bills, mortgages, credit card payment, etc. are often left in case of sudden death. These obligations can be met with life Insurance without any depletion in family assets. Planning for important events with the cost living going up day by day prudent people would go for a life insurance as the most cost effective means to ensure that the important mile stone in their children’s lives are not hampered by the uncertainties of life. Investment:
Life insurance is great avenue to help. A charitable cause, or people with philanthropic desire but short of means, life insurance provides the option to contribute much more than is possible by the life insured TYPES OF LIFE INSURANCE 1. Term insurance: It covers the life for a term of 1 or more years. It pays only death benefits only if the policy holder dies during the period the insurance is in force. Term insurance generally offers the cheapest form of life insurance. You can renew most of the term insurance policies for one or more terms even if the health condition has changed. 2. Whole life insurance: It covers the life for as long as the person lives if his premiums are paid. The person generally pays the same premium throughout his life time. Some whole life policies allow to pay the premium for a shorter period (15, 20, 25 years). The premium for these policies is higher. There are options in the market to have a return of premium option in a whole life policy. That means after a certain age of paying premiums, the company will pay back the premium to the life assured but the coverage will continue.
3. Money back insurance: The money back plan not only covers your life, it also assures you the return of a certain percent of the sum assured as cash payment at regular intervals. It is a savings plan with the added advantage of life cover and regular cash inflow. This plan is ideal for planning for specials moments like a wedding, your child’s education or purchase of an assets, etc. Money back plan have “participating” and “nonparticipating” versions in the market. 4. Endowment assurance: Endowment insurance is a level premium plan with a savings feature. At maturity, a lump sum is paid out equal to the sum assured (plus dividends in a par policy). If death occurs during the term of the policy then the total amount of insurance and any dividends (par policy) are paid out.
5. Universal life: This is a flexible life insurance policy and is also market sensitive. You decide on the several investment options on how your net premium are to be invested. While the money invested has the potential for significant growth, such funds are subject to market risks including the loss of the principle. 6. Unit linked product: Market linked plans or unit linked insurance plans (ULIP) are similar to traditional insurance policies with the exception that your premium amount is invested by the insurance company in the stock market. Market linked insurance plans (MLP) are the way to invest mutual funds and invest in a basket of securities, allowing you to choose between investment options predominantly in equity , debt or a mix of both (called balanced option). INSURANCE TERMS There are several terms associated with insurance that need to be known by an individual to understand their impact. Some terms are technical and hence there might be some effort required in order to understand them properly and then use them to one’s advantage. Insured-The insurance contract involves the insurer and insured. This means that there is one party that is giving the insurance and the other party who is getting the cover of insurance. The insured is the subject matter of the insurance cover. This means that the person who is insured is the one whose life is covered in life insurance.Every life insurance policy will have an insured. One can distinguish the insured from the owner of the policy who is the persone who takes the policy . in many cases , the owner and the insured might be the same persone as the person who takes the policy will also be the one whose life is coverd . Insurer
The insurer is the entity that provides the insurer. The insuance company will be covering the life and the property of the various people entities. The insurer is one of the parties that will complete the insurance perpose. The strength of the insurance company is very important in ensuring growth of the insurance sector. Beneficial The beneficial is the person who has to receive the proceeds under the insurance policy on the occurance of risk. Different people could become a beneficial under various circumstances. This will main the beneficial will receive the amount in case of the death of the insure. In some cases the insure or the person whose life is covered will receive the pay out . This will happen when there are policy that pay out specific sum on the completion of certain number of pairs of the policy. If the individual survives for this time period than the pay out that is specified will be received by him.
Premium The sum paid by the insured to the insurance company as consideration for insurance cover. This has to be paid in accordance with the term of the policy. The premium can be paid monthly, quarterly, half yearly or annually. While the premium stops after a certain period, the cover on the life of the person will continue for a longer period. Surrender value There may be cases when the person taking the policy is not able to pay the required amount of premium. The person may like to discontinue the policy .If the required conditions are met, then there can be a surrender of the policy to the company. The policy is closed at an early stage and given back to the insurance company at a price lower than the sum assured. This price is known as the surrender value.
Paid up value In some cases when the insurance policy is running the policy holder would not like to surrender and loss the insurance cover available. There is an option available to achieve the objective of stopping the payment of premium but keep the insurance cover. These can be done when the policy is paid to a certain extent and the cover will be limited to the proportion of the premiums paid till now. Unit allocation When the premium is paid by the investors in unit linked policies a part of it goes to various expenses and the remaining amount is used to buy units in the fund specified in the scheme and these will appreciate according to the movement in the net asset value of the scheme. Death benefit The life insurance company pays the beneficiary the amount that is equal to the sum assured in case of death of person cover under the policy. This is known as the death benefit given to those who have been nominated to receive this benefit in case of the death of the insured. Top up Several insurance policies have the facility where the insured can raise the amount of investment by paying necessary additional amount of premium. Depending upon the nature of the policy, it can lead to increase in the cover. This facility reduces the workload and conditions to be fulfilled by the person if he had gone for an additional policy by paying same amount.
Benefits of life insurance: 1. Superior to any other saving plan –life insurance policies offers protection against the risk of death which is nit available in any other contemporary saving plan. In the event of death of policy holders the insurance makes available the full sum assured to the policies holders near and dear once. In comparison any other saving plan would amount to the total saving accustomed till date. If the death occurs prematurely, such saving can be much lesser than the sum assured
2. Encourage thrift –A saving deposits can easily be withdrawn. The payment of life insurance premium however is considered sacrosanct payment of interest on mortgage thus; a life insurance policy in fact brings about compulsory savings and is viewed with the same seriousness as the payment of interest on mortgage. Thus a life insurance policy in fact brings about compulsory savings. 3. Easy settlement and protection against creditors A life insurance policy is the only financial instrument the proceeds of which can be protected against the claim of a creditor of the assured by effecting a valid assignment. 4. Administering the legacy for beneficiaries Speculative expenses can quickly cause the squandered. Several policies have foreseen this possibility and provide for payments over a period of years or in a combination of installment and lump sum amount. 5. Ready marketability and suitability for quick borrowing A life insurance policy can after a certain time period become cost effective that means to ensure that the important milestone in their children’s lives are not hampered by the uncertainties of life. 6. Investment Life insurance is also an investment. Apart from tax benefits which are also allowed by the govt. of India for investing in life insurance, some life insurance policies offer returns on investments along with the covert for life. This helps us with long term financial goals. 7. Hospital cash benefits Many policies can also provide for covering the hospitalization expenses along with cover for life. 8. Tax benefit
Under the income tax act, tax relief under section 88 is available for the premium paid and section 10[10D] benefits are available for the death or maturity or surrender proceeds from a life insurance policy.
THE IRDA BILL On July 14, 2000, the chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations in an extra ordinary issue of the Indian gazette those details of the regulation. Insurance regulatory and development authority is constituted by the government of India, which governs all the companies that are operating in the insurance sector in India. As per the section 4 of IRDA act 1999, insurance regulatory and development authority (IRDA) specifies the composition of authority. The authority is a 10member team consisting of 1. Chairman 2. Five whole team members 3. Four part time member All appointed by the govt. of India.
Mission of IRDA To protect the interest of the policy holders, to regulate, to promote and ensure orderly growth of the insurance industry and for matters connected with or incidental there to. Duties, powers and functions of IRDA Section 14 of IRDA act 2000 lays down the duties, powers and functions of IRDA. The authority shall have the duty to regulate, promote and ensure orderly growth of insurance and re-insurance business.
Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration. Protection of the interest of the policy holder in matters of concerning assignment of policy, nomination by policy holder, insurable interest, settlement of insurance claim, surrender value of policy and other terms and condition of contract. Specifying requisite qualification, code of conduct and practical training for intermediary or insurance intermediaries and agents. Specifying the code of conduct for surveyors and loss assessors. Promoting efficiency in the conduct of insurance business. Promoting and regulating professional organizations connected with insurance and re-insurance business. Levying fees and other charges for carrying out the purpose of this act. Calling for information from, undertaking inspection of, conducting enquiries and investigation including audit of the insurers, intermediaries and other organization connected with the insurance business. Control and regulation of the rates, advantages, terms and conditions that may be offered by the insurers in respect of general insurance business not controlled by the TARIFF ADVISORY COMMITTEE under section 64 U of the insurance act 1938. Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries. Regulating investment of funds by insurance companies. Regulating maintenance of margin of solvency
INTRODUCTION TO MUTUAL FUND
MUTUAL FUNDS-MEANING AND DEFINATION: A Mutual Fund is a pool of money, collected from investors, and is invested according to certain investment objectives. A Mutual Fund is created when investors put there money together .It is therefore a pool of the investors’ funds. The most important characteristic of a mutual fund is that the contributors and the beneficiaries of the fund are the same class, namely the investors. The term mutual means that investors contribute to the pool, and also benefits from the pool. There are no other claimants to the funds. The pool of funds held mutually by investors is the Mutual Fund. A Mutual Fund’s business is to invest the funds thus collected, according to the wishes of the investors who created the pool. In many market these wishes articulated as “investment mandates”. Usually, the investor appoints professional investment managers, to manage their funds. The same objective is achieved when professional investment managers create a “product”; offer it for investment to the investor .This product represent a share in the pool, a pre-states investment objective. For example, a Mutual Fund, which sells a “money market Mutual Fund”, is actually seeking investors willing to invest in a pool that would invest predominantly in a money market instruments. CONCEPT A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. 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 Operation Flow Chart
There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund: ORGANISATION OF A MUTUAL FUND
Mutual fund schemes may be classified on the basis of its structure & its investment objective.
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 date. Investors can conveniently buy & sell units at Net Asset Value (NAV) based prices. The key feature of open ended schemes is liquidity. 2. Closed-ended funds:
A closed ended fund has a stipulated maturity period which generally ranging from3 to 15 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 of the Mutual Fund through specific repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. 3. Interval Funds:
Interval funds combine the features of open-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.
By Investment Objective:
1. Growth Funds:
The aim of growth fund 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 proved that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. 2. Income Funds: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures & govt. securities. Income funds are ideal for capital stability & regular income. 3. Balanced Funds: The aim of balanced funds is to provide both growth & regular income. Such schemes periodically distribute a part of their earning & invest both in equities & 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 & moderate growth.
4. Money Market Funds: The aim of money market funds is to provide easy liquidity, preservation of capital & moderate income. These schemes generally invest in safer short term investments such as treasury bills, certificates of deposit, commercial paper & inter bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate & individual investors as a means to park their surplus funds for short periods.
Other Schemes: 1. Tax Saving Schemes:
These schemes offers tax rebates to the investors under specific provisions of the Indian income tax laws as the govt. offers tax incentives for investments in specified avenues. Investments made in equity linked saving schemes (ELSS) are allowed as deduction u/s 80C of the income tax act, 1961.Investments in these funds would enable the investor to avail the benefits under clause (xiii) of subsection (2) of section 80C of the Income Tax Act, 1961.Investment made in these schemes up to Rs. 1 lakh by the eligible investor being an individual or a HUF will qualify for deduction under this section of the act. 2. Gilt Funds:
They are g-sec (govt. securities) with medium & long term maturity. Securities with one year maturity are covered under money market funds. These funds have low default risk. The minimum amount of investment is quite high in these funds so they are beyond the range for small investors. 3. Short-term Funds:
These funds invest in bonds & debentures of high quality rated by rating agencies like CRISIL etc. (of lesser duration viz.18-24 months), g-sec & money market instruments. STP helps in reducing volatility in the debt market & at the same time providing liquidity & stable returns. 4. Liquid Funds:
They invest in bonds, call & money market & treasury bills. They provide an ideal investment option for a period of 2-60 days. They provide an ideal opportunity to earn on amount lying ideal in current a/c, which would instead generate no return. Unlike the income / bond funds or the short- term funds there is no interest rate or market risk involved here.
Special Schemes: a. Industry specific schemes: Industry specific schemes invest only in the industries specified in the portfolio. The investment of these funds is limited to specific industries like InfoTech, FMCG & Pharma etc.
b. Index schemes: Index funds attempt to replicates the performance of a particular index such as BSE Sensex or the NSE c. Sector Specific Schemes: Sector funds are those, which invest, exclusively in a specified sector. This could be an industry or a group of industries or various segments such as ‘A’ group shares or initial public offerings.
BENEFITS OF MUTUAL FUNDS:
The advantages of investing in mutual funds are: • • • • • • • • • • • Professional Management Diversification Convenient Administration Growth Potential Low Costs Liquidity Transparency Flexibility Affordability Tax benefits Well regulated
1. Professional Management Mutual Fund provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analysis the performance and
prospects of companies and selects suitable investments to achieve the objective of the scheme. 2. Diversification Mutual Fund invests in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. 3. Convenient Administration Investing in a Mutual Fund reduces paper work & helps you avoid many problems such as bad deliveries, delayed payments & follow up with brokers & companies. Mutual Fund saves your time & makes investing easy & convenient. 4. Growth potential Over a medium to long term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. 5. Low Costs Mutual Funds are relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial & other fees translate into lower costs for investors.
6. Liquidity In open-ended schemes, the investor gets the money back promptly at NAV based prices from the Mutual Fund. In closed-ended schemes, the units can be sold on a stock exchange at the prevailing market prices or the investor can avail of the facility of direct repurchase at NAV based prices by the Mutual Funds. 6. Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets & the fund manager’s investment strategy & outlook. 7. Flexibility Through features such as regular withdrawal plans & dividend re-investment plans, you can systematically invest or withdraw funds according to your needs & convenience. 8. 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. 10. Tax Benefits Dividends are tax free for all equity & balanced schemes. The Union Budget 2005-06 has made investments in ELSS eligible for inclusion in the Rs. 1 lakh limit that will be deducted while computing taxable income u/s 80C. An investment in ELSS helps investors to maintain a healthy real return by countering inflation impact. 11. Well Regulated All Mutual Funds are registered with SEBI & they function within the provisions of strict regulations designed to protect interest of investors. The operations of Mutual Funds are regularly monitored by SEBI.
INTRODUCTION TO ULIPs:
INTRODUCTION Unit Linked Insurance Plan (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/insuranceseeker the hassles of managing and tracking a portfolio or products It provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of 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). ULIP came into play in the 1960s and is popular in many countries in the world. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers. As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today's times, ULIP provides solutions for insurance planning, financial needs, financial planning for children’s marriage planning also can be done with this.
Features • • ULIPs are not an investment tool; it’s actually an insurance product. The Feature of an ULIP is to get insurance for say 40 years, u don’t need to pay for 40 years, instead its premium paying term is between one and five years.
• • •
One can get insurance cover of up to 50 times of first year premium paid. One can also get good returns like a mutual fund. After few years, if u found your investment doubled due to market upswing, u can take back the invested amount and leave the rest with the policy, u can enjoy the insurance cover with literaly zero investment.
ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings, but they are structured differently.
In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges. The rest of the premium is used to invest in a fund that invests money in stocks or bonds.
The policyholder’s share in the fund is represented by the number of units. The value of the unit is determined by the total value of all the investments made by the fund divided by the number of units.
If the insurance company offers a range of funds, the insured can direct the company to invest in the fund of his choice. Insurers usually offer three choices — an equity (growth) fund, balanced fund and a fund which invests in bonds.
Insurers love ULIPs for several reasons. Most important of all, insurers can sell these policies with less capital of their own than what would be required if they sold traditional policies.
Since ULIPs are devised to mobilise savings, they give insurance companies an opportunity to get a large chunk of the asset management business, which has been traditionally dominated by mutual funds.
Benefits ULIP provides multiple benefits to the consumer. The benefits include:
• • • • • • • • • • • • •
Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against Death due to accident Disability Critical Illness Surgeries Liquidity Tax planning
Mutual fund vs. Unit linked plan
Which is a good product to take? Mutual fund + term insurance or unit linked insurance plans? Well it depends on the knowledge level of the buyer, and the smartness of the salesman. Mutual funds is the 'safety of the principal' guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. Insurance is a provision against risk and it is a device with which man tries to protect himself from risk in life. The recent development in the financial innovation is Unit Link Insurance Policy (ULIP), which covers the concept of mutual fund and insurance. 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/insuranceseeker the hassles of managing and tracking a portfolio or products.
Comparision of ULIPS vs MFS Below is a brief comparision of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specific to the Indian market.
Primary Objective MFs: Investments ULIPs: Protection + Investments Investment Duration MFs: Works out for Medium term, Long Term Investors. Risky for Short Term investors. ULIPs: Works out for Long Term Investors only. Flexibility MFs: Very flexible. Plenty of scope to correct your mistakes if you made any wrong investment decisions. You can easily shuffle your portfolio in MFs. ULIPs: Flexibility is limited to moving across the different funds offered with your policy. Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to an other ULIP of a different fund house can be expensive. Liquidity MFs: Very liquid. You can sell your MF units any time (except ELSS). Some MF's like those from Reliance have introduced redemptions at ATMs. ULIPs: Limited liquidity. Need to stay invested for the minimum number of years specified before you can redeem. Investment Objective MFs: MF's can be used as your vechile for investments to achive different objectives. (Eg: Buying a car three years from now. Downpayment for a home five years from now. Childrens education 10 years from now. Childrens marriage 15 years from now. Retirement planning 25 years from now. Medical expenses after retirement 25 years from now) ULIPs: ULIPs can be used for achieving only long term objectives (Children education, Children’s marriage, Retirement planning) Tax Implications MFs: All investments in MF's don't qualify for section 80C. Only investments in ELSS qualify for 80C.
ULIPs: Provide Tax Benefits under section 80C. MFs: Returns on equity MF's are exempt from long term capital gains tax. (Unless tax laws change in the future). ULIPs: We are moving from EEE to EET. No clarity if ULIPs will be taxed under EET. MFs: Tax liabilities when moving across from debt to equity funds.(Returns from debt MF's are taxed.) ULIPs: Very flexible in moving between equity and debt funds (not tax implications until maturity of the policy). Strings Attached (fine print) MFs: None so ever. At most you pay a small exit load if any. ULIPs: Some strings attached for your policy to be in effect. Minimum number of premiums need to be paid. Minimum fund balance need to be always maintained. (I personally do not like policies which say pay three years premium and get insurance cover for the next 25 years since there are a lot of ifs and butts involved. A lot of assumptions made and nothing is in your hand, it could turn out your fund balance might be exhausted after just 12 years of insurance cover). IN BRIEF: 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.
Despite the seemingly comparable structures there are various factors wherein the two differ. In this article we evaluate the two avenues on certain common parameters and find out how they measure up. 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, halfyearly, quarterly or monthly basis. In ULIPs, determining the premium paid is often the starting point for the investment activity. 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 predetermined 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 restraint placed is that insurers are required to notify the regulator of all the expenses that will be charged on their ULIP offerings. 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.
ULIPs vs Mutual Funds
ULIPs Mutual Funds Investment amounts Determined by the investor and can be modified as well Minimum investment amounts are determined by the fund house Expenses No upper limits, expenses determined by the insurance company Upper limits for expenses chargeable to investors have been set by the regulator Portfolio disclosure Not mandatory* Quarterly disclosures are mandatory Modifying asset allocation Generally permitted for free or at a nominal cost Entry/exit loads have to be borne by the investor Tax benefits Section 80C benefits are available on all ULIP investments Section 80C benefits are available only on investments in tax-saving funds
* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so. 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. 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.
Various Schemes However, there are some schemes in which the policyholder receives the sum assured plus the value of the investments. Various schemes have been tailored to suit different customer profiles and, in that sense, offer a great deal of choice. The advantage of ULIP is that since the investments are made for long periods, the chances of earning a decent return are high. Just as in the case of mutual funds, buyers who are risk averse can buy debt schemes while those who have an appetite for risk can opt for balanced or equity schemes. COMPARISION OF CHARGES:
If there is an investment of Rs.60,000 every year in a mutual fund of a leading fund house and also the same amount in ULIPS of HDFC, ICICI and BAJAJ ALLIANZ. The following are the charges are considered. MFS Loading charges = 2.25% Fund Management Charge = 2.50% HDFC Unit Linked Endowment Plus Loading charges = 60% first year, 1% from second year Fund Management Charge = 0.80%
Admin charge = Rs.240 per annum Loyalty bonus = 0.1% each year Bajaj Allianz Unit Gain Plus Loading charges = 24% first year, 3% from second year Fund Management Charge = 1.75% Admin charge = Rs.240 per annum ICICI Lifetime Plus Loading charges = 25% first year, 25% second year, 3% third and fourth year, 1% from fifth year Fund Management Charge = 1.75% Admin charge = Rs.720 per annum If the investments grew by 10%, the following is what the returns would look like if all the charges are being considered. * The returns from HDFC Unit Linked Endowment Plus will beat MF returns by 9TH YEAR * The returns from Bajaj Allianz Unit Gain Plus will beat MF returns by 11TH YEAR * The returns from ICICI Prudential Lifetime Plus will beat MF returns by 12TH YEAR
CONCLUSION On the long run (10+ years), ULIPs are infact cheaper than MFs in terms of charges. Hidden charges which are not quiet evident to the eye like fund management charge eat up a major portion of returns in MFs making them more expensive than ULIPS over time.
Example: Pension Plan vs Mutual Funds
There is a query asked by a investor that whether he would be better off investing in a pension plan offered by a life insurance company or investing in mutual funds. Given below is an analysis on the options available to the investor. Set of Variables.
The client’s age is 38 years and he would like to retire 22 years hence i.e. at the age of 60 years
The client would like to invest an amount of Rs 1,000,000 (Rs 1 m) each year for three years. In total, he will invest an amount of Rs 3 m over 3 years.
The client has been suggested a single premium plan of Rs 1 m with additional ‘top-ups’ worth Rs 1 m p.a. (per annum) for the following two years. In all, the client would be paying Rs 3 m over the 3-yr period.
The client has a high-risk appetite and would like to remain invested in equities throughout the tenure of the pension plan.
The client has a well-diversified portfolio including mutual funds and stocks.
Based on the information, there is a likely retirement solution for the investor. Let us first take a look at how investments in the unit linked pension plan (ULPP) pan out. Pension plan: Preparing for the future Investment amt (Rs) One-time charge (%)
Admn. Charges (Rs)* Fund Mngt Charges (%) Investment Tenure (Yrs) Net maturity Value (Rs) 1,000,000 2.50 180 0.80 22 18,400,000 1,000,000 2.50 180 0.80 21 1,000,000 1.00 180 0.80 20 *Administration charges are subject to 5.00% inflation per annum. Investments in unit linked pension plan (ULPP) If the client decides to buy the pension plan, then he would be paying Rs 1,000,000 in the first year. Since this is a single premium plan, one-time charges on the same are 2.50% (i.e. in the first year). In other words, Rs 25,000 would be deducted from the client’s single premium amount and the remaining amount (i.e. Rs 975,000) would be
invested in the 100% equity ULPP option. This amount will remain invested for the entire 22-yr tenure. The charges for any additional top-ups in the second year too would be to the tune of 2.50%. Similar to the first year, Rs 25,000 would be deducted from the second year’s top-up amount. So Rs 975,000 would be invested over 21 years. One-time charges for any top-ups from the third year onwards fall to 1% for the year. Therefore, only Rs 10,000 (i.e. 1% of Rs 1,000,000) would be deducted and the remaining amount would be invested. The third year amount (Rs 990,000) will remain invested for a 20-yr period (i.e. time to maturity). Fund management charges (FMC) for managing equities in the given ULPP are 0.80% p.a. Administration charges are assumed to be Rs 180 p.a. (increasing at an assumed inflation rate of 5.00%). As can be seen from the table above, assuming a compounded growth rate (CAGR) of 10% p.a. over a 22-Yr tenure, the client’s investments will grow to approximately Rs 18,400,000. As against the ULPP given above, let us now analyse how investments in a mutual fund would have worked out over a similar tenure. How do mutual funds fare? Investment amt (Rs) Entry load (%) Fund Mngt Charges (%)* Investment Tenure (Yrs) Net maturity Value (Rs) 1,000,000
2.25 2.00 22 15,240,000 1,000,000 2.25 2.00 21 1,000,000 2.25 2.00 20 *FMC is assumed to be 2.00% for the first 5 years, 1.75% for the next 5 years and 1.50% the remaining tenure. Investments in a mutual fund Similar to a ULPP, the client would invest Rs 1,000,000 p.a. for 3 years in a mutual fund scheme. However, unlike a one-time initial charge associated with the ULPP above, mutual funds usually have an entry/exit load on their schemes. Assuming an entry load of 2.25% for each of his three annual investments (of Rs 1,000,000), the net amount invested would be drawn down by Rs 22,500 (i.e. 2.25% of Rs 1,000,000) each year for the initial three years. We have also assumed a decreasing FMC on the mutual fund schemes- the assumption here is it would be 2.00% for the first 5 years, 1.75% for the next 5 years and 1.50% for the remaining period thereafter. The ‘decreasing FMC’ assumption is based on the fact that as the corpus for a mutual fund scheme grows over a period of time, economies of scale come into play. This helps the mutual fund spread its costs over a larger corpus, thereby reducing its overall cost of managing the fund.
As with the ULPP, assuming a 10% rate of growth over a 22-yr period, the mutual fund investments would have grown to approximately Rs 15,240,000. The corpus generated by ULPP is higher than the mutual fund corpus by Rs 3,160,000 (i.e. 20.73%). The reason why ULPP scores over mutual funds is because of a low FMC. The FMC on the ULPP under review is 0.80% throughout the tenure as compared to the mutual fund FMC, which is in the 1.50%-2.00% range. Over the long term, FMC makes a significant impact by reducing the corpus available for investments. In other words, lower the FMC, higher the investible surplus and vice-versa. In our view therefore, the client would be better off investing his money in the ULPP.
However, analysis on pension plans versus mutual funds would be considered myopic if deliberated only from the expenses point of view. There are some inherent advantages as well as disadvantages that both ULPP and mutual fund investments offer. 1. Maturity proceeds The maturity payout differs for ULPP as compared to mutual funds. Only up to onethird of the maturity proceeds are allowed to be withdrawn under the pension plan; the remaining two-third amount has to be ‘compulsorily’ invested in an annuity from a life insurance company. The annuity helps generate an income stream for a time period as specified by the individual. Conversely, in an open-ended structure, equity funds allow the individual to withdraw the entire corpus whenever he wants. 2. Diversification Mutual funds offer the benefit of diversification across various parameters like fund management style (aggressive vs. conservative) and investment strategy (e.g. largecap orientation, mid-cap orientation, value style of fund management, growth style). This level of diversification is not possible with the ULPP under consideration. Also, in case an individual feels that a particular mutual fund has not lived up to expectations, then he can redeem his investments in that particular scheme and invest
in another scheme that fits into his criteria (i.e. modify his portfolio). The same is not entirely possible with a ULPP- since the individual has already invested his entire ‘available’ savings into only one ‘plan’.
3. Track record Several equity funds have a track record to boast of. A good track record helps individuals identify mutual funds that have performed well across time horizons as well as market phases. However, the same is not the case with unit linked insurance plans, which are a recent phenomenon. While some of them may have done well over the short time period that they have existed, we would like to evaluate their performance over a longer time frame of at least 5 years before giving a conclusive view. So what is the bottom line? As can be seen from our calculations and analysis, the client is better off investing in the ULPP as opposed to equity funds; but of course one needs to keep in mind the inherent disadvantages of ULIPs as mentioned above. ADVANTAGES OF ULIPS OVER MUTUAL FUNDS: 1. Can easily rebalance your risk between equity and debt without any tax implications. 2. Best suited for medium risk taking individuals who wish to invest in equity and debt funds (at least 40% or higher exposure to debt). 3. No additional tax burden for those investing mainly in debt unlike in MFs.
What is Research? Research is a scientific & systematic search for pertinent information on a specific topic. It is an art of scientific investigation. Research is a voyage of discovery. It is also said to be the pursuit of truth with The role of research in several fields of applied economics, whether related to business or to economy as a whole, has greatly influenced in modern times. The increasing complex nature of business & government has focused attention on the use of research in solving problems. The stages which are there in research process are as follows: 1. 2. 3. 4. 5. 6. 7. 8. Problem formulation or Objectives of the Study Preparation of the research design Data Sources Data Collection Techniques Market Segmentation Fieldwork & Sample Design Data Analysis & Interpretation Developing Logical Conclusion
1. Objectives of the StudyThe major objective of the project was to comprise unit linked insurance plans with mutual funds. 2. Preparation of the Research DesignA research design is the arrangement of the conditions for collection & analysis of data. Actually it is the blue print of research project. The research design is as follows:
Descriptive Research a. b. 3. Data SourcesThe data collection process was carried out in various stages. These stages can be clubbed under two major heads. 1. 2. Primary Source-Survey Secondary Sources Survey Method Questionnaire Method
1. Primary Source-Survey: A random survey was carried out while going out to contact the respondents. 2. Secondary Sources: Here the data collection tools were: directories, special publications, yellow pages, etc. There were still many such potential clients who were not listed in such publication so we had to find out about them through personal references & by generating leads from the various clients who gave us the names of various influential people. 4.Data Collection TechniquesThe Data was collected through questionnaire & telephone interviewing. The data collection period was 45 days i.e. from 1July, 2008 to 15 August, 2008 Questionnaire: The data was collected on a printed questionnaire, in which questions were asked in a logical order. Each question has a specific meaning. The data analysis is based on the data collected through these questions. 5. Market Segmentation-
The market segmentation was done keeping in mind what types of clients were available in the market. These segments are namely: A. Businessmen B. Professionals C. Govt. employees D. Private employees Each Segment is clearly defined as follows: A. Businessmen: All the people who are running their own business i.e. owners of shoe business, Readymade garments, departmental & general stores, etc. were approached. B. Professionals: All the people who have a professional degree & practicing their own profession i.e. Professionals like CA, doctors, engineers, lawyers, architects etc. were approached. C. Govt. employees: All the people who are employed either by the central or state governments of India i.e. employees who are working in RSMM Ltd., PWD, AVVNL, BSNL, Education department (Govt. Schools & colleges), etc. were approached. D. Private Employees: All the people who are employed by privately owned organizations of India i.e. employees who are working in various private banks (HDFC, ICICI, IndusInd, and IDBI) & other private firms & companies were approached.
6. Fieldwork & Sample DesignData collection for this project was not an easy job without clearly identifying the exact areas which have to be included in the data gathering exercise.
For the purpose of sampling, following steps were used: i. ii. iii. iv. v. Defining the population or the universe Developing a sampling frame Selecting the sampling procedure Determining the sample size Selecting the specified sample member
These steps have been explained below one by one: i. The Universe: The universe for the research is Udaipur city. ii. The sampling frame: The sampling frame may be defined as the listing of the general components of the individual unit that comprise the defined population. For this project the sampling frame was all the businessmen, professionals, govt. employees & private employees of Udaipur (urban). Businessmen Professionals Govt. employees Private employees Various shops & Trade houses Various Associations Various Govt. Offices Various Privately owned firms
iii. Sampling procedure: Sampling procedure used in the project is non probability sampling. A purposive type of sampling was done and the required information was collected through convenience and judgmental sampling. Non-probability Sampling Judgmental Sampling Convenience Sampling
iv. The sample size: The sample size when the complete data was collected came out to be 120. The sample was designed as follows: Businessmen Professionals Govt. Employees Private Employees Sample Size 30 30 30 30 120
v. The data: The data was gathered by moving around in the field. This data added up to the already existing database (through references) which was available with us in the form of secondary data as directories & walk-ins.
7. Data Analysis & Interpretation: Analysis of the data was done by drawing inferences through what was collected as input from the respondents. The data analysis & interpretation part is dealt in detail on the next page. Interpretation was given on the basis of data analysis
The data has been collected from various segments of the market on a random basis. The data was collected via a questionnaire in which different questions were asked in a logical order. The data has been analyzed as follows:
Market Segmentation: The entire population has been categorized into four segments. 30 respondents are sampled from each of the segment. In this way the sample size comes to be 120. These segments are:
S.No. Segment No. of respondents 1. Businessmen 30 2. Professionals 30 3. Govt. Employees 30 4. Private Employees 30 Sample Size 120
Market seg mentation
40 30 20 10 0
Avg. savings (p.a.) Professionals Total=30 Businessmen Total=30 Govt. Employees Total=30 Private Total=30 Below 10% 9 13 8 5 Employees
11-20% 3 8 7 10 21-30% 13 4 8 11 31-40% 0 3 5 1 Above 40% 5 2 2 3 Table 1: Segment wise Savings Analysis:
The following pi-chart & graph shows that out 30 professionals:
• • • • •
30% people have savings up to 10% of their income. 10% people have savings between 11-20% of their income. 43.33% people have savings between 21-30% of their income. None of the people have savings between 31-40% of their income. 16.67% of the people have savings above 40% of their income
2.The following pi-chart & graph shows that out 30 Businessmen:
• • • • •
43.33% people have savings up to 10% of their income. 26.67% people have savings between 11-20% of their income. 13.33% people have savings between 21-30% of their income. 10% people have savings between 31-40% of their income. 6.67% of the people have savings above 40% of their income.
3.The following pi-chart & graph shows that out 30 Govt. Employees:
• • • • •
26.67% people have savings up to 10% of their income. 23.33% people have savings between 11-20% of their income. 26.67% people have savings between 21-30% of their income. 16.66% people have savings between 31-40% of their income. 6.67% of the people have savings above 40% of their income.
4.The following pi-chart & graph shows that out of 30 Private Employees:
• • • • •
16.67% people have savings up to 10% of their income. 33.33% people have savings between 11-20% of their income. 36.67% people have savings between 21-30% of their income. 3.33% people have savings between 31-40% of their income. 10% of the people have savings above 40% of their income.
Table 2: The investment option in which saving/investment is being done by different segments:-Investment options Professionals Total=30 Businessmen Total=30 Govt. Employees Total=30 Private Total=30 Bank deposit Employees
3 2 5 2 Life insurance 16 10 16 5 Recurring deposit 1 2 4 1 Shares/MF 6 7 2 18 others 4 9 3 4
The following pi-chart & graph shows that out of 30 Professionals:
• • • • •
10% people have invested in Bank Deposit. 53.33% people have invested in Life Insurance. 3.33% people have invested in Recurring Deposit 20% people have invested in Shares/MF. 13.33% of the people have. invested in others avenue.
The following pi-chart & graph shows that out of 30 Businessmen:
• • • • •
6.67% people have invested in Bank Deposit. 33.33% people have invested in Life Insurance. 6.67% people have invested in Recurring Deposit 23.33% people have invested in Shares/MF. 30% of the people have. invested in others avenue.
The following pi-chart & graph shows that out of 30 Govt. Employees:
• • • • •
16.67% people have invested in Bank Deposit. 53.33% people have invested in Life Insurance. 13.33% people have invested in Recurring Deposit 6.67% people have invested in Shares/MF. 10% of the people have. invested in others avenue.
The following pi-chart & graph shows that out of 30 Private Employees:
• • • • •
6.67% people have invested in Bank Deposit. 16.67% people have invested in Life Insurance. 3.33% people have invested in Recurring Deposit 60% people have invested in Shares/MF. 13.33% of the people have. invested in others avenue.
Table 3: Rating to investment instruments:--5 means most preferred & 1 means least preferred.
Investment options Professionals Total=30 Businessmen Total=30 Govt. Employees Total=30 Private Total=30 Mutual funds 2 2 1 3 Employees
Bank deposit 5 4 5 2 ULIPS 4 3 2 4 Recurring deposits 1 1 4 1 shares 3 5 3 5 The following pi-chart & graph shows that:
Bank Deposits are most preferred. Recurring Deposit are least preferred. ---- By professionals
The following pi-chart & graph shows that:
Shares are most preferred. Recurring Deposit are least preferred. ---- By Businessmen
The following pi-chart & graph shows that:
Bank Deposits are most preferred. Mutual Funds are least preferred. ---- By Govt. Employees
The following pi-chart & graph shows that:
Shares are most preferred. Recurring Deposit are least preferred. ---- By Private employes
Table 4: While selecting the policy, the most influence factor selected by different segments:-----
Influence factors Professionals Total=30 Businessmen Total=30 Govt. Employees Total=30 Private Total=30 Tax benefit 25 0 Employees
28 2 Investment purpose 2 20 0 22 Future security 3 2 2 3 Other reason 0 8 0 2
The following pi-chart & graph shows that:
83.33% people invest to save tax. 6.67% people invest to get return. 10%people invest for future security.
The following pi-chart & graph shows that:
. 66.67% people invest to get return. 6.67%people invest for future security. 26.67%people invest for other reason. The following pi-chart & graph shows that:
93.33% people invest to save tax. 6.67%people invest for future security. The following pi-chart & graph shows that:
6.67% people invest to save tax. 73.33% people invest to get return. 10%people invest for future security. 6.67%people invest for other reason. Table 5: awareness & investment in ULIP & MF: -------Influence factors Professionals Total=30 Businessmen Total=30 Govt. Employees Total=30 Private Total=30 Employees
ULIPS ULIPS ULIPS ULIPS awareness 13 16 9 25 Investment 10 7 4 5
MF MF MF MF 10 11 5 22 4 4 2 4
The following pi-charts & graph shows that:
Awareness towards ULIP & MF
43.33% professionals aware about ULIP. 33.33% professionals aware about MF
• • • • • •
53.33% Businessmen aware about ULIP. 36.67% Businessmen aware about MF 30% Gvt. Employees aware about ULIP. 16.67% Gvt. Employees aware about MF 83.33% private Employees aware about ULIP. 73.33% private Employees aware about MF.
The following pi-charts & graph shows that:
• • • • • • • •
33.33% professionals invest in ULIP. 13.33% professionals invest in MF 23.33% Businessmen invest in ULIP. 13.33% Businessmen invest in MF 13.33% Govt. Employees invest in ULIP. 6.67% Govt. Employees invest in MF 16.67% private Employees invest in ULIP. 13.33% private Employees invest in MF
On the basis of the results, the following conclusions can be drawn: 1. Most of the respondents were blind to their portfolio planning. 2. Investors of Udaipur are more risk averse as compared to metros. 3. Life Insurance is the most loved investment. 4. ULIPs form an attractive investment avenue and have a lot of potential for growth. However the major hindrance observed has been the lack of awareness regarding the same. 5. Most of the respondents have not even heard about Mutual Funds.
6. Some respondents know about ULIP & Mutual Funds but not educated enough to invest in. 7. Even in other segments, its largely due to lack of adequate information and resulting confidence in the product, conventional instruments are being preferred. 8. Very few respondents have invested in Mutual Funds. 9. There is very less awareness of Mutual Funds in the segments of Businessmen & Govt. employees .thus there is huge potential in those segments. 10. Aggressive marketing and mass awareness programmes need to be conducted to realize the actual potential of this product.
On the basis of the data analysis & the results obtained, the following suggestions can be given to the bank & AMCs. 1. The bank & AMCs should emphasize on educating the people about new investment avenue like ULIPs & specially Mutual Funds because the awareness is less enough. 2. Awareness camps should be organized on a periodic basis. 3. Company should emphasize on market survey so as to design the product as the customer desires.
4. AMCs should organize advertising campaigns to attract the investors towards the funds & schemes. 5. Since most of the respondents have desired to avail the “safety” & “Returns” from their investments therefore AMCs need to emphasize the feature of diversified portfolio & the equity returns.
LIMITATIONS OF THE STUDY
Every research has its own limitations & the present research work is no exception to this general rule. The inherent limitations of the study are as under:
Interview method, which was followed in the present report work, is relatively
more time consuming. In addition to this it is very expensive method, especially when spreaded geographical sample is taken.
Questionnaire method, can be used only when respondents are literate &
Non-response by some of the respondents.
Since the population is not homogeneous some biasness might have creeped in.
There was a certain degree of misinterpretation or mislead by the respondents
about the points raised in the interview.
Websites referred: 1. www.njindiainvest.com 2. www.amfiindia.com 3. www.mutualfunds.com 4. www.inglife.com 5. www.timesofmoney.com
1. Marketing Research: Naresh K. Malhotra 2. Financial Management: I.M. Pandey
Magazines/Journals referred: 1. Business Today 2. The Times of India 3. Economic Times
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