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INDUSTRY PROFILE
The mutual fund industry is a lot like the film star of the finance business.
Though it is perhaps the smallest segment of the industry, it is also the most
glamorous in that it is a young industry where there are changes in the rules
of the game everyday, and there are constant shifts and upheavals.
The mutual fund is structured around a fairly simple concept, the mitigation
of risk through the spreading of investments across multiple entities, which is
achieved by the pooling of a number of small investments into a large bucket.
Yet it has been the subject of perhaps the most elaborate and prolonged
regulatory effort in the history of the country.
A little history:
The mutual fund industry started in India in a small way with the UTI Act
creating what was effectively a small savings division within the RBI. Over a
period of 25 years this grew fairly successfully and gave investors a good
return, and therefore in 1989, as the next logical step, public sector banks
and financial institutions were allowed to float mutual funds and their success
emboldened the government to allow the private sector to foray into this area.
The initial years of the industry also saw the emerging years of the Indian
equity market, when a number of mistakes were made and hence the mutual
fund schemes, which invested in lesser-known stocks and at very high levels,
became loss leaders for retail investors. From those days to today the retail
investor, for whom the mutual fund is actually intended, has not yet returned
to the industry in a big way. But to be fair, the industry too has focused on
brining in the large investor, so that it can create a significant base corpus,
which can make the retail investor feel more secure .
first month of the current fiscal. As of now, there are 33 fund houses in
the country including 16 joint ventures and 3 whollyowned foreign asset
managers.
According to a recent McKinsey report, the total AUM of the Indian mutual
fund industry could grow to $350-440 billion by 2012, expanding 33%
annually. While the revenue and profit (PAT) pools of Indian AMCs are
pegged
at $542 million and $220 million respectively, it is at par with fund houses
in developed economies. Operating profits for AMCs in India, as a percentage
of average assets under management, were at 32 basis points in 2006-07,
while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the
US,
in the same time frame.
No. of
Mutual Fund Name
ABN AMRO M F
AIG GlobalM F
SBI Mutual Fund
Birla Mutual Fund
BOB Mutual Fund
Canara Robeco Mutual Fund
DBS Chola Mutual Fund
Deutsche Mutual Fund
DSP Merrill Lynch Mutual Fund
Escorts Mutual Fund
Fidelity Mutual Fund
Franklin Templeton Investments
HDFC Mutual Fund
HSBC Mutual Fund
ICICI Prudential Mutual Fund
ING Mutual Fund
JPMorgan Mutual Fund
Kotak Mahindra Mutual Fund
LIC Mutual Fund
Lotus India Mutual Fund
Morgan Stanley Mutual Fund
PRINCIPAL Mutual Fund
Quantum Mutual Fund
Reliance Mutual Fund
Sahara Mutual Fund
Mirae asset mutual fund
Sundaram Mutual Fund
Tata Mutual Fund
Taurus Mutual Fund
UTI Mutual Fund
Schemes*
337
As on
Corpus
July 31,
7803
54
2008
July 31,
3513
177
2008
July 31,
29151.00
Major
343
2008
July 31,
37497.00
players in
22
2008
July 31,
56.00
Indian
54
2008
July 31,
4576.00
80
2008
July 31,
1853.00
187
2008
July 31,
10792.00
211
26
39
230
2008
Feb 29, 2008
Feb 29, 2008
Mar 31, 2008
July 31,
19483.00
177.00
7464.00
24441.00
371
2008
July 31,
50,752.00
221
2008
July 31,
16,385.00
431
2008
July 31,
55,161.00
262
2008
July 31,
7091.00
2008
July 31,
3054.00
185
2008
July 31,
18,782.00
112
2008
July 31,
17,499.00
216
2008
July 31,
7831.00
2008
July 31,
2,814.00
151
2008
July 31,
11,359.00
2008
July 31,
66.00
345
2008
July 31,
84,564.00
45
2008
July 31,
175.00
255
2008
July 31,
2546.00
219
2008
July 31,
11,898.00
389
2008
July 31,
20,443.00
14
2008
July 31,
289.00
315
2008
July 31,
46,120.00
2008
mutual
fund
industry
and their
AUM
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: -
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.
Also, 1993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July 1993.
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 .
Our saving rate is over 23%, highest in the world. Only channelizing
these savings in mutual funds sector is required.
Mutual fund can penetrate rurals like the Indian insurance industry with
simple and limited products.
Many nationalized banks got into the mutual fund business in the early
nineties and got off to a start due to the stock market boom was
prevailing. These banks did not really understand the mutual fund
business and they just viewed it as another kind of banking activity.
Few hired specialized staff and generally chose to transfer staff from
the parent organizations. The performance of most of the schemes
floated by these funds was not good. Some schemes had offered
guaranteed returns and their parent organizations had to bail out these
AMCs by paying large amounts of money as a difference between the
guaranteed and actual returns. The service levels were also very bad.
Most of these AMCs have not been able to retain staff, float new
schemes etc.
11
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:
12
13
It has been a forum where mutual funds have been able to present their
views, debate and participate in creating their own regulatory framework. The
association was created originally as a body that would lobby with the
regulator to ensure that the fund viewpoint was heard. Today, it is usually the
body that is consulted on matters long before regulations are framed, and it
often initiates many regulatory changes that prevent malpractices that
emerge from time to time.
AMFI works through a number of committees, some of which are standing
committees to address areas where there is a need for constant vigil and
improvements and other which are adhoc committees constituted to address
specific issues. These committees consist of industry professionals from
among the member mutual funds. There is now some thought that AMFI
should become a self-regulatory organization since it has worked so
effectively as an industry body.
OBJECTIVES:
To define and maintain high professional and ethical standards in all areas
of operation of mutual fund industry
To recommend and promote best business practices and code of conduct
to be followed by members and others engaged in the activities of mutual
fund and asset management including agencies connected or involved in the
field of capital markets and financial services.
To interact with the Securities and Exchange Board of India (SEBI) and to
represent to SEBI on all matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank of India and other bodies
on all matters relating to the Mutual Fund Industry.
14
15
MEMBERS OF AMFI:
o Bank Sponsored
2. Others
o Institutions
1.
16
o Private Sector
1.
Indian
17
2. Foreign
19
REGULATIONS,
1993
providing
detailed
procedure
for
20
years; and
(ii) the networth is positive in all the immediately preceding five years; and
(iii) the networth in the immediately preceding year is more than the capital
contribution of the sponsor in the asset management company; and
(iv) the sponsor has profits after providing for depreciation, interest and tax in
three out of the immediately preceding five years, including the fifth year;
(b) in the case of an existing mutual fund, such fund is in the form of a trust
and the trust deed has been approved by the Board;
(c) the sponsor has contributed or contributes at least 40% to the net worth of
the asset management company:
Provided that any person who holds 40% or more of the net worth of an
asset
management company shall be deemed to be a sponsor and will be required
to fulfill the eligibility criteria specified in these regulations;
(d) the sponsor or any of its directors or the principal officer to be employed
by the mutual fund should not have been guilty of fraud or has not been
convicted of an offence involving moral turpitude or has not been found guilty
of any economic
offence;
(e) appointment of trustees to act as trustees for the mutual fund in
accordance with the provisions of the regulations;
(f) appointment of asset management company to manage the mutual fund
and operate the scheme of such funds in accordance with the provisions of
these regulations;
(g) appointment of a custodian in order to keep custody of the securities
10[or
gold and gold related instruments and carry out the custodian activities as
may be authorized by the trustees.
22
Consideration of application
8. The Board, may on receipt of all information decide the application.
Grant of Certificate of Registration
9. The Board may register the mutual fund and grant a certificate in Form B
on the applicant paying the registration fee as specified in Second Schedule.
Terms and conditions of registration
10. The registration granted to a mutual fund under regulation 9, shall be
subject to the following terms and conditions:
(a) the trustees, the sponsor, the asset management company and the
custodian shall comply with the provisions of these regulations;
(b) the mutual fund shall forthwith inform the Board, if any information or
particulars previously submitted to the Board was misleading or false in any
material respect;
(c) the mutual fund shall forthwith inform the Board, of any material change in
the
information or particulars previously furnished, which have a bearing on the
registration granted by it;
(d) payment of fees as specified in the regulations and the Second Schedule.
Rejection of application
11. Where the sponsor does not satisfy the eligibility criteria mentioned in
regulation 7, the Board may reject the application and inform the applicant of
the same.
Payment of annual service fee:
12. A mutual fund shall pay before the 15th April each year a service fee as
specified in the Second Schedule for every financial year from the year
following the year of registration:
23
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.
24
27[have
not been
26
Provided [further] that the period specified in the first proviso may be
extended in appropriate cases by the Board up to three years for reasons to
be recorded in writing :
Provided further that no new schemes shall be allowed to be launched or
managed by such asset management company till the networth has been
raised to rupees ten crores.
Explanation : For the purposes of this clause, networth means the
aggregate of the paid up capital and free reserves of the asset management
company after
deducting therefrom miscellaneous expenditure to the extent not written off or
adjusted or deferred revenue expenditure, intangible assets and accumulated
losses.
(2) The Board may, after considering an application with reference to the
matters
specified in sub-regulation (1), grant approval to the asset management
company.
Terms and conditions to be complied with
17. The approval granted under sub-regulation (2) of regulation 21 shall be
subject to the
following conditions, namely:
(a) any director of the asset management company shall not hold the office of
the
director in another asset management company unless such person is an
independent director referred to in clause (d) of sub-regulation (1) of
regulation 21 and approval of the Board of asset management company of
which such person is a director, has been obtained;
(b) the asset management company shall forthwith inform the Board of any
material change in the information or particulars previously furnished, which
have a bearing on the approval granted by it;
27
research on commercial basis if any of such activities are not in conflict with
the activities of the mutual fund :
Provided that the asset management company may itself or through its
subsidiaries undertake such activities if it satisfies the Board that the key
personnel of the asset management company, the systems, back office, bank
and securities accounts are segregated activity-wise and there exist systems
to prohibit access to inside information of various activities :
Provided further that asset management company shall meet capital
adequacy
requirements, if any, separately for each such activity and obtain separate
approval, if necessary under the relevant regulations.
(3) The asset management company shall not invest in any of its schemes
unless full disclosure of its intention to invest has been made in the offer
documents 34[in case of schemes launched after the notification of these
regulations :
Provided that an asset management company shall not be entitled to charge
any fees on its investment in that scheme.
(3) The asset management company shall be responsible for the acts of
commission or omission by its employees or the persons whose services
have been procured by the asset management company.
(4) The asset management company shall submit to the trustees quarterly
reports of each year on its activities and the compliance with these
regulations.
(5) The trustees at the request of the asset management company may
terminate the assignment of the asset management company at any time:
Provided that such termination shall become effective only after the trustees
have accepted the termination of assignment and communicated their
decision in writing to the asset management company.
(6) Notwithstanding anything contained in any contract or agreement or
termination, the asset management company or its directors or other officers
shall not be absolved of liability to the mutual fund for their acts of
commission or omission, while holding such position or office.
(6A) The Chief Executive Officer (whatever his designation may be) of the
asset
management company shall ensure that the mutual fund complies with all the
provisions of these regulations and the guidelines or circulars issued in
relation thereto from time to time and that the investments made by the fund
managers are in the interest of the unit holders and shall also be responsible
for the overall risk management function of the mutual fund.
Explanation.For the purpose of this sub-regulation, the words these
regulations shall mean and include the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996 as amended from time to time.
30
(6B) The fund managers (whatever the designation may be) shall ensure that
the funds of the schemes are invested to achieve the objectives of the
scheme and in the interest of the unit holders.
(7) (a) An asset management company shall not through any broker
associated with the sponsor, purchase or sell securities, which is average of 5
per cent or more of the aggregate purchases and sale of securities made by
the mutual fund in all its schemes :
Provided that for the purpose of this sub-regulation, the aggregate purchase
and sale of securities shall exclude sale and distribution of units issued by the
mutual fund :
Provided further that the aforesaid limit of 5 per cent shall apply for a block
of any three months.
(b) An asset management company shall not purchase or sell securities
through any broker [other than a broker referred to in clause (a) of subregulation (7) which is average of 5 per cent or more of the aggregate
purchases and sale of securities made by the mutual fund in all its schemes,
unless the asset management company has recorded in writing the
justification for exceeding the limit of 5 per cent and reports of all such
investments are sent to the trustees on a quarterly basis :
Provided that the aforesaid limit shall apply for a block of three months.
(8) An asset management company shall not utilise the services of the
sponsor or any of its associates, employees or their relatives, for the purpose
of any securities transaction and distribution and sale of securities :
Provided that an asset management company may utilise such services if
disclosure to that effect is made to the unitholders and the brokerage or
commission paid is also disclosed in the half-yearly annual accounts of the
mutual fund :
Provided further that the mutual funds shall disclose at the time of declaring
halfyearly and yearly results :
31
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;
32
(b) any change in the interests of directors every six months; and
(c) a quarterly report to the trustees giving details and adequate justification
about the purchase and sale of the securities of the group companies of the
sponsor or the asset management company, as the case may be, by the
mutual fund during the said quarter.
(13) Each director of the asset management company shall file the details of
his transactions of dealing in securities with the trustees on a quarterly basis
in accordance with guidelines issued by the Board.
(14) The asset management company shall not appoint any person as key
personnel who has been found guilty of any economic offence or involved in
violation of securities laws.
(15) The asset management company shall appoint registrars and share
transfer agents who are registered with the Board:
Provided if the work relating to the transfer of units is processed in-house,
the charges at competitive market rates may be debited to the scheme and
for rates higher than the competitive market rates, prior approval of the
trustees shall be obtained and reasons for charging higher rates shall be
disclosed in the annual accounts.
(16) The asset management company shall abide by the Code of Conduct as
specified in the Fifth Schedule.
Appointment of custodian
21. (1) The mutual fund shall appoint a Custodian to carry out the custodial
services for the schemes of the fund and sent intimation of the same to the
Board within fifteen days of the appointment of the Custodian:
Provided that in case of a gold exchange traded fund scheme, the assets of
the scheme being gold or gold related instruments may be kept in custody of
a bank which is registered as a custodian with the Board.
33
(2) No custodian in which the sponsor or its associates hold 50 per cent or
more of the voting rights of the share capital of the custodian or where 50 per
cent or more of the directors of the custodian represent the interest of the
sponsor or its associates shall act as custodian for a mutual fund constituted
by the same sponsor or any of its associates or subsidiary company.
The ownership is in the hands of the investors who have pooled in their
funds.
34
Portfolio Diversification
Mutual funds invest in a number of companies. This diversification
reduces the risk because it happens very rarely that all the stocks decline at
the same time and in the same proportion. So this is the main advantage of
mutual funds.
Professional Management
Mutual
funds
provide
the
services
of
experienced
and
skilled
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.
35
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 managers investment strategy
Flexibility
Flexibility is also the main advantage of mutual fund. Through this
investors can systematically invest or withdraw funds according to their needs
and convenience like regular investment plans, regular withdrawal plans,
dividend reinvestment plans etc.
Convenient Administration
Investing in a mutual fund reduces paperwork and helps investors to
avoid many problems like bad deliveries, delayed payments and follow up
with brokers and companies. Mutual funds save time and make investing
easy.
Affordability
Investors individually may lack sufficient funds to invest in high-grade
stocks. A mutual fund because of its large corpus allows even a small investor
to take the benefit of its investment strategy.
Well Regulated
All mutual funds are registered with SEBI and they function with in the
provisions of strict regulations designed to protect the interest of investors.
The operations of mutual funds are regularly monitored by SEBI.
36
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.
Taxes
During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If your fund makes a
profit on its sales, you will pay taxes on the income you receive, even you
reinvest the money you made.
37
Management Risk
When you invest in mutual fund, you depend on fund manager to make the
right decisions regarding the funds portfolio. If the manager does not perform
as well as you had hoped, you might not make as much money on your
investment as you expected. Of course, if you invest in index funds, you
forego management risk because these funds do not employ managers.
38
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.
39
Sponsor
The sponsor should contribute at least 40% to the net worth of the AMC.
However, if any person holds 40% or more of the net worth of an AMC shall
be deemed to be a sponsor and will be required to fulfill the eligibility criteria
in the Mutual Fund Regulations. The sponsor or any of its directors or the
principal officer employed by the mutual fund should not be guilty of fraud or
guilty of any economic offence.
Trustees
The mutual fund is required to have an independent Board of Trustees,
i.e. two third of the trustees should be independent persons who are not
associated with the sponsors in any manner. An AMC or any of its officers or
employees are not eligible to act as a trustee of any mutual fund. The trustees
are responsible for - inter alia ensuring that the AMC has all its systems in
place, all key personnel, auditors, registrar etc. have been appointed prior to
the launch of any scheme.
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.
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 .
41
By structure
By Investment
Other Schemes
Objectives
Open-ended
Schemes
Debt
Schemes
Close Ended
Schemes
MM Mutual
fund
Interval Schemes
FMP
Other Debt
Schemes
Equity
Schemes
Large cap
fund
Sector specific
fund
Mid cap
Fund
Index Schemes
Small cap
fund
Any Other
Equity Fund
42
Dividend
Payout
Growth
Reinvested
43
According to Structure
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.
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.
45
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.
Other Schemes
Special Schemes:
Index Schemes
Index funds attempt to replicate the performance of a particular
index such as the BSE Sensex or the NSE 50.
Bond Schemes
It seeks investment in bonds, debentures and debt related
instrument to generate regular income flow.
47
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.
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.
48
ULIPS
49
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
3.1.1 FEATURES OF TL :
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.
51
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
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
53
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.
ULIP products are exempted from tax and they provide life insurance.
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 individuals disposal. ULIPS generally come in
three broad variants:
55
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 dont 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
56
57
58
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
59
COMPARISON
BETWEEN ULIPS
AND MUTUAL
FUNDS
60
61
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.
63
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.
65
The high returns (above 20 per cent) are definitely not sustainable over a
long term, as they have been generated during the biggest bull run in recent
stock market history.
The free hand given to ULIPs might prove risky if the timing of exit happens to
coincide with a bearish market phase, because of the inherently high equity
component of these schemes.
While a debt-oriented ULIP scheme might be superior to a debt option in a
conventional mutual fund due to tax concessions that insurance companies
enjoy, such tax incentives may not last.
Look beyond NAVs
The appreciation in the net asset value (NAV) of ULIPs barely indicate the
actual returns earned on your investment. The various charges on your policy
are deducted either directly from premiums before investing in units or
collected on a monthly basis by knocking off units.
Either way, the charges do not affect the NAV; but the number of units in your
account suffers. You might have access to daily NAVs but your real returns
may be substantially lower.
A rough calculation shows that if our investments earn a 12 per cent
annualised return over a 20-year period in a growth fund, when measured by
the change in NAV, the real pre- tax returns might be only 9 per cent. The
shorter the term, the lower the real returns.
66
67
68
Try top-ups
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.
69
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)
70
71
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 years 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 years
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 agents 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 9,000much 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
schemes 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 youre still left with a sizeable difference.
72
73
Chapter 2
SBI Mutual Fund
Company Profile
Awards & Achievements
Products
Major Funds of SBI Mutual Fund
74
75
76
KEY PERSONNEL:
Mr. Achal K. Gupta
Managing Director & Chief Executive Office
Mr. C A Santosh
Chief Manager - Customer Service.
Mr. Didier Turpin
Dy. Chief Executive Officer
Ms. Aparna Nirgude
Chief Risk Officer
Mr. Ashwini Kumar Jain
Chief Operating Officer
Mr. Ashutosh P Vaidya
Company Secretary & Compliance Officer
Mr. Sanjay Sinha
Chief Investment Officer
Mr. Parijat Agrawal
Head Fixed Income
77
SBI Mutual Fund (SBIMF) has been the proud recipient of the:
78
PRODUCTS
EQUITY FUNDS:
The investments of these schemes will predominantly be in the stock markets
and endeavor will be to provide investors the opportunity to benefit from the
higher returns which stock markets can provide. However they are also
exposed to the volatility and attendant risks of stock markets and hence
should be chosen only by such investors who have high risk taking capacities
and are willing to think long term. Equity Funds include diversified Equity
Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in
various stocks across different sectors while sectoral funds which are
specialized Equity Funds restrict their investments only to shares of a
particular sector and hence, are riskier than Diversified Equity Funds. Index
Funds invest passively only in the stocks of a particular index and the
performance of such funds move with the movements of the index
MSFU - IT Fund
DEBT SCHEMES
80
81
82
BALANCED SCHEMES
Magnum Balanced Fund invest in a mix of equity and debt investments.
Hence they are less risky than equity funds, but at the same time provide
commensurately lower returns. They provide a good investment opportunity
to investors who do not wish to be completely exposed to equity markets, but
is looking for higher returns than those provided by debt funds.
83
(EQUITY FUND)
Investment Objective
The objective of the scheme would be to generate opportunities for growth
along with possibility of consistent returns by investing predominantly
in a portfolio of stocks of companies engaged in the commodity
business within the following sectors - Oil& Gas, Metals, Materials &
Agriculture and in debt & money market instruments
Asset Allocation
Instrument
Equity and equity related instruments of
commodity based companies
Foreign Securities/ADRs/GDRs of
commodity based companies
Fixed/Floating Rate Debt instruments
including derivatives
Money Market instruments*
% of Portfolio of
Plan A & B
Risk Profile
High
0% - 30%
Medium
0% - 30%
Low
84
Scheme Highlights
1.An open-ended equity scheme investing in stocks of commodity based
companies.
2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend
and Growth options available.Reinvestment and payout facility
available.
3.Dividends will be completely tax-free. Long term capital gains to be
completely tax-free. STT would be at the rate of 0.20% at the time of
repurchase.
Minimum Application
Rs. 5000 and in multiples of Rs. 1000
1. An open-ended equity scheme investing in stocks of commodity based
companies
2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and
Growth options available.Reinvestment and payout facility available.
Entry Load
Investments below
Exit Load
Investments below Rs. 5 crore, exit within 6 months
Rs. 5 crores-2.25%
Investments of Rs.5
NIL
SIP
Rs.500/month - 12 months
Rs.1000/month - 6months,
Rs.1500/quarter - 12 months
A minimum of Rs. 500 can be withdrawn every month or quarter by
indicating in the application form or by issuing advance
instructions to the Registrars at any time.
86
(DEBT FUND)
Investment Objective
The objective of the scheme is to provide the investors an opportunity to earn,
in accordance with their requirements, through capital gains or through
regular dividends, returns that would be higher than the returns offered by
comparable investment avenues through investment in debt & money market
securities.
Asset Allocation
Instrument
% of Portfolio of
Risk Profile
Plan A & B
Upto 90%
High
Debt
Securitized Debt
Government Securities
Cash & Call Money
Money Market Instruments
Units of other mutual funds
Low
High
Medium
Mediom
Low
87
Scheme Highlights
1.Open ended Debt Scheme 2. Following Plans are available to the
investors :(A) Growth Plan (B) Dividend Plan (C) Bonus Plan (D)
Floating Rate Plan Options available under Floating Rate Plan Short
Term (Growth, Dividend & Weekly Dividend)Long Term (Regular
(Dividend & Growth) Long Term (Institutional (Dividend & Growth)
2. The Plans will invest their entire corpus in high quality debt
(Corporate debentures, PSU/FI/Govt guaranteed bonds), Govt
securities and money market instruments (commercial paper,
certificates of deposit, T-bills, bills rediscounting, repos, shortterm bank deposits, etc). There shall be no investment in equity.
3. The Growth Plan / Option will give returns through capital gains only. No
dividends shall be declared under this Plan. The Dividend Plan will
endeavour to declare regular dividends every half year, depending on
the NAV at that point of time. The Dividend Option in Floating Rate
Short Term Plan will endeavour to declare dividends on a monthly
basis while the dividend option under the Floating Rate Plan Long
Term (Regular and Institutional) Plan will declare dividends on a
quarterly basis.
88
Entry Load
Nil
Exit Load
Up Rs. 50 lacs : 0.5%; upto 6 months. Above Rs.
50 lacs : Nil
SWP
SIP
Rs.500/month - 12 months Investors have the facility to switchover between
Rs.1000/month - 6months the Plans at NAV. Also, switchover facility at the
Rs.1500/quarter - 12
months
89
% of Portfolio of
Risk Profile
Plan A & B
At least 50%
Medium to High
Up to 40%
Not more than 10%
Securitized Debt
of investments in
Medium to High
debt
Balance
Low
Scheme Highlights
1.An open-ended scheme investing in a mix of debt and equity instruments.
Investors get the benefit of high expected-returns of equity investments
with the safety of debt investments in one scheme.
90
Entry Load
Exit Load
Investments below Rs. 5 Investments below Rs. 5 crore, exit within 6
crores - 2.25%
Investments of Rs.5
SIP
Rs.500/month - 12
SWP
Systematic Withdrawal Plan (SWP): A minimum of
91
92
RESEARCH METHODOLOGY
OBJECTIVES:
To study the behavior of the investors whether they prefer mutual funds
or ulips?
Population
94
All the clients of State bank of India and State bank of Patiala
who are investing money in mutual funds and ulips, both .
Sample Unit
Investors and non-investors.
Sample Size
This study involves 50 respondents.
Sampling Technique:
Data Collection:
Primary sources
Secondary sources
The secondary sources of data were taken from the various
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.
96
97
y
19
31
50
Percentage
62%
38%
100
INTERPRETATION:
62% of the people invest in mutual funds.
98
Recurring deposits
If others, please specify.
Options
frequency
percentages
Fixed deposits
11
45.83
37.5
Recurring deposits
16.66
Total
24
100
Others: 7
99
Frequency percentage
22
44%
s
Agents
Seminar
Workshop
total
12
7
9
50
24%
14%
18%
100
options
Frequenc
(observed-
(observed-
(observed-
Advertisement
y
22
expected
9.5
expected)
90.25
expected)/e
7.22
s
Agents
Seminar
Workshop
Total
12
7
9
50
-.5
-5.5
-3.5
.25
30.25
12.25
133
.02
2.42
.98
10.64
Interpretation: It means that all the modes of information are not the
same. Advertisement is more popular
101
Options
Frequenc
Percentages
y
Government
27
54
Private sector
23
46
total
50
100
sector
Options
Frequenc
expected
expected)
expected)/e
0.16
23
-2
102
0.16
50
-2
0.32
Government 27
sector
Private
sector
total
options
frequenc
percentages
y
Steadily
17
34
At an average rate 13
26
fast
20
40
total
50
100
103
104
Options
frequency percentages
Safety of
14
28
Low risk
15
30
Higher
14
28
50
100
principal
returns
Maturity
period
Terms and
conditions
Total
105
Options
frequenc
expected
expected)
expected)/e
14
16
1.6
Low risk
15
25
2.5
Higher
14
16
1.6
-6
36
3.6
-7
49
4.9
142
14.2
Safety of
principal
returns
Maturity
period
Terms
and
conditions
total
50
chi square=
observed-expected = 14.2
expected
at df(4), the table value is 9.488 which is less than the calculated value.
Hence , H0 is rejected
106
Options
frequency
26
Invest more in it
16
107
Interpretation: 26% of the respondents will wait and watch even if the
share market drops.
Options
frequency
Percentages
Yes
34
68
No
16
32
total
50
100
frequency
Daily
15
Monthly
25
Occasionally 10
109
Options
frequency
Percentages
Daily
15
30
Monthly
25
50
Occasionally 10
20
total
50
100
Annual
Total
Income
Share
Below
1,50,000-
2,50,000-
Above
1,50,000
2,50,000
4,00,000
4,00,000
No 12
24
Yes
13
26
15
19
50
Market
Total
Annual
Frequency(yes) Observed-
(Observed-
(observed-
expected)
12.25
expected)/e
1.884
income
Below
expected
-3.5
1,50,000
1,50,000-
-2.5
6.25
0.961
2,50,000
2,50,000-
-.5
0.25
0.038
4,00,000
Above
13
6.5
42.25
6.5
26
61
9.383
4,00,000
total
Expected=26/4= 6.5
chi square= observed-expected = 9.383
expected
at df(3), the table value is 7.815 which is less than the calculated value.
Hence, H0 is rejected.
111
Options Frequenc
0- 5%
5-10%
10-15%
total
Options
0-5
5-10
10-15
total
y
26
13
11
50
Frequency
26
13
11
50
percentages
52
26
22
100
Mv
2.5
7.5
12.5
Dx=MV-7.5/5
-1
0
1
112
FdX
-26
0
11
-15
113
Options
Frequenc
y
1-5 years
22
5-10 years 17
10-15 years 11
total
50
Options
Percentages
44
34
12
100
Frequenc
Observed-
expected
1-5 years
5-10
9
7
years
10-15
years
total
19
(Observed-
(observed-
2.67
0.67
expected)
7.1289
0.4489
expected)/e
1.126
0.0709
3.33
11.0889
1.751
18.6667
2.9479
114
options
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,
frequency
18
6
3
1
5
4
13
Percentages
36
12
6
2
10
8
26
50
100
gold
total
115
116
Very unstable.
Somewhat unstable.
Moderately stable.
Stable.
Very stable
Options (X)
Very unstable(1)
Somewhat
Frequency ( )
11
12
X
11
24
11
48
unstable(2)
Moderately
27
81
stable(3)
Stable(4)
Very stable(5)
total
10
8
50
40
40
142
160
200
500
50
Standard deviation, = x - x
= 2.675
2.675 = 0.3783
7.07
0.3783
Ho is accepted.
INTERPRETATION: the financial situation is moderately stable.
options
frequenc
Percentages
Low
Moderat
y
14
18
32
41
e
high
total
12
50
27
100
118
Options
frequenc
percentages
y
7
8
14
11
10
50
14
16
28
22
20
100
119
Options
Sbi mutual fund
HDFC mutual fund
Reliance mutual fund
ABN AMRO mutual fund
others
total
Frequency (O)
7
8
14
11
10
50
(O-E)
-3
-2
4
1
0
0
(O-E)
9
4
16
1
0
30
(O-E)/E
0.9
0.4
1.6
0.1
3.0
Hence, H0 is accepted.
Interpretation: People mostly prefer all the brands equally for their
future investments.
121
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.
8% are housewives.
5% are retired.
122
123
124
A mutual fund is the ideal investment vehicle for todays 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.
125
FINDINGS
126
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.
127
BIBLIOGRAPHY
www.amfiindia.com
www.principalindia.com
www.investorsguide.com
www.moneycontrol.com
www.mutualfundsindia.com
www.sbimf.com
www.sebi.co.in
128
129
QUESTIONNAIRE
Recurring deposits
If others, please specify.
130
b) Government Sector (
Safety of principal
Low risk
High returns
Maturity period
no( )
Invest more in it
131
No (
5-10% (
10-15% ( )
132
Ulips ( )
Very unstable.
( )
Moderately stable.
( )
Somewhat unstable ( ).
Stable. ( )
Very stable ( )
Your comfort level in making investment decisions can best be described as
Low
( )
moderate
( )
high
( )
If in the near future if you ever plan to invest in your money in any of
the mutual fund company, which would be your choice?
Sbi mutual fund ( )
Reliance mutual fund ( )
( )
others ( )
133
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
Professional
Retired
Housewife
Other: _________
Married
Annual income:
Below Rs 1,50,000
Rs 1,50,000- Rs2,50,000
134
Rs 2,50,000-Rs 4,00,000
Above Rs 4,00,000
135