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PREFACE

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


manager it is necessary that the theoretical must be supplemented with
exposure to the real environment.
Theoretical knowledge just provides the base and it’s not sufficient to
produce a good manager that’s why practical knowledge is needed.
Therefore the research product is an essential requirement for the student of
MBA. This research project not only helps the student to utilize his skills
properly learn field realities but also provides a chance to the organization to
find out talent among the budding managers in the very beginning.
In accordance with the requirement of MBA course I have summer training
project on the topic “Comparitive Analysis of Mutual funds and Ulips”. The
main objective of the research project was to study the two instruments and
make a detailed comparison of the two.
For conducting the research project sample size of 50 customers
of SBIMF and SBOP was selected. The information regarding the project
research was collected through the questionnaire formed by me which was
filled by the customers there.

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INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business.
Though it is perhaps the smallest segment of the industry, it is also the most
glamorous – in that it is a young industry where there are changes in the rules
of the game everyday, and there are constant shifts and upheavals.
The mutual fund is structured around a fairly simple concept, the mitigation
of risk through the spreading of investments across multiple entities, which is
achieved by the pooling of a number of small investments into a large bucket.
Yet it has been the subject of perhaps the most elaborate and prolonged
regulatory effort in the history of the country.
A little history:
The mutual fund industry started in India in a small way with the UTI Act
creating what was effectively a small savings division within the RBI. Over a
period of 25 years this grew fairly successfully and gave investors a good
return, and therefore in 1989, as the next logical step, public sector banks
and financial institutions were allowed to float mutual funds and their success
emboldened the government to allow the private sector to foray into this area.
The initial years of the industry also saw the emerging years of the Indian
equity market, when a number of mistakes were made and hence the mutual
fund schemes, which invested in lesser-known stocks and at very high levels,
became loss leaders for retail investors. From those days to today the retail
investor, for whom the mutual fund is actually intended, has not yet returned
to the industry in a big way. But to be fair, the industry too has focused on
brining in the large investor, so that it can create a significant base corpus,
which can make the retail investor feel more secure.

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The Indian MF industry has Rs 5.67 lakh crore of assets under
management. As per data released by Association of Mutual Funds in India,
the asset base of all mutual fund combined has risen by 7.32% in April, the
first month of the current fiscal. As of now, there are 33 fund houses in
the country including 16 joint ventures and 3 whollyowned foreign asset
managers.
According to a recent McKinsey report, the total AUM of the Indian mutual
fund industry could grow to $350-440 billion by 2012, expanding 33%
annually. While the revenue and profit (PAT) pools of Indian AMCs are
pegged
at $542 million and $220 million respectively, it is at par with fund houses
in developed economies. Operating profits for AMCs in India, as a percentage

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


while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the
US,
in the same time frame.

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No. of
Mutual Fund Name As on
Schemes* Corpus
337 July 31, 7803
ABN AMRO M F
2008
54 July 31, 3513
AIG GlobalM F
2008
177 July 31, 29151.00
SBI Mutual Fund
2008
343 July 31, 37497.00
Birla Mutual Fund
2008
22 July 31, 56.00
BOB Mutual Fund
2008 Major
54 July 31, 4576.00
Canara Robeco Mutual Fund
2008 players in
80 July 31, 1853.00
DBS Chola Mutual Fund
2008 Indian
187 July 31, 10792.00
Deutsche Mutual Fund
2008
mutual
DSP Merrill Lynch Mutual Fund 211 Feb 29, 2008 19483.00
Escorts Mutual Fund 26 Feb 29, 2008 177.00 fund
Fidelity Mutual Fund 39 Mar 31, 2008 7464.00
Franklin Templeton 230 July 31, 24441.00 industry
Investments 2008
371 July 31, 50,752.00 and their
HDFC Mutual Fund
2008
221 July 31, 16,385.00
AUM
HSBC Mutual Fund
2008
431 July 31, 55,161.00
ICICI Prudential Mutual Fund
2008
262 July 31, 7091.00
ING Mutual Fund
2008
9 July 31, 3054.00
JPMorgan Mutual Fund
2008
185 July 31, 18,782.00
Kotak Mahindra Mutual Fund
2008
112 July 31, 17,499.00
LIC Mutual Fund
2008
216 July 31, 7831.00
Lotus India Mutual Fund
2008
3 July 31, 2,814.00
Morgan Stanley Mutual Fund
2008
151 July 31, 11,359.00
PRINCIPAL Mutual Fund
2008
6 July 31, 66.00
Quantum Mutual Fund
2008
345 July 31, 84,564.00
Reliance Mutual Fund
2008
45 July 31, 175.00
Sahara Mutual Fund
2008
255 July 31, 2546.00
Mirae asset mutual fund
2008
219 July 31, 11,898.00
Sundaram Mutual Fund
2008
389 July 31, 20,443.00
Tata Mutual Fund
2008 6
14 July 31, 289.00
Taurus Mutual Fund
2008
315 July 31, 46,120.00
UTI Mutual Fund
2008
HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve Bank.
The history of mutual funds in India can be broadly divided into four distinct
phases: -

First Phase – 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set
up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-
linked from the RBI and the Industrial Development Bank of India (IDBI) took
over the regulatory and administrative control in place of RBI. The first
scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had
Rs.6,700 crores of assets under management.

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


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1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI
Mutual Fund established in June 1987 followed by Can bank Mutual Fund
(Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual
Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).
LIC established its mutual fund in June 1989 while GIC had set up its mutual
fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management
of Rs.47,004 crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund
families.

Also, 1993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July 1993.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI
was bifurcated into two separate entities. One is the Specified Undertaking of
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the Unit Trust of India with assets under management of Rs.29,835 crores as
at the end of January 2003, representing broadly, the assets of US 64
scheme, assured return and certain other schemes. The Specified
Undertaking of Unit Trust of India, functioning under an administrator and
under the rules framed by Government of India and does not come under the
purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of assets under management and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private
sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29
funds, which manage assets of Rs.153108 crores under 421 schemes.

GROWTH IN ASSETS UNDER MANAGEMENT

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ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

While the Indian mutual fund industry has grown in size by about 320% from
March, 1993 (Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms of
AUM, the AUM of the sector excluding UTI has grown over 8 times from Rs.
152 billion in March 1999 to $ 148 billion as at March 2008.

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Though India is a minor player in the global mutual fund industry, its AUM as
a proportion of the global AUM has steadily increased and has doubled over
its levels in 1999.

The growth rate of Indian mutual fund industry has been increasing for the
last few years. It was approximately 0.12% in the year of 1999 and it is
noticed 0.25% in 2004 in terms of AUM as percentage of global AUM .

Some facts for the growth of mutual funds in India

• 100% growth in the last 6 years.


• Number of foreign AMC’s is in the queue to enter the Indian markets.
• Our saving rate is over 23%, highest in the world. Only channelizing
these savings in mutual funds sector is required.
• We have approximately 29 mutual funds which is much less than US
having more than 800. There is a big scope for expansion.
• Mutual fund can penetrate rurals like the Indian insurance industry with
simple and limited products.
• SEBI allowing the MF's to launch commodity mutual funds.
• Emphasis on better corporate governance.
• Trying to curb the late trading practices.
• Introduction of Financial Planners who can provide need based advice.

Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive
expansion of the foreign owned mutual fund companies and the
decline of the companies floated by the nationalized banks and smaller
private sector players.

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Many nationalized banks got into the mutual fund business in the early
nineties and got off to a start due to the stock market boom was
prevailing. These banks did not really understand the mutual fund
business and they just viewed it as another kind of banking activity.
Few hired specialized staff and generally chose to transfer staff from
the parent organizations. The performance of most of the schemes
floated by these funds was not good. Some schemes had offered
guaranteed returns and their parent organizations had to bail out these
AMCs by paying large amounts of money as a difference between the
guaranteed and actual returns. The service levels were also very bad.
Most of these AMCs have not been able to retain staff, float new
schemes etc.

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TECHNOLOGICAL ENVIRONMENT

IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out several innovations in
their products and is offering value added services to their investors. Some of
the value added services that are being offered are:

• Electronic fund transfer facility.


• Investment and re-purchase facility through internet.
• Added features like accident insurance cover, mediclaim etc.
• Holding the investment in electronic form, doing away with the
traditional form of unit certificates.
• Cheque writing facilities.
• Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more
easily accessible to an ever increasing number of investors across the
country. For the first time in India the mutual fund start using the automated
trading, clearing and settlement system of stock exchanges for sale and
repurchase of open-ended de-materialized mutual fund units.

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Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP)
were options introduced which have come in very handy for the investor to
maximize their returns from their investments. SIP ensures that there is a
regular investment that the investor makes on specified dates making his
purchases to spread out reducing the effect of the short term volatility of
markets. SWP was designed to ensure that investors who wanted a regular
income or cash flow from their investments were able to do so with a pre-
defined automated form. Today the SW facility has come in handy for the
investors to reduce their taxes.

LEGAL AND POLITICAL ENVIRONMENT

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund
association in India was generated to function as a non-profit organization.
Association of Mutual Funds in India (AMFI) was incorporated on 22 nd August
1995.

AMFI is an apex body of all Asset Management Companies (AMC), which has
been registered with SEBI. Till date all the AMCs are that have launched
mutual fund schemes are its members. It functions under the supervision and
guidelines of board of directors. AMFI has brought down the Indian Mutual
Fund Industry to a professional and healthy market with ethical lines
enhancing and maintaining standards. It follows the principle of both
protecting and promoting the interest of mutual funds as well as their unit
holders.

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It has been a forum where mutual funds have been able to present their
views, debate and participate in creating their own regulatory framework. The
association was created originally as a body that would lobby with the
regulator to ensure that the fund viewpoint was heard. Today, it is usually the
body that is consulted on matters long before regulations are framed, and it
often initiates many regulatory changes that prevent malpractices that
emerge from time to time.

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


committees to address areas where there is a need for constant vigil and
improvements and other which are adhoc committees constituted to address
specific issues. These committees consist of industry professionals from
among the member mutual funds. There is now some thought that AMFI
should become a self-regulatory organization since it has worked so
effectively as an industry body.

OBJECTIVES:

 To define and maintain high professional and ethical standards in all areas
of operation of mutual fund industry

 To recommend and promote best business practices and code of conduct


to be followed by members and others engaged in the activities of mutual
fund and asset management including agencies connected or involved in the
field of capital markets and financial services.

 To interact with the Securities and Exchange Board of India (SEBI) and to
represent to SEBI on all matters concerning the mutual fund industry.

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


on all matters relating to the Mutual Fund Industry.

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 To develop a cadre of well trained Agent distributors and to implement a
programme of training and certification for all intermediaries and other
engaged in the industry.

 To undertake nation wide investor awareness programme so as to


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

 To disseminate information on Mutual Fund Industry and to undertake


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

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MEMBERS OF AMFI:

o Bank Sponsored

1. Joint Ventures - Predominantly Indian

1. Canara Robeco Asset Management Company Limited


2. SBI Funds Management Private Limited

2. Others

1. Baroda Pioneer Asset Management Company Limited


2. UTI Asset Management Company Ltd

o Institutions

1. LIC Mutual Fund Asset Management Company Limited

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o Private Sector

1. Indian

1. Benchmark Asset Management Company Pvt. Ltd.


2. DBS Cholamandalam Asset Management Ltd.
3. Deutsche Asset Management (India) Pvt. Ltd.
4. Edelweiss Asset Management Limited
5. Escorts Asset Management Limited
6. IDFC Asset Management Company Private Limited
7. JM Financial Asset Management Private Limited
8. Kotak Mahindra Asset Management Company
Limited(KMAMCL)
9. Quantum Asset Management Co. Private Ltd.
10. Reliance Capital Asset Management Ltd.
11. Sahara Asset Management Company Private Limited
12. Tata Asset Management Limited
13. Taurus Asset Management Company Limited

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2. Foreign

1. AIG Global Asset Management Company (India) Pvt. Ltd.


2. FIL Fund Management Private Limited
3. Franklin Templeton Asset Management (India) Private
Limited
4. Mirae Asset Global Investment Management (India) Pvt.
Ltd.

3. Joint Ventures - Predominantly Indian

1. Birla Sun Life Asset Management Company Limited


2. DSP Merrill Lynch Fund Managers Limited
3. HDFC Asset Management Company Limited
4. ICICI Prudential Asset Mgmt.Company Limited
5. Sundaram BNP Paribas Asset Management Company
Limited

4. Joint Ventures - Predominantly Foreign

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


2. Bharti AXA Investment Managers Private Limited
3. HSBC Asset Management (India) Private Ltd.

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4. ING Investment Management (India) Pvt. Ltd.
5. JPMorgan Asset Management India Pvt. Ltd.
6. Lotus India Asset Management Co. Private Ltd.
7. Morgan Stanley Investment Management Pvt.Ltd.
8. Principal Pnb Asset Management Co. Pvt. Ltd.

REGULATORY MEASURES BY SEBI

Like Banking & Insurance up to the nineties of the last century, Mutual Fund
industry in India was set up and functioned exclusively in the state monopoly
represented by the Unit Trust of India. This monopoly was diluted in the
eighties by allowing nationalized banks and insurance companies (LIC & GIC)
to set up their institutions under the Indian Trusts Act to transact mutual fund
business, allowing the Indian investor the option to choose between different
service providers. Unit Trust was a statutory corporation governed by its own
incorporating act. There was no separate regulatory authority up to the time
SEBI was made a statutory authority in 1992. but it was only in the year 1993,
when a government took a policy decision to deregulate Indian Economy from
government control and to transform it market oriented, that the industry was
opened to competition from private and foreign players. By the year 2000
there came to be established in the market 34 mutual funds offerings a variety
of about 550 schemes.

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SECURITIES AND EXCHANGE BOARD OF INDIA
(MUTUAL FUNDS) REGULATIONS, 1996

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


India (SEBI) since inception of SEBI as a statutory body. SEBI initially
formulated “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL
FUNDS) REGULATIONS, 1993” providing detailed procedure for
establishment, registration, constitution, management of trustees, asset
management company, about schemes/products to be designed, about
investment of funds collected, general obligation of MFs, about inspection,
audit etc. based on experience gained and feedback received from the
market SEBI revised the guidelines of 1993 and issued fresh guidelines in
1996 titled “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL
FUNDS) REGULATIONS, 1996”. The said regulations as amended from time
to time are in force even today.

The SEBI mutual fund regulations contain ten chapters and twelve schedules.
Chapters containing material subjects relating to regulation and conduct of
business by Mutual Funds.

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REGISTRATION OF MUTUAL FUND:

Application for registration


1. An application for registration of a mutual fund shall be made to the Board
in Form A by the sponsor.

Application fee to accompany the application


2. Every application for registration under regulation 3 shall be accompanied
by nonrefundable application fee as specified in the Second Schedule.

Application to conform to the requirements


3. An application which is not complete in all respects shall be liable to be
rejected:
Provided that, before rejecting any such application, the applicant shall be
given an opportunity to complete such formalities within such time as may be
specified by the Board.

Furnishing information
4. The Board may require the sponsor to furnish such further information or
clarification as may be required by it.

Eligibility criteria
5. For the purpose of grant of a certificate of registration, the applicant has to
fulfill the following, namely :—
(a) the sponsor should have a sound track record and general reputation of
fairness and integrity in all his business transactions.
Explanation : For the purposes of this clause “sound track record” shall mean
the
sponsor should,—
(i) be carrying on business in financial services for a period of not less than
five
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years; and
(ii) the networth is positive in all the immediately preceding five years; and
(iii) the networth in the immediately preceding year is more than the capital
contribution of the sponsor in the asset management company; and
(iv) the sponsor has profits after providing for depreciation, interest and tax in
three out of the immediately preceding five years, including the fifth year;

(b) in the case of an existing mutual fund, such fund is in the form of a trust
and the trust deed has been approved by the Board;

(c) the sponsor has contributed or contributes at least 40% to the net worth of
the asset management company:
Provided that any person who holds 40% or more of the net worth of an
asset
management company shall be deemed to be a sponsor and will be required
to fulfill the eligibility criteria specified in these regulations;
(d) the sponsor or any of its directors or the principal officer to be employed
by the mutual fund should not have been guilty of fraud or has not been
convicted of an offence involving moral turpitude or has not been found guilty
of any economic
offence;

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


accordance with the provisions of the regulations;

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


and operate the scheme of such funds in accordance with the provisions of
these regulations;

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


gold and gold related instruments and carry out the custodian activities as
may be authorized by the trustees.
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Consideration of application
8. The Board, may on receipt of all information decide the application.

Grant of Certificate of Registration


9. The Board may register the mutual fund and grant a certificate in Form B
on the applicant paying the registration fee as specified in Second Schedule.

Terms and conditions of registration


10. The registration granted to a mutual fund under regulation 9, shall be
subject to the following terms and conditions:
(a) the trustees, the sponsor, the asset management company and the
custodian shall comply with the provisions of these regulations;
(b) the mutual fund shall forthwith inform the Board, if any information or
particulars previously submitted to the Board was misleading or false in any
material respect;
(c) the mutual fund shall forthwith inform the Board, of any material change in
the
information or particulars previously furnished, which have a bearing on the
registration granted by it;
(d) payment of fees as specified in the regulations and the Second Schedule.

Rejection of application
11. Where the sponsor does not satisfy the eligibility criteria mentioned in
regulation 7, the Board may reject the application and inform the applicant of
the same.

Payment of annual service fee:


12. A mutual fund shall pay before the 15th April each year a service fee as
specified in the Second Schedule for every financial year from the year
following the year of registration:

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Provided that the Board may, on being satisfied with the reasons for the
delay permit the mutual fund to pay the service fee at any time before the
expiry of two months from the commencement of the financial year to which
such fee relates.

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Failure to pay annual service fee
13. The Board may not permit a mutual fund who has not paid service fee to
launch any scheme.

CONSTITUTION AND MANAGEMENT OF ASSET


MANAGEMENT
COMPANY AND CUSTODIAN

Application by an asset management company

14. (1) The application for the approval of the asset management company
shall be made in Form D.
(2) The provisions of regulations 5, 6 and 8 shall, so far as may be, apply to
the
application made under sub-regulation (1) as they apply to the application for
registration of a mutual fund.

Appointment of an asset management company


15. (1) The sponsor or, if so authorised by the trust deed, the trustee, shall
appoint an asset management company, which has been approved by the
Board under sub-regulation(2) of regulation 21.

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


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

(3) Any change in the appointment of the asset management company shall
be subject to prior approval of the Board and the unitholders.

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Eligibility criteria for appointment of asset management company
16. (1) For grant of approval of the asset management company the applicant
has to fulfill the following :—
(a) in case the asset management company is an existing asset management
company it has a sound track record, general reputation and fairness in
transactions.
Explanation: For the purpose of this clause sound track record shall mean
the
networth and the profitability of the asset management company;
(aa) the asset management company is a fit and proper person;
(b) the directors of the asset management company are persons having
adequate professional experience in finance and financial services related
field and not found guilty of moral turpitude or convicted of any economic
offence or violation of any securities laws;
(c) the key personnel of the asset management company 27[have not been
found guilty of moral turpitude or convicted of economic offence or violation of
securities laws or worked for any asset management company or mutual fund
or any intermediary 29[during the period when its] registration has been
suspended or cancelled at any time by the Board;
(d) the board of directors of such asset management company has at least
fifty per cent directors, who are not associate of, or associated in any manner
with, the sponsor or any of its subsidiaries or the trustees;
(e) the Chairman of the asset management company is not a trustee of any
mutual fund;
(f) the asset management company has a networth of not less than rupees
ten crores :
Provided that an asset management company already granted approval
under the provisions of Securities and Exchange Board of India (Mutual
Funds) Regulations, 1993 shall within a period of twelve months from the date
of notification of these regulations increase its networth to rupees ten crores :

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Provided [further] that the period specified in the first proviso may be
extended in appropriate cases by the Board up to three years for reasons to
be recorded in writing :
Provided further that no new schemes shall be allowed to be launched or
managed by such asset management company till the networth has been
raised to rupees ten crores.
Explanation : For the purposes of this clause, “networth” means the
aggregate of the paid up capital and free reserves of the asset management
company after
deducting therefrom miscellaneous expenditure to the extent not written off or
adjusted or deferred revenue expenditure, intangible assets and accumulated
losses.
(2) The Board may, after considering an application with reference to the
matters
specified in sub-regulation (1), grant approval to the asset management
company.

Terms and conditions to be complied with

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


subject to the
following conditions, namely:—
(a) any director of the asset management company shall not hold the office of
the
director in another asset management company unless such person is an
independent director referred to in clause (d) of sub-regulation (1) of
regulation 21 and approval of the Board of asset management company of
which such person is a director, has been obtained;
(b) the asset management company shall forthwith inform the Board of any
material change in the information or particulars previously furnished, which
have a bearing on the approval granted by it;

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(c) no appointment of a director of an asset management company shall be
made without prior approval of the trustees;
(d) the asset management company undertakes to comply with these
regulations;
(e) no change in the controlling interest of the asset management company
shall be made unless,—
(i) prior approval of the trustees and the Board is obtained;
(ii) a written communication about the proposed change is sent to each
unitholder and an advertisement is given in one English daily newspaper
having
nationwide circulation and in a newspaper published in the language of the
region where the Head Office of the mutual fund is situated; and
(iii) the unitholders are given an option to exit on the prevailing Net Asset
Value
without any exit load;]
(f) the asset management company shall furnish such information and
documents to the trustees as and when required by the trustees.

Procedure where approval is not granted


18. Where an application made under regulation 19 for grant of approval does
not satisfy the eligibility criteria laid down in regulation 21, the Board may
reject the application.

Restrictions on business activities of the asset management company


19. The asset management company shall—
(1) not act as a trustee of any mutual fund;

(2) not undertake any other business activities except activities in the nature
of
portfolio management services,] management and advisory services to
offshore funds, pension funds, provident funds, venture capital funds,
management of insurance funds, financial consultancy and exchange of
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research on commercial basis if any of such activities are not in conflict with
the activities of the mutual fund :

Provided that the asset management company may itself or through its
subsidiaries undertake such activities if it satisfies the Board that the key
personnel of the asset management company, the systems, back office, bank
and securities accounts are segregated activity-wise and there exist systems
to prohibit access to inside information of various activities :
Provided further that asset management company shall meet capital
adequacy
requirements, if any, separately for each such activity and obtain separate
approval, if necessary under the relevant regulations.
(3) The asset management company shall not invest in any of its schemes
unless full disclosure of its intention to invest has been made in the offer
documents 34[in case of schemes launched after the notification of these
regulations :
Provided that an asset management company shall not be entitled to charge
any fees on its investment in that scheme.

Asset management company and its obligations

20. (1) The asset management company shall take all reasonable steps and
exercise due diligence to ensure that the investment of funds pertaining to
any scheme is not contrary to the provisions of these regulations and the trust
deed.
(2) The asset management company shall exercise due diligence and care in
all its investment decisions as would be exercised by other persons engaged
in the same business.
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(3) The asset management company shall be responsible for the acts of
commission or omission by its employees or the persons whose services
have been procured by the asset management company.

(4) The asset management company shall submit to the trustees quarterly
reports of each year on its activities and the compliance with these
regulations.

(5) The trustees at the request of the asset management company may
terminate the assignment of the asset management company at any time:
Provided that such termination shall become effective only after the trustees
have accepted the termination of assignment and communicated their
decision in writing to the asset management company.

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


termination, the asset management company or its directors or other officers
shall not be absolved of liability to the mutual fund for their acts of
commission or omission, while holding such position or office.

(6A) The Chief Executive Officer (whatever his designation may be) of the
asset
management company shall ensure that the mutual fund complies with all the
provisions of these regulations and the guidelines or circulars issued in
relation thereto from time to time and that the investments made by the fund
managers are in the interest of the unit holders and shall also be responsible
for the overall risk management function of the mutual fund.
Explanation.—For the purpose of this sub-regulation, the words “these
regulations” shall mean and include the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996 as amended from time to time.

31
(6B) The fund managers (whatever the designation may be) shall ensure that
the funds of the schemes are invested to achieve the objectives of the
scheme and in the interest of the unit holders.

(7) (a) An asset management company shall not through any broker
associated with the sponsor, purchase or sell securities, which is average of 5
per cent or more of the aggregate purchases and sale of securities made by
the mutual fund in all its schemes :
Provided that for the purpose of this sub-regulation, the aggregate purchase
and sale of securities shall exclude sale and distribution of units issued by the
mutual fund :
Provided further that the aforesaid limit of 5 per cent shall apply for a block
of any three months.
(b) An asset management company shall not purchase or sell securities
through any broker [other than a broker referred to in clause (a) of sub-
regulation (7) which is average of 5 per cent or more of the aggregate
purchases and sale of securities made by the mutual fund in all its schemes,
unless the asset management company has recorded in writing the
justification for exceeding the limit of 5 per cent and reports of all such
investments are sent to the trustees on a quarterly basis :
Provided that the aforesaid limit shall apply for a block of three months.

(8) An asset management company shall not utilise the services of the
sponsor or any of its associates, employees or their relatives, for the purpose
of any securities transaction and distribution and sale of securities :
Provided that an asset management company may utilise such services if
disclosure to that effect is made to the unitholders and the brokerage or
commission paid is also disclosed in the half-yearly annual accounts of the
mutual fund :
Provided further that the mutual funds shall disclose at the time of declaring
halfyearly and yearly results :

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(i) any underwriting obligations undertaken by the schemes of the mutual
funds with respect to issue of securities associate companies,
(ii) devolvement, if any,
(iii) subscription by the schemes in the issues lead managed by associate
companies,
(iv) subscription to any issue of equity or debt on private placement basis
where the sponsor or its associate companies have acted as arranger or
manager.

(9) The asset management company shall file with the trustees the details of
transactions in securities by the key personnel of the asset management
company in their own name or on behalf of the asset management company
and shall also report to the Board, as and when required by the Board.

(10) In case the asset management company enters into any securities
transactions with any of its associates a report to that effect shall be sent to
the trustees at its next meeting.

(11) In case any company has invested more than 5 per cent of the net asset
value of a scheme, the investment made by that scheme or by any other
scheme of the same mutual fund in that company or its subsidiaries shall be
brought to the notice of the trustees by the asset management company and
be disclosed in the half-yearly and annual accounts of the respective
schemes with justification for such investment 40[provided the latter
investment has been made within one year of the date of the former
investment calculated on either side.

(12) The asset management company shall file with the trustees and the
Board—
(a) detailed bio-data of all its directors along with their interest in other
companies
within fifteen days of their appointment;
33
(b) any change in the interests of directors every six months; and
(c) a quarterly report to the trustees giving details and adequate justification
about the purchase and sale of the securities of the group companies of the
sponsor or the asset management company, as the case may be, by the
mutual fund during the said quarter.
(13) Each director of the asset management company shall file the details of
his transactions of dealing in securities with the trustees on a quarterly basis
in accordance with guidelines issued by the Board.

(14) The asset management company shall not appoint any person as key
personnel who has been found guilty of any economic offence or involved in
violation of securities laws.

(15) The asset management company shall appoint registrars and share
transfer agents who are registered with the Board:
Provided if the work relating to the transfer of units is processed in-house,
the charges at competitive market rates may be debited to the scheme and
for rates higher than the competitive market rates, prior approval of the
trustees shall be obtained and reasons for charging higher rates shall be
disclosed in the annual accounts.

(16) The asset management company shall abide by the Code of Conduct as
specified in the Fifth Schedule.

Appointment of custodian

21. (1) The mutual fund shall appoint a Custodian to carry out the custodial
services for the schemes of the fund and sent intimation of the same to the
Board within fifteen days of the appointment of the Custodian:
Provided that in case of a gold exchange traded fund scheme, the assets of
the scheme being gold or gold related instruments may be kept in custody of
a bank which is registered as a custodian with the Board.
34
(2) No custodian in which the sponsor or its associates hold 50 per cent or
more of the voting rights of the share capital of the custodian or where 50 per
cent or more of the directors of the custodian represent the interest of the
sponsor or its associates shall act as custodian for a mutual fund constituted
by the same sponsor or any of its associates or subsidiary company.

Agreement with custodian

22. The mutual fund shall enter into a custodian agreement with the
custodian, which shall contain the clauses which are necessary for the
efficient and orderly conduct of the affairs of the custodian:
Provided that the agreement, the service contract, terms and appointment of
the
custodian shall be entered into with the prior approval of the trustees.

CHARACTERISTICS OF MUTUAL FUNDS

• The ownership is in the hands of the investors who have pooled in their
funds.

• It is managed by a team of investment professionals and other service


providers.

• The pool of funds is invested in a portfolio of marketable investments.

• The investors share is denominated by ‘units’ whose value is called as


Net Asset Value (NAV) which changes everyday.

• The investment portfolio is created according to the stated investment


objectives of the fund.

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ADVANTAGES OF MUTUAL FUNDS

The advantages of mutual funds are given below: -

Portfolio Diversification

Mutual funds invest in a number of companies. This diversification


reduces the risk because it happens very rarely that all the stocks decline at
the same time and in the same proportion. So this is the main advantage of
mutual funds.

Professional Management

Mutual funds provide the services of experienced and skilled


professionals, assisted by investment research team that analysis the
performance and prospects of companies and select the suitable investments
to achieve the objectives of the scheme.

Low Costs

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


directly investing in a capital markets because of less amount of brokerage
and other fees.

Liquidity

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


needs money he can easily get redemption, which is not possible in most of
other options of investment. In open-ended schemes of mutual fund, the
investor gets the money back at net asset value and on the other hand in
close-ended schemes the units can be sold in a stock exchange at a
prevailing market price.
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Transparency

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


investment, the proportion of money invested in each class of assets and the
fund manager’s investment strategy

Flexibility

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


investors can systematically invest or withdraw funds according to their needs
and convenience like regular investment plans, regular withdrawal plans,
dividend reinvestment plans etc.

Convenient Administration

Investing in a mutual fund reduces paperwork and helps investors to


avoid many problems like bad deliveries, delayed payments and follow up
with brokers and companies. Mutual funds save time and make investing
easy.

Affordability

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


stocks. A mutual fund because of its large corpus allows even a small
investor to take the benefit of its investment strategy.

Well Regulated

All mutual funds are registered with SEBI and they function with in the
provisions of strict regulations designed to protect the interest of investors.
The operations of mutual funds are regularly monitored by SEBI.

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DISADVANTAGES OF MUTUAL FUNDS

Mutual funds have their following drawbacks:

No Guarantees

No investment is risk free. If the entire stock market declines in value, the
value of mutual fund shares will go down as well, no matter how balanced the
portfolio. Investors encounter fewer risks when they invest in mutual funds
than when they buy and sell stocks on their own. However, anyone who
invests through mutual fund runs the risk of losing the money.

Fees and Commissions

All funds charge administrative fees to cover their day to day expenses.
Some funds also charge sales commissions or loads to compensate brokers,
financial consultants, or financial planners. Even if you don’t use a broker or
other financial advisor, you will pay a sales commission if you buy shares in a
Load Fund.

Taxes

During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If your fund makes a
profit on its sales, you will pay taxes on the income you receive, even you
reinvest the money you made.

38
Management Risk

When you invest in mutual fund, you depend on fund manager to make the
right decisions regarding the fund’s portfolio. If the manager does not perform
as well as you had hoped, you might not make as much money on your
investment as you expected. Of course, if you invest in index funds, you
forego management risk because these funds do not employ managers.

39
STRUCTURE OF MUTUAL FUND

There are many entities involved and the diagram below illustrates the structu
re of mutual funds: -

Structure of Mutual Funds

SEBI

The regulation of mutual funds operating in India falls under the preview
of authority of the “Securities and Exchange Board of India” (SEBI). Any
person proposing to set up a mutual fund in India is required under the SEBI
(Mutual Funds) Regulations, 1996 to be registered with the SEBI.

40
Sponsor

The sponsor should contribute at least 40% to the net worth of the AMC.
However, if any person holds 40% or more of the net worth of an AMC shall
be deemed to be a sponsor and will be required to fulfill the eligibility criteria
in the Mutual Fund Regulations. The sponsor or any of its directors or the
principal officer employed by the mutual fund should not be guilty of fraud or
guilty of any economic offence.

Trustees

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


i.e. two third of the trustees should be independent persons who are not
associated with the sponsors in any manner. An AMC or any of its officers or
employees are not eligible to act as a trustee of any mutual fund. The trustees
are responsible for - inter alia – ensuring that the AMC has all its systems in
place, all key personnel, auditors, registrar etc. have been appointed prior to
the launch of any scheme.

Asset Management Company

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


the assets of the mutual fund. Under the mutual fund regulations, the
applicant must satisfy certain eligibility criteria in order to qualify to register
with SEBI as an AMC.

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


2. The chairman of the AMC is not a trustee of any mutual fund.
3. The AMC should have and must at all times maintain a minimum net
worth of Cr. 100 million.
4. The director of the AMC should be a person having adequate
professional experience.

41
5. The board of directors of such AMC has at least 50% directors who are
not associate of or associated in any manner with the sponsor or any
of its subsidiaries or the trustees.

The Transfer Agents

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


maintaining the register of investors / unit holders and every day settlements
of purchases and redemption of units. The role of a transfer agent is to collect
data from distributors relating to daily purchases and redemption of units.

Custodian

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


appoint a custodian to carry out the custodial services for the schemes of the
fund. Only institutions with substantial organizational strength, service
capability in terms of computerization and other infrastructure facilities are
approved to act as custodians. The custodian must be totally delinked from
the AMC and must be registered with SEBI.

Unit Holders

They are the parties to whom the mutual fund is sold. They are ultimate
beneficiary of the income earned by the mutual funds.

42
TYPES OF MUTUAL FUND SCHEMES

In India, there are many companies, both public and private that are engaged
in the trading of mutual funds. Wide varieties of Mutual Fund Schemes exist
to cater to the needs such as financial position, risk tolerance and return
expectations etc. Investment can be made either in the debt Securities or
equity .The table below gives an overview into the existing types of schemes
in the Industry.

TYPES OF MUTUAL FUND SCHEME

By structure By Investment Other Schemes

Objectives

Tax saving fund


Open-ended Debt Equity
Schemes Schemes Schemes

Close Ended MM Mutual Large cap Sector specific


Schemes fund fund fund

Interval Schemes FMP


Mid cap Index Schemes
Fund

Other Debt
Schemes Small cap
fund

Any Other
Equity Fund
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Generally two options are available for every scheme regarding
dividend payout and growth option. By opting for growth option an investor
can have the benefit of long-term growth in the stock market on the other side
by opting for the dividend option an investor can maintain his liquidity by
receiving dividend time to time. Some time people refer dividend option as
dividend fund and growth fund. Generally decisions regarding declaration of
the dividend depend upon the performance of stock market and performance
of the fund.

OPTION REGARDING DIVIDEND

Dividend Growth

Payout Reinvested

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Systematic Investment Plan (SIP)

Systematic investment plan is like Recurring Deposit in which investor


invests in the particular scheme on regular intervals. In the case it is
convenient for salaried class and middle-income group. In this case on regular
interval units of specified amount is created. An investor can make payment by
regular payments by issuing cheques, post dated cheques, ECS, standing
Mandate etc. SIP can be started in the any open-ended fund if there is
provision of it. There are some entry and exit load barriers for discontinuation
and redemption of the fund before the said period.

According to Structure

Open – Ended Funds

An open – ended fund is one that is available for subscription all through the
year. These do not have a fixed maturity. Investors can conveniently buy and
sell units at Net Asset Value (NAV) related prices. The key feature of open –
ended schemes is liquidity.

Close – Ended Funds

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


ranging from 3 to 15 years. The fund is open for subscription only during a
specified period. Investors can invest in the scheme at the same time of the
initial public issue and thereafter they can buy and sell the units of the
scheme on the stock exchanges where they are listed. In order to provide an
exit route to the investors, some close – ended funds give an option of selling

45
back the units to the mutual fund through periodic repurchase at NAV related
prices.

Interval Funds

Interval funds combine the features of open – ended and close – ended
schemes. They are open for sales or redemption during pre-determined
intervals at their NAV.

According to Investment Objective:

Growth Funds

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


medium to long term. Such schemes normally invest a majority of their
corpus in equities. It has been proven that returns from stocks are
much better than the other investments had over the long term. Growth
schemes are ideal for investors having a long term outlook seeking
growth over a period of time.

Income Funds

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


income to investors. Such schemes generally invest in fixed income
securities such as bonds, corporate debentures and government
securities. Income funds are ideal for capital stability and regular
income.

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Balanced Funds

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


income. Such schemes periodically distribute a part of their earning
and invest both in equities and fixed income securities in the proportion
indicated in their offer documents. In a rising stock market, the NAV of
these schemes may not normally keep pace or fall equally when the
market falls. These are ideal for investors looking for a combination of
income and moderate growth.

Money Market Funds

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


preservation of capital and moderate income. These schemes
generally invest in safe short term instruments such as treasury bills,
certificates of deposit, commercial paper and inter – bank call money.
Returns on these schemes may fluctuate depending upon the interest
rates prevailing in the market. These are ideal for corporate and
individual investors as a means to park their surplus funds for short
periods.

Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific


provisions of the Indian Income Tax laws as the government offers tax
incentives for investment in specified avenues. Investments made in
Equity Linked Saving Schemes (ELSS) and Pension Schemes are
allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also
provides opportunities to investors to save capital gains.

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Special Schemes:

Index Schemes

Index funds attempt to replicate the performance of a particular


index such as the BSE Sensex or the NSE 50.

Sector Specific Schemes

Sector funds are those which invest exclusively in a specified


industry or a group of industries or various segments such as ‘A’ group
shares or initial public offerings.

Bond Schemes

It seeks investment in bonds, debentures and debt related


instrument to generate regular income flow.

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FREQUENTLY USED TERMS

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


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

Diversification – The policy of spreading investments among a range of


different securities to reduce the risk.

Net Asset Value (NAV) - Net Asset Value is the market value of the
assets of the scheme minus its liabilities. The per unit NAV is the net asset
value of the scheme divided by the number of units outstanding on the
Valuation Date.

Sales Price - Is the price you pay when you invest in a scheme. Also called
Offer Price. It may include a sales load.

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


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

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


repurchase their units and close-ended schemes redeem their units on
maturity. Such prices are NAV related.

Sales Load - Is a charge collected by a scheme when it sells the units. Also
called ‘Front-end’ load. Schemes that do not charge a load are called ‘No
Load’ schemes.

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ULIPS

50
PLATFORMS OF LIFE INSURANCE- UNIT LINKED
INSURANCE PLANS

World over , insurance come in different forms and shapes . although the
generic names may find similar , the difference in product features makes one
wonder about the basis on which these products are designed .With
insurance market opened up , Indian customer has suddenly found himself in
a market place where he is bombarded with a lot of jargon as well as
marketing gimmicks with a very little knowledge of what is happening . This
module is aimed at clarifying these underlying concepts and simplifying the
different products available in the market.

We have many products like Endowment , Whole life , Money back etc. All
these products are based on following basic platforms or structures viz.
 Traditional Life
 Universal Life or Unit Linked Policies

3.1 TRADITIONAL LIFE – AN OVERVIEW


The basic and widely used form of design is known as Traditional Life
Platform. It is based on the concept of sharing . Each of the policy holder
contributes his contribution (premium) into the common large fund is
managed by the company on behalf of the policy holders.

51
Administration of that common fund in the interest of everybody was
entrusted to the insurance company .It was the responsibility of the company
to administer schemes for benefit of the policyholders. Policyholders played a
very passive roll . In the course of time , the same concept of sharing and a
common fund was extended to different areas like saving , investment etc.

3.1.1 FEATURES OF TL :

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


has no other responsibility but to pay the premium regularly.
 Company is responsible for the protection as well as maximization of
the policyholder’s funds.
 There is a common fund where in all the premiums paid are
accumulated. Expenses incurred as well as claims paid are then taken
out of this fund.
 Companies carry out the valuation of the fund periodically to ascertain
the position. It is also a practice to increase the minimum possible
guarantee under a policy every year in the form of declaring and
attaching bonuses to the sum assured on the basis of this valuation.
Declaration of bonuses is not mandatory .
 Based on the end objective , companies may offer different plans like
saving plans, investment plans etc.(e.g. Endowment , SPWLIP)
It helps to maintain a smooth growth and protects against the vagaries of the
market. In other words it minimizes the risk of investments for an average
individual. He shares his risk with a group of like-minded individuals.

ULIP is the Product Innovation of the conventional Insurance product.


With the decline in the popularity of traditional Insurance products &
changing Investor needs in terms of life protection, periodicity, returns
& liquidity, it was need of the hour to have an Instrument that offers all
these features bundled into one.
52
A Unit Link Insurance Policy (ULIP) is one in which the customer is provided
with a life insurance cover and the premium paid is invested in either debt or
equity products or a combination of the two. In other words, it enables the
buyer to secure some protection for his family in the event of his untimely
death and at the same time provides him an opportunity to earn a return on
his premium paid. In the event of the insured person's untimely death, his
nominees would normally receive an amount that is the higher of the sum
assured or the value of the units (investments).

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


protection/insurance needs of an insurance seeker. It saves the
investor/insurance-seeker the hassles of managing and tracking a portfolio or
products. More importantly ULIPs offer investors the opportunity to select a
product which matches their risk profile.

Unit Linked Insurance Plans came into play in the 1960s and became very
popular in Western Europe and Americas. In India The first unit linked
Insurance Plan , popularly known as ULIP – Unit Linked Insurance Plan in
India was brought out by Unit Trust Of India in the year 1971 by entering into
a group insurance arrangement with LIC o provide for life cover to the
investors , while UTI , as a mutual was taking care of investing the unit
holders money in the capital market and giving them a fair return .

Subsequently in the year 1989 , another Unit Linked Product was launched
by the LIC Mutual Fund called by the name of “DHANARAKSHA” which was
more or less on the line of ULIP of UTI . Thereafter LIC itself came out with a
Unit Linked Insurance Product known by name “BIMA PLUS “ in the year
2001-02 .

Presently a number of private life insurance companies have launched Unit


Linked Insurance Products with a variety of new features.
53
TYPES OF ULIP

There are various unit linked insurance plans available in the market.
However, the key ones are pension, children, group and capital guarantee
plans.

The pension plans come with two variations — with and without life cover —
and are meant for people who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at taking care of their
educational and other needs..
Apart from unit-linked plans for individuals, group unit linked plans are also
available in the market. The Group linked plans are basically designed for
employers who want to offer certain benefits for their employees such as
gratuity, superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan
promises the policyholder that at least the premium paid will be returned at
maturity. But the guaranteed amount is payable only when the policy's
maturity value is below the total premium paid by the individual till maturity.
However, the guarantee is not provided on the actual premium paid but only
on that portion of the premium that is net of expenses (mortality, sales and
marketing, administration).

How ULIPs work

ULIPs work on the lines of mutual funds. The premium paid by the client (less
any charge) is used to buy units in various funds (aggressive, balanced or
conservative) floated by the insurance companies. Units are bought according

54
to the plan chosen by the policyholder. On every additional premium, more
units are allotted to his fund. The policyholder can also switch among the
funds as and when he desires. While some companies allow any number of
free switches to the policyholder, some restrict the number to just three or
four. If the number is exceeded, a certain charge is levied.
Individuals can also make additional investments (besides premium) from
time to time to increase the savings component in their plan. This facility is
termed "top-up". The money parked in a ULIP plan is returned either on the
insured's death or in the event of maturity of the policy. In case of the insured
person's untimely death, the amount that the beneficiary is paid is the higher
of the sum assured (insurance cover) or the value of the units (investments).
However, some schemes pay the sum assured plus the prevailing value of
the investments.

ULIP - KEY FEATURES

• Premiums paid can be single, regular or variable. The payment period


too can be regular or variable. The risk cover can be increased or
decreased.

• As in all insurance policies, the risk charge (mortality rate) varies with
age.

• The maturity benefit is not typically a fixed amount and the maturity
period can be advanced or extended.

• Investments can be made in gilt funds, balanced funds, money market


funds, growth funds or bonds.

• The policyholder can switch between schemes, for instance, balanced


to debt or gilt to equity, etc.
55
• The maturity benefit is the net asset value of the units.

• The costs in ULIP are higher because there is a life insurance


component in it as well, in addition to the investment component.

• Insurance companies have the discretion to decide on their investment


portfolios.

• Being transparent the policyholder gets the entire episode on the


performance of his fund.

• ULIP products are exempted from tax and they provide life insurance.

• Provides capital appreciation.

• Investor gets an option to choose among debt, balanced and equity


funds.

USP of ULIPS

Insurance cover plus savings

ULIPs serve the purpose of providing life insurance combined with savings at
market-linked returns. To that extent, ULIPS can be termed as a two-in-one
plan in terms of giving an individual the twin benefits of life insurance plus
savings.

Multiple investment options


ULIPS offer a lot more variety than traditional life insurance plans. So there
are multiple options at the individual’s disposal. ULIPS generally come in
three broad variants:

56
 Aggressive ULIPS (which can typically invest 80%-100% in equities,
balance in debt)
 Balanced ULIPS (can typically invest around 40%-60% in equities)
 Conservative ULIPS (can typically invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact
debt/equity allocations may vary across insurance companies. Individuals can
opt for a variant based on their risk profile.

Flexibility

The flexibility with which individuals can switch between the ULIP variants to
capitalise on investment opportunities across the equity and debt markets is
what distinguishes it from other instruments. Some insurance companies
allow a certain number of ‘free’ switches. Switching also helps individuals on
another front. They can shift from an Aggressive to a Balanced or a
Conservative ULIP as they approach retirement. This is a reflection of the
change in their risk appetite as they grow older.

Works like an SIP


Rupee cost-averaging is another important benefit associated with ULIPS.
With an SIP, individuals invest their monies regularly over time intervals of a
month/quarter and don’t have to worry about ‘timing’ the stock markets.

HURDLES OF ULIP

NO STANDARDIZATION

All the costs are levied in ways that do not lend to standardisation. If one
company calculates administration cost by a formula, another levies a flat
rate. If one company allows a range of the sum assured (SA), another allows
only a multiple of the premium. There was also the problem of a varying cost
structure with age

57
LACK OF FLEXIBILITY IN LIFE COVER

ULIP is known to be more flexible in nature than the traditional plans and, on
most counts, they are. However, some insurance companies do not allow the
individual to fix the life cover that he needs. These rely on a multiplier that is
fixed by the insurer

OVERSTATING THE YIELD

Insurance companies work on illustrations. They are allowed to show you how
much your annual premium will be worth if it grew at 10 per cent per annum.
But there are costs, so each company also gives a post-cost return at the 10
per cent illustration, calling it the yield. some companies were not including
the mortality cost while calculating the yield. This amounts to overstating the
yield.

INTERNALLY MADE SALES ILLUSTRATION

During the process of collecting information, it was found that the sales
benefit illustration shown was not conforming to the Insurance Regulatory and
Development Authority (Irda) format. in many locations30 per cent return
illustrations are still rampant

NOT ALL SHOW THE BENCHMARK RETURN

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


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

58
benchmark, or the measuring rod of performance, some companies are not
using any benchmark at all.

EARLY EXIT OPTIONS

The Ulip product works over the long term. The earlier the exit, the worse off
is the investor since he ends up redeeming a high-front-load product and is
then encouraged to move into another higher cost product at that stage. An
early exit also takes away the benefit of compounding from insured.

59
CREEPING COSTS

Since the investors are now more aware than before and have begun to ask
for costs, some companies have found a way to answer that without
disclosing too much. People are now asking how much of the premium will go
to work. There are plans that are able to say 92 per cent will be invested, that
is, will have a front load of just 8 per cent. What they do not say is the much
higher policy administration cost that is tucked away inside (adjusted from the
fund value).

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


administration costs, that stay fixed over time, there are plans that charge this
amount, but it grows by as much as 5 per cent a year over time. There are
others that charge a multiple of this amount and that too grows

60
COMPARISON
BETWEEN ULIPS
AND MUTUAL
FUNDS

61
COMPARISON BETWEEN ULIPS AND MUTUAL FUNDS:

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


to mutual funds in terms of their structure and functioning. As is the case with
mutual funds, investors in ULIPs are allotted units by the insurance company
and a net asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes
similar to the ones found in the mutual funds domain, i.e. diversified equity
funds, balanced funds and debt funds to name a few. Generally speaking,
ULIPs can be termed as mutual fund schemes with an insurance component.

However it should not be construed that barring the insurance element there
is nothing differentiating mutual funds from ULIPs.

Points of difference between the two:

1. Mode of investment/ investment amounts

Mutual fund investors have the option of either making lump sum investments
or investing using the systematic investment plan (SIP) route which entails
commitments over longer time horizons. The minimum investment amounts
are laid out by the fund house.

ULIP investors also have the choice of investing in a lump sum (single
premium) or using the conventional route, i.e. making premium payments on
an annual, half-yearly, quarterly or monthly basis. In ULIPs, determining the
premium paid is often the starting point for the investment activity.

62
This is in stark contrast to conventional insurance plans where the sum
assured is the starting point and premiums to be paid are determined
thereafter.

ULIP investors also have the flexibility to alter the premium amounts during
the policy's tenure. For example an individual with access to surplus funds
can enhance the contribution thereby ensuring that his surplus funds are
gainfully invested; conversely an individual faced with a liquidity crunch has
the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). The freedom to modify premium payments at
one's convenience clearly gives ULIP investors an edge over their mutual
fund counterparts.

2. Expenses

In mutual fund investments, expenses charged for various activities like fund
management, sales and marketing, administration among others are subject
to pre-determined upper limits as prescribed by the Securities and Exchange
Board of India.

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


2.5% per annum on a recurring basis for all their expenses; any expense
above the prescribed limit is borne by the fund house and not the investors.

Similarly funds also charge their investors entry and exit loads (in most cases,
either is applicable). Entry loads are charged at the timing of making an
investment while the exit load is charged at the time of sale.

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


products with no upper limits being prescribed by the regulator, i.e. the
Insurance Regulatory and Development Authority. This explains the complex
and at times 'unwieldy' expense structures on ULIP offerings. The only
63
restraint placed is that insurers are required to notify the regulator of all the
expenses that will be charged on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher


expenses translate into lower amounts being invested and a smaller corpus
being accumulated. ULIP-related expenses have been dealt with in detail in
the article "Understanding ULIP expenses".

3. Portfolio disclosure

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


quarterly basis, albeit most fund houses do so on a monthly basis. Investors
get the opportunity to see where their monies are being invested and how
they have been managed by studying the portfolio.

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


portfolios. During our interactions with leading insurers we came across
divergent views on this issue.

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


basis is mandatory, the other believes that there is no legal obligation to do so
and that insurers are required to disclose their portfolios only on demand.

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


basis. However the lack of transparency in ULIP investments could be a
cause for concern considering that the amount invested in insurance policies
is essentially meant to provide for contingencies and for long-term needs like
retirement; regular portfolio disclosures on the other hand can enable
investors to make timely investment decisions.

64
4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and ULIPs
segment are largely comparable. For example plans that invest their entire
corpus in equities (diversified equity funds), a 60:40 allotment in equity and
debt instruments (balanced funds) and those investing only in debt
instruments (debt funds) can be found in both ULIPs and mutual funds.

If a mutual fund investor in a diversified equity fund wishes to shift his corpus
into a debt from the same fund house, he could have to bear an exit load
and/or entry load.

On the other hand most insurance companies permit their ULIP inventors to
shift investments across various plans/asset classes either at a nominal or no
cost (usually, a couple of switches are allowed free of charge every year and
a cost has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset classes
as per his convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market
when the ULIP investor's equity component has appreciated, he can book
profits by simply transferring the requisite amount to a debt-oriented plan.

5. Tax benefits

ULIP investments qualify for deductions under Section 80C of the Income Tax
Act. This holds good, irrespective of the nature of the plan chosen by the
investor. On the other hand in the mutual funds domain, only investments in
tax-saving funds (also referred to as equity-linked savings schemes) are
eligible for Section 80C benefits.
65
Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds
(for example diversified equity funds, balanced funds), if the investments are
held for a period over 12 months, the gains are tax free; conversely
investments sold within a 12-month period attract short-term capital gains tax
@ 10%.

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


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

Despite the seemingly similar structures evidently both mutual funds and
ULIPs have their unique set of advantages to offer. As always, it is vital for
investors to be aware of the nuances in both offerings and make informed
decisions.

66
Investing in ulips? Remember …………

The high returns (above 20 per cent) are definitely not sustainable over a
long term, as they have been generated during the biggest bull run in recent
stock market history.

The free hand given to ULIPs might prove risky if the timing of exit happens to
coincide with a bearish market phase, because of the inherently high equity
component of these schemes.

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


conventional mutual fund due to tax concessions that insurance companies
enjoy, such tax incentives may not last.

Look beyond NAVs

The appreciation in the net asset value (NAV) of ULIPs barely indicate the
actual returns earned on your investment. The various charges on your policy
are deducted either directly from premiums before investing in units or
collected on a monthly basis by knocking off units.

Either way, the charges do not affect the NAV; but the number of units in your
account suffers. You might have access to daily NAVs but your real returns
may be substantially lower.

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


annualised return over a 20-year period in a growth fund, when measured by
the change in NAV, the real pre- tax returns might be only 9 per cent. The
shorter the term, the lower the real returns.

67
How charges dent returns

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


marketing and broker commissions. These charges could be as high as 65
per cent of the first year premiums. Premium allocation charges are usually
very high (5-65 per cent) in the first couple of years, but taper off later. The
high initial charges mainly go towards funding agent commissions, which
could be as high as 40 per cent of the initial premium as per IRDA (Insurance
Regulatory and Development Authority) regulations.

The charges are higher for a linked plan than a non-linked plan, as the former
require lot more servicing than the latter, such as regular disclosure of
investments, switches, re-direction of premiums, withdrawals, and so on.
Insurance companies have the discretion to structure their expenses structure
whereas a mutual fund does not have that luxury. The expense ratios in their
case cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for a
debt plan respectively. The lack of regulation on the expense front works to
the detriment of investors in ULIPs.

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


lose out on the compounding benefit. Insurance companies explain that
charges get evened out over a long term. Thus we are forced to stay with the
plan for a longer tenure to even out the effect of initial charges as the shorter
the tenure, the lower our real returns.

If we want to withdraw from the plan, you lose out, as you will have to pay
withdrawal charges up to a certain number of years.

68
In effect, when we lock in our money in a ULIP, despite the promise of
flexibility and liquidity, we are stuck with one fund management style. This is
all the more reason to look for an established track record before committing
our hard-earned money.

Evaluate alternative options

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


returns before considering ULIPs.

Insurance companies argue that comparing ULIPs with mutual funds is like
comparing oranges with apples, as the objectives are different for both the
products.

Most ULIPs give us the choice of a minimum investment cover so that we can
direct maximum premiums towards investments.

Thus, both ULIPs and mutual funds target the same customers. If risk
cover is your primary objective, pure insurance plans are less expensive.

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


three to five years of consistent returns across various market cycles to judge
a fund's performance.

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


in linked plans might not be advisable at this juncture.

69
Try top-ups

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


the regular premiums. These top-ups are charged at a much lower rate —
usually one to two per cent. The expenses incurred on a top-up including
agent commissions are much lower than regular premiums.

Some companies also give a credit on top-ups. For instance, if you pay in Rs
100 as a top up, the actual allocation to units will be Rs 101. If you keep the
regular premiums to the minimum and increase your top ups, you can save
up on charges, enhancing returns in the long run.

Reduce life cover

The price of the life cover attached to a ULIP is higher than a normal term
plan. Risk charges are charged on a daily or monthly basis depending on the
daily amount at risk. Rates are not locked and are charged on a one-year
renewal basis.

Our life cover charges would depend on the accumulation in your investment
account. As accumulation increases, the amount at risk for the insurance
company decreases. However, with increasing age, the cost per Rs 1,000
sum assured increases, effectively increasing your overall insurance costs. A
lower life cover could yield better returns.

70
Stay away from riders

Any riders, such as accident rider or critical illness rider, are also charged on
a one-year renewal basis. Opting for these riders with a plain insurance cover
could provide better value for money.

ULIP's as an investment is a very good vehicle for wealth creation ,but way
Unit Linked Insurance schemes are sold by insurance company
representative's and insurance advisors is not correct.

ULIP's usually have following charges built into it :

a) Up-front Charges
b) Mortality Charges ( Charges for providing the risk cover for life)
c) Administrative Charges
d) Fund Management Charges

Mutual Fund's have the following charges :

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


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

71
A few aspects of investing in ULIPs versus mutual funds.

Liquidity

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


Regulatory and Development Authority (IRDA), ULIPs have a minimum term
of five years and a minimum lockin of three years. You can make partial
withdrawals after three years. The surrender value of a ULIP is low in the
initial years, since the insurer deducts a large part of your premium as
marketing and distribution costs. ULIPs are essentially long-term products
that make sense only if your time horizon is 10 to 20 years.

Mutual fund investments, on the other hand, can be redeemed at any time,
barring ELSS (equity-linked savings schemes). Exit loads, if applicable , are
generally for six months to a year in equity funds. So mutual funds score
substantially higher on liquidity.

Tax efficiency

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


for exemption under Section 80C of the Income Tax Act (subject to a limit of
Rs 1 lakh). But investments in ELSS schemes of mutual funds are also
eligible for exemption under the same section .Besides the premium, the
maturity amount in ULIPs is also tax-free , irrespective of whether the
investment was in a balanced or debt plan. So they do have an edge on
mutual funds, as debt funds are taxed at 10% without indexation benefits, and
20% with indexation benefits. The point, though, is that if you invest in a debt
plan through a ULIP, despite its tax-efficiency your post-tax returns will be
low, because of high front-end costs. Debt mutual funds don’t charge such
costs.

72
Expenses

Insurance agents get high commissions for ULIPs, and they get them in the
initial years, not staggered over the term. So the insurer recovers most
charges from you in the initial years, as it risks a loss if the policy lapses.
Typically , insurers levy enormous selling charges, averaging more than 20%
of the first year’s premium, and dropping to 10% and 7.5% in subsequent
years. (And this is after investors balked when charges were as high as 65%!)
Compare this with mutual funds’ fees of 2.25% on entry, uniform for all
schemes. Different ULIPs have varying charges, often not made clear to
investors.

For instance, an agent who sells you a ULIP may get 25% of your first year’s
premium, 10% in the second year, 7.5% in the third and fourth year and 5%
thereafter. If your annual premium is Rs 10,000 and the agent’s commission
in the first year is 25%, it means only Rs 7,500 of your money is invested in
the first year. So even if the NAV of the fund rises, say 20%, that year, your
portfolio would be worth only Rs 9,000—much lower than the Rs 10,000 you
paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a
2.25% entry load, Rs 225 is deducted , and the rest is invested. If the
scheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows how
ULIPs work out expensive for investors. Deduct the cost of a term policy from
the mutual fund returns, and you’re still left with a sizeable difference.

73
74
Chapter – 2
SBI Mutual Fund
Company Profile
Awards & Achievements
Products
Major Funds of SBI Mutual Fund

75
STATE BANK OF INDIA MUTUAL FUND

Proven Skills in Wealth Generation

SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an
enviable track record in judicious investments and consistent wealth creation.

The fund traces its lineage to SBI - India’s largest banking enterprise. The
institution has grown immensely since its inception and today it is India's
largest bank, patronised by over 80% of the top corporate houses of the
country.

SBI Mutual Fund is a joint venture between the State Bank of India and
Société Générale Asset Management, one of the world’s leading
fund management companies that manages over US$ 500 Billion
worldwide.

76
Exploiting expertise, compounding growth

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


successfully redeemed fifteen of them. In the process it has rewarded it’s
investors handsomely with consistently high returns.

A total of over 5.4 million investors have reposed their faith in the wealth
generation expertise of the Mutual Fund.

Schemes of the Mutual fund have consistently outperformed benchmark


indices and have emerged as the preferred investment for millions of
investors and HNI’s.

Today, the fund manages over Rs. 31,794 crores of assets and has a diverse
profile of investors actively parking their investments across 36 active
schemes.

The fund serves this vast family of investors by reaching out to them through
network of over 130 points of acceptance, 28 investor service centers, 46
investor service desks and 56 district organisers.

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


Resurgent India Opportunities Fund.

Growth through innovation and stable investment policies is the SBI MF


credo.

77
KEY PERSONNEL:

Mr. Achal K. Gupta


Managing Director & Chief Executive Office

Mr. C A Santosh
Chief Manager - Customer Service.

Mr. Didier Turpin


Dy. Chief Executive Officer

Ms. Aparna Nirgude


Chief Risk Officer

Mr. Ashwini Kumar Jain


Chief Operating Officer

Mr. Ashutosh P Vaidya


Company Secretary & Compliance Officer

Mr. Sanjay Sinha


Chief Investment Officer

Mr. Parijat Agrawal


Head – Fixed Income

78
Awards and achievements:

• SBI Mutual Fund (SBIMF) has been the proud recipient of the:

ICRA Online Award - 8 times

The Lipper Award (Year 2005-2006)

CNBC TV - 18 Crisil Mutual Fund of the Year Award 2007

CNBC AWAAZ CONSUMER AWARDS 2007

79
PRODUCTS

EQUITY FUNDS:

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


and endeavor will be to provide investors the opportunity to benefit from the
higher returns which stock markets can provide. However they are also
exposed to the volatility and attendant risks of stock markets and hence
should be chosen only by such investors who have high risk taking capacities
and are willing to think long term. Equity Funds include diversified Equity
Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in
various stocks across different sectors while sectoral funds which are
specialized Equity Funds restrict their investments only to shares of a
particular sector and hence, are riskier than Diversified Equity Funds. Index
Funds invest passively only in the stocks of a particular index and the
performance of such funds move with the movements of the index

• Magnum COMMA Fund


• Magnum Equity Fund
• Magnum Global Fund
• Magnum Index Fund
• Magnum MidCap Fund
• Magnum Multicap Fund
• Magnum Multiplier Plus 1993
• Magnum Sector Funds Umbrella
• MSFU - Emerging Businesses Fund
• MSFU - IT Fund
• MSFU - Pharma Fund
80
• MSFU - Contra Fund
• MSFU - FMCG Fund
• SBI Arbitrage Opportunities Fund
• SBI Blue chip Fund
• SBI Infrastructure Fund - Series I
• SBI Magnum Taxgain Scheme 1993
• SBI ONE India Fund
• SBI TAX ADVANTAGE FUND - SERIES I

DEBT SCHEMES

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


Government Securities and Money Market instruments either completely
avoiding any investments in the stock markets as in Income Funds or Gilt
Funds or having a small exposure to equities as in Monthly Income Plans or
Children's Plan. Hence they are safer than equity funds. At the same time the
expected returns from debt funds would be lower. Such investments are
advisable for the risk-averse investor and as a part of the investment portfolio
for other investors.

• Magnum Children`s Benefit Plan

• Magnum Gilt Fund


• Magnum Gilt Fund (Long Term)
81
• Magnum Gilt Fund (Short Term)

• Magnum Income Fund

• Magnum Income Plus Fund


• Magnum Income Plus Fund (Saving Plan)

• Magnum Income Plus Fund (Investment Plan)

• Magnum Insta Cash Fund

• Magnum InstaCash Fund -Liquid Floater Plan

• Magnum Institutional Income Fund


• Magnum Monthly Income Plan

• Magnum Monthly Income Plan Floater

• Magnum NRI Investment Fund

• SBI Capital Protection Oriented Fund - Series I


• SBI Premier Liquid Fund

• SBI Short Horizon Fund


• SBI Short Horizon Fund - Liquid Plus Fund
• SBI Short Horizon Fund - Short Term Fund

82
BALANCED SCHEMES

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


Hence they are less risky than equity funds, but at the same time provide
commensurately lower returns. They provide a good investment opportunity
to investors who do not wish to be completely exposed to equity markets, but
is looking for higher returns than those provided by debt funds.

• Magnum Balanced Fund


• Magnum NRI Investment Fund - FlexiAsset Plan

83
MAJOR FUNDS OF SBI MF

(EQUITY FUND)

Investment Objective

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


along with possibility of consistent returns by investing predominantly
in a portfolio of stocks of companies engaged in the commodity
business within the following sectors - Oil& Gas, Metals, Materials &
Agriculture and in debt & money market instruments

Asset Allocation

% of Portfolio of
Instrument Risk Profile
Plan A & B
Equity and equity related instruments of
within 65% – 100% High
commodity based companies
Foreign Securities/ADRs/GDRs of
0% - 10% High
commodity based companies
Fixed/Floating Rate Debt instruments
0% - 30% Medium
including derivatives
Money Market instruments* 0% - 30% Low

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Scheme Highlights

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


companies.
2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend
and Growth options available.Reinvestment and payout facility
available.
3.Dividends will be completely tax-free. Long term capital gains to be
completely tax-free. STT would be at the rate of 0.20% at the time of
repurchase.

Minimum Application

Rs. 5000 and in multiples of Rs. 1000

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


companies

2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and
Growth options available.Reinvestment and payout facility available.

3.Dividends will be completely tax-free. Long term capital gains to be


completely tax-free. STT would be at the rate of 0.20% at the time of
repurchase

Entry Load Exit Load


Investments below Investments below Rs. 5 crore, exit within 6 months
Rs. 5 crores-2.25% from the date of allotment – 1%, Investments below
Investments of Rs.5 Rs. 5 crore, exit between 6 months & 12 months from
crores and above - the date of allotment – 0.5%, Investments below Rs. 5
NIL crore, exit after 12 months from the date of allotment
– Nil, Investments of Rs. 5 crore and above– Nil
85
SIP

Rs.500/month - 12 months

Rs.1000/month - 6months,

Rs.1500/quarter - 12 months

A minimum of Rs. 500 can be withdrawn every month or quarter by


indicating in the application form or by issuing advance
instructions to the Registrars at any time.

86
(DEBT FUND)

Investment Objective
The objective of the scheme is to provide the investors an opportunity to earn,
in accordance with their requirements, through capital gains or through
regular dividends, returns that would be higher than the returns offered by
comparable investment avenues through investment in debt & money market
securities.

Asset Allocation
% of Portfolio of
Instrument Risk Profile
Plan A & B
Corporate debentures &
Bonds/PSU/FI/Govt. Guaranteed
Upto 90% High
Bonds / Other including Securitised
Debt
Not more than 10%
Securitized Debt Low
of in debt
Government Securities Upto 90% High
Cash & Call Money Upto 25% Medium
Money Market Instruments Upto 25% Mediom
Units of other mutual funds Upto 5% Low

87
Scheme Highlights

1.Open ended Debt Scheme 2. Following Plans are available to the


investors :(A) Growth Plan (B) Dividend Plan (C) Bonus Plan (D)
Floating Rate Plan Options available under Floating Rate Plan Short
Term (Growth, Dividend & Weekly Dividend)Long Term (Regular
(Dividend & Growth) Long Term (Institutional (Dividend & Growth)

2. The Plans will invest their entire corpus in high quality debt
(Corporate debentures, PSU/FI/Govt guaranteed bonds), Govt
securities and money market instruments (commercial paper,
certificates of deposit, T-bills, bills rediscounting, repos, short-
term bank deposits, etc). There shall be no investment in equity.

3. The Growth Plan / Option will give returns through capital gains only. No
dividends shall be declared under this Plan. The Dividend Plan will
endeavour to declare regular dividends every half year, depending on
the NAV at that point of time. The Dividend Option in Floating Rate
Short Term Plan will endeavour to declare dividends on a monthly
basis while the dividend option under the Floating Rate Plan Long
Term (Regular and Institutional) Plan will declare dividends on a
quarterly basis.

4 Switchover between the Plans at NAV. :Also, switchover facility at


the NAV related prices to other openend schemes of SBI Mutual Fund
is available. This facility of switchover to other schemes is not available
to NRIs and FIIs

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Entry Load Exit Load
Nil Up Rs. 50 lacs : 0.5%; upto 6 months. Above Rs.
50 lacs : Nil
SIP SWP
Rs.500/month - 12 months Investors have the facility to switchover between
Rs.1000/month - 6months the Plans at NAV. Also, switchover facility at the
Rs.1500/quarter - 12 NAV related prices to other openend schemes of
months SBI Mutual Fund is available. This facility of
switchover to other schemes is not available to
NRIs and FIIs

89
Magnum Balanced Fund

Investment Objective

To provide investors long term capital appreciation along with the liquidity of
an open-ended scheme by investing in a mix of debt and equity. The
scheme will invest in a diversified portfolio of equities of high growth
companies and balance the risk through investing the rest in a
relatively safe portfolio of debt.

Asset Allocation
% of Portfolio of
Instrument Risk Profile
Plan A & B
Equities At least 50% Medium to High
Debt Instruments like debentures,
Up to 40%
bonds,khokhas, etc.
Not more than 10%
Securitized Debt of investments in Medium to High
debt
Money Market Instruments Balance Low

Scheme Highlights

1.An open-ended scheme investing in a mix of debt and equity instruments.


Investors get the benefit of high expected-returns of equity investments
with the safety of debt investments in one scheme.

90
2. On an ongoing basis, magnums will be allotted at an entry load of
2.25% to the NAV.
3. Scheme open for Resident Indians, Trusts, Indian Corporates, on a
fully repatriable basis for NRIs and, Overseas Corporate Bodies.
4. Facility to reinvest dividend proceeds into the scheme at NAV
available.
5. Switchover facility to any other open-ended schemes of SBI Mutual
Fund at NAV related prices.
6. The scheme will declare NAV, Sale and repurchase price on a daily
basis.
7. Nomination facility available for individuals applying on their behalf
either singly or jointly upto three.

Entry Load Exit Load


Investments below Rs. 5 Investments below Rs. 5 crore, exit within 6
crores - 2.25% months from the date of allotment – 1%,
Investments of Rs.5 Investments below Rs. 5 crore, exit between 6
crores and above - NIL months & 12 months from the date of allotment –
0.5%, Investments below Rs. 5 crore, exit after 12
months from the date of allotment – Nil,
Investments of Rs. 5 crore and above– Nil
SIP SWP
Rs.500/month - 12 Systematic Withdrawal Plan (SWP): A minimum of
months Rs.1000/month - Rs. 500 can be withdrawn every month or quarter
6months Rs.1500/quarter by issuing advance instructions to the Registrars at
- 12 months any time. There is also a facility of a Monthly
Pension Plan, whereby investors can withdraw a
minimum amount of Rs. 500/- every month.

91
92
RESEARCH METHODOLOGY

OBJECTIVES:

• To study about the mutual funds industry.


• To study the approach of investors towards mutual funds and ulips.
• To study the behavior of the investors whether they prefer mutual
funds or ulips?

SCOPE OF THE STUDY:

• Subject matter is related to the investor’s approach towards mutual


funds and ulips.
• People of age between 20 to 60
• Area limited to Chandigarh.
• Demographics include names, age, qualification, occupation, marital
status and annual income.

STEPS OF RESEARCH DESIGN:

• Define the information needed:- This first step states


that what is the information that is actually required.
93
Information in this case we require is that what is the
approach of investors while investing their money in mutual
funds and ulips e.g. what do they consider while deciding as
to invest in which of the two i.e mutual funds or ulips. Also,
it studies the extent to which the investors are aware of the
various costs that one bears while making any investment.
So, the information sought and information generated is only
possible after defining the information needed.

• Design the research:- A research design is a framework


or blueprint for conducting the research project. It details the
procedures necessary for obtaining the information needed
to solve research problems. In this project, the research
design is explorative in nature.

• Specify the scaling procedures:- Scaling involves


creating a continuum on which measured objects are
located. Both nominal and interval scales have been used
for this purpose.
• Construct and pretest a questionnaire:- A
questionnaire is a formalized set of questions for obtaining
information from respondents. Where as pretesting refers
to the testing of the questionnaire on a small sample of
respondents in order to identify and eliminate potential
problems.

Population

94
All the clients of State bank of India and State bank of Patiala
who are investing money in mutual funds and ulips, both.

• Sample Unit

Investors and non-investors.

• Sample Size

This study involves 50 respondents.

• Sampling Technique:

The sample size has been taken by non-random convenience


sampling technique

• Data Collection:
• Data has been collected both from primary as well as
secondary sources as described below:
• Primary sources
Primary data was obtained through questionnaires filled by
people and through direct communication with respondents in
the form of Interview.
• Secondary sources
The secondary sources of data were taken from the various
websites , books, journals reports, articles etc. This mainly
provided information about the mutual fund and ulips industry in
India.

• Plan for data analysis : Analysis of data is planned with


the help of mean, chi-square technique and analysis of
variance.

95
LIMITATIONS:

No study is free from limitations. The limitations of this study can be:

• Sample size taken is small and may not be sufficient to predict the
results with 100% accuracy.

• The result is based on primary and secondary data that has it’s own
limitations.

• The study only covers the area of Chandigarh that may not be
applicable to other areas.

96
97
COMPARATIVE ANALYSIS OF MUTUAL FUNDS
AND ULIPS : What do investors prefer?

• Do you invest in Mutual Funds ?

response Frequenc Percentage


y
Yes 19 62%
No 31 38%
total 50 100

38%
yes
no
62%

INTERPRETATION:

62% of the people invest in mutual funds.

98
• If not, then what other option(s) do you prefer to invest?

Fixed deposits  post office schemes 

Recurring deposits 

If others, please specify.

Options frequency percentages


Fixed deposits 11 45.83
Post office schemes 9 37.5
Recurring deposits 4 16.66
Total 24 100

Others: 7

99
what is the mode of information that you use for insurance
companies?

a) Advertisement b) Agents c) Seminar d) Work shops 

Options Frequenc percentage


y
Advertisement 22 44%
s
Agents 12 24%
Seminar 7 14%
Workshop 9 18%
total 50 100

options Frequenc (observed- (observed- (observed-


y expected expected)² expected)²/e
Advertisement 22 9.5 90.25 7.22
s
Agents 12 -.5 .25 .02
Seminar 7 -5.5 30.25 2.42
Workshop 9 -3.5 12.25 .98
Total 50 133 10.64
expected frequency= 50/4= 12.5

chi square= ∑ │observed-expected│² = 10.64

expected

at 3 degree of freedom, df(3)=7.815, thus the calculated value is greater than


the table value. Hence, H0 is rejected

100
18%
advertisement
44%
agents
14% seminar
workshops
24%

Interpretation: It means that all the modes of information are not the
same. Advertisement is more popular

101
In which sector do you prefer to invest your money?

Options Frequenc Percentages


y
Government 27 54
sector
Private sector 23 46
total 50 100

frequency

46%
government sector

54% private sector

Options Frequenc Observed- (Observed- (observed-


y expected expected)² expected)²/e
Government 27 2 4 0.16
sector
Private 23 -2 4 0.16
sector
total 50 -2 8 0.32

102
chi square= ∑ │observed-expected│² = 0.32

expected

at df(1), the table value is 3.841 which is greater than the calculated value.

Hence, H0 is accepted.
.

Interpretation: People prefer both the sectors equally.

• At which rate do you want your investment to grow?

options frequenc percentages


y
Steadily 17 34
At an average rate 13 26
fast 20 40
total 50 100

103
frequency

34%
40% steadily
at an average rate
fast

26%

interpretation: 40% of the respondents want their investments to grow


fastly

104
Which factor do you consider before investing in mutual fund or
Ulips (tick)

Options frequency percentages


Safety of 14 28
principal
Low risk 15 30
Higher 14 28
returns
Maturity 4 8
period
Terms and 3 6
conditions
Total 50 100

frequency

8% 6%
28% safety of principal
low risk
high returns
28% maturity period
30% terms and conditions

105
Options frequenc Observed- (Observed- (observed-
y expected expected)² expected)²/e
Safety of 14 4 16 1.6
principal
Low risk 15 5 25 2.5
Higher 14 4 16 1.6
returns
Maturity 4 -6 36 3.6
period
Terms 3 -7 49 4.9
and
conditions
total 50 142 14.2

chi square= ∑ │observed-expected│² = 14.2

expected

at df(4), the table value is 9.488 which is less than the calculated value.
Hence , H0 is rejected

Interpretation: people prefer low risk as the most important factor


before investing in mutual funds or ulips.

106
Imagine that stock market drops immediately after you invest
in it then what will you do?

Options frequency
Withdraw your money 8
Wait and watch 26
Invest more in it 16

frequency

16%
32%
withdraw your money
wait and watch
invest more in it
52%

107
Interpretation: 26% of the respondents will wait and watch even if the
share market drops.

A. Do you have any other investment/insurance policy?

Options frequency Percentages


Yes 34 68
No 16 32
total 50 100

frequency

32%
Yes
No
68%

Interpretation: 68 % of the people had bought other investment


policies.

108
How often do you monitor your investment?

Options frequency
Daily 15
Monthly 25
Occasionally 10

frequency

20%
30%
daily
monthly
occasionally

50%

Options frequency Percentages


Daily 15 30 109
Monthly 25 50
Occasionally 10 20
total 50 100
Interpretation: It shows that most of the people .i.e. 50% prefer
monitoring their investment on monthly basis.

20% of the people monitor their investment occasionally.

Do you invest your money in share market?

Annual Total
Income
Below 1,50,000- 2,50,000- Above
1,50,000 2,50,000 4,00,000 4,00,000
Share No 12 3 3 6 24
Market
Yes 3 4 6 13 26
Total 15 7 9 19 50

Annual Frequency(yes) Observed- (Observed- (observed-


income expected expected)² expected)²/e
Below 3 -3.5 12.25 1.884
1,50,000
1,50,000- 4 -2.5 6.25 0.961
2,50,000
2,50,000- 6 -.5 0.25 0.038
4,00,000
Above 13 6.5 42.25 6.5
4,00,000

110
total 26 0 61 9.383

Expected=26/4= 6.5

chi square= ∑ │observed-expected│² = 9.383

expected

at df(3), the table value is 7.815 which is less than the calculated value.

Hence, H0 is rejected.

Interpretation: it states that with the rise in income, the percentage of


people investing in share market also increases.

What percentage of your income do you invest?

Options Frequenc percentages


y
0- 5% 26 52
5-10% 13 26
10-15% 11 22
total 50 100

111
frequency

22%

upto 5%
5-10%
52%
10% % above
26%

Options Frequency Mv Dx=MV-7.5/5 FdX


0-5 26 2.5 -1 -26
5-10 13 7.5 0 0
10-15 11 12.5 1 11
total 50 -15

MEAN= 7.5+ -15/20 * 5= 6%

INTERPRETATION: people invest around 6% of their income.

112
How long have you been investing in mutual funds

Options Frequenc Percentages


y
1-5 years 22 44
5-10 years 17 34
10-15 years 11 12
total 50 100

frequency

22%

44% 1-5 years


5-10 years
10-15 years

34%

Options Frequenc Observed- (Observed- (observed-


y expected expected)² expected)²/e
1-5 years 9 2.67 7.1289 1.126
5-10 7 0.67 0.4489 0.0709
years
10-15 3 3.33 11.0889 1.751
years
total 19 18.6667 2.9479

113
chi square= ∑ │observed-expected│² = 2.9479

expected

at df(2), the table value is 5.991 which is greater than the calculated value.
Hence, H0 is accepted.

Interpretation: This shows that people normally tend to invest for longer
term. There’s not much of a difference between the various time
periods.

In the past, you have invested mostly in (choose one):

options frequency Percentages


Savings A/cs & PO schemes 18 36
Mutual funds investing in bonds 6 12
Mutual funds investing in stocks 3 6
Balanced mutual funds 1 2
Individual stocks & bonds 5 10
Ulips 4 8
Other instruments like real estate, 13 26
gold
total 50 100

114
frequency Savings A/cs &
PO schemes

Mutual funds
investing in bonds
18%
Mutual funds
6% investing in stocks
50% 3%
1% Balanced mutual
5% funds
4%
Individual stocks &
13%
bonds

Ulips

Other instruments
like real estate,
gold

Interpretation: In the past maximum percentage of the respondents i.e


36% of the respondents have invested in saving a/c’s and po’s.

115
You would describe your financial situation as being:
Very unstable. Somewhat unstable.
Moderately stable. Stable.
Very stable

Options (X) Frequency ( ƒ) ƒX ƒ x²


Very unstable(1) 11 11 11
Somewhat 12 24 48
unstable(2)
Moderately 9 27 81
stable(3)
Stable(4) 10 40 160
Very stable(5) 8 40 200
total 50 142 500

Sample mean = ∑Fx = 142 = 2.84


∑f 50

Standard deviation, σ = √ ∑ ƒ x² - ∑ƒx = 2.675


∑ƒ ∑ƒ

Standard error = standard deviation = 2.675 = 0.3783


√n 7.07

Z= │Xs - Xp│= │2.84-3│= 0.4229


S.E 0.3783

SINCE THE CALCULATED VALUE IS LESSER THAN THE TABLE VALUE


AT (.05) i.e 1.96,

116
Ho is accepted.

INTERPRETATION: the financial situation is moderately stable.

Your comfort level in making investment decisions can best be described


as:

options frequenc Percentages


y
Low 14 32
Moderat 18 41
e
high 12 27
total 50 100

frequency

27% 32%
Low
Moderate
high

41%

117
INTERPRETATION: 41% of the respondents are moderately
comfortable in making investment decisions.

If in the near future if you ever plan to invest in your money in any of
the mutual fund company, which would be your choice?

Options frequenc percentages


y
Sbi mutual fund 7 14
HDFC mutual fund 8 16
Reliance mutual fund 14 28
ABN AMRO mutual 11 22
fund
others 10 20
total 50 100

118
frequency

20% 14% Sbi mutual fund


16% HDFC mutual fund
Reliance mutual fund
22% ABN AMRO mutual fund
28% others

Options Frequency (O) (O-E) (O-E)² (O-E)²/E


Sbi mutual fund 7 -3 9 0.9
HDFC mutual fund 8 -2 4 0.4
Reliance mutual fund 14 4 16 1.6
ABN AMRO mutual 11 1 1 0.1
fund
others 10 0 0 -
total 50 0 30 3.0

119
chi square= ∑ │observed-expected│² = 3.0

expected

At df(4), the table value is 9.488 which is greater than the calculated value.
Hence, H0 is accepted.

Interpretation: People mostly prefer all the brands equally for their
future investments.

120
DEMOGRAPHICS

58% of people belong to 25-35 age group and on the other hand only
17% of people belong to above 40 age group.

17% of the people are under graduate.

52% of the people are graduates, and

31% of the people are post graduates.

55% of the people are married

45% of the people are unmarried.

31% of the people are having their own business.

31% of the people are salaried.

25% are professionals.

8% are housewives.

5% are retired.

24% of the people belong to below 1,50,000 income group.

121
36% of the people belong to1,50,000 – 2,50,000 income group.

33% of the people belong to 2,50,000 – 4,00,000 income group.

Only 7% of the people belong to above 4,00,000 income group.

122
123
A mutual fund is the ideal investment vehicle for today’s complex and
modern financial scenario. Markets for equity shares, bonds and
other fixes income instruments, real estate, derivatives and other
assets have become mature and information driven. Today each and
every person is fully aware of every kind of investment proposal.
Everybody wants to invest money, which entitled of low risk, high
returns and easy redemption. In my opinion before investing in
mutual funds, one should be fully aware of each and everything.

At the same time Ulips as an investment avenue is good for people


who has interest in staying for a longer period of time, that is around
10 years and above. Also in the coming times, Ulips will grow faster.
Ulips are actually being publicized more and also the other traditional
endowment policies are becoming unattractive because of lower
interest rate. It is good for people who were investing in ULIP policies
of insurance companies as their investments earn them a better
return than the other policies.

124
FINDINGS

• Highest number of investors comes from the salaried class.


• Highest number of investors comes from the age group of 25-
35.
• Most of the people have been investing their money n the
share market belong to Rs.400000 and above income group.
• Mostly investors prefer monitoring their investment on monthly
basis.
• Most of the people invest upto 6% of their annual income in
mutual funds.
• Most of the people between the age group of 25– 35 invest
their money in share market.

125
RECOMMENDATIONS

The performance of the mutual fund depends on the previous years Net Asset
Value of the fund. All schemes are doing well. But the future is uncertain. So,
the AMC (Asset under Management Companies) should take the following
steps: -

1. The people do not want to take risk. The AMC should launch
more diversified funds so that the risk becomes minimum. This
will lure more and more people to invest in mutual funds.
2. The expectation of the people from the mutual funds is high. So,
the portfolio of the fund should be prepared taking into
consideration the expectations of the people.
3. Try tp reduce fund charges, administration charges and other
charges which helps to invest more funds in the security market
and earn good returns.
4. Diffferent campaigns should be launched to educate people
regarding mutual funds.
5. companies should give regular dividends as it depicts
profitability.
6. Mutual funds should concentrate on differentiating the portfolio
of their MF than their competitors MF
7. Companies should give handsome brokerage to brokers so that
they get attracted towards distribution of the funds.

126
BIBLIOGRAPHY

• www.amfiindia.com

• www.principalindia.com
• www.investorsguide.com
• www.moneycontrol.com
• www.mutualfundsindia.com
• www.sbimf.com
• www.sebi.co.in

127
128
QUESTIONNAIRE

I am Priyanka Manocha pursuing MBA from Gian Jyoti institute of


management and technology, Mohali. As a part of the curriculum I
am doing research on “COMPARATIVE ANALYSIS OF MUTUAL
FUNDS AND ULIPS”. Kindly help me in the same by filling the
Questionnaire. Your response would be kept strictly confidential and
would be used only for academic research.

Do you invest in Mutual Funds or Ulips?

Yes  No 

If not, then what other option(s) do you prefer to invest?

Fixed deposits  post office schemes 

Recurring deposits 

If others, please specify.

How do you get the information of the various Insurance


Companies?

a) Advertisement b) Agents c) Seminar d) Work shops 

129
In which sector do you prefer to invest your money?

a) Private Sector ( ) b) Government Sector ( )

At which rate do you want your investment to grow?

o Steadily
o At an average rate
o Fast

Which factor do you consider before investing in mutual fund or


Ulips? (tick)

• Safety of principal
• Low risk
• High returns
• Maturity period

Terms and conditions

Do you invest your money in share market?

Yes ( ) no( )

Imagine that stock market drops immediately after you invest in it


then what will you do?

 Withdraw your money


 Wait and watch
 Invest more in it

130
Do you have any other investment/insurance policy?

Yes ( ) No ( )

How often do you monitor your investment?

o Daily
o Monthly
o Occasionally

What percentage of your income do you invest?

0-5% ( ) 5-10% ( ) 10-15% ( )

How long have you been investing in mutual funds?

o For the last 1-5 years


o For the last 5-10 years
o For the last 10 – 15 years

131
In the past, you have invested mostly in (choose one):

Savings A/cs & PO schemes ( ) Mutual funds investing in bonds ( )

Mutual funds investing in stocks ( ) Balanced mutual funds ( )

Individual stocks & bonds ( ) Ulips ( )

Other instruments like real estate, gold ( )

You would describe your financial situation as being:


Very unstable. ( ) Somewhat unstable ( ).
Moderately stable. ( ) Stable. ( )
Very stable ( )

Your comfort level in making investment decisions can best be described as

Low ( ) moderate ( ) high ( )

If in the near future if you ever plan to invest in your money in any of
the mutual fund company, which would be your choice?

Sbi mutual fund ( ) HDFC mutual fund ( )

Reliance mutual fund ( ) ABN AMRO mutual fund ( )

others ( )

132
PERSONAL DETAILS

Name: ………………………………………………………………

Age Group:

 Below 20

 Between 20-30

 Between 30-40

 Above 40

Qualification:

 Under graduate  Graduate

 Post graduate  Other:_______________

Occupation:

 Salaried  Business  Housewife

 Professional  Retired  Other: _________

Marital status:  Single  Married

Annual income:

 Below Rs 1,50,000  Rs 1,50,000- Rs2,50,000

133
 Rs 2,50,000-Rs 4,00,000  Above Rs 4,00,000

134