INTRODUCTION

➢TOPIC
➢COMPANY

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 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 most glamorous – in that it is a young
industry where there are changes in the rules of the game every day, and there are constant
shifts and upheavals. The mutual fund is structured around a fairly simple concept, the
mitigation of risk through the spreading of investments across multiple entities, which is
achieved by the pooling of a number of small investments into a large bucket. Yet it has been
the subject of perhaps the most elaborate and prolonged regulatory effort in the history of
the country.

A Little History-
The mutual fund industry started in India in a small way with the UTI Act creating what was
effectively a small savings division within the RBI. Over a period of 25 years this grew fairly
successfully and gave investors a good return, and therefore in 1989, as the next logical step,
public sector banks and financial institutions were allowed to float mutual funds and their
success emboldened the government to allow the private sector to foray into this area. The
initial years of the industry also saw the emerging years of the Indian equity market, when a
number of mistakes were made and hence the mutual fund schemes, which invested in lesser
known stocks and at very high levels, became loss leaders for retail investors. From those days
to today the retail investor, for whom the mutual fund is actually intended, has not yet
returned to the industry in a big way. But to be fair, the industry too has focused on brining
in the large investor, so that it can create a significant base corpus, which can make the retail
investor feel more secure.

The Indian MF industry has Rs. 5.67 lakh Crores of assets under management. As per data
released by Association of Mutual Funds in India, the asset base of all mutual fund combined
has risen by 7.32% in April, the first month of the current fiscal. As of now, there are 33 fund
houses in the country including 16 joint ventures and 3 wholly owned foreign asset managers.
According to a recent McKinsey report, the total AUM of the Indian mutual fund industry
could grow to $350-440 billion by 2012, expanding 33%annually. While the revenue and profit
(PAT) pools of Indian As are pegged at $542 million and $220 million respectively, it is at par
with fund houses in developed economies. Operating profits for AMCs in India, as a
percentage of average assets under management, were at 32 basis points in 2006-07, while
the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US, in the same time
frame.

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

1. 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 and administrative control of the Reserve
Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank
of India (IDBI) took over the regulatory and administrative control in place of RBI. The first
scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores
of assets under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can
bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual
Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).LIC established
its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.At the
end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores .

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year
in which the first Mutual Fund Regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged
with Frank) was the first private sector mutual fund registered in July 1993.

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 4. Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with
assets under management of Rs.29,835 crores asset the end of January 2003, representing
broadly, the assets of US 64 schemes, assured return and certain other schemes. The specified
undertakings of Unit Trust of India, functioning under an administrator and under the rules
framed by Government of India and does not come under the purview of the Mutual Fund
Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation
of the erstwhile UTI which had in March2000 more than Rs.76,000 crores of assets under
management and with up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and growth. As at the end
of September, 2004, there were 29funds, which manage assets of Rs.153108 crores under
421 schemes.

ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

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

Though India is a minor player in the global mutual fund industry, its AUM as a proportion of
the global AUM has steadily increased and has doubled over its levels in 1999.The growth rate
of Indian mutual fund industry has been increasing for the last few years. It was approximately
0.12% in the year of 1999 and it is noticed 0.25% in 2004 in terms of AUM as percentage of
global AUM.

Some facts for the growth of mutual funds in India

➢ 100% growth in the last 6 years.
➢ Number of foreign AMC’s is in the queue to enter the Indian markets.
➢ Our saving rate is over 23%, highest in the world. Only channelizing these savings in
mutual funds sector is required.

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 ➢ We have approximately 29 mutual funds which is much less than U Shaving more than
800. There is a big scope for expansion.
➢ Mutual fund can penetrate Rural like the Indian insurance industry with simple and
limited products.
➢ SEBI allowing the MF's to launch commodity mutual funds.
➢ Emphasis on better corporate governance.
➢ Trying to curb the late trading practices.

Recent trends in mutual fund industry

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

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

TECHNOLOGICAL ENVIRONMENT

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

1. Electronic fund transfer facility.

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

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

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

LEGAL AND POLITICAL ENVIRONMENT:

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in India
was generated to function as a non-profit organization. Association of Mutual Funds in India
(AMFI) was incorporated on 22ndAugust1995.AMFI is an apex body of all Asset Management
Companies (AMC), which has been registered with SEBI. Till date all the AMCs are that have
launched mutual fund schemes are its members. It functions under the supervision and
guidelines of board of directors. AMFI has brought down the Indian Mutual Fund Industry to
a professional and healthy market with ethical lines enhancing and maintaining standards. It
follows the principle of both protecting and promoting the interest of mutual funds as well as
their unit holders.

It has been a forum where mutual funds have been able to present their views, debate and
participate in creating their own regulatory framework. The association was created originally
as a body that would lobby with the regulator to ensure that the fund viewpoint was heard.
Today, it is usually the body that is consulted on matters long before regulations are framed,
and it often initiates many regulatory changes that prevent malpractices that emerge from
time to time. AMFI works through a number of committees, some of which are standing
committees to address areas where there is a need for constant vigil and improvements and
other which are adhoc committees constituted to address specific issues. These committees
consist of industry professionals from among the member mutual funds. There is now some
thought that AMFI should become a self-regulatory organization since it has worked so
effectively as an industry body.

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CHAPTER – 2

OBJECTIVES

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 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 nationwide 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 OF AMFI:

I. Bank Sponsored
1) Joint Ventures - Predominantly Indian
1. Canara Robeco Asset Management Company Limited
2. SBI Funds Management Private Limited
2) Others
1. Baroda Pioneer Asset Management Company Limited
2. UTI Asset Management Company Ltd

II. Institutions

1) LIC Mutual Fund Asset Management Company Limited.

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III. Indian-

a) Benchmark Asset Management Company Pvt Ltd.

b) DBS Cholamandalam Asset Management Ltd.
c) Deutsche Asset Management (India) Pvt Ltd.
d) Edelweiss Asset Management Limited
e) Escorts Asset Management Limited
f) IDFC Asset Management Company Private Limited
g) JM Financial Asset Management Private Limited
h) Kotak Mahindra Asset Management Company Limited(KMAMCL)
i) Quantum Asset Management Co. Private Ltd.
j) Reliance Capital Asset Management Ltd.
k) Sahara Asset Management Company Private Limited
l) Tata Asset Management Limited
m) Taurus Asset Management Company Limited

IV. 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.

V. Joint Ventures - Predominantly Indian

1. Birla Sun Life Asset Management Company Limited

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

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IV. Joint Ventures - Predominantly Foreign
1. ABN AMRO Asset Management (India) Pvt Ltd.
2. Bharti AXA Investment Managers Pvt Limited
3. HSBC Asset Management (India) Pvt Ltd.
4. ING Investment Management (India) Pvt Ltd.
5. JPMorgan Asset Management India Pvt Ltd.
6. Lotus India Asset Management Co. Pvt Ltd.
7. Morgan Stanley Investment Management 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 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 2000there came to be established in the market 34 mutual funds offerings a variety
of about 550 schemes.

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SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUND) REGULATION,
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 FUND) 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 in1996 titled “SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUALFUNDS)
REGULATIONS, 1996”. The said regulations as amended from time to time are in force even
today. The SEBI mutual fund regulations contain ten chapters and twelve schedules. Chapters
containing material subjects relating to regulation and conduct of business by Mutual Funds

REGISTRATION OF MUTUAL FUND:

Application for registration:

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

Application fee to accompany the application

Every application for registration under regulation 3 shall be accompanied by non -refundable
application fee as specified in the Second Schedule.

Application to conform to the requirements

An application which is not complete in all respects shall be liable to be rejected:

Provided that, before rejecting any such application, the applicant shall be given an
opportunity to complete such formalities within such time as may be specified by the Board.

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

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 Eligibility criteria
For the purpose of grant of a certificate of registration, the applicant has to full-fill 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;
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;
(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 fulfil the eligibility criteria
specified in these regulations;

(d) Appointment of trustees to act as trustees for the mutual fund in accordance with
the provisions of the regulations;
(e) 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;

(f) Appointment of a custodian in order to keep custody of the securities

Or gold and gold related instruments and carry out the custodian activities as may be
authorized by the trustees.

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

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Grant of Certificate of Registration
The Board may register the mutual fund and grant a certificate in Form Bon the applicant
paying the registration fee as specified in Second Schedule.

Terms and conditions of registration

The registration granted to a mutual fund under regulation 9, shall be subject to the following
terms and conditions:

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

Rejection of application
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:

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:

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

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

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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 every day.

•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: -

1. Portfolio Diversification
Mutual funds invest in a number of companies. This Mutual Fund invests in a number of
companies. This diversification reduces the risk because it happens very rarely that all the
stock’s decline at the same time and in the same proportion. So this is the main advantage of
mutual funds.

2. Professional Management
Mutual funds provide the securities 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.

3. Low Costs
Mutual funds are a relatively less expensive way3 to invest as compare to directly investing
in a capital markets because of less amount of brokerage and other fees.

4. 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 assest value and on
other hand in close ended schemes the units can be sold in stock exchange at a prevailing
market price.

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 5. 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

6. 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, and dividend reinvestment plans etc.

7. Convenient Administration
Investing in a mutual fund reduces paperwork and helps investors to avoid many problems
like bad deliveries, delayed payments and follow up with brokers and companies. Mutual
funds save time and make investing easy.

8. Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
bec3ause of its large corpus allows even a small investor to take the benefit of its investment
strategy.

9. 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
fund333333 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.

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

Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 % 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 money on your investment as you expected. Of course, if you invest in index
funds, you forego management risk because these funds do not employ managers.

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 STRUCTURE OF MUTUAL FUND
There are many entities involved and the diagram below illustrates the 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 fulfil the eligibility criteria the Mutual Fund Regulations. The sponsor or
any of its directors or the principal officer employed by the mutual fund should not be guilty
of fraud or guilty of any economic offence.

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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 is 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 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.

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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 to cater to the needs such as
financial position, risk tolerance and return expectations etc. Investment can be made either
in the debt Securities or equity .The table below gives an overview into the existing types of
schemes in the Industry.

Generally two options are available for every scheme regarding dividend pay-out 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

Systematic Investment Plan (SIP)

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

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 • 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 that
returns from stocks are much better than the other investments had over the long term.
Growth schemes are ideal for investors having a long term outlook seeking growth over a
period of time.

Income Funds
The aim of the income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures and
government securities. Income funds are ideal for capital stability and regular income.

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

Money Market Funds

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

FREQUENTLY USED TERMS

Advisor – He is employed by a mutual fund organization to give professional advice on the
fund’s investments and to supervise the management of its asset.

Diversification – The policy of spreading investments among a range of different securities to

reduce the risk.

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

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

Repurchase Price -Is the price at which a close-ended scheme repurchases its units and it may
include a back-end load? This is also called Bid Price.

Redemption Price-Is the price at which open-ended schemes repurchase their units and
close-ended schemes redeem their units on maturity? Such prices are NAV related.

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

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 ULIPS

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.

a) Traditional Life
b) Universal Life or Unit Linked Policies

➢ TRADITIONAL LIFE – AN OVERVIEW

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

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

22
FEATURES OF TL:
a) This is the simplest way of designing product as far as concerned. He has no other
responsibility but to pay the premium regularly.
b) Company is responsible for the protection as well as maximization of the
policyholder’s funds.
c) 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.
d) 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.
e) 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.

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 fulfil 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

23
Linked Insurance Product known by name “BIMA PLUS “ in the year 2001-02 .Presently a
number of private life insurance companies have launched Unit Linked Insurance Products
with a variety of new features

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

The pension plans come with two variations — with and without life cover —and are meant
for people who want to generate returns for their sunset years. The children plans, on the
other hand, are aimed at taking care of their educational and other needs.. Apart from unit-
linked plans for individuals, group unit linked plans are also available in the market. The Group
linked plans are basically designed for employers who want to offer certain benefits for their
employees such as gratuity, superannuation and leave encashment. The other important
category of ULIPs is capital guarantee plans. The plan promises the policyholder that at least
the premium paid will be returned at maturity. But the guaranteed amount is payable only
when the policy's maturity value is below the total premium paid by the individual till
maturity. However, the guarantee is not provided on the actual premium paid but only on
that portion of the premium that is net of expenses (mortality, sales and marketing,
administration).

How ULIPs work

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

24
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 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.

25
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:

a) Aggressive ULIPS (which can typically invest 80%-100% in equities, balance in debt)
b) Balanced ULIPS (can typically invest around 40%-60% in equities)
c) Conservative ULIPS (can typically invest up to 20% in equities) Although this is how
the ULIP options are generally designed, the exact debt/equity allocations may vary
across insurance companies. Individuals can opt for a variant based on their risk
profile.

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

Works like an SIP

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

➢ HURDLES OF ULIP
➢ NO STANDARDIZATION

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

26
LACK OF FLEXIBILITY IN LIFE COVER
ULIP is known to be more flexible in nature than the traditional plans and, on most counts,
they are. However, some insurance companies do not allow the individual to fix the life cover
that he needs. These rely on a multiplier that is fixed by the insurer

OVERSTATING THE YIELD

Insurance companies work on illustrations. They are allowed to show you how much your
annual premium will be worth if it grew at 10 per cent per annum. But there are costs, so each
company also gives a post-cost return at the 10per 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.

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

27
 COMPARISON BETWEEN

ULIPS AND MUTUALFUNDS

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 ULIP’s
are allotted units by the insurance company and a net asset value (NAV) is declared for the
same on a daily basis. Similarly ULIP investors have the option of investing across various
schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds,
balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as
mutual fund schemes with an insurance component. However it should not be construed that
barring the insurance element there is nothing differentiating mutual funds from ULIPs.

Points of difference between the two:

1. Mode of investment/ investment amounts

Mutual fund investors have the option of either making lump sum investments or investing
using the systematic investment plan (SIP) route which entails commitments over longer time
horizons. The minimum investment amounts are laid out by the fund house. ULIP investors
also have the choice of investing in a lump sum (single premium) or using the conventional
route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly basis.
In ULIPs, determining the premium paid is often the starting point for the investment activity.

This is in stark contrast to conventional insurance plans where the sum assured is the starting
point and premiums to be paid are determined thereafter. ULIP investors also have the
flexibility to alter the premium amounts during the policy's tenure. For example an individual
with access to surplus funds can enhance the contribution thereby ensuring that his surplus
funds are gainfully invested; conversely an individual faced with a liquidity crunch has the
option of paying a lower amount (the difference being adjusted in the accumulated value of
his ULIP). The freedom to modify premium payments at one's convenience clearly gives ULIP
investors an edge over their mutual fund counterparts.

2. Expenses
In mutual fund investments, expenses charged for various activities like fund management,
sales and marketing, administration among others are subject to pre-determined upper limits
as prescribed by the Securities and Exchange Board of India. For example equity-oriented
funds can charge their investors a maximum of 2.5% per annum on a recurring basis for all
their expenses; any expense above the prescribed limit is borne by the fund house and not
the investors. Similarly funds also charge their investors entry and exit loads (in most cases,

28
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 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 ULIP’s segment are
largely comparable. For example plans that invest their entire corpus in equities (diversified
equity funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those
investing only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from
the same fund house, he could have to bear an exit load and/or entry load. On the other hand
most insurance companies permit their ULIP inventors to shift investments across various
plans/asset classes either at a nominal or no cost (usually, a couple of switches are allowed
free of charge every year and a cost has to be borne for additional switches).Effectively the
ULIP investor is given the option to invest across asset classes as per his convenience in a cost-
effective manner. This can prove to be very useful for investors, for example in a bull market
when the ULIP investor's equity component has appreciated, he can book profits by simply
transferring the requisite amount to a debt-oriented plan.

29
5. Tax benefits
ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds
well, irrespective of the nature of the plan chosen by the investor. On the other hand in the
mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked
savings schemes) are eligible for Section 80C benefits.

Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example
diversified equity funds, balanced funds), if the investments are held for a period over 12
months, the gains are tax free; conversely investments sold within a 12-month period attract
short-term capital gains tax@ 10%.Similarly, debt-oriented funds attract a long-term capital
gains tax @ 10%,while a short-term capital gain is taxed at the investor's marginal tax rate.
Despite the seemingly similar structures evidently both mutual funds and ULIPs have their
unique set of advantages to offer. As always, it is vital for investors to be aware of the nuances
in both offerings and make informed decisions.

Investing in ULIPS? Remember…………

The high returns

(Above 20 per cent) are definitely not sustainable over a long term, as they have been
generated during the biggest bull run in recent stock market history. The free hand given to
ULIPs might prove risky if the timing of exit happens to coincide with a bearish market phase,
because of the inherently high equity component of these schemes. While a debt-oriented
ULIP scheme might be superior to a debt option in a conventional mutual fund due to tax
concessions that insurance companies enjoy, such tax incentives may not last.

Look beyond NAVs

The appreciation in the net asset value (NAV) of ULIP’s barely indicating 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.

30
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 65per cent of the first year premiums.
Premium allocation charges are usually very high (5-65 per cent) in the first couple of years,
but taper off later. The high initial charges mainly go towards funding agent commissions,
which could be as high as 40 per cent of the initial premium as per IRDA (Insurance Regulatory
and Development Authority) regulations. The charges are higher for a linked plan than a non-
linked plan, as the former require lot more servicing than the latter, such as regular disclosure
of investments, switches, re-direction of premiums, withdrawals; and so on .Insurance
companies have the discretion to structure their expenses structure whereas a mutual fund
does not have that luxury. The expense ratios in their case cannot exceed 2.5 per cent for an
equity plan and 2.25 per cent for a debt plan respectively. The lack of regulation on the
expense front works to the detriment of investors in ULIPs.

The front-loading of charges

It 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.

31
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 Rs100 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 1,000sum
assured increases, effectively increasing your overall insurance costs. A lower life cover could
yield better returns.

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.

32
ULIP's usually have following charges built into it:
a) Up-front Charge

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

c) Administrative Charges

d) Fund Management Charges

Mutual Funds 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 lock
in of three years. You can make partial withdrawals after three years. The surrender value of
a ULIP is low in the initial years, since the insurer deducts a large part of your premium as
marketing and distribution costs. ULIPs are essentially long-term products that make sense
only if your time horizon is 10 to 20 years. Mutual fund investments, on the other hand, can
be redeemed at any time, barring ELSS (equity-linked savings schemes). Exit loads, if
applicable, are generally for six months to a year in equity funds.

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

33
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, and20% 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 below, 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 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 a2.25%
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.

34
CHAPTER – 3

RESEARCH
METHODOLOGY

35
 RESEARCH METHODOLOGY

This section includes the research methods, their rationale, validity, reliability, sample size,
alternatives and limitation faced during primary research.

• To know about the various needs of staff and what they want from their job.
• To discuss what steps do managers to take the motivate their staff and full-fill their
needs.
• To gauge the impact of staff motivation on employee productivity.

Research in common language refers to a search of knowledge. Research is a scientific and a

systematic search for the information on a specific topic. In fact, research is an act of scientific
investigation. Research methodology is a systematic is a systematic way to solve a research
problem. It may be understood as a science of study, how research is done scientifically. In it
we study the various steps that are generally adopted by researchers in studying these
research problems.

It is necessary for the researcher to know not only the research methods, but also the
methodology. The scope of research methodology is wider than the research methods. The
research process consists of a series of closely related activities; at times the first steps
determine the nature of the last steps to be undertaken. Research is an academic activity and
as such the term should be used in a technical sense In short, the search for knowledge
through objectives and systematic method of finding solution to a problem is research.

Why a research study has been undertaken, how the research problem has been defined, in
what way and why the hypothesis has been formulated, what data how been collected and
what particular methods has been adopted and a host of similar other question are usually
answered when we talk of research methodology concerning a research problem of study.
The term research refers to systematic methods consisting of enunciating the problem,
formulating a hypothesis, collecting the fact or data, analyzing the facts and reaching certain
conclusions either in the form of solution towards the concerned problem in certain
generalization for some theoretical formulation.

Research methodology is the arrangement of condition for collection and analysis of data in
a manner that aim to combine relevance to the research purpose with econ9omy in
procedure.

Research methodology is the conceptual structure within which research is conducted. It

constitutes the blueprint for the collection measurement and analysis of the data.

36
Research methodology is a frame work for the study and is used as a guide in collecting and
analysing the data. It is a strategy specifying which approach will be used for gathering and
analysing the data. It also includes the time and cost budget since most studies are under
these two constraints.

Formulating Research
For researcher, must decide the general area of interest or aspect of a subject matter that
would like to enquire in to. The best way of understanding the problems is to discuss it with
those having some experience in the matter. The topic of the research project was studied
thoroughly related to the project. The subject matter was deliberated and discuss with my
project guide under the whom the project may be undertaken to reflect performance
appraisal as an effective tool for human resource management. Once the problem is
formulated, brief summary of it should be written down. At this stage, the researcher should
undertake extensive literature study connected with the problem.

Research Design:
In this study Descriptive research design is used.

Descriptive research, also known as statistical research, describes data and characteristics
about the population or phenomenon being studied. Descriptive research answer the
question who, what, where, when and how. Although the data description is factual, accurate
and systematic, the research cannot describe what caused a situation. Thus, descriptive
research cannot be used to create a causal relationship, where one variable affects another.

The description is used for frequencies, average and other statistical calculation. Often the
best approach, prior to writing descriptive research, is to conduct a study investigation.
Qualitative research often has the aim of description and researcher may follow-up with
examinations of why the observation exists and what the implication of the findings are.

In short descriptive research deals with everything that can be counted and studied. But there
are always restrictions to that. Your research must have an impact to the lives of the people
around you. For example, findings the most frequent disease that affects the children of a
town. The reader of the research will know what to do to prevent that disease thus; more
people will live a healthy life. Descriptive Research, also known as statistical research,
describes data and characteristic about the population or phenomenon being studied.
Descriptive research answer the question who, what, where when and how…

Research is a systematic and objectives process of gathering recording and analysing data for
aid of making decision regarding a particular problem.

37
RESEARCH DESIGN
The research design is a master plan specifying the methods and procedure for collecting and
analysing the needed information the research design of my dissertation.

DESCRIPTIVE RESEARCH
Descriptive research includes study and facts findings inquiries of different kinds.

DATA Collection
Primary Data -It is collected with the help of questionnaire.

RESEARCH INSTRUMENTS
Questionnaire-Under this method, list of questions pertaining to the study are prepared con
summers of shoes. Questionnaire has structured type questions as well as unstructured type
question. Structured objective types questions are prepared for the respondents with fixed
response categories. Some of the questions are of multiple-choice type. The questions have
more than one alternative.

Sampling Design

• Target population market shopkeeper

• Sample size 100 people

38
 CHAPTER – 4

DATA INTERPRETATION
AND
ANALYSIS

39
Data Collection:
Primary Data-primary data were collected through personal observation and questionnaire
method. The respondents were contacted personally at their workplace.

OBJECTIVES:
➢ To study about the mutual funds industry.
➢ To study the approach of investors towards mutual funds and ULIP’S.
➢ To study the behaviour of the investors whether they prefer mutual funds or ULIP’S.

SCOPE OF THE STUDY:

➢ Subject matter is related to the investor’s approach towards mutual funds and ULIP’S.
➢ People of age between 20- 60
➢ Area limited to Gurugram and Haryana.
➢ 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 the information that is actually required is. Information in this
case we require is that what is the approach of investors while investing their money in
mutual funds and ULPI’S e.g. what do they consider while deciding as to invest in which of
the two i.e. mutual funds or ULIP’S. 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 frame work 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.

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•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 pre-test a questionnaire:-

A questionnaire is a formalized set of questions for obtaining information from respondents.

Whereas pretesting refers to the testing of the questionnaire on a small sample of
respondents in order to identify and eliminate potential problems.

Population-All the clients of State bank of India and State bank of Patiala who are investing
money in mutual funds and ULIP’S, 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.

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CHAPTER - 5

FINDINGS

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 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 in 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 up to 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.

DEMOGRAPHICS
✓ 58% of people belong to 25-30 age group and on the other hand only
✓ 17% of people belong to above 40 age group.
✓ 17%of the people are under graduates.
✓ 52% of the people are graduates.
✓ 31%of the people are post graduates
✓ 55% of the people are married.
✓ 45% of the people are unmarried.
✓ 31% of the people have 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 to 1, 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 4, 00,000 income group.

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CONCLUSION

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 CONCLUSION

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
have 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.

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LIMITATIONS

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 LIMITATIONS

No study is free from limitations.

The limitations of this study can be:

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

•The result is based on primary and secondary data that has its own limitations.

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

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 SAMPLE QUESTIONNAIRE
Name: .................... Age: ...................... Mob: ......................

Ques.1 What is your Qualification?

(a) Under-graduation (b) Graduation (c) Post Graduation (d) Others

Ques.2 What is your Occupation?

(a) Government (b) Private (c) Business (d) Others

Ques.3 What is your monthly family income?

(a) <=10000 (b) 100001-200000 (c) 200001-300000 (d) >300000

Ques.4 Do you have any idea about mutual fund?

(a) Yes (b) No

Ques.5 From where you come to know about Mutual Fund?

(a) Advertisement (b) Peer group (c) Banks (d) Financial Advisors

Ques.6 Where will you prefer to invest?

(a) Savings (b) Insurance (c) FD (d) Shares

Ques.7 Which is your preference while investing?

(a) Low returns (b) High risk (c) Liquidity (d) Trust

Ques.8 Which mutual fund company you will prefer to invest?

(a) Reliance (b) SBI (c) UTI (d) HDFC

Ques.9 Which mode of investment you will prefer?

(a) Long term (b) Short term

Ques.10 What are your objectives for investment?

(a) Preservation (b) Current income (c) Conservative growth (d) Aggressive growth

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 BIBLIOGRAPHY

➢ www.amfiindia.com
➢ www.principalindia.com
➢ www.investorsguide.com
➢ www.moneycontrol.com
➢ www.mutualfundsindia.com
➢ www.sbimf.com
➢ www.sebi.co.in

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