On

Guided by: Submitted

by: Ms Mamta Daundiyal Mitushi
Jain Senior Sales Manager MBA- 3rd
Semester HDFC SLIC 6501

1
 ACKNOWLEDGEMENT

A project starts with an objective but it is accomplished only with enormous

efforts and tremendous support and guidance. It has been an utmost pleasure for
me to work with HDFC SLIC. The cordial environment here has always made
me feel to be a part of the organization.

The process of completion of project report involves creation of debt towards

innumerable persons. I am grateful to Ms Mamta Daundiyal (Sales
Development Manager), who gave me time from his busy schedule & under
whose guidance this project has been successfully completed.

I also express my appreciation and thanks to all employees of HDFC SLIC,

especially in the finance department for their patience, helpful nature and who
have contributed to my learning which I will cherish forever.

I express my profound gratitude to my faculty guide Prof. Harsh Purohit, who

helped me with his guidance during the project.

My deepest regards to my parents, for their encouragement that became my

strength which lead me to the path of knowledge.

2
 CONTENTS

 INTRODUCTION
 THE ESSENCE OF ANALYSIS
 COMPANY PROFILE OF MUTUAL FUND
 The structure of mutual fund
 Organization of mutual fund
 Types of mutual fund
 Future of Mutual Funds in India.

 CONCEPT OF ULIP
 Design of an ULIP
 Choice of risk cover
 Choice of investment funds
 Switching
 Benefits associated with ULIP

 ANALYSIS OF MUTUAL FUND SCHEMES

AS FROM COMPARISON TABLES OF HDFC AND
ICICI MUTUAL FUNDS
Analysis from the comparison HDFC ULIP and
ICICI ULIP sheet
Benefits associated with ULIP’s products
Analysis from the comparison HDFC ULIP and
Mutual Fund
Advantages of investing in Mutual Fund
Disadvantages of investing in Mutual Fund

CONCLUSION AND FINDINGS

REFERENCES

3
 INTRODUCTION
The introduction into India of modern, flexible unit-linked insurance products
(ULIPs) has given access to a wide array of long-term investment choices, making
clients look at insurance products as a key part of their savings portfolios. These
ULIPs have been in most markets for decades and have been a real success story
in the liberalized insurance market. Fund options include the security of unitized
with-profits-through-balanced funds, to equity funds. Clients choose the fund that
suits them best and can switch between funds. Security also comes from insurance
cover which guarantees that, in case
Of premature demise, the client can be certain that the objective of creating a fund
to educate his children or an income for his spouse is absolutely guaranteed from
day one; that is something a mutual fund can never promise. Compared to ULIPs,
the investment borizon of MFs is short term, which is the outcome of corporate
investing short term. But life insurers offer a long-term investment outlook with
policies that last anything from 5-30 years, or more. Maximizing growth
objectives for long-term savers rise quite different issues and need a much more
stable approach to investment. The charges on ULIPs are generally seen as being
more competitive for medium-to-longer-term investments. It is certainly so in
India. MFs do have a part to play in the savings revolution in India. Corporate
have an almost globally unique tax advantage in parking short-term assets in them.
Also, some retail investors do use MFs for short-to-medium-term positioms, but
they should take care that they invest with a MF manager who guarantees to
segregate their money from corporate funds that flow in and out. With investor
protection in the form of compulsory product illustrations, and a strong and

4
effective regulator, ULIPs are set to grow from strength to strength in India. They
are the long-term product of choice.

The essence of the analysis

Unit-linked insurance plans are all of a sudden much talked about, publicized and
sold. While these are not a recent phenomenon, since a number of insurance
companies already had these products as a part of their portfolio, of late these
plans have seen sudden frenzy.

It is perhaps the bull phase or the lure of market-linked returns that insurance
companies have been shouting hoarse about that is responsible for these products
outselling others.

Given a thought? Do these products actually provide you market linked returns as
when compared with mutual funds

So there exists need to find the risks and return associated with MFS and ULIPS
and which is the best suited for different investors.

5
 Company profile of ICICI prudential Mutual fund

Prudential ICICI Asset Management company, (55%:45%) a joint venture

between prudential Plc, UK’s leading insurance company and ICICI Bank Ltd,
India’s premier financial institution.

The joint venture was formed with the key objective of providing the Indian
investor mutual fund products to suit a variety of investment needs. The AMC has
already launched a range of products to suit different risk and maturity profiles.
Prudential ICICI Asset Management Company Limited has a net worth of about
Rs. 80.14 crore (1crore=10million) as of Marc 31, 2004. both prudential and ICICI
Bank Ltd have a strategic long-term commitment to the rapidly expanding
financial services sector in India

About sponsors

PRUDENTIAL

Prudential plc is a leading international financial services group providing retail

financial products and services and fund management to many millions of
customers worldwide. As a group prudential plc has, as of December 31, 2004,
over GBP187 billion of funds under management, more then 16 million customers
and over 22,500 employees worldwide

ICICI Bank

6
ICICI Bank is India’s second-largest bank with total assets of about Rs 146,214
crore at December 31, 2004 and profit after tax of Rs. 1,391 crore in the nine
months ended December 31, 2204 (Rs 1,637 crore in fiscal 2004) ICICI Bank has
a network of about 530 branches and extension counters and over 1,80 ATMs.
ICICI Bank offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and through
its specialised subsidiaries and affiliates in the areas of investment banking, life
and non-life insurance, venture capital and asset management. ICICI Bank set up
its international banking group in fiscal 2002 to cater to the cross-border needs of
clients and leverage on its domestic banking strengths to offer products
internationally. ICICI Bank currently has subsidiaries in the united kingdom and
Canada, branches in Singapore and Bahrain and representative offices in the
united states, china united Arab emirates Bangladesh and south Africa.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an India financial
institution, and was its wholly-owned subsidiary.

7
 COMPANY PROFILE
HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED
(HDFC)

HDFC was incorporated in 1977 as the first specialised housing finance institution
in India. HDFC provides financial assistance to individuals, corporates and
developers for the purchase or construction of residential housing. It also provides
property related services (e.g.property identification, sales services and valuation),
training and consultancy. Of these activities, housing finance remains the
dominant activity. HDFC currently has a client base of over 8,00,000 borrowers,
12,00,000 depositors, 92,000 shareholders and 50,000 deposit agents. HDFC
raises funds from international agencies such as the world Bank IFC(Washington),
USAID, CDC, ADB and KFW, domestic term loans from banks and insurance
companies, bonds and deposits. HDFChas received the highest rating for its bonds
and deposits program for the ninth year in succession. HDFC standard life
insurance company limited, promoted by HDFC was the first life insurance
company in the private sector to be granted a certificate of registration (on October
23

, 2000) by the insurance regulatory and development authority to transact life

insurance business in India

8
 STANDARD LIFE INVESTMENTS LIMITED

The standard life assurance company was established in 1825 and has considerable
experience in global financial markets. In 1998, a standard life investment limited
became the dedicated investment management company of the standard life group
and is owned 100% by the standard life assurance company. With global assets
under management of approximately US$186.45billion as at march 31,2005,
standard life investments limited is one of the world’s major investment
companies and is responsible for investing money on behalf of five million retail
and institutional clients worldwide. With its headquarters in Edinburgh, standard
life investments limited has an extensive and developing global presence with
operations in the united kingdom, Ireland Canada, USA, China, Korea Hong
Kong. In order to meet the different needs and risk profiles of its clients, standard
life investments limited manages a diverse portfolio covering all of the major
markets world-wide, which includes a range of private and public equities,
government and company property and various derivative instruments. The
company’s current holdings in UK equities account for approximately 2% of the
market capitalization of the London stock exchange.

The data has been collected through filing up of the questionnaire from different
company’s managers and financial consultants and interviewing them about their
various options of investments.
Primary data was collected from these managers and financial consultants only.
This is first hand data. This data is gauged by personally conducting interviews,
observation and by means of questionnaire.

9
 Structure of mutual funds

Mutual fund is a trust that polls the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realized is shared by
its unit holders in proportion to the number of units owned by them. Thus a mutual
fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of securities
at a relatively low cost.
The flow chart below describes broadly the working of a mutual fund;

10
 ORGANISATION OF MUTUAL FUND

There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund;

The Players
Every MF will comprise a sponsor, trustee, AMC, custodian and registrar, and is
regulated by sebi.

Sebi. All MFs must be registered with Sebi before they become operational. MFs
are governed by the securities and Exchange Board or India (mutual funds)
regulations, 1996.

Sponsor. The company that sets up the Mf is called the sponsor. It is typically a
financial intuition, bank, investment house or even an individual, that contributes
at least 40 per cent to the networth of the asset management company (AMC).
According to sebi regulations, a sponsor must have adequate experience, financial
worth, a good track record and have been in the financial services business for at
least five year. The sponsor initiate the fund’s activities by appointing the trustees,
the AMC and custodians.
11
Trustee. Trustees are needed to safeguard the interests of the MF. The trustee
monitors the operations of the various schemes and safeguards investor interests.
The trustee must be experienced and ensure the fund’s operations are aboveboard,
in compliance with existing regulations, and benefit the unit-holders. The trustees
can also review the AMC’s operations and transactions, including contracts with
various agencies such as custodians and registrars. Two-thirds of the trustees
should not be associated with the sponsors in any manner. An AMC, its offices or
employees shall not be eligible to act as trustees.
Asset Management Company. The AMC seeks to multiply the invested money
in the fund in line with the scheme’s investment objective. It should have a net
worth of at least rs 10 crores. The AMC is a key player in the MF game and does
everything to make the most of you investment. It launches new schemes,
manages them, and employs the fund management team, including the fund
manager. Investors are most likely to interact with the AMC. The sponsor appoints
the AMC and the trustees’ review its operation.
The AMC gets a fee based on a specified percentage of the assets it manages. Any
expenses over and above the maximum prescribed limits have to be borne by the
AMC.
Custodian. An MF needs to store and record transactions, for which it relies on
banks or financial institutions that designated custodians.
R&T agents. Registrars and transfer agents (R&T agents) handle all paperwork
involving investor servicing. Their services include processing initial public
offerings, dispatch of certificates, account statements, annual reports and dividend
warrants. Some MFs handle this work in-house.

TYPES OF MUTUAL FUNDS

12
MFs can be classified on the basis of investment objective, nature, and load
structure

One the basis of investment objective,

1. Equity /growth fund. This is a scheme that invests only in equity. When
investing in stocks, you cannot be sure of your investment tenure or returns. As a
thumb-rule, the longer a stock is held, the higher the gains. You stand a better
chance of a substantial appreciation if you invest in stock-based funds.
Stocks are categorized by their market capitalization into small, medium or large,
and MFs are accordingly classified as large-cap, mid-cap or small-cap funds. The
NAV of an equi8ty scheme will fluctuate with the stock market.
2. Sector fund. An equity scheme that invests in shares of companies operating in
specific industries is called a sector fund. For instance, a pharma fund would
invest only in pharmaceutical companies. Sector funds are risky as they are
susceptible to cyclical influences—it is unlikely that the market will favour a
particular sector for too long.
3. Equity-linked savings schemes. The major portion of investment in ELSS
schemes is in equity and offers 20 per cent tax rebates under section 88, subject to
a maximum investment of Rs 10,000 annually. Dividends are tax-free. As an
ELSS is linked to the market, it can earn substantially more than other Section 88
schemes, which offer fixed rates of return to a maximum of 11 per cent.
4. Dept funds. This fund invests in fixed income instruments such as debentures
(bonds) and various money market instruments. Here, both returns and investment
tenure are stated at the time of investing. Bonds can be issued by companies or by
the government (state or central). Bonds are rated by independent credit rating
agencies such as Crisil/CARE/ICRA, which verify the company’s ability to
honour its interest commitments. The NAV of a debt fund does not fluctuate as
mush as that of an equity fund.
13
5. Gilt fund. Gilts are securities issued by the central government and are said to
carry sovereign or minimal risk.
6. Money market fund. This fund invests exclusively in money market
instruments. Including commercial paper, commercial bills, treasury bills,
government securities with an unexpired maturity of up to one year, call or notice
money, certificate of deposit, usance bills and other instruments specified by the
RBI. These funds have a minimum lock-in period of 15 days. Till recently, the
RBI regulated money market funds but they now come under sebi.
7. Liquid fund. A liquid fund is the same as a money market fund, but avoids a
lock-in period. Most of them lock funds in for up to three days to protect against
banking procedural inefficiencies. Used as an alternative to current account
balances, a liquid fund is ideally suited to investors who want to park their funds
for a very short time—seven to eight days. Consequently, fund houses process
redemption requests within 24 hours instead of the standard three working days.
The minimum in these funds is Rs 25,000.
8. Balanced fund. Balanced schemes invest in both equity and debt, with 50-75
per cent in equity and the rest in debt. It is important to know the stock to bonds
ratio in a fund to understand the risks and rewards structure.

Future of Mutual Funds in India

Indian mutual fund industry reached Rs. 1,50,537 crore. It is estimated that by
2010 March-end, the total assets of all scheduled commercial banks should be Rs.
40,90,000 crore.
14
The annual composite rate of growth is expected 13.4% during the rest of the
decade. In the last 5 years we have seen annual growth rate of 9%. According to
the current growth rate, by year 2010, mutual fund assets will be double.

Let us discuss with the following table :

Aggregate deposits of Scheduled Com Banks in India (Rs. Crore)

Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Sep-04 4-Dec

Deposits 605410 851593 989141 113118 128085 - 156725 1622579

8 3 1

Change in % 15 14 13 12 - 18 3
over last yr.

Mutual Fund AUM’s Growth

Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Sep-04 4-Dec

MF AUM’s 68984 93717 83131 94017 75306 137626 151141 149300

Change in % 26 13 12 25 45 9 1
over last yr.

Prudential ICICI Mutual Fund

Incorporated 259/8/1993

15
Ownership Foreign JV

Ownership Pattern Foreign – 55%

Domestic – 45%

Sponsor Prudential pic, ICICI Bank

Total Assets (Rs Cr) 21,477.20 as on 8/31/2005

Equity Funds (Open End) 11

Debt Funds (Open End) 12

Debt Funds (Open End) 13

Short-term Debt 13

(Open End)

Hybrid Funds 7

(Open End)

Closed-end Funds 11

Mutual Funds schemes available with ICICI Mutual fund and

various factors associated with them
ss

16
Category Risk 1 Year Expense Front- Back- CDSC Mim. Return

17
Hybrid: Average 50.40 2.31 2.25 0.00 No 5000 Above
E
q
ui
ty
-
or
ie
nt
ed
Hybrid: Average 50.40 2.31 2.25 0.00 No 5000 Above
E
q
ui
ty
-
or
ie
nt
ed
Hybrid: Below 44.76 2.00 1.50 0.00 Yes 5000 Above
E
q
ui
ty
-
or
ie
nt
ed
Hybrid: Below 14.37 1.50 1.50 0.00 Yes 5000 Below
D
eb
t-
or
ie
nt
ed
Equity: Not -- 1.27 2.25 0.00 No 5000 Not
Di
ve
rs
ifi
ed
Equity: Not -- 1.27 2.25 0.00 No 5000 Not
Diversified

18
Debt: Not 5.20 1.00 0.00 0.00 No 5000 Not
Specialty
Debt: Not 5.20 1.00 0.00 0.00 No 5000 Not
Specialty
Debt: Not 5.20 1.00 0.00 0.00 No 5000 Not
Specialty
Debt: Below 5.31 0.75 0.00 0.00 No 100000 Not
Floating
Rate
Equity : Not 123.67 2.05 2.25 0.00 No 5000 Not
FMCG

19
Debt: Not -- 0.15 -- -- No 25000 Not
Specialty
Gift : Above 3.48 1.15 0.00 0.00 No 25000 Above
Medium &
Long-term

Gift : Above 3.48 1.15 0.00 0.00 No 25000 Above

Medium &
Long-term

Gift : Average 4.71 1.10 0.00 0.00 Yes 25000 Below

Medium &
Long-term

Equity Above 65.56 2.30 2.25 0.00 No 5000 Average

Diversified
Equity Above 65.56 2.30 2.25 0.00 No 5000 Average
Diversified
Debt Average 4.39 1.77 0.00 0.00 Yes 5000 Average
Medium-
Term

Debt Below 14.94 0.60 0.00 0.00 No 5000 High

Medium-
Term

Debt Below 14.94 0.60 0.00 0.00 No 5000 High

Medium-
Term

Equity High 53.05 1.25 0.00 0.00 Yes 5000 Average

Index

Equity Not -- -- 2.25 0.00 Yes 5000 Not

Diversified
Debt: Ultra Average 5.032 0.88 0.00 0.00 No 15000 Average
Short-term

Debt: Ultra Low 5.35 0.53 0.00 0.00 No 5000000 High

Short-term 0
Insti

Hybrid Below 12.39 1.7 0.00 0.00 Yes 5000

monthly
income
20
HDFC MUTUAL FUND

Ownership Private

Ownership Pattern Foreign - 0%

Domestic – 100%

Sponsor Housing Development

Finance Corporation Ltd.

Total Assets (Rs. Cr) 17,812.86 as on 8/37/2005

Equity Funds (Open End) 11

Debt Funds (Open End) 7

Short-term Debt (Open End) 12

Hybrid Funds (Open End) 6

Closed-end Funds None

21
 Mutual Funds schemes available with ICICI Mutual fund and
various factors associated with them

Category Risk Grade Return 1 Year Expense Front-End Back CDSC Mim
Grade Return Ratio Load % End Initial Inv.
Load (Rs.)
%

Hybrid: Equity-oriented Above Average Average 37.49% 2.13 2.25 0.00 No 5000

Hybrid: Equity-oriented Above Average Average 37.49% 2.13 2.25 0.00 No 5000

Equity: Diversified Below Average Above 79.00 2.21 2.25 0.00 No 5000
Average

Equity: Diversified Below Average Above 79.00 2.21 2.25 0.00 No 5000
Average

Debt: Ultra Short-term Above Average Below 4.48 0.64 0.00 0.00 No 100000
Average

Debt: Ultra Short-term Above Average Above 5.38 0.18 0.00 0.00 Yes 5000
Average

Hybrid: Equity-oriented Average Below 46.79 2.25 2.25 0.00 Yes 5000
Average

Hybrid: Debt-oriented Below Average Average 19.54 2.25 1.25 0.00 Yes 5000

Equity: Diversified Below Average Above 66.08 2.02 2.25 0.00 No 5000
Average

Equity: Diversified Below Average Above 79.00 2.21 2.25 0.00 No 5000
Average

Debt: Medium & Long- Above Average Average 1.97 1.60 0.00 0.00 No 5000
term

Debt: Medium & Long- Above Average Average 1.97 1.60 0.00 0.00 No 5000
term

Debt : Short-term Average Average 3.80 1.33 0.00 0.00 No 5000

Debt : Short-term Average Average 3.80 1.33 0.00 0.00 No 5000

22
Equity: Diversified Below Average Average 60.29 2.34 2.25 0.00 No 5000

Equity: Diversified Below Average Average 60.29 2.34 2.25 0.00 No 5000

Debt: Medium-term Average Above 4.17 1.84 0.00 0.00 Yes 5000
Average

Debt: Medium-term Average Above 4.17 1.84 0.00 0.00 Yes 5000
Average

Equity: Index Low Below 51.23 1.50 0.00 0.00 Yes 5000
Average

Equity: Index Low Below 51.23 1.50 0.00 0.00 Yes 5000
Average

Equity: Diversified Average Below 56.40 1.50 0.00 0.00 Yes 5000
Average

Equity: Diversified Average Below 56.40 1.50 0.00 0.00 Yes 5000
Average

Debt: Ultra Short-term Average Average 5.11 0.35 0.00 0.00 No 100000

Debt: Ultra Short-term Average Average 5.11 0.35 0.00 0.00 No 100000

Debt: Ultra Short-term Average Average 5.24 0.53 0.00 0.00 No 20000000
Insti

Debt: Ultra Short-term Average Average 5.24 0.53 0.00 0.00 No 20000000
Insti

23
HDFC Balanced-D Fund (Profile and Investment pattern view)

Current State & Profile

Latest NAV 17.393 (16/09/05)

52-Week High 18.953 (08/03/05)

52-Week Low 14.071 (20/04/05)

Fund Category

Type Open End

Launch Date

Risk Grade Above Average

Return Grade Average

Net Assets (Cr) 124.08 (31/08/05)

Benchmark

Trailing Returns Trailing Returns

As on 16 Sep 2005 Fund Category

Year to Date 21.70 24.51

1-Month 4.68 5.37

3-Month 17.59 17.48

1-Year 37.49 43.60

3-Year 34.18 38.77

5-Year -- 18.27

Return Since Launch 18.80 --

Returns upto 1 year are absolute and over 1 year are annualized.

24
Top 3 Instruments % Net Asset

As on 31/08/05

Bonds/NCDs 18.06

Securities Debt 7.46

Net Current Assets 4.71

Top Holdings AS ON
31/08/05
Name of Holding % Net Assets

Reliance Industries 8.07

IRFC 5.62

E I D-Parry (I) 5.33

Grasim Industries 4.89

BHEL 4.73

25
CONCEPT OF UNIT LINKED INSURANCE PLAN

• Unit Linked Policies are unbundled

o Separate identification of parts

- Investments element, expense, administration

charges and benefit charges shown separately.

• Unit Linked Policies make use of linked funds

o Investment housed in funds divided into units

- client has choice of funds

• Unit Linked Policies are linked

o Value of policy linked to net assets

- investment risk and rewards transferred from insurer to the

client.

• Unit Linked Policies have explicit charges

 Consequence of unbundling

- charges may or many not be guaranteed

26
BENEFITS OF UNIT LINKED PLANS

 To the client

- Flexibility of premium , sum assured and

benefits

- Transparency

- Control over investment strategy

- Control over the degree of investment risk

 To the insurer

 Product demanded by the market

 Retention of existing clients and attracting new clients

• Unit Linked Policies have explicit

charges

 Consequence of unbundling

- Charges may or may not be guaranteed

27
 BENEFITS
 To the client

- Flexibility of premium, sum assured and

benefits

- Transparency

- Control over investment strategy

- Control over the degree of investment risk.

To the insurer

- Product demanded by the market

- Retention of existing clients and attracting new clients

28
 DESIGN
Product Design

- Endowment, pension, whole life.

- Investment funds with objectives

Pricing
- Initial charges to cover marketing, distribution and
other new business costs

- Surrender charges to recover costs already incurred to

the extent that they have not been recovered prior to surrender.

- Renewal charges to cover the ongoing costs of

administering the policy and any renewal commission payable

- Fund Management Charges to cover the ongoing cost

of managing the investments of the policy.

- Switch or Redirection Charge to cover the additional

administration costs associated with switching investments and
redirecting premiums. Also used to discourage frequent
switches/redirections.

- Add-on benefit charges calculated on a current cost

method. Risk premium applied each month to the sum at risk under
each benefit.
29
FLEXIBILITY IN PREMIUM PAYMENT
- Choice of annual, half0yearly and quarterly modes.

- Regular premium increases during the term of the

contract.

- Single premium top-ups at any time.

- Minimum premium payable

Type of Premium Minimum Premium

Regular Premium Rs. 10,000 per annum

Regular Premium increases Rs. 5,000 per annum

Single Premium Top-ups Rs. 5,000

- can be paid by cash, local cheque, demand draft or

standing order

- outstation cheques and post dated cheques not allowed

- advance premium payment would be held in suspense

account till due date

- Reduction in premium allowed subject to payment of

at least three years regular premium

- Premium can also be reduced to zero in which case the

policy would be converted into a paid up status.

30
 Regular Premium Premium Reduction
Increase

HDFC Standard Life Allowed Allowed

ICICI Prudential Not Allowed Not Allowed

31
 CHOICE OF RISK COVER

• Risk Cover offered with following options

Name of the Option Risk covered

Life Option Death

Extra Life Option Death and Accidental Death

Life and Health Option Death and accelerated critical illness

Extra Life and Health Option Death, Accelerated critical illness and
Accidental
Death

In case death or accelerated critical illness cover (if opted), in the event of death or
critical illness as applicable the higher of the sum assured and the value of the
units would be paid.

In case accidental death cover is opted, then on accidental death the death benefit
(higher of the sum assured and the value of units) plus the sum assured for the
accidental death cover would be paid.

32
 Life Option Extra Life Life and Extra Life
Option Health and Health
Option Option

Cover Death Death and Death and Death, critical

Accident Critical Illness and
Illness Accident

Suitability No option Suitable for Suitable for Suitable to

clients who clients who clients who
perceive a perceive a perceive the
risk of risk of critical risk of
accident and Illness and accident and
who do not who do not critical illness
have adequate have adequate and who do
accident critical illness not have both
cover cover the covers

Options Can add the Can delete the Can delete the Can delete the
during the accident and accident critical illness critical illness
validity of the critical illness cover and add cover and add cover and the
policy cover the critical the accident accident
illness cover cover cover

33
  Client can choose the level of risk cover by selecting one of the pre-
determined cover levels depending on the entry age

 The cover levels available are :-

Age Bands LOW MEDIUM HIGH

18-40 5 times annual 10 times annual 20 times annual

premium premium premium

41-50 5 times annual 10 times annual Not available

premium premium

51 and above 5 times annual Not available Not available

premium

The death cover, accelerated critical illness cover and the accidental death
benefit cover would be to the to the extent of the same level chosen by the
policyholder.

The sum assured will be subject to underwriting. Once the sum assured
level is chosen the same cannot be altered during the term of the contract.

• same risk charge

Age Death ACI ADB

20 0.70 0.28 0.42

30 0.80 0.60 0.47

40 1.46 1.78 0.55

50 3.71 5.76 0.74

34
 60 9.17 12.27 1.01

 Choice of risk cover

- death benefit cannot be altered

- accelerated critical illness benefit and accidental death benefit can be

deleted at any time.

- Once the accelerated critical illness benefit and accidental death

benefit are deleted the same cannot be added back at a later date.

35
• CHOICE OF INVESTMENT FUNDS

 Choice of five funds :-

• Liquid Fund

• Secure Management Fund

• Defensive Managed Fund

• Balanced Managed Fund

• Growth Fund

High
Growth Fund

Balanced Managed Fund

Level of Risk

Defensive Managed Fund

Secure Managed Fund

Low Liquid Fund

36
LIQUID FUND
The liquid fund invests in Bank Deposits and high quality short-term money
market instruments. The fund is designed to be cash secure and has a very low
level of risk, however unit prices may occasionally go down due to the use of
short-term money market instruments.

SECURE MANAGED FUND

The Secure managed fund will invest in Government Securities and Bonds issued
by companies or other bodies with a high credit standing, however a small amount
of working capital may be invested in cash to facilitate the day-to-day running o f
the fund. The fund has a low level of risk but unit prices may still go up or down.

DEFENSIVE MANAGED FUND

15% to 30% of the Defensive Managed fund will be invested in high quality
Indian equities. The remainder will be invested in Government Securities and
Bonds issued by companies or other bodies with a high credit standing, though a
small amount of working capital may be invested in cash to facilitate the day-to-
day running of the fund. The fund has a moderate level of risk with the
opportunity to earn higher returns in the long term from some investment, unit
prices may go up or down.
BALANCED MANAGED FUND
30% to 60% of the Balanced Managed fund will be invested in high quality Indian
equities. The remainder will be invested in Government Securities and Bonds
issued by companies or other bodies with a high credit standing, through a small
amount of working capital may be invested in cash to facilitate the day-to-day
running of the fund. The fund has a higher level of risk with the opportunity to
earn higher returns in the long term from the higher proportion invested in
equities, unit prices may go up or down.

37
GROWTH FUND
The Growth fund invests in high quality Indian equities. In addition a small
amount of working capital may be invested in cash to facilitate the day-to-day
running of the fund. The fund has a higher level of risk with the opportunity to
earn higher returns in the ling term from the investment in equities. Unit prices
may go up or down.

Investment pattern in various funds

Liquid Secure Defensive Balanced Growth
Fund Managed Managed Managed Fund
Fund Fund Fund
High Low Low Low Low

Low High High Medium Nil

Nil Nil Low Medium High

38
 Choices of funds available with HDFC SL and ICICI PRU

Type of Liquid Fund Secure Defensive Balanced Growth

Fund Managed Managed Managed Fund
Fund Fund Fund
Investment Bank Govt. 15-30% in 30-50% in Equities
Deposits/Short Securities equities equities
term money and Bonds

HDFC SL Available Available Available Available Available

ICICI Not Available Available Not Available Available

Available

39
 SWITCHING

 Switching of funds allowed at any time

 HDFC SL currently do not charge for switching however the company
reserves the right to charge for switches in excess of two each year and
ICICI PRU Except for the 4 free switches allowed every policy year, all
other switches will be charged at Rs. 100 per switch.
 Switching and premium redirection are subject to cut off rules (discussed
later)

• BENEFITS ASSOCIATED WITH ULIPS

• On death
• On diagnosis of critical illness
• On accidental benefit
• On maturity
• On full surrender
• On withdrawal
• Paid up benefits

 Benefits on death

The greater of the policy value and the sum assured would be paid

40
 Policy Value Sum Assured Death Benefit
15000 150000 150000
45000 150000 150000
75000 150000 150000
105000 150000 150000
135000 150000 150000
165000 150000 165000
195000 150000 195000
225000 150000 225000

In ICIC PRU
Death Benefit : The Sum Assured under the product has 2 options, either
500% of the initial premium or 105% of the initial premium. In the event of
an unfortunate death, the beneficiary will receive higher of the value of
units or the initial death benefit, less any withdrawals.

 Benefits on diagnosis of critical illness (if chosen)

- the greater of the policy value and the sum assured would be paid
- Diseases covered : cancer, coronary artery by-pass graft surgery
(CABG), Heart Attack, Kidney failure. Major organ transplant,
Stroke

Policy Value Sum Assured Critical Illness Benefit

15000 150000 150000
45000 150000 150000
75000 150000 150000
105000 150000 150000
135000 150000 150000
41
 165000 150000 165000
195000 150000 195000
225000 150000 225000

• Benefits on accidental death (if chosen)

- additional amount equal to the sum assured in addition to the death
benefit would be paid
Policy Value Sum Assured Critical Illness Benefit
15000 150000 300000
45000 150000 300000
75000 150000 300000
105000 150000 300000
135000 150000 300000
165000 150000 315000
195000 150000 3455000
225000 150000 375000

• Benefits on maturity

Policy value (value of units in the policy holders account) would be

paid.
Policy Value Sum Assured Maturity Benefit
15000 150000 15000
45000 150000 45000
75000 150000 105000
105000 150000 1350000
135000 150000 105000
165000 150000 135000
195000 150000 195000
225000 150000 225000

42
 Benefits on surrender

- policyholder can surrender the policy at any time

- policy value less the surrender charge would be payable
- surrender charge is 25% of 3 years outstanding premium
- surrender charge calculation is shown below.

Mode Annual No of Amount 3 years Balance Surrender

Premium Premium paid till premium of 3 years Charge
paid surrender
Yearly 10000 1 10000 30000 20000 5000

Half 1000 3 15000 30000 15000 3750

yearly

Quarterly 12000 8 24000 36000 12000 3000

Half 16000 6 48000 48000 48000 0

yearly

Quarterly 28000 13 91000 84000 0 0

Benefits on withdrawal
- policyholder can make lumpsum withdrawal at any time subject to
• withdrawal amount is greater than Rs. 10000, and
• the unitized fund is not less than the sum assured after withdra
- currently no charges on withdrawal but the company reserves the
right to charge in future.
43
Unitised Fund Sum Assured Amount of Comments
Withdrawal

500000 200000 25000 Not allowed

200000 500000 10000 Not allowed

500000 500000 10000 Not allowed

600000 500000 5000 Not allowed

Paid up Benefits
- policyholder can make the policy paid up provided
• three years premium have been paid, and
• the policy has acquired sufficient value (Rs 15,000 at present)
- in other cases the policy will lapse and the policy value less charges
would be returned to the policyholder
- paid up policy can be reinstated at any time without collecting arrears of
premium

Unitised Sum Assured No of years Comments

Fund premium paid

500000 200000 5 Allowed

200000 500000 3 Allowed

44
500000 500000 2 Not Allowed

600000 500000 1 Not Allowed

10000 500000 5 Not Allowed

CHARGES

 Investment Content Rate

 Bid Offer Spread
 Fund Management Charge
 Policy Fee
 Risk Charge
 Surrender Charge
 Partial Withdrawal Charge
 Policy Alteration Charge

 Investment Content Rate (ICR)

Policy year in which premium is paid Investment Content Rate (ICR)

45
Year 1 73%
Year 2 73%
Year 3 and subsequent 99%
Years

Regular Premium Increases Increases

99%

Single Premium Top- Up(s) 99%

Allocation Table

HDFC SL Year 1 73%

Year 2 73%
Year 3 +99%
ICICI Pru Year 1 80%
Year 2 92.5%
Year 3 + 96%

Bid Offer Spread

- There is no bid offer spread under ULEP

46
  Fund Management Charge

- 0.80% of the fund per year

- deducted on a daily basis from the fund before arriving at the Net Asset
Value

HDFC SL 0.80% p.a.

ICICI Pru 1.5% to 2.25% p.a.

Policy fee

- Rs. 15 per month deducted by cancellation of the units

- Proportioned across funds according to the fund holding at the time of
cancellation

HDFC SL Rs. 15 per month

ICICI Pru NIL

 Risk Charge

- taken by cancellation of units every month

- Charges calculated as sum at risk * monthly rate (attained age, gender,
benefit)

Risk Charges

Age Death ACI ADB

47
 20 0.70 0.28 0.42
30 0.80 0.60 0.47
40 1.46 1.78 0.55
50 3.71 5.76 0.74
60 9.17 12.27 1.01

 Surrender Charges

- surrender charge is 25% of 3 years outstanding premium

HDFC SL 3 YEARS OUTSTANDING

PREMIUM
ICICI PRU NOT SPECIFIED

 Partial Withdrawal Charge

- presently HDFC SL do not charge on partial withdrawal

- HDFC SL the right to charge on multiple withdrawals in a year in
future

 Policy Alteration Charge

- presently we do not charge on policy alterations

- we reserve the right to charge on policy alteration in future

48
 ANALYSIS OF MUTUAL FUND SCHEMES FROM
COMPARISON TABLES OF HDFC AND ICICI MUTUAL
FUNDS

Mutual Objective Risk type Investment Who should Investme

Fund portfolio invest nt
horizon
Market/Funds Liquidity+moderat Negligible Treasury bills, Those who park 2-days-3
e income risk certificate of their funds in weeks.
+ preservation of deposits, current account or
capital commercial short term bank
papers, securities, fixed deposit
call money
Term funds Liquidity Little Call money Those with surplus 3 weeks-3
/Moderate Income interest rate commercial short term funds months
risk papers. Treasury
bills. CD’s. Short
Term G-secs.

Funds Regular Income Credit risk & Predominantly Salaried & More than
interest rate debentures, conservative 9-12
government investors. months
securities,
corporate bonds

49
Funds Security & Income Interest rate Government Salaried and 12 months
risk securities conservative & more
investor.

Funds Long term capital High risk Stocks Aggressive 3 year

appreciation investors with long plus.
term out look.

Funds To generate NAV, vary Portfolio index like Aggressive 3 years

returns which are with index BSE NIFTY etc investors plus
commensurate performance
with returns of
respective index
Funds Growth & regular Capital Balance ratio of Moderate & 2 year
income market risk equity and debt Aggressive plus
and interest funds to ensure
rate risk
higher returns at
lower risk

Analysis from the Comparison HDFC ULIP and ICICI ULIP Sheet
50
In the analysis, two investments were being done keeping the profile of person
remaining the i.e. Age is 30, term for the investment is taken as 15 years,
Sum assured 50,00,000 and annual premium 50,000 frequency of payment is taken
as monthly. The returns from the two different companies comes out to be
different,
The maturity value comes out to be 14, 94,785 from the HDFC SL ULIP whereas
in the case of ICICI PRU, the maturity value out to be 1, 309,832.

Following factor are responsible for such and different outcome for the different
compnies:-
 The HDFC SL has policy of keeping the ICR low in the case of the first
consecutive 3 years, then after the ICR becomes for the 99%, this concept
keeps the return on the investment low in the first 3 years and later on the
returns on investment keeps on going up but in case of ICICI PRU. The
ICR is 80% in the first year, 925%, 96% in second year and from third year
onwards its kept constant, when the whole ICR is taken on the account the
ICR of HDFC SL comes out to be maximum when compared with ICICI
PRU.

 The HDFC SL keeps its Fund .80% per annum which is among the lowest
in the industry which ultimately yields to high returns where in case of
ICICI the FMC are in range of 1.5-2-2.5 per annum, the FMC is being
deducted from the account of investor which keeps the returns low as when
compared with HDFC ULIP.
 The HDFC SL keeps the policy fee Rs. 15 per month but ICICI PRU did
not charge any policy fee that’s sounds very relaxing in case of ICICI PRU,
but that did not have much impact on returns.

51
  When HDFC ULIP compared with ICICI PRU the returns in case of HDFC
SL ULIP comes out to be lower in first five years but later on when
compared with ICICI ULIP returns is much more higher than that of ICICI,
So the long term concept must be kept in mind while investing in HDFC
ULIP, and in case of short run ICICI PRU gives out good results, means the
investor is benefited more when he invests in HDFC SL ULIP or any other
ULIP for long term, In case of short run ULIPS can turn into nightmare
giving you less returns in short time as the in initial years the part of
investment goes as age commission and other charges.

Following thing have to be analyzed with different alternatives by making

investment in ULIPs Products of Insurance Company .

1. Investment Content Rate.

2. Fund Management Charges.
3. Policy fees.
4. Investment Returns from the past track records.

52
Benefits associated with ULPs products
Twin Benefit
ULIPs offer a twin benefit –
Serve the purpose of providing life insurance
Provide savings at market-linked returns. This is more beneficial to the investor as
compared to his investment in a mutual fund which does not offer a life cover.

Capital guarantee
Any product that promises to keen the principal amount invested intact, is offering
a capital guarantee. For example, a bond issue that will pay out the principal
amount at the end of the tenure is giving a capital guarantee - it will return the
money it borrowed from the investor. Most fixed interest products give a capital
guarantee. However, such a guarantee does not exist in equity products that do not
ensure a return of principal your investment can lose value.

Traditional endowment plans are structured so that the annual premiums relate to a sum
assured. This is paid out to the nominee in case of the policy holder’s death. If the person
survives the term of the plan, he gets a certain pre-decided amount back. This is usually
the sum of the premiums paid plus a 3-4 per cent return. The policy holder has no control
over what assets the insurance company buys.Unit linked allow the policy holder to
choose between asset classes - debt or equity or a combination of the two – and the final
amount on death or survival is linked to the market value of the corpus on the claim. The
capital guaranteed products offer to give a certain sum assured, but also allow you to put
part of the premium amount in potentially high return equities. So one can also track net
asset value of money (as in a mutual fund) in this product, like in a unit linked plan.

53
Only the part that is invested in unit linked plan gets a guarantee. After taking care
of the costs like agent commission, mortality charges (that part of the premium
that goes toward the pure insurance cover), annual fees about 60-70 %of the
premium is fee for investment. This the money that will give you a return and is
guaranteed. Some companies guarantee only the invested premium, other will
guarantee the returns as they accrue each year. For example, ICICI Prudential’s
Invest Shield, on an annual premium of Rs 10,000 gives a some assured of Rs 2
lakh and promises to give Rs2.8 lakh after 20 years, assuming a 6 % return,
remember, is only on the invested amount (Rs 7,611 in this case). However, if
persons treating the entire premium as an investment and would like to see returns
on this, without the costs of benefits of insurance, then the return on Rs 10,000
that grows to Rs 2.8 lakh in this policy, works out to be 3.4 %.

ULIPs have multiple investment options

The individuals have an option of investing based on his market analysis and his
risk profile. Generally there three categories of ULIPs.

• Aggressive ULIPs (which can typically invest 80%-100% in equities,

balance in debt)
• Balanced ULIPs (can tipically invest around 40%-60% in equities)
• Conservative ULIPs (can tipically invest up to 20% in equities)

ULIPs are Flexible:

The individuals are allowed to switch between the ULIP variants outlined above to
capitalize on investment opportunities across the equity and debt markets. Some
insurance companies allow a certain number of ‘free’ switches. This is an

54
important feature that allows the informed individual/investor to benefit from the
vagaries of stock/debt markets. For instance, when stock markets were on the
brink of 7,000 points (Sensex), the prudent investor would prefer to shift his assets
from an aggressive ULIP to a low risk conservative ULIP.

ULIPs are designed to feature Systematic Investment Plan (SIP)

As generally advocated by a mutual fund industry, ULIPs also facilitate SIP to the
investors. With a SIP, individuals invest their funds regularly over time intervals a
month/quarter and don’t have to worry about ‘timing’ the stock markets. An added
benefit with ULIPs is that individuals can also invest a one-time amount in the
ULIP either to benefit from opportunities in the stock markets or if they have an
investible surplus in a particular year that they wish to put aside for the future.

Flexibility

Individuals may well ask how ULIPs are any different from mutual funds. After
all, mutual funds also offer hybrid/balanced schemes that allow an individual to
select a plan according to his risk profile.

The difference lies in the flexibility that ULIPs afford the individual. Individuals
can switch between the ULIP variants outlined above to capitalize on investment
opportunities across the equity and debt markets. Some insurance companies allow
a certain number of ‘free’ switches.

This is an important feature that allows the informed individuals/investor to

benefit from the vagaries of stock/debt markets. For instance, when stock markets
55
were on the brink of 7,000 points (Sensex), the informed investor could have
shifted his assets from an Aggressive ULIP to a low-risk Conservative ULIP.

Switching also help 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.

Disadvantages of investing in a ULIPs are:

Liquidity :- Money invested in ULIPS do not offer high returns in the recent
years, so it is not worthwhile to take money out from ULIPs schemes as the ICR is
low in first 3 years, if investor wishes to do so he will suffer from losses 73% is
invested in the first 3 years and rest goes to agent commission and fund charges.
So it is not beneficiary to take money out from that.

No Gains in Short term

When ULIPs products are compared with Mutual funds, they don’t offer
handsome returns in short term. So money invested in them should be for long
term.

Higher Charges

Unlike a mutual fund, the charges incurred on ULIPs by insurance companies are
higher. This is primarily due to mortality charges being levied as well as the high
commissions paid by life insurance companies to their agents/advisers/consultants.
56
Analysis from the Comparison HDFC ULIP and Mutual fund (MIP) Sheet

In this analysis, two investments were being done keeping the profile of person
remaining the same i.e. Age is 33, term for the investment is taken as 30 years.
Sum assured 500,0000 and annual premium 100,000, frequency of payment is
taken as monthly. The returns of two different companies comes out to be
different.
The maturity value comes out to be 14,309,649 from the HDFC SL ULIP whereas
in the case of MIP FUND, the maturity value comes out to be 11,815,096.

Here is the list of factors responsible for such and different outcome for the
different companies:-

Here two are different from each other from investors point of view HDFC ULIP,
is insurance company while the another is Mutual fund company, HDFC SL
provide the twin benefit that is insurance with investments and another is purely
voluntary investment schemes.

When taken for short term the Mutual fund is gainer, as it yields more return on
investment when compared with HDFC ULIPs or any other ULIPs because in case
of Mutual fund Investment Counter Rate is higher i.e. 100% and how in case of
ULIPs. So amount invested is certainly higher which yields more returns in short
term.

The long term benefit is provided by the ULIPs only that comes after the 10th year,
the return is higher when compared with Mutual fund Scheme that is because the
fund management charge is low in the case of HDFC ULIP which is 0.80% which
deducted from the investment earnings.

57
Its beneficial for investor who invests in long term investment to take ULIPs
which provide twin benefit i.e. Insurance and investment. Rather than investing in
mutual funds, who thereby charges high fund management charge.

Advantages of investing in a Mutual Fund are as follows :-

Number of options available in mutual funds schemes

Mutual funds invest according to the underlying investment objective as specified

at the time of launching a scheme. MFs have equity funds, debt funds, gift funds
and many other that cater to the different needs of the investor. The availability of
these options makes them a good option. While equity funds can be as risky as the
stock markets themselves, debt funds offer the kind of security that is aimed for at
the time of making investment. Money market funds offer the liquidity that is
desired by big investors who wish to park surplus funds for very short-term
periods. Balance Funds actor to the investors having an appetite for risk greater
then the debt funds but less then the equity funds. The only pertinent factor here is
that the fund has to be selected keeping the risk profile of the investor in mind
because the products listed above have a different risks associated with them.

Diversification : The best mutual funds design their portfolios so individual

investment will react differently to the same economic conditions. For example
economic conditions like a rise in interest rates may cause certain securities in a
diversified portfolio to decrease in value. Other securities in the portfolio will
respond to the same economic conditions by increasing in value. When a
portfolio is balanced in this way, the value of the overall portfolio should
gradually increase overtime, even if some securities lose value.

58
 Professional Management: Mutual Funds employ the services of skilled
professionals who have years of experience to back them up. They use intensive
research techniques to analyze each investment option for the potential of
returns along with their risk levels to come up with the figures for performance
that determine the suitability of any potential investment.

Liquidity: It’s easy to your money out of mutual fund. Write a check. make a
call and you’ve got the cash .

The investors can withdraw or redeem money at the Net asset Value related
prices in the open-end schemes. In closed-end schemes, the units can be
transacted at the prevailing market price on a stock exchange. Mutua funds also
provided the facility of direct repurchase at NAV related prices. The market
prices of these schemes a dependent on the NAVs of funds and may trade at
more than NAV (know as Premium) or less then NAV (known as discount)
depending on the expected future trend of NAV which in turn is linked to
general market conditions. Bullish market may result in schemes trading at
premium while in bearish markets the funds usually trade at Discount. This
means that the money can be withdrawn anytime , without much reduction in
yield. Some mutual funds however, charge exit lodes for withdrawal within a
period linked to

Low cost: Mutual fund expenses are often no more than 1.5 percent of your
investment. Expenses for index funds are less than that, because index funds are
not actively managed. Instead, they automatically buy stoke in companies that are
listed on a specific index.

59
Transparency

Being under a regularly framework, mutual funds have to disclose their holdings,
investment pattern and all the information that can be considered as material,
before all investors. This means that the investment strategy , outlooks of the
market and scheme related details are disclosed with reasonable frequency to
ensure that transparency exists in the system. This unlike any other investment
option in India where the investor knows nothing as nothing is disclosed.

Tax benefits the industry offers equity linked savings schemes as well. Equity-
based funds, they can take long-term call on stocks and market conditions
without
Having to worry about redemption pressure as the money is looked in for
three years and provide good returns. Some of the ELSS have been exceptional
performers in past and cater to equity investor with good performances. The
industry offered tax benefits under various sections of the IT Act. For e.g.
dividend income is free in the hand of the investor while capital gains are taxed
after providing for cost inflation indexation. Hitherto, the benefits under section
54EA/EB were available to take benefits of the tax provisions for capital gains but
have now been removed . The benefits listen so far have essentially been for the
small retail investor but the industry can attract investments from institutional and
big investors as well. Liquid funds offer liquidity as well as better returns than
banks and so attract investors. Many funds provide anytime withdrawal enabling a
big investor to take maximum benefits.

Well regulated Unlike the company foxed deposits, where there is little control
with the investment being considered as unsecured debt from the legal point of
view, the Mutual Fund industry is very well regulated. All investments have to be
60
accounted for, decisions judiciously taken. SEBI acts as a true watchdog in this
case and can impose penalties on the AMCs at fault. The regulations, designed to
protect the investors’ interests are also implemented effectively.

Reduced Risk

An investor who holds just one investment is vulnerable to a high level of risk.
Mutual funds spread that risk among many different securities, limiting the
potential of one company’s performance from impacting the entire portfolio. It
also reduces the emotion associated with watching individual equities rise and fall.

Convenience

With features like dematerialized account statements, easy subscription and

redemption processes, availability of NAVs and performance details through
journals, newspapers and updates and lot mire; Mutual Funds are sure a
convenient way of investing.

Disadvantages of investing in Mutual funds

Mutual funds have their drawbacks and may not be for everyone:

No Guarantees: No investment is risk free. If the entire stock market declines in

value, the value of mutual fund share will go down as well, no matter how
balanced the portfolio. Investors encounter fewer risks when they invests in
mutual funds than when they buy and sell stocks on their own. However, anyone
who invests through a mutual fund runs the risk of losing money.

61
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 adviser, you will pay a sales commission if you buy
shares in a load fund.

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

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

Interest-rate risk

Unlike stock market where an upward movement of market leads to upward

movement in stock prices, it is a fall in the market yield that pushes up the prices
of debt securities. This happens because there exists an inverse relationship
between the yield and the price of a bond. So, if there is an upward movement of
interest rates after one has invested in a bond fund. The prices of bond will go
down leading to a corresponding fall in the NAVs of the bond funds. Let us take
an example:

Suppose a person buys a bond for Rs. 100 with a coupon rate of 10%. In other
terms the person should get Rs. 110 at the end of the year. If the RBI announces a
62
hike in the bank rate and the market yield for the duration of the bond increased,
say to 11%, the prices of the bond will fall around to Rs. 90.91 in order to adjust to
the market yield. This is termed as interest rate risk in financial jargon and is
precisely what happened in 2000 when RBI had hiked the interest rates.

An investor stands to benefit in the opposite scenario, when the interest rates are
cut as then the prices go up leading to better returns from the fund. If the interest
rate in the above example falls to 9% ,a person still gets Rs. 10 in interest but in
order to align the amount received to the prevailing market yield, the price of the
bond adjusts to adjusts to Rs. 111.11. In this case, the investor is better of by
selling it at Rs. 111.11 than holding it to its maturity, as then he will only get Rs.
110.

This risk is also dependent upon the maturity and duration of the bond and
generally, the longer a fund’s duration or average maturity, the higher its interest-
rate risk, or the more sensitive the NAV of the fund will be to changes in interest
rates. One can reduce the interest rate risk by choosing a bond fund with a shorter
duration or average maturity.

Credit risk

Just like shares where the performance of the company has some bearing on the
stock prices, credibility of the issuer is of importance in debt instruments. The risk
of the issuer not being able to make payments on his liabilities (debt instrument) is
termed as default risk or credit risk. This is of special concern to the investor if the
fund is investing into junk bonds or lower quality bonds. Bond funds offer
professional management and a range of quality ratings to help lower this risk and
so investors stand to benefit by the expertise of fund to pick good papers only.

63
Delay Risk

Cash flows are estimated on the basis of the pattern of income distribution. For
example, a bond can pay interest half yearly, on fixed dates and so if there is any
delay in receiving payments from the issuer, there is bound to be a mismatch
between the cash flows. This can be termed as the delay risk. Mutual funds too can
miss out on the interest due on an investment and have to show it as accrued but
not received. This also affects the time value of the money due. A continuation of
this trend may lead to a re-rating of the paper and add to the non-performing assets
of the fund.

Balancing Risk vs. Reward

As with any investment in any category, there is always a trade off between the
risks taken and returns generated. The greater the risk of a bond fund (dependent
on the quality and duration of papers), the higher is the potential reward, or return.
With a bond fund, the risk that prices may fluctuate and the value of your
investment may increase or decrease is not eliminated and so one must choose
funds based on his risk tolerance.

Mutual funds do not offer investors the opportunity to compare the p/e ratio,
sales growth, earnings per share, etc.

64
Facts for the growth of mutual funds in India

• 100% growth in the last 6 years.

• Number of foreign AMC’s are in the queue to enter the Indian
markets like Fidelity Investments, US based, with over US$1 trillion
assets under management worldwide.
• Our saving rate is over 23%, highest in the world. Only canalizing
these savings in mutual funds sector is required.
• We have approximately 29 mutual funds which is much less than US
having more than 800. There is a big scope for expansion.
• ‘B’ and ‘C’ class cities are growing rapidly. Today most of the
mutual funds are concentrating on the ‘A’ class cities. Soon they will
find scope in the growing cities.
• 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.
• Introduction of Financial Planners who can provide need based
advice.

65
 CONCLUSION AND FINDINGS

PARTICULARS Contribution

MUTUAL Purely Voluntary

FUND
You need not follow any discipline in investing. Generally
people do not invest regularly – they invest when the market is
high and want to disinvest when the market is low.
Minimum initial contribution Rs. 5000/- and Rs. 10000/- and
thereafter in multiples of Rs. 1000/-/ Rs. 1.
If you make a Systematic Investment Plan (SIP) then the
minimum investment is generally Rs. 500- Rs. 1000
Per SIP installment.

ULIP Compulsory Saving

You save regularly and invest through the highs and lows in the
market.
The biggest risk in investing is:
a. A one time investment.
b. When the market is high –ULIP overcomes this
limitation.

Premium payment may be paid quarterly/half yearly/annually

(15 days grace is given).
Minimum committed contribution Rs.10000/- p.a.
You can:
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 a. Reduce contribution (provided 3 years installments have
been paid).
Increase the committed Contribution in multiples if Rs.5000/-.
Top up whenever you have spare Money – Rs.5000/- and
multiples of Rs.1 thereafter.

Schemes

Mutual Fund Liquid, Income, MIP, Balanced and Share Funds are the
standard Schemes. There are a huge variety of specialized
schemes – tailor made to meet every possible Requirement/need.

ULIP Liquid, Income, MIP, Balanced and Share Funds.

Option

Mutual Fund Dividend/Dividend re – invest/Growth and Bonus Options are

Available.
Dividend is generally declared when the market is high – thus
we ‘bleed’ the fund when the market is high with the ‘dividend’
option.
There is a systematic Withdrawal Facility which is especially
useful in the Growth Option.

ULIP There is only the Growth option.

Thus the whole value goes up/down when the market goes
up/down.
We can only ‘bleed’ the fund by making withdrawals provided
the value does not go below the ‘Sum Assured’ i.e. Life Cover

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 amount.

Switches

Mutual Fund You can switch anytime from one scheme to another .
ULIP You can switch any time from one scheme to another.

Redirection of Premium

Mutual Fund You can invest in any other scheme and may/may not use the
same folio.
ULIP Every time you pay the premium you can direct as to which of
the above schemes it is to be invested.
Life Insurance Cover

Mutual Fund There is no life insurance cover.

ULIP You have life cover up to 5 times/10 times/20 times the
committed contribution (subject to age constraints).
For example – if your contribution is Rs. 10000/- you can
choose a cover of:
5 times i.e. Rs. 50000/-
10 times i.e. Rs. 100000/-, 20 times i.e. Rs. 200000/-
Accident Death Benefit and Critical Illness riders are also
available.
How does the insurance cover work?
If he value of your units is Rs. 11000/- and if you have chosen
Rs. 50000/- life cover then you will be charged life cover for
only Rs. 39000/- (Rs. 50000/-cover Rs. 11000/- value). When
the value of units is Rs. 50000/- the life cover becomes nil.

Withdrawls & Surrender of Policy

Mutual Fund You can cash all/part of your units anytime - the money should
be with you within 4 working days. You can receive intermittent

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 cash flows in the form of:
a. Dividends.
Systematic Withdrawals Plan redemptions.
ULIP 1.You can surrender your policy without any surrender
charge provided you have paid the premium of 3 years. If you
wish to surrender without paying 3 years premium then the
surrender change is 25% of the 3 years outstanding premium
(i.e. your default).
2. You can withdraw money in multiples of Rs. 10000/-
provided that you do not bring down the value to below the sum
assured (sum assured – in the above example Rs. 500000/-)
3. You can make the policy folly paid up (which means
that you do not have to contribute any more to the policy)
provided:
a. Three years premium has been paid.
b. The policy value is more then Rs. 15000/- (or as fixed
by HDFC SL).

Fee & Charges

Mutual Fund Share and Balanced funds generally have an entry load of 2% -
2.25%.
Debt funds generally have an exit load of 0.5% if you exit before
6 months.

The fund management charges are however high i.e. around2% -

2.5% p.a. which are charge daily to the NAV. This charged on
the entire base i.e. funds under management.
ULIP With insurance companies the initial charges are

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 generally high (which affects the compounding effects) –
however the fund management charges are low. The charges are
finally work out to be cheaper then mutual funds.
1. The initial charges are:
1st Year – 27%
2nd Year – 27%
3rd Year onwards – 1%
2. Top up’s are charged only 1%.
3. The fund management charges are however far lower
then mutual funds i.e. 0.8% p.a. (Far lower since it is charged to
the entire funds under management which gives policies above 8
years term a huge boost in profitability).
4. There is a policy fee of Rs. 15 per month charged by
deducting units.
5. Life insurance cover charges based on age and the
insurance cover is charged by deducting units.

Value/ Maturity Value

Mutual Fund Units x NAV (rate) is the amount paid to you.

ULIP Units x NAV (rate) is the amount paid to you.

Tax Benefits

Mutual Fund 1. Dividends on debt funds are subject to the dividend tax.
2. Dividends on share funds are tax free.
3. Capital gains (except long term capital gains on ‘share funds’) are
subject to long term/short term capital gain tax.
Section 80C deduction from income up to Rs. 1 Lac for
investment in Templeton Pension Plan, UTI Retirement Benefit

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 Plan and Equity Linked Savings Schemes approved under
Section 80C.
ULIP 1.ULIP Capital gains are tax free provided the annual
contributions (including top up’s) do not exceed 20% of the sum
assured (subject to the provisions of Section 10& 10D).
NOTE – Please consider this provision before makings
top-ups or you may lose your tax free status.
2. Contributions are eligible to Section 80C deduction
from income up to Rs. 1 Lac (subject to Section 88 – 2B) i.e.
annual contribution should not exceed 20% of the policy
amount.
NOTE – Please consider this provision before making
top-ups or you may lose your tax rebate.
3. Contributions to Pension Plan eligible to Section 80C
deduction up to Rs. 10000/-.

Advice

Mutual Fund Advisable to make lump sum investments in debt funds

and to enter share/balanced funds via Systematic Investment
Plan (SIP).
ULIP Term of 10 years or less is advisable only when you
require insurance cover. If you are entering with a horizon of 11
years to 30 years then ULIP scores handsomely over mutual
funds.

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 REFERENCES

Websites

http://www.hdfestandardlifeinsurance.com
http://www.iciciprulife.com/index.jsp
http://www.personalfn.com/
http://www.standardlife.com
http://www.hdfc.com
http://www.amfiindia.com
http://www.nse.com
http://www.sebi.com

Companies visited for information

ICICI prudential, C.P

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HDFC Mutual Fund, C.P
HDFC SLC Lajpat Nagar
Prudential ICICI Mutual Fund, Barakhamba Road,

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