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A MANEGEMENT REPORT OF SUMMER


PROJECT
COMPARITIVE ANALYSIS OF MUTUAL FUND AND ULIP
18-Jul-10

ACKNOWLEDGEMENT
“Gratitude is the language of heart, when the language if from the
heart, emotions prevail and when emotions prevail words fails.”
At the dusk of this project, it gives me immense pleasure,
extending my deepest sense of profuse to gratitude towards my
inspirations my faculty guide Mr. DEVENDRA SINGH and PANKAJ
VARSHNEY Sir , it was under them valuable guidance that I
embarked upon this work. My gratitude and indebtedness to them
is beyond work. At this stage it most impossible to ignore the co-
operation and friendly attitude showed over me by all the staff of
Capital Market Service Division of SAHARA INDIA(LUCKNOW) who
supports me into the completion in my project.
I shall be inducted to deputy manager Mr. Devender Singh and
Pankaj Varshney Sir for their guidance and giving me chance to
do this project for the feasibility study.
Last but not the least; I would like to take this opportunity to
thanks my entire faculty, my friends and everyone who help me
directly or indirectly during this entire span of project.
SAURABH PAL
M.B.A.(IB)
3rd semester
SCHOOL OF
ECONOMICS
DAVV(INDORE
UNIVERSITY)

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.

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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 “Comparative Analysis of Mutual funds and
Tulips”. 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 Sahara mutual fund and LIC was selected. The information
regarding the project research was collected through the
questionnaire formed by me which was filled by the customers .

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CONTENTS –
1. COMPANY’S PROFILE
2. INTRODUCTION TO PROJECT
3. MUTUAL FUND
a. INTRODUCTION
b. INTERNATIONAL MUTUAL FUND
c. HISTORY
d. CHARACTERSTICS
e. ADVANTAGES
f. DISADVANTAGES
g. STRUCTURE
1.ULIP
a)INTRODUCTION
b)FEATURES
c)HURDLES
1. COMPARISON BETWEEN MUTUAL FUND AND
ULIP
2.REASEARCH METHODOLOGY
3.REPORT/FINDINGS/STUDY/QUESTIONAIRE
4.SUMMARY
5.BIBLIOGRAPHY

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COMPANY‘S PROFILE
Sahara India- a corporate, which believe that quality, is
never an accident it is a result of
planning, team work and a commitment of excellence.
Sahara India Pariwar is a multi-business conglomerate
with diversified business interest that includes finance,
real estate, media &entertainment, tourism & hospitality,
and service & trading.
Sahara India Pariwar
Year 1978 in Gorakhpur, India
2009, headquarter in lucknow India
Workers 3 12.05 lack
Dependents 15 78.50 lack
Asset 2000 Over 75,000 crore
Establishments 1 2105
No Trade union
No owner
Important Points
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• The employees at Sahara India Pariwar greet each other
by saying “Sahara Pranam”.
• Every year, republic day and independence day is
celebrated as Bharat Parv ( national festival) and Sahara
India Pariwar celebrates it as the biggest event of the
pariwar( family).
• Sahara India Pariwar has been the official sponsors of
the Indian cricket team and Indian hockey team.
• Sahara India Pariwar in often referred as the world’s
largest family.
” • 910,000 workers/ employees and no trade union.
• Its five star hostel ‘Sahara Star’ near Mumbai airport
has the world’s largest pillar less
clear-to-sky dome of its kind.
• Holds the Guinness world record for planning 125,256
trees by 1400 volunteers in 6 hours and 35 minutes 0n
5th June 1988 at amby vally city.
• Hold the record in India for 25%-50% hike in the gross
salary of all of its employees at one go.
• Conducts mass marriage ceremony of 101
underprivileged girls every year.
• Subrato Roy Sahara is also referred as “Saharasri.

SAHARA INDIA PARIWAR


OVERVIEW
Sahara India Pariwar is a major entity on the corporate
scene having diversified business interests that include
Finance, Infrastructure & Housing, Media &
Entertainment, Consumer Products, Manufacturing, and
Services & Trading.
Quality is our essence and we, at Sahara India Pariwar ,
have always stressed on the
Qualitative aspect. Consequently in this run for quality,
quantity has always pursued us. We look forward to

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reaching the zenith and reaffirm our commitment to the
process of sound nation-building.
CORE COMMITMENTS - OUR STRENGTH
• Emotion
• Discipline
• Duty
• No discrimination
• Quality
• Give respect
• Self-respect
• Truth
• Collective Materialism
• Religion
• Absolute Honesty
What
A commitment of Sahara India Pariwar to the genuine
needs and rights of anybody &
everybody - Be it to a depositor, newspaper reader,
consumer.... all business associates and Sahara India
Family Members.
Need
India needs effective consumer protection and protection
of workers' genuine rights. There are various agencies,
promising protection & action. But no external body can
provide justice unless the company becomes 'QUALITY
CONSCIOUS' WITH STRICTLY NODISCRIMINATION POLICY
AND JUSTICE CONSCIOUSNESS as its very dominating
nature.
Motto
We not only believe but practice NO DISCRIMINATION,
JUSTICE & HIGH QUALITY - means
enthusiastic, productive performance of duty "KARTAVYA'
towards the consumer', workers ‘genuine satisfaction.
Aim
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To provide justice - be it a matter of the tiniest
imperfection or injustice in our COMMITMENT -products or
services. direct or indirect, short term or long term.
Where
Kindly rush your grievances/suggestions or any queries
related to Sahara India Pariwar to the nearest Sahara
establishment .
Sahara India Pariwar is a major entity on the corporate
scene having diversified business interests that include
Finance, Infrastructure & Housing, Media &
Entertainment, Consumer Products, Manufacturing, and
Services & Trading.
Quality
Quality is our essence and we, at Sahara India Pariwar,
have always stressed on the
Qualitative aspect. Consequently in this run for quality,
quantity has always pursued us. We look forward to
reaching the zenith and reaffirm our commitment to the
process of sound nation-building.
WE CHASE QUALITY, QUANTITY CHASES
US
Core Commitments - Our Strength
Emotion
Emotion is in Performance of genuine duties towards the
loved ones primarily in their benefit, from their point of
view. EMOTION is THE KEY that generates the required
energy and enthusiasm for desired quality performance.
Discipline
The enthusiastic obedience of laws and orders, which are
given by the rightful authority.
Duty
The enthusiastic obedience of laws and orders, which are
given by our CONSCIENCE.
NO Discrimination
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Never should we discriminate in any of our actions,
reactions, attitudes, decisions,
conclusions, in any of our expressions while caring for the
six health’s of other human beings, namely physical,
material, mental, emotional, social and professional
health’s.
Quality
Results from honoring Rules, Regulations, Commitments,
Values, Fairness, Performance of Duties by honestly
balancing one's own and others' reasonable point of view
in the matters of Material & Emotional aspects.
Give Respect
To definitely make others feel important and respected
by giving sincere regard to others ‘feelings, reasonable
wishes & thoughts with an open and receptive mind and
warmth.
Self-Respect
To develop a sense of respect for oneself in others' mind,
i.e. to generate genuine & warm feelings for oneself
among others on a continuous basis.
Truth
Means total transparency in action, reaction, attitude and
all other expressions and the
conviction to follow the right course.
Collective Materialism
Means to progress and prosper together for collective
sharing and caring and not individually or for a select
group.
Religion
There is a religion higher than religion itself - it is
NATIONALITY. We may practice our
religions in the confines of our homes, but outside, we
should be Indians and only Indians.

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'Bharatiyata' or Nationalism thus becomes our supreme
religion.
Absolute Honesty
People generally manipulate and deceive for achieving
their unreasonable desires and greed if others do not or
cannot see, hear or understand. But we firmly believe
that our mind inside knows the truth and we should be
absolutely honest to our mind inside and accordingly our
actions, reactions, directions, decisions and all our
expressions should be present in all human dealings.
PHILOSOPHY
SAHARA INDIA PARIWAR'S PHILOSOPHY -
"Collective Materialism"
In any human relationship, it becomes imperative to take
into consideration the materialistic aspect of life - we do
so but by giving it second priority.
The first priority is given to emotional aspect and with
perfect blending of materialism with emotionalism,
results in continuous collective growth for collective
sharing and caring, that gives an impetus to our
philosophy - "COLLECTIVE MATERIALISM".
BHARTIYATA
There is a religion higher than religion itself - it is the
INDIAN NATIONALITY. The swirl of the Tricolor never fails
to move a Sahara Worker. For we believe, it is the great
feeling that transcends all castes, creed and sects. Bharat
Parva is Celebrated on every 26th of January and 15th of
August with a spirit and gaiety rarely seen. It comes from
our heart.
LEADERSHIP
My Biggest Achievement in Life “I’m very proud to
be the Guardian of The
world’s Largest Family.
"Saharasri" Subrata Roy Sahara

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Managing Worker & Chairman
Sahara India Pariwar
In business profit earnings and overall growth of business
get the highest priority
and are certainly creditable, but ultimate credibility of
business enterprise, particularly of larger ones is in the
utilization of profit, be it for best possible enlistment of its
workforce and for espousing Social, National
Development causes or for rendering services to mankind
as whole. Fulfilling the Qualitative aspect of utilization of
profit, the world's largest family ‘Sahara India Pariwar' is
proud to have reached today new horizons of growth and
development.
On the basis of our philosophy of Collective Materialism
we have always given
importance to the fact that profit earning is the
Quantitative aspect whereas the proper
utilization of profit is the Qualitative aspect. Ironically, we
only recognize and get recognized byte Quantitative
aspect.
I, therefore earnestly appeal to one and all in Politics,
Media, Business etc. that every
action, reaction, selection, appreciation or criticism
should be oriented strictly towards the Qualitative aspect.
I appeal to anybody and everybody to accord top priority
to Qualitative aspect in anything and everything for
peaceful, prosperous and progressive co-existence of
mankind anywhere and everywhere.
Today, I feel proud of the fact that I am the Guardian of
the World's largest
family. Perhaps, I am the world's only person whose
family is so vast, so disciplined, so
dedicated and so committed. Such a vast family as
Sahara India Pariwar has a grand and infinite future and I

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am sure that we will sustain our duty, consciousness,
discipline and dutifulness with a sense of dedication, as
we have always done in the past, so that together we
could build an India full of energy and radiance.
Structure of Sahara India Business:-
SAHARAINDIA
PARIWAR
Business
Finance Infrastructure
& Housing
Media &
Entertainment
Consumer
Product
Manufacturing
Service &
Trading
Para
banking
Life
Insurance
Mutual
Fund
Hosing
Finance
Hill City
Mega Quality
Townships
Hotels
Hospitals
Residential &
Commercial
Project
Entertainment

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Channel
Movie
Channel
World
Cinema
Production
Cinema
Halls
Consumer
Product &
Retail Chain
Jute Project
Handicraft
Promotion
Sahara
Next
Care House
Travel &
Tourism
News
Sahara India Life Insurance Company Ltd.
(First Wholly Indian Life Insurance Company in the Private Sector)
With Life Insurance Penetration in India at just
about 22% of the Insurable population
and premium income of 2% of GDP, the group sees
it as a very high growth sector of
Indian economy
Sahara India Life Insurance Company Ltd. (SILICL) is
today the first wholly Indian-owned Life Insurance
Company in the private sector. We launched our
operations on 30 October 2004after being granted license
to operate as a life insurer in India by Insurance
Regulatory and Development Authority on 6 February
2004.

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The range of products:
Sahara Nidhi - Endowment (with profit)
Sahara Sampann - Money back (with profit)
Sahara Amar Jeevan - Deferred Annuity
Sahara Kavach – A pure term policy
Sahara Sanchay-R - Unit Linked plan
Sahara Swabhimaan - Unit Linked Pension Plan
Sahara Ankur – A unit linked policy for children
Sahara Samriddhi – Money back with profits
Sahara Sahyog - Micro Endowment Insurance Plan
Sahara Samooh Samyojana - Unit Linked Group
Savings cum Insurance plan
Sahara Jamakarta Samooh Bima - Group Term
Insurance Plan-Non-Par
Sahara Assets Management Company Pvt.
Ltd.
Sach Mein Mutual!
One of the fastest growing sectors in India with an
average CAGR of 20% over the past
5 years.
With a view to offering its clientele a mutual fund that is
truly mutual, Sahara Mutual Fund was established in
2005. Our financial experts help hundreds of people to
manage their mutual fund investments, diversify their
portfolios and reduce their investment risks. Sahara
Mutual Fund offers seven schemes, of which 3 are Equity
schemes viz. Sahara Growth Fund, Sahara Tax Gain,
Sahara Madcap Fund and 4 are Debt-oriented schemes
viz.Sahara Income Fund, Sahara Short Term Fund, Sahara
Liquid Fund and Sahara Gilt Fund.
Our Investment Advisors help our clientele create the
perfect balance of returns, safety and liquidity by
assisting them to choose the right scheme, based on their
risk profile and
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investment goals.
At Sahara Mutual Fund, we take the onus for our
performance by linking it to the fee we earn. It is about
building a long term relationship. One in which we remain
'Mutually Yours' over the years. That's why we offer our
clientele the Variable Pricing Option.
Sahara Housingfina Corporation Limited
Every year in India all companies together disburse
Rs. 33,000 crore (USD 7653 million)
loan with a growth rate of around 20%
Sahara Housingfinas Corporation Limited was founded in
August 2002 with its registered corporate office at
Kolkata. SHCL commenced retail-lending business in May
2004 with professionals from the industry and fully
integrated on-line systems solution backed by strong
procedures and underwriting standards. Today we
operate from four regions viz. Kolkata, Lucknow,
Hyderabad and Mumbai and have a branch each in
Kolkata, Asansol, Siliguri,Lucknow, Gorakhpur, Pune,
Hyderabad, Vijaywada and Mumbai. We serve our
clientele through our attractive and competitive home
loan schemes. Specially tailored schemes for the allotees
of Sahara City Homes are also being worked out. We are
expanding our business by increasing the number of
business outlets.
Media & Entertainment:-
Sahara India Pariwar’s foray into the field of media and
entertainment began with the launch of Sahara TV on 28
March 2000 with the 24-hour free-to-air Digital Hindi
General Entertainment Channel beamed across 66
countries. On 10th October 2004, the channel was
rechristened Sahara One Television with the launch of the
First Indian Sangeet Awards held at the Royal Albert Hall,
London. Sahara One subsequently converted into a pay

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channel mode and is part of the Sahara One bouquet of
channels. Today, Sahara One Television reaches out to
over 40 million Cable and Satellite Television homes.
Consumer Products & Retail Chain:-
At present our product division offers a range of products
of everyday use as well as objects of desire through a
chain of showrooms called 'Unique' in various locations of
India. The number of these showrooms is proposed to be
increased to 6000. The products offered come under
three categories.
1. Sahara Select - Fashion & Lifestyle Products
2. Sahara Care - Daily Need Products &
3. Sahara Sports - Fitness & Leisure Products
Examples:-
Personal & Beauty Care
Home Care
Clothing
Jewellery & Watches
Accessories
Home Decor
House ware
Home Furnishings
Kids Products
Manufacturing & Service Trading:-
Sahara India launch a new innovative projects as per as:
Araria Jute project: Production of handloom, handicrafts &
hand-knitted carpets to bring forth socio-economic
development of the people of Araria.

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INTRODUCTION TO PROJECT TOPIC-
Which is COMPARITIVE ANALYSIS OF MUTUAL FUND AND ULIP

➢ MUTUAL FUND
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 mostglamorous – in
that it is a young industry where there are changes in the
rulesof the game everyday, and there are constant shifts
and upheavals.
The mutual fund is structured around a fairly simple
concept, the mitigationof risk through the spreading of
investments across multiple entities, which isachieved by
the pooling of a number of small investments into a large
bucket.Yet it has been the subject of perhaps the most
elaborate and 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 Actcreating what was effectively a small
savings division within the RBI. Over aperiod of 25 years
this grew fairly successfully and gave investors a good
return, and therefore in 1989, as the next logical step,
public sector banksand financial institutions were allowed
to float mutual funds and their successemboldened the
government to allow the private sector to foray into this
area.
The initial years of the industry also saw the emerging
years of the Indianequity market, when a number of
mistakes were made and hence the mutualfund schemes,
which invested in lesser-known stocks and at very high
levels,

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became loss leaders for retail investors. From those days
to today the retailinvestor, for whom the mutual fund is
actually intended, has not yet returnedto the industry in a
big way. But to be fair, the industry too has focused
onbrining in the large investor, so that it can create a
significant base corpus,which can make the retail investor
feel more secure.

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, thefirst month of
the current fiscal. As of now, there are 33 fund houses
inthe country including 16 joint ventures and 3 wholly
owned foreign asset managers.
According to a recent McKinsey report, the total AUM of
the Indian mutualfund industry could grow to $350-440
billion by 2012, expanding 33%annually. While the
revenue and profit (PAT) pools of Indian AMCs arepegged
at $542 million and $220 million respectively, it is at par
with fund housesin 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 theUS, in the same time
frame.

Major players in Indian mutual fund


industry and their AUM

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Mutual Fund No. Of Schemes* As on
corpus
, ABN AMRO MF 337 July 31,2008 7803
AIG GlobalM F 54 July 31,2008 3513
SBI Mutual Fund 177 July 31, 2008
29151.00
Birla Mutual Fund 343 July 31, 2008
37497.00
BOB Mutual Fund 22 July 31, 2008
56.00
Canara Robeco MF 54 July 31, 2008
4576.00
DBS Chola Mutual Fund 80 July 31, 2008
1853.00
Deutsche Mutual Fund 187 July 31,2008
10792.00
DSP Merrill Lynch MF 211 Feb 29, 2008
19483.00
Escorts Mutual Fund 26 Feb 29, 2008
177.00
Fidelity Mutual Fund 39 Mar 31, 2008
7464.00
Franklin Templeton
Investments 230 July 31,2008
24441.00
HDFC Mutual Fund 371 July 31,2008
50752.00
HSBC Mutual Fund 221 July 31,2008
16385.00
ICICI Prudential MF 431 July 31,2008
55161.00
ING Mutual Fund 262 July 31,2008
7091.00
JPMorgan Mutual Fund 9 July 31,2008 3054.00
Kotak Mahindra MF 185 July 31, 2008
18782.00
LIC Mutual Fund 112 July 31,2008
17499.0
Reliance Mutual Fund 345 July 31,2008
84564.00
Sahara Mutual Fund 45 July 31,2008
175.0
Sundaram Mutual Fund 219 July 31,2008
11898.00
Tata Mutual Fund 389 July 31,2008
20443.00
UTI Mutual Fund 315 July 312008
46120.00

International
Mutual Funds
International mutual funds are those funds that invest in
non-domestic securities markets throughout the world.

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Investing in international markets provides greater
portfolio diversification and let you capitalize on some of
the world's best opportunities. If investments are chosen
carefully, international mutual fund may be profitable
when some markets are rising and others are declining.

However, fund managers need to keep close watch on


foreign currencies and world markets as profitable
investments in a rising market can lose money if the
foreign currency rises against the dollar. In recent years
international mutual funds have gained popularity. This
can be attributed to removal of trade barriers and
expansion of economies, which has sparked off growth in
various regions of the world.

Things to Consider Before Investing in


International Mutual Funds

International Investing Formula:


According to a survey, the best policy for investment is to
have a 70% domestic investment and a 30% international
diversified funds investment. The survey reveals that this
investment strategy is better than having a 100%
domestic investment portfolio or a 100% international
exposure in terms of risk exposure and return on the
capital.

Diversification:
Not all the markets of the world move in one pack, so a
downswing in a country's market can be well taken care

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off by gains in the others. So, it is essential to have
diversification in different markets across the world.

Currency Exchange Risk:


You should also factor in foreign exchange currency
fluctuations in your investment returns. For example you
invested INR 9000 in an international mutual fund. At that
time let say one dollar was worth Rs 45.00. This means in
effect you invested $200. After an year your investment
appreciated to Rs 10,000 but at the same time dollar
appreciated to Rs. 50. So due to fluctuation in dollar-
rupee rate, your investment is still worth $200

In addition to these considerations, it is advisable to


aware of political history and current events before
investing in international mutual funds

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HISTORY OF MUTUAL FUND
The mutual fund industry in India started in 1963 with the
formation of UnitTrust of India, at the initiative of the
Government of India and Reserve Bank.
The history of mutual funds in India can be broadly
divided into four distinctphases: -
First Phase – 1964-87
An Act of Parliament established Unit Trust of India (UTI)
on 1963. It was setup by the Reserve Bank of India and
functioned under the Regulatory andadministrative
control of the Reserve Bank of India. In 1978 UTI was
delinked
from the RBI and the Industrial Development Bank of
India (IDBI) tookover the regulatory and administrative
control in place of RBI. The firstscheme launched by UTI
was Unit Scheme 1964. At the end of 1988 UTI
hadRs.6,700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public
Sector Funds)
1987 marked the entry of non- UTI, public sector mutual
funds set up bypublic sector banks and Life Insurance
Corporation of India (LIC) and General
Insurance Corporation of India (GIC). SBI Mutual Fund was
the first non- UTIMutual Fund established in June 1987
followed by Can bank Mutual Fund(Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank 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 mutualfund in
December 1990.

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At the end of 1993, the mutual fund industry had assets
under managementof Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private
Sector Funds)
With the entry of private sector funds in 1993, a new era
started in the Indianmutual fund industry, giving the
Indian investors a wider choice of fundfamilies.
Also, 1993 was the year in which the first Mutual Fund
Regulations came intobeing, under which all mutual
funds, except UTI were to be registered andgoverned.
The erstwhile Kothari Pioneer (now merged with
FranklinTempleton) was the first private sector mutual
fund registered in July 1993.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of
India Act 1963 UTIwas bifurcated into two separate
entities. One is the Specified Undertaking ofthe Unit Trust
of India with assets under management of Rs.29,835
crores asat 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 preview of the Mutual Fund
Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI,
PNB, BOB andLIC. It is registered with SEBI and functions
under the Mutual FundRegulations. With the bifurcation of
the erstwhile UTI which had in March2000 more than
Rs.76,000 crores of assets under management and with
thesetting up of a UTI Mutual Fund, conforming to the
SEBI Mutual FundRegulations, and with recent mergers
taking place among different privatesector funds, the
mutual fund industry has entered its current phase
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ofconsolidation 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

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

Though India is a minor player in the global mutual fund


industry, its AUM asa proportion of the global AUM has
steadily increased and has doubled overits levels in 1999.
The growth rate of Indian mutual fund industry has been
increasing for thelast few years. It was approximately
0.12% in the year of 1999 and it 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 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.over 23%, highest in the world. Only
channelizing
these savings in mutual funds sector is required.

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• We have approximately 29 mutual funds which is much
less than UShaving more than 800. There is a big scope
for expansion.
• Mutual fund can penetrate rural like the Indian
insurance industry withsimple and limited products.
Recent trends in mutual fund industry
The most important trend in the mutual fund industry is
the aggressiveexpansion of the foreign owned mutual
fund companies and thedecline of the companies floated
by the nationalized banks and smallerprivate sector
players.

Many nationalized banks got into the mutual fund


business in the earlynineties and got off to a start due to
the stock market boom wasprevailing. These banks did
not really understand the mutual fundbusiness and they
just viewed it as another kind of banking activity.Few
hired specialized staff and generally chose to transfer
staff fromthe parent organizations. The performance of
most of the schemesfloated by these funds was not good.
Some schemes had offeredguaranteed returns and their
parent organizations had to bail out theseAMCs by paying
large amounts of money as a difference between
theguaranteed and actual returns. The service levels
were also very bad.Most of these AMCs have not been
able to retain staff, float newschemes etc.

TECHNOLOGICAL ENVIRONMENT
IMPACT OF TECHNOLOGY
Mutual fund, during the last one decade brought out
several innovations intheir 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.

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• 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 moreeasily accessible to an ever
increasing number of investors across thecountry. For the
first time in India the mutual fund start using the
automatedtrading, clearing and settlement system of
stock exchanges for sale andrepurchase of open-ended
de-materialized mutual fund units.

Systematic Investment Plan (SIP) and Systematic


Withdrawal Plan (SWP)were options introduced which
have come in very handy for the investor tomaximize
their returns from their investments. SIP ensures that
there is a
regular investment that the investor makes on specified
dates making hispurchases 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 predefined 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)

26
With the increase in mutual fund players in India, a need
for mutual fundassociation in India was generated to
function as a non-profit organization.
Association of Mutual Funds in India (AMFI) was
incorporated on 22nd August1995.
AMFI is an apex body of all Asset Management
Companies (AMC), which hasbeen registered with SEBI.
Till date all the AMCs are that have launchedmutual fund
schemes are its members. It functions under the
supervision and
guidelines of board of directors. AMFI has brought down
the Indian MutualFund Industry to a professional and
healthy market with ethical linesenhancing and
maintaining standards. It follows the principle of
bothprotecting and promoting the interest of mutual
funds as well as their unit holders.
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 vigilance 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

27
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.
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.

MEMBERS O F AMFI:
Bank Sponsored
1. Joint Ventures - Predominantly Indian
1. Canara Robeco Asset Management Company Limited
2. SBI Funds Management Private Limited
2. Others

28
1. Baroda Pioneer Asset Management Company Limited
2. UTI Asset Management Company Ltd
Institutions
1. LIC Mutual Fund Asset Management Company Limited

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

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

29
3. HDFC Asset Management Company Limited
4. ICICI Prudential Asset Mgmt.Company Limited
5. Sundaram BNP Paribas Asset Management Company
Limited

4. Joint Ventures - Predominantly Foreign


1. ABN AMRO Asset Management (India) Pvt. Ltd.
2. Bharti AXA Investment Managers Private Limited
3. HSBC Asset Management (India) Private Ltd.
4. ING Investment Management (India) Pvt. Ltd.
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

30
there came to be established in the market 34 mutual
funds offerings a variety of about 550 schemes.

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 Fund.
REGISTRATION OF MUTUAL FUND:

Application for registration


1. An application for registration of a mutual fund shall be
made to the Boardin 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.
31
Application to conform to the requirements
3. An application which is not complete in all respects
shall be liable to berejected:
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 years; and
(ii) the net worth is positive in all the immediately
preceding five years; and
(iii) the net worth 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;

32
(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.
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:

33
(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:
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.
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

34
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 authorized 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 unit holders 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 unit holders.
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 net worth and the profitability of
the asset management company; 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
35
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 net worth 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 net worth
to rupees ten crore 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 net worth has been raised to rupees ten
crores.
Explanation : For the purposes of this clause, “net
worth” means the aggregate of the paid up capital and
free reserves of the asset management company after
deducting there from miscellaneous expenditure to the

36
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;
(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 unit holder and an advertisement is given
in one English daily newspaper having nationwide

37
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 unit holders 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 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 :

38
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.
(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:

39
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.
(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 :

40
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 utilize 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
utilize such services if disclosure to that effect is made to
the unit holders 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 half yearly and yearly results
(i) any underwriting obligations undertaken by the
schemes of the mutual funds with respect to issue of
securities associate companies,
(ii) devolvement, if any,

41
(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; (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

42
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.
(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

43
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.
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

44
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.
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

45
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.
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

46
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.
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 manager.

STRUCTURE OF MUTUAL FUND


There are many entities involved and the diagram below
illustrates the structure 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.

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

47
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.
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

48
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.
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 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

• Open-ended Schemes
• Interval Schemes
• Sector specific fund
• Index Schemes
• Tax saving fund

49
• Small cap fund
• Equity Schemes
• Debt Schemes
• Close Ended Schemes
• MM Mutual fund
• Other Debt Schemes
• FMP
• Any Other
• Equity Fund
• Mid cap Fund
• Large cap fund
Generally two options are available for every scheme
regarding dividend payout and growth option. By opting
for growth option an investor can have the benefit of
long-term growth in the stock market on the other side by
opting for the dividend option an investor can maintain
his liquidity by receiving dividend time to time. Some
time people refer dividend option as dividend fund and
growth fund. Generally decisions regarding declaration of
the dividend depend upon the performance of stock
market and performance of the fund.
OPTION REGARDING DIVIDEND
Dividend Growth
Payout Reinvested

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

50
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 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

51
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.

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.

52
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.
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.
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

53
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.

➢ ULIPS
54
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 holder.
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

55
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.

56
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 .

57
Presently a number of private life insurance companies
have launched Unit Linked Insurance Products with a
variety of new features.

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)

58
floated by the insurance companies. Units are bought
according 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
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.
• The maturity benefit is the net asset value of the units.
• The costs in ULIP are higher because there is a life
insurance

59
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:
 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.

60
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.

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

61
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
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.

62
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
COMPARISON BETWEEN ULIPS
AND MUTUAL FUNDS

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

63
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.
This is in stark contrast to conventional insurance plans
where the sum assured is the starting point and
premiums to be paid are determined
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.

64
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
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

65
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.
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

66
investor is given the option to invest across asset classes
as per his convenience in a cost-effective manner.
This can prove to be very useful for investors, for
example in a bull market when the ULIP investor's equity
component has appreciated, he can book profits by
simply transferring the requisite amount to a debt-
oriented plan.
5. Tax benefits
ULIP investments qualify for deductions under Section
80C of the Income Tax Act. This holds good, irrespective
of the nature of the plan chosen by the investor. On the
other hand in the mutual funds domain, only investments
in tax-saving funds (also referred to as equity-linked
savings schemes) are eligible for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case of
equity-oriented funds (for example diversified equity
funds, balanced funds), if the investments are held for a
period over 12 months, the gains are tax free; conversely
investments sold within a 12-month period attract short-
term capital gains tax @ 10%.
Similarly, debt-oriented funds attract a long-term capital
gains tax @ 10%, while a short-term capital gain is taxed
at the investor's marginal tax rate. Despite the seemingly
similar structures evidently both mutual funds and ULIPs
have their unique set of advantages to offer. As always, it
is vital for investors to be aware of the nuances in both
offerings and make informed decision.

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.

67
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.

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.

68
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. 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.

69
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.
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.

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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)

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.

71
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.
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

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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.

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:
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• 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. 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.

74
Population
All the clients of Sahara india and people of different
areas 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.

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.

75
• 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.

COMPARATIVE ANALYSIS OF MUTUAL FUNDS


AND ULIPS : What do investors prefer?
• Do you invest in Mutual Funds ?
response Frequency
Percentage
Yes 62%
No 38%
total 100
INTERPRETATION:
62% of the people invest in mutual funds.

what is the mode of information that you use for


insurance
companies?
a) Advertisement b) Agents c) Seminar d) Work shops 
Advertisements 44%
Agents 24%
Seminar 14%
Workshop 18%
total 100
In which sector do you prefer to invest your
money?
government sector 54%
private sector 46%
total 100
.

76
Interpretation: People prefer both the sectors
equally.
• At which rate do you want your investment to
grow?
34% steadily
26% at an average rate
40% fast
interpretation: 40% of the respondents want their
investments to grow
Which factor do you consider before investing in
mutual fund or
Ulips (tick)

Safety of principal 28%


Low risk 30%
Higher returns 28%
Maturity period 8%
Terms and conditions 6%
Total 100
Interpretation: people prefer low risk as the most
important factor
before investing in mutual funds or ulips.

Imagine that stock market drops immediately after


you invest
in it then what will you do?
Options frequency

withdraw your money 16%


wait and watch 52%
invest more in it 32%

Interpretation: 26% of the respondents will wait


and watch even if the

77
share market drops.

A. Do you have any other investment/insurance


policy?
Yes 68%
No 32%
total 100
Interpretation: 68 % of the people had bought other
investment
policies.

How often do you monitor your investment?


Options frequency

Daily 30%
Monthly 50%
Occasionally 20%
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.
How long have you been investing in mutual funds

1-5 years 44%


5-10 years 34%
10-15 years 22%

In the past, you have invested mostly in (choose


one):
Savings A/cs & PO schemes 36%
Mutual funds investing in stocks 6%
Balanced mutual funds 2%
Individual stocks & bonds 10%
Ulips 8%

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Other instruments like real estate,
Gold 26%
total 100
.
INTERPRETATION: the financial situation is
moderately stable.

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.
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.
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

79
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.
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.

80
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.

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QUESTIONNAIRE
I am SAURABH PAL pursuing MBA from SCHOOL OF
ECONOMICS (INDORE UNIVERSITY). As a part of the
curriculum Iam doing research on “COMPARATIVE
ANALYSIS OF MUTUALFUNDS AND ULIPS”. Kindly help me
in the same by filling theQuestionnaire. Your response
would be kept strictly confidential andwould 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 
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
82
• 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
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
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:

83
Very unstable. ( ) Somewhat unstable ( ).
Moderately stable. ( ) Stable. ( )
Very stable ( )
Your comfort level in making investment decisions
can best be described as
Low ( ) moderate ( ) high ( )
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
 Rs 2, 50,000-Rs 4, 00,000  above Rs 4, 00,000

84
➢ SUMMARY
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.

85
BIBLIOGRAPHY
• www.amfiindia.com
• www.principalindia.com
• www.investorsguide.com
• www.moneycontrol.com
• www.mutualfundsindia.com
• www.sebi.co.in
• www.irda.com

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MBA 1st Semester Results 2009-10


Name: ARCHANA PANDEY
Fathers Name: SRI BHOOT NATH PANDEY
Roll No: 0906270014
Status: REGULAR
Course: M.B.A. (70)
Institute Name: MOTILAL RASTOGI SCHOOL OF MANAGEMENT,LUCKNOW-226008

MARKS DETAIL
1ST Semester
Subject Code External Marks Sessional Marks
MBA011 048 046
MBA012 060 042
MBA013 072 045
MBA014 038 037
MBA015 036 043
MBA016 058 042
MBA017 062 043

86
MBA018 061 048
AUC001 Not Cleared.

Carry Over Paper

Year Status Marks


First Year CP(0) 781

Date Of Declaration of Result:4-Mar-2010

Reasons
Incomplete data - pl.provide Even semester's data.

Note: University does not own for the errors or omissions, if any, in this statement.

87