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A
PROJECT REPORT
ON
STUDY OF TAX SAVING SCHEMES IN MUTUAL FUNDS
IN
ICICI PRUDENTIAL LIFE INSURANCE CO. LTD.
Submitted to Punjab technical university
In the partial fulfillment of the requirement for degree of
MASTERSOF
BUSINESS ADMINISTRATION
BY
Nitesh Uppal
ROLL NO: 1176091
DEPARTMENT OF BUSINESS MANAGEMENT
DEVRAJ GROUPS TECHNICAL CAMPUS
AFFILATED TO
PUNJAB TECHNICAL UNIVERSITY, JALANDHAR
2011-2013
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DECLARATION
This is to certify that the project report titledSTUDY OF TAX SAVING SCHEMES
IN MUTUAL FUNDS ICICI PRUDENTIAL LIFE INSURANCE CO. LTD.
carried out by NITESH UPPAL S/o Sh: MUKESH KUMAR UPPAL has been
accomplished under the guidance and supervision ofMRS. PARVEEN BALA & MS.
NITIKA GUPTA
This is an original work and has not been submitted by her anywhere else for the award
of any degree. All sources of information and help have been duly mentioned and
acknowledged.
Signature of Student
Signature of faculty Guide
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ACKNOWLEDGEMENT
My very special gratitude and heart felt thanks to our beloved Chairperson, for his blessings
and best wishes to carry out my project work. Who is responsible for moulding our thinking to
complete this project.
It is my great pleasure to express my sincere gratitude and thanks to my heads of the
Department Mrs. Parveen, for his valuable guidance and help.
I am extremely thankful to my project guide Ms. Nitika Gupta, Department of management
studies for imitating keen interest and giving valuable guidance atevery stage of this project.
I wish to express my sincere thanks to the company guide Mr. Rohit Gupta & Chakshina
Gupta who is my external guide for his kind support and guidanceto complete my project.I am also thankful to all the faculty members of the Department of management studies for
their kind and valuable cooperation during the course of the project. I would also like to thank
my parents, Friends and well wishers who encourage me to complete this project successfully.
Date:
NITESH UPPAL
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LIST OF CHAPTERSCHAPTER NO. CONTENTS PAGE NO.
1 Introductions about company
1.1 Organization chart
1.2 SWOT analysis
2 Introduction about project topic
2.1 Need of study
3 Objectives of study
4 Review of literature
5 Research Methodology
6 Data analysis & interpretation
7 Results & findings
8 Limitations
9 Suggestions
10 Conclusion
11 Bibliography
CHAPTER NO: 1
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INTRODUCTION
ABOUT
ICICI PRUDENTIAL LIFEINSURANCE
ICICI PRUDENTIAL LIFE INSURENCE - AN INTRODUCTION
First of all one must have knowledge about what is life insurance:
Life insurance is a form of insurance that pays monetary proceeds upon the death of the
insured covered in the policy. Essentially, a life insurance policy is a contract between
the named insured and the insurance company wherein the insurance company agrees to
pay an agreed upon sum of money to the insured's named beneficiary so long as the
insured's premiums are current.
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With a large population and the untapped market area of this population insurance
happens to be a very big opportunity in India. Today it stands as a business growing at
the rate of 15-20% annually. Together with banking services, it adds about 7 percent to
the countries GDP. In spite of all this growth statistics of the penetration of the
insurance in the country is very poor. Nearly 80% of Indian populations are without life
insurance cover and the health insurance. This is an indicator that growth potential for
the insurance sector is immense in India.
It was due to this immense growth that the regulations were introduced in the insurance
sector and in continuation Malhotra Committee was constituted by the government in
1993 to examine the various aspects of the industry. The key element of the reform
process was participation of overseas insurance companies with 26% capital. Creating a
more competitive financial system suitable for the requirements of the economy was the
main idea behind this reform.
Since then the insurance industry has gone through many changes. The liberalization of
the industry the insurance industry has never looked back and today stand as one of the
most competitive and exploring industry in India. The entry of the private players and
the increased use of the new distribution are in the limelight today. The use of new
distribution techniques and the IT tools has increased the scope of the industry in the
longer run.
Insurance is the business of providing protection against financial aspects of risk, such
as those to property, life health and legal liability. It is one method of a greater concept
known as risk management which is the need to mange uncertainty on account of
exposure to loss, injury, disadvantage or destruction.
Insurance is the method of spreading and transfer of risk. The fortunate many who are
exposed to some or similar risk shares loss of the unfortunate. Insurance does not
protect the assets but only compensates the economic or financial loss.
In insurance the insured makes payment called premiums to an insurer, and in return
is able to claim a payment from the insurer if the insured suffers a defined type of loss.
This relationship is usually drawn up in a formal legal contract.
Insurance companies also earn investment profits, because they have the use of the
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premium money from the time they receive it until the time they need it to pay claims.
This money is called the float. When the investments of float are successful they may
earn large profits, even if the insurance company pays out in claims every penny
received as premiums. In fact, most insurance companies pay out more money than they
receive in premiums. The excess amount that they pay to policyholders is the cost of
float. An insurance company will profit if they invest the money at a greater return than
their cost of float.
An insurance contract or policy will set out in detail the exact circumstances under
which a benefit payment will be made and the amount of the premiums.
Classification of insurance
The insurance industry in India can broadly classified in two parts. They are.
1) Life insurance.
2) Non-life (general) insurance.
1) Life insurance:
Life insurance can be defined as life insurance provides a sum of money if the person
who is insured dies while the policy is in effect.
In 1818 British introduced to India, with the establishment of the oriental life insurance
company in Calcutta. The first Indian owned Life Insurance Company; the Bombay
mutual life assurance society was set up in 1870.the life insurance act, 1912 was the
first statuary measure to regulate the life insurance business in India. In 1983, the earlier
legislation was consolidated and amended by the insurance act, 1938, with
comprehensive provisions for detailed effective control over insurance. The union
government had opened the insurance sector for private participation in 1999, also
allowing the private companies to have foreign equity up to 26%. Following the
opening up of the insurance sector, 12 private sector companies have entered the life
insurance business.
Benefits of life insurance
Life insurance encourages saving and forces thrift.
It is superior to a traditional savings vehicle.
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It helps to achieve the purpose of life assured.
It can be enchased and facilitates quick borrowing.
It provides valuable tax relief.
Thus insurance is found to be very useful in the lives of the person both in short term
and long term.
Fundamental principles of life insurance contract;
1) Principle of almost good faith:
A positive duty to voluntary disclose, accurately and fully, all facts, material to the risk
being proposed whether requested or not.
2) Principle of insurable interest:
Relationships with the subject matter (a person) which is recognized in law and gives
legal right to insure that person.
2) Non-life (general) Insurance:
Triton insurance co. ltd was the first general insurance company to be established in
India in 1850, whose shares were mainly held by the British. The first general insurance
company to be set up by an Indian was Indian mercantile insurance co. Ltd., which wasstabilized in 1907. there emerged many a player on the Indian scene thereafter.
The general insurance business was nationalized after the promulgation of General
Insurance Corporation (GIC) OF India undertook the post-nationalization general
insurance business.
1. INDUSTRY PROFILE
1.1 Insurance in India
The insurance sector in India has come a full circle from being an open competitive
market to nationalization and back to a liberalized market again. Tracing the
developments in the Indian insurance sector reveals the 360 degree turn witnessed over
a period of almost two centuries.
1.2 A Brief history of the Insurance Sector
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The business of life insurance in India in its existing form started in India in the year
1818 with the establishment of the Oriental Life Insurance Company in Calcutta.
Some of the important milestones in the life insurance in India are;
1912: The Indian Life Assurance
For over 50 years, life insurance in India was defined and driven by only one company-
the Life Insurance Corporation of India (LIC). With the Insurance Regulatory and
Development Authority (IRDA) Bill 1999 paving the way for entry of private
companies into both life and general sectors there was bound to be new-found
excitement- and new success stories. Today, just three years since their entry, their
cumulative share has crossed 13% (source: IRDA), far exceeding expectations. Clearly
insurance is on a growth path.
The percentage of premium income to GDP which was just 2.3% in 2000-01 rose to
3.3% in 2002-03; and life insurance has emerged as the dominant contributor to this
growth.
The industry presented a huge opportunity. Life insurance penetration, for instance, was
at an abysmal 22% of the insurable population. However, private players have had to
rise to many challenges. They were faced with attitudinal barriers towards the category
and the perception that insurance was only a tax saving tool. Insurance per se had lost it
basic rationale: protection. It wasnt surprising then that its potential lay frozen and
unexploited. The challenge for private insurance players was to change the established
category driver and get customers to evaluate life insurance as an investment-cum-
protection tool.
1.3 Brief Review of Scenario Insurance
Insurance in India started without any Regulation in Nineteenth century.
It was story of a typical colonial era. A few British companies dominated
the market mostly in large urban centers.
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Insurance was nationalized mainly on 3 counts First, Indian lives were not insured.
Second, even if they were insured, they were treated as substandard lives and extra
premium was charged. Third, there were gross irregularities in the functioning of
Life insurance was nationalized in the year 1956, and then general insurance was
nationalized in the year 1972. In 1999, the private insurance companies were
allowed back again into insurance sector with maximum cap of 26 percent foreign
holding.
1818 The British introduce to India, with the establishment of the Oriental
Life Insurance company in Calcutta.
1850 Non life insurance debuts, with Triton Insurance Company.
1870 Bombay Mutual life Assurance Society is the first Indian-owned life
insurer
1907 Indian mercantile Insurance is the first Indian non-life insurer.
1912 The Indian life assurance companies act enacted to regulate the life
insurance business.
1938 The insurance act, which forms the basis for most current insurance
laws, replaces earlier act.
1956 Life insurance nationalized, government takes over 245 Indian and
foreign insurers and provident societies.
1956 Government sets up LIC
1972 Non life insurance nationalized, GIC set up.
1993 Malhotra committee, headed by former RBI governor R.N.Malhotra,
set up to draw up a blue print for insurance sector reforms.
1994 Malhotra Committee recommends re-entry of private players,
autonomy to PSU insurers.
1997 Insurance regulator IRDA (Insurance Regulatory and Development
Authority) set up.
2000 IRDA starts giving licensed to private insurers
2001 ICICI Prudential Life Insurance came into the market to sell a policy.
2002 Banks were allowed to sell insurance plans, as TPAs enter the scene,
insurers start settling non-life claims in the cashless mode.
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1.4 The Insurance Regulatory and Development Authority (IRDA):
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in
Parliament in December 1999. The IRDA since its incorporation as a statutory body in
April 2000 has fastidiously stuck to its schedule of framing regulations and registering
the private sector insurance companies.
The other decisions taken simultaneously to provide the supporting systems to the
insurance sector and in particular the life insurance companies were the launch of the
IRDAs online service for issue and renewal of licenses to agents.
The approval of institutions for imparting training to agents has also ensured that the
insurance companies would have a trained workforce of insurance agents in place to sell
their products, which are expected to be introduced by early next year.
Since being set up as an independent statutory body the IRDA has put in a framework
of globally compatible regulations. In the private sector 12 life insurance and 6 general
insurance companies have been registered.
With the demographic changes and changing life styles, the demand for insurance
cover has also evolved taking into consideration the needs of prospective
policyholder for packaged products. There have been innovations in the types of
products developed by the insurers, which are relevant to the people of different agegroups, and suit their requirements. Continued innovations in product development has
resulted in a wide range of flexible products to meet the requirements for cover at
different stages of life -today a variety of products are available ranging from traditional
to Unit linked providing protection towards child, endowment, capital guarantee,
pension and group solutions. A number of new products have been introduced in the life
segment with guaranteed additions, which were subsequently withdrawn/toned down;
single premium mode has been popularized; unit linked products; and add-on/riders
inc lu ding accidental death; dismemberment, critical illness, fixed term assurance
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risk cover, group hospital and surgical treatment, hospital cash benefits, etc.
Comprehensive packaged products have been popularized with features of endowment,
money back, whole life, single premium, regular premium, rebate in premium for higher
sum assured, premium mode rebate, etc., together with riders to the base products.
1.5 Historical Perspective
Prior to 1956 -242 companies operating
1956 -Nationalization- LIC monopoly player -Government control
2001 -Opened up sector
1.6 Contribution to Indian Economy
Life Insurance is the only sector which garners long term savings.
Spread of financial services in rural areas and amongst socially less privileged.
Long term funds for infrastructure.
Strong positive correlation between development of capital markets and
insurance/pension structure.
Employment generation.
1.7 Insurance Industry prior to de-regulation
Prior to deregulation in 2000, market was a public monopoly.
Public Monopoly
- 2000 Offices
- Over 800,000 agents
Distribution through tied agents only
Sales approach primarily on a tax savings platform
Traditional style product offering : Endowment and money back plans
Inadequate and inflexible products
Pensions: Small part of product offer
Limited focus on customer needs
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Types of insurance companies
Insurance companies may be classified as
Life insurance companies, who sell life insurance, annuities and pensions
products.
Non-life orgeneralinsurance companies, who sell other types of insurance.
In most countries, life and non-life insurers are subject to different regulations, tax and
accounting rules. The main reason for the distinction between the two types of company
is that life business is very long term in nature coverage for life assurance or a
pension can cover risks over many decades. By contrast, non-life insurance cover
usually covers a shorter period, such as one year.
Insurance companies are generally classified as eithermutualorstockcompanies. This
is more of a traditional distinction as true mutual companies are becoming rare. Mutual
companies are owned by the policyholders, while stockholders, (who may or may not
own policies) own stock insurance companies.
Reinsurance companies are insurance companies that sell policies to other insurance
companies, allowing them to reduce their risks and protect themselves from very large
losses. The reinsurance market is dominated by a few very large companies, with huge
reserves.
Captive Insurance companies may be defined as limited purpose insurance companies
established with the specific objective of financing risks emanating from their parent
group or groups. This definition can sometimes be extended to include some of the risks
of the parent company's customers.
In short terms, it is an in-house self-insurance vehicle. Captives may take the form of a
"pure" entity (which is a 100% subsidiary of the self-insured parent company); of a
"mutual" captive (which insures the collective risks of industry members); and of an
"association" captive (which self-insures individual risks of the members of a
professional, commercial or industrial association).
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Size of global insurance industry
Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. This follows
11.7% growth in the previous year. Life insurance premiums grew by 9.8% during the
year due to rising demand for annuity and pension products. Non-life insurance
premiums grew by 9.4% as premium rates increased. Over the past decade, global
insurance premiums rose by more than a half as annual growth fluctuated between 2%
and 10%..
Financial viability of insurance companies
Financial stability and strength of the insurance company should be a major
consideration when purchasing an insurance contract. An insurance premium
paid currently provides coverage for losses that might arise many years in the future.
For that reason, the viability of the insurance carrier is very important. In recent years, a
number of insurance companies have become insolvent, leaving their policyholders
with no coverage (or coverage only from a government-backed insurance pool with less
attractive payouts for losses). A number of independent rating agencies, such as Best's,
provide information and rate the financial viability of insurance companies.
Health insurance
Health insurance, which is coverage for individuals to protect them against medical
costs, is a highly charged and political issue in the United States, which does not have
socialized health coverage. In theory, the market for health insurance provision should
function in a manner similar to other insurance coverage, but the skyrocketing cost of
health coverage has disrupted markets around the globe, but perhaps most glaringly in
the U.S. Please see health insurance for a discussion of this category.
Dental insurance
Dental insurance, like health insurance, is coverage for individuals to protect them
against dental costs. Dental insurance usually goes hand-in-hand with health insurance,
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with most people in the United States receiving it included in their health insurance plan
from their employer. Along with receiving dental insurance from your employer, there
are ways to receive dental insurance through resellers and companies for individuals
and families; although this way tends to be too expensive for most people.
2. COMPANY PROFILE
ICICI Prudential Life Insurance Company Limited (the Company) a joint venture
Between ICICI Bank Limited and Prudential plc of UKwas incorporated on July 20,
2000 as a company under the Companies Act, 1956 (the Act). The Company is
licensed by the Insurance Regulatory and Development Authority (IRDA) for carryinglife insurance business in India.
ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a
premier financial powerhouse and prudential plc, a leading international financial
services group headquartered in the United Kingdom (UK). The company brings
together the local market expertise and financial strength of ICICI Bank and
Prudentials International life insurance experience. The company was granted a
certificate of Registration by the IRDA on November 24, 2000 and eighteen days later,
issued its first policy on December 12. ICICI Prudential was amongst the first private
sector insurance companies to begin operations in December 2000 after receiving
approval from Insurance Regulatory Development Authority (IRDA).
From its early days, ICICI Prudential seemed to have the wherewithal for a large-scale
business. By March 31, 2002, a little over a year since its launch, the company had
issued 100,000 policies translating into premium income of approximately Rs. 1,200million on a sum assured of over Rs.23 billion. When the company began its operations,
the need was to build a brand that was relatable to, symbolized trust and was easily
recognized and understood. It launched a corporate campaign ICICI Prudential also
made using the theme of Sindoor to epitomize protection, trust, togetherness and all
that is Indian; endearing itself to the masses. The success of the campaign, the calling
card of the company saw the brand awareness scores almost at par with its 40 year old
competitor. The theme of protection was also extended to subsequent product and
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category specific campaigns from child plans to retirement solutions which highlight
how the company will be with its customers at every step of life.
From day one, the company has unflinchingly focused on being mass-market player,
developing products, creating a distribution network and deploying resources that
would further its goal. Apart from ramping up thoroughly training its advisors, the
company has twelve Bancasurance partners the largest in the country. It swiftly
revised and added to its initial range of products, pioneering market-linked products and
pension plans, to offer customers the most flexible life insurance policies in the country.
In February 2004, ICICI Prudential increased its capital base by Rs. 500 million, its
ninth capital hike, bringing the total paid up equity capital to Rs. 6,750 million. With
the authorized capital of the company standing at Rs. 12 billion, ICICI Prudential
continues to have the highest
capital base amongst all life insurers in the country. The challenge ICICI Prudential
now faces is to retain its top-notch position and continue to deliver the finest life
insurance and pension solutions to its ever-growing customer base.
ICICI Prudentials equity base stands at Rs. 1185 crore with ICICI Bank and Prudential
plc holding 74% and 26% stake respectively. For the year ended March 31, 2006, the
company garnered Rs.2, 412 crore of weighted new business premium and wrote
837,963 policies. The sum assured in force stands at Rs.45, 888 crore. The company has
a network of over 72,000 advisors; as well as 9 bancasurance partners and over 200
corporate agent and broker tie-ups.
ICICI Prudential is also the only private life insurer in India to receive a National
Insurer Financial Strength rating of AAA (Ind) from Fitch ratings. The AAA rating isthe highest credit rating, and is a clear assurance of ICICI Prudentials ability to meet its
obligations to customers at the time of maturity or claims.
For the past five years, ICICI Prudential has retained its position as the No.1 private
insurer in the country, with a wide range of flexible products that meet the needs of the
Indian customer at every step in life.
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Beginning operations in December 2000, ICICI Prudentials success has been meteoric,
becoming the number one private life insurer within months of launch. Today, it has
one of the largest distribution networks amongst private life insurers in India, with
branches in 54 cities. The total number of policies issued stands at more than 780,000
with a total sum assured in excess of Rs.160 billion.
ICICI Prudential closed the financial year ended march 31, 2004 with a total received
premium income of Rs. 9.9 billion; up 135% last years total premium income of
Rs.4.20 billion. New business premium income shows a 106% growth at Rs. 7.5 billion,
driven mainly by the companys range of unique unit-linked policies and pension plans.
The companys retail market share amongst private companies stood at 36%, making it
clear leader in the segment. To add to its achievements, in the year 2003/04 it was
adjudged Most Trusted Private Life Insurer (Economic Times Most Trusted Brand
Survey by AC Nielsen ORG-MARG). It was also conferred the Outlook Money-Best
Life Insurer award for the second year running. The company is also proud to have
won Silver at EFFIES 2003 for its Retire from work, not life campaign. Notably,
ICICI Prudential was also short-listed to the final round for its Sindoor campaign in
EFFIES 2002.
ICICI Prudentials success is rooted in its philosophy to always offer the customer a
choice. This has been the driving force behind its multi-channel distribution strategy,
which includes advisors, banks, direct marketing and corporate agents. In fact, ICICI
Prudential was the first life insurer to invest in multiple channels and offer the customer
choice and access; thus reducing dependency on any one channel, great strides in the
retirement solutions and pensions market.
The Companys penetration of the retirement market was driven by the focused
approach towards creating awareness through sustained campaign; Retire from work,
not life. Within six months, the campaign rewarded ICICI Prudential with an increased
share of 23% of the total pensions market and 78% amongst private players. ICICI
Prudential has one of the largest distribution networks amongst private life insurers in
India, having commenced operations in 132 cities and towns in India, stretching from
Bhuj in the west to Guwahati in the east, and Jammu in the north to Trivandrum in the
south.
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The company has 9 bank partnerships for distribution, having agreements with ICICI
Bank, Bank of India, Federal Bank, South Indian Bank, Lord Krishna Bank, and some
co-operative banks, as well as over 200 corporate agents and brokers, it has also tied up
with NGOs, MFIs and corporate for the distribution of rural policies.
ICICI Prudential has recruited and trained more than 72,000 insurance advisors to
interface with and advise customers. Further, it leverages its state-of-the-art IT
infrastructure to provide superior quality of service to customers.
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1.1 ORGANISATION CHART
ORGANISATION CHART
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1.2 SWOT ANALYSIS
SWOT ANALYSIS
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Strength
1. ICICI Prudential is the 1stlife insurance company to introduce UNITLINKED,
PENSION PRODUCTS AND LIFE TIME it can get the pioneer advantage.
2. Prudential is the 156 year old company founded in 1848 so it has full fledge
experience in this industries.
3. ICICI enjoys a rating with the Moodys which is higher than the severing rating.48
4. Large distribution channel with 30 branches and more than 30,000financial advisors.
5. ICICI Prudential has the best incentives which motivate and encourage the advisors
to work and fulfill the commitment.
6. The financial condition of both companies is very sound.
7. Good customer has service.
8. Company has created a brand name.
Weaknesses
1. It has to do operation with in the boundary of IRDA.
2. Up till now no more option of product for middle class offered by ICICI prudential
life insurance.
3. No option in rural area.
4. Yet to build a strong distribution network in the market.
Opportunity
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1. Today ICICI prudential covers 40% market so yet there is a great potentiality to
increase market share.
2. Insurance plan like pension plan, child plan & investment plan of ICICI prudential
go good response from the market. So in future company can take benefit for it.
3. The brand name that creates ICICI prudential and awareness level of it is
comparatively quite higher than competition. So it will be helpful in future while
lunching new innovation products
.4.Untapped market of India.
Threats
1 . . It is a private company so there is a doubt about solvency & liquidity among
the general people.
2. Change in the environmental factors may effects the company.
3. The GOVT. policies and the annual budget may effect the insurance market.
4. Large distribution network of LIC and trust of people in LIC.
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CHAPTER NO: 2
Introduction
About
Project Topic
INTRODUCTION OF MUTUAL FUNDS
There are a lot of investment avenues available today in the financial market for an
investor with an investable surplus. He can invest in Bank Deposits, Corporate
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Debentures, and Bonds where there is low risk but low return. He may invest in Stock
of companies where the risk is high and the returns are also proportionately high. The
recent trends in the Stock Market have shown that an average retail investor always lost
with periodic bearish tends. People began opting for portfolio managers with expertise
in stock markets who would invest on their behalf. Thus we had wealth management
services provided by many institutions. However they proved too costly for a small
investor. These investors have found a good shelter with the mutualfunds.
CONCEPT OF MUTUAL FUND
A mutual fund is a common pool of money into which investors place their
contributions that are to be invested in accordance with a stated objective. Theownership of the fund is thus joint or mutual; the fund belongs to all investors. A
single investors ownership of the fund is in the same proportion as the amount of the
contribution made by him or her bears to the total amount of the fund Mutual Funds are
trusts, which accept savings from investors and invest the same in diversified financial
instruments in terms of objectives set out in the trusts deed with the view to reduce the
risk and maximize the income and capital appreciation for distribution for the members.
A Mutual Fund is a corporation and the fund managers interest is to professionally
manage the funds provided by the investors and provide a return on them after
deducting reasonable management fees. The objective sought to be achieved by Mutual
Fund is to provide an opportunity for lower income groups to acquire without much
difficulty financial assets. They cater mainly to the needs of the individual investor
whose means are small and to manage investors portfolio in a manner that provides a
regular income, growth, safety, liquidity and diversification opportunities.
DEFINITION OF MUTUAL FUND
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Mutual funds are collective savings and investment vehicles where savings of small
(or
Sometimes big) investors are pooled together to invest for their mutual benefit and
returns Distributed proportionately.A mutual fund is an investment that pools your
money with the money of an unlimited number of other investors. In return, you and the
other investors each own shares of the fund. The fund's assets are invested according to
an investment objective into the fund's portfolio of investments. Aggressive growth
funds seek long-term capital growth by investing primarily in stocks of fast-growing
smaller companies or market segments. Aggressive growth funds are also called capital
appreciation funds.
Why Select Mutual Fund?
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vice versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investors opt
for bank FD, which provide moderate return with minimal risk. But as he moves ahead
to invest in capital protected funds and the profit-bonds that give out more return which
is slightly higher as compared to the bank deposits but the risk involved also increasesin the same proportion. Thus investors choose mutual funds as their primary means of
investing, as Mutual funds provide professional management, diversification,
convenience and liquidity. That doesnt mean mutual fund investments risk free.
This is because the money that is pooled in are not invested only in debts funds which
are less riskier but are also invested in the stock markets which involves a higher risk
but can expect higher returns. Hedge fund involves a very high risk since it is mostly
traded in the derivatives market which is considered very volatile.
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THE CYCLE OF INVESTMENT IN MUTUAL FUNDS
HISTORY OF MUTUAL FUNDS IN INDIA
27
MOBILIZATION OF SERVICES
SAVINGINVESTMENT
RETURNS
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The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank. The history of
mutual funds in India can be broadly divided into four distinct phases
FIRST PHASE
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set
up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from
the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory
and administrative control in place of RBI. The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs.6, 700 corers of assets under
management.
SECOND PHASE (ENTRY OF PUBLIC SECTOR FUNDS)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National
Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June
1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the
mutual fund industry had assets under management of Rs.47, 004 corers.
THIRD PHASE (ENTRY OF PRIVATE SECTOR FUNDS)
With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993
was the year in which the first Mutual Fund Regulations came into being, under which
all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by
a more comprehensive a revised Mutual Fund Regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.
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The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1, 21,805 cores. The Unit Trust of India with Rs.44, 541 cores of assets under
management was way ahead of other mutual funds.
FOURTH PHASEIn February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 corers as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund
Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions
under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which
had in March 2000 more than Rs.76,000 corers of assets under management and with
the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations,
and with recent mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108 corers under
421 schemes.
ADVANTAGES OF MUTUAL FUNDS
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If mutual funds are emerging as the favorite investment vehicle, it is because of the
many advantages they have over other forms and the avenues of investing, particularly
for the investor who has limited resources available in terms of capital and the ability to
carry out detailed research and market monitoring. The following are the major
advantages offered by mutual funds to all investors:
Portfolio Diversification
Each investor in the fund is a part owner of all the funds assets, thus enabling him to
hold a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital.
Professional Management
Even if an investor has a big amount of capital available to him, he benefits from the
Professional management skills brought in by the fund in the management of the
investors portfolio. The investment management skills, along with the needed research
into available investment options, ensure a much better return than what an investor can
manage on his own. Few investors have the skill and resources of their own to succeed
in todays fast moving, global and sophisticated markets.
Reduction/Diversification of Risk
When an investor invests directly, all the risk of potential loss is his own, whether he
places a deposit with a company or a bank, or he buys a share or debenture on his own
or in any other from. While investing in the pool of funds with investors, the potential
losses are also shared with other investors. The risk reduction is one of the most
important benefits of a collective investment vehicle like the mutual fund.
Reduction of Transaction Costs
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What is true of risk as also true of the transaction costs. The investor bears all the costs
of
Investing such as brokerage or custody of securities. When going through a fund, he has
the benefit of economies of scale; the funds pay lesser costs because of larger volumes,
a benefit passed on to its investors.
Liquidity
Often, investors hold shares or bonds they cannot directly, easily and quickly sell.
When they invest in the units of a fund, they can generally cash their investments any
time, by selling their units to the fund if open-ended, or selling them in the market if the
fund is close-end. Liquidity of investment is clearly a big benefit.
Convenience and Flexibility
Mutual fund management companies offer many investor services that a direct market
investor cannot get. Investors can easily transfer their holding from one scheme to the
other; get updated market information and so on.
Tax Benefits
Any income distributed after March 31, 2002 will be subject to tax in the assessment of
all Unit holders. However, as a measure of concession to Unit holders of open-ended
equity oriented funds, income distributions for the year ending March 31, 2003, will be
taxed at a concessional rate of 10.5%.In case of Individuals and Hindu Undivided
Families a deduction up to Rs. 9,000 from the Total Income will be admissible in
respect of income from investments specified in Section 80L,Wealth-Tax and Gift-Tax.
Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
Well Regulated:
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All mutual funds are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interests of investors. The operations of Mutual
Funds are regularly monitored by SEBI.
Transparency:
You get regular information on the value of your investment in addition to disclosure on
the specific investments made by your scheme, the proportion invested in each class of
assets and the fund manager's investment strategy and outlook.
DISADVANTAGES OF MUAUAL FUNDS
No Control over Costs
An investor in a mutual fund has no control of the overall costs of investing. The
investor pays investment management fees as long as he remains with the fund, albeit in
return for the professional management and research. Fees are payable even if the value
of his investments is declining. A mutual fund investor also pays fund distribution costs,
which he would not in curing direct investing. However, this shortcoming only means
that there is a cost to obtain the mutual fund services.
No Tailor-Made Portfolio
Investors who invest on their own can build their own portfolios of shares and bonds
and other securities. Investing through fund means he delegates this decision to the fund
managers. The very-high-net-worth individuals or large corporate investors may find
this to be a constraint in achieving their objectives. However, most mutual fund
managers help investors overcome this constraint by offering families of funds- a large
number of different schemes- within their own management company. An investor can
choose from different investment plans and constructs a portfolio to his choice.
Managing a Portfolio of Funds
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Availability of a large number of funds can actually mean too much choice for the
investor. He may again need advice on how to select a fund to achieve his objectives,
quite similar to the situation when he has individual shares or bonds to select.
The Wisdom of Professional Management
That's right, this is not an advantage. The average mutual fund manager is no better at
picking stocks than the average nonprofessional, but charges fees.
No Control
Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat
of somebody else's car.
Dilution
Mutual funds generally have such small holdings of so many different stocks that
insanely great performance by a fund's top holdings still doesn't make much of a
difference in a mutual fund's total performance.
Buried Costs
Many mutual funds specialize in burying their costs and in hiring salesmen who do not
make those costs clear to their clients.
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TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. thus mutual funds has Variety of
flavors, Being a collection of many stocks, an investors can go for picking a mutual
fund might be easy. There are over hundreds of mutual funds scheme to choose from. It
is easier to think of mutual funds in categories, mentioned below:
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A). BY STRUCTURE
1. Open - Ended Schemes
An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes
Closed-end fund has a stipulated maturity period which generally ranging from 3 to 15
years. The fund is open for subscription only during a specified period. Investors can
invest in the scheme at the time of the initial public issue and thereafter they can buy or
sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor.
3. Interval Schemes
Interval Schemes are that scheme, which combines the features of open-ended and
close- ended schemes. The units may be traded on the stock exchange or may be open
for sale or redemption during pre-determined intervals at NAV related prices.
B). BY NATURE
1. Equity Fund
These funds invest a maximum part of their corpus into equities holdings. The structure
of the fund may vary different for different schemes and the fund managers outlook on
different stocks. The Equity Funds are sub-classified depending upon their investment
objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
2. Debt Funds
The objective of these Funds is to invest in debt papers. Government authorities, private
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Companies, banks and financial institutions are some of the major issuers of debt
papers. By investing in debt instruments, these funds ensure low risk and provide stable
income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known
as
Government of India debt papers. These Funds carry zero Default risk but are
associated with Interest Rate risk. These schemes are safer as they invest in papers
backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds,
corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These
scheme ranks slightly high on the risk-return matrix when compared with other debt
schemes.
Short Term Plans (STPs)
Meant for investment horizon for three to six months. These funds primarily invest in
short-term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).
Some portion of the corpus is also invested in corporate debentures.
Liquid Funds:
Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like Treasury
Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-
term cash management of corporate houses and are meant for an investment horizon of
1day to 3 months. These schemes rank low on risk-return matrix and are considered to
be the safest amongst all categories of mutual funds
3. Balanced Funds
As the name suggest they, are a mix of both equity and debt funds. They invest in both
equities and fixed income securities, which are in line with pre-defined investment
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objective of the scheme. These schemes aim to provide investors with the best of both
the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment
parameterize,Each category of funds is backed by an investment philosophy, which is
pre-defined in the objectives of the fund. The investor can align his own investment
needs with the funds objective and invest accordingly.
C). BY INVESTMENT OBJECTIVE
Growth Schemes
Growth Schemes are also known as equity schemes. The aim of these schemes is to
provide capital appreciation over medium to long term. These schemes normally invest
a major part of their fund in equities and are willing to bear short-term decline in value
for possible future appreciation.
Income Schemes
Income Schemes are also known as debt schemes. The aim of these schemes is to
provide
Regular and steady income to investors. These schemes generally invest in fixed
income securities such as bonds and corporate debentures. Capital appreciation in such
schemes may be limited.
Balanced Schemes
Balanced Schemes aim to provide both growth and income by periodically distributing
a part of the income and capital gains they earn. These schemes invest in both shares
and fixed income securities, in the proportion indicated in their offer documents
(normally 50:50).
Money Market Schemes
Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments, such
as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
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Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you
buy or sell units in the fund, a commission will be payable. Typically entry and exit
loads range from1% to 2%. It could be worth paying the load, if the fund has a good
performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
Commission is payable on purchase or sale of units in the fund. The advantage of a no
load fund is that the entire corpus is put to work.
OTHER SCHEMES
Tax Saving Schemes
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from
time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity
Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes
Index schemes attempt to replicate the performance of a particular index such as the
BSE
Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks
that constitute the index. The percentage of each stock to the total holding will be
identical to the stocks index weight age. And hence, the returns from such schemes
would be more or less equivalent to those of the Inde
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Sector Specific Schemes
These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these fundsare dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on theperformance of those sectors/industries and mustexit at an appropriate time.
MUTUAL FUND INDUSTRY
An Overview
The mutual fund industry in india began with the setting up of the Unit Trust of
india (UTI) in 1963 by the Government of India. Till the year 2000, UTI has grown to
be a dominant player in the industry with the assets of over Rs. 76,547 crores as of
March 31, 2000. the UTI is governed by a special legislation, the Unit Trust of India
Act, 1963. in 1987 public sector banks and insurance companies were permitted to set
up mutual funds. Also the two insurance companies LIC and GIC established mutual
funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund
(Regulation) 1993, which for the first time established a comprehensive regulatory
framework for the mutual fund industry. Since then several mutual funds have been set
up by the private and the joint sectrors.
Growth of Mutual Funds
The Indian Mutual Fund has passed through three phases. The first phase was
between 1964 and 1987 and the only player was the Unit Trust of India, which had a
total assets of Rs. 6700 crores at the end of 1988. The second phase is between 1987
and 1993 in which period 8 funds were established (6 by banks and one each by LIC
and GIC). The total assets under management had grown to rs. 61028 crores at the end
of 1994 and the number of schemes were 167.
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INTRODUCTION
The third phase began with the entry of private and foreign sectors in the Mutual
Fund industry in 1993. Kothari Pioneer Mutual Fund was the first fund to be
established the private sector in association with a foreign fund. At the end of financial
year 2000 (31st March) funds were functioning with Rs. 113005 crores as total assets
under management. As on August end 2000 there were 33 funds with 391 schemes and
assets under management with Rs. 102849 crores.
As you probably know, mutual funds have become extremely popular over the
last 20 years. What was once just another obscure financial instrument is now a part of
our daily lives. More than 80 million people, or one half of the households in America,
invest in mutual funds That means that, in the United States alone, trillions (yes, with a
"T") of dollars are invested in mutual funds.
In fact, to many people, investing meaying mutual funds. After all, it's common
knowledge that incesting in mutual funds is (or at least should be) better than simply
letting your cash waste away in a savings account, but, for most people, that's where the
understanding of funds ends. It doesn't help that mutual fund salespeople speak a
strange language that, sounding sort of like English, is interspersed with jargon like
MER, NAVPS, load/no-load, etc.
Originally mutual funds were heralded as a way for the little guy to get a piece of
the market. Instead of spending all your free time buried in the financial pages of the
Wall Street Journal, all you have to do is buy a mutual fund and you'd be set on your
way to financial freedom. As you might have guessed, it's not that easy. Mutual fundsare an excellent idea in theory, but, in reality, they haven't always delivered. Not all
mutual funds are created equal, and investing in mutuals isn't as easy as throwing your
money at the first salesperson who solicits your business.
Trend in Mutual Funds Industry
The Indian Mutual fund industry, despite all that has been said about it is still in
a nascent stage and has extremely bright future ahead. The industry is still one-tenth
size of the banking deposits in the country.
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The private sector mutual fund industry in its resent avatar is barely 7 years
old. The total asset under management over the past 4 to 5 tears has almost remain
stagnant around the Rs 100, 000 crore mark.
This has put a question mark in front of the claims that mutual funds are
growing part of the financial savings and planning industry in India. It holds scope for
growth. In India this industry began with the setting up of the Unit Trust Of India
(UTI) in 1964 by the government of India in order to mobiles small saving. During the
past 37 years, UTI has grown to be a dominant player in the industry with assets with
over Rs 76,547 crore as of March2000. However, trouble hit UTI has lost its dominant
position in the industry and the asset under management has slipped drastically to Rs
46,396 crore.
Private sector mutual funds, which were permitted along with foreign partners in
1993, now enjoy a dominant position in the country. Kothari Pioneer Mutual fund was
the first fund to be established in the private sector with foreign fund. The private
sector now controls around RS 45,818 crore assets under management, almost half the
size of the industry.
The mutual fund industry has become a fastest growing sector in the countrys
capital and financial market with an average compounded growth rate of 20 percent
over the past five years. This is despite increasing competition with more than 30 asset
management companies for investors money. As on June 2002, the industry has Rs
100,703 crore asset under management spread across 36 funds with more than 390
schemes.
Exchange Board of India (SEBI) came out with comprehensive regulation in 1993,
which defined the structure of the mutual fund and asset management, Companies for
the first time. The industry is in the process of evolving into a bigger and better
investment medium for all market segment, Say Kavita Hurry, CEO ING Investment
Management, further, currently, ING Investments manages around Rs.364 crore as on
June 2002.
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Drastic Transformation:
The industry is undergoing a transformation and is witnessing large number of
mergers, acquisitions and takeovers in the schemes and asset management companies.
Mutual fund products are competing with the banks deposits, Reserves Banks of India
(RBI) bonds, pension funds and post offices schemes that provide not only guaranteed
return but also tax-free returns. However, mutual funds are unable to provide assured
return since they are investing in financial markets and returns from them are, by
definition, uncertain. These transformation benefiting the investor friendly open-ended
schemes, increasing the range of funds to choose from, enhanced transparency and
improvement regulation.
Market Trends:
A lone UTI with just one scheme in 1964 now competes with as many as 400
odd products and 34 players in the market. In spite of the stiff competition and losing
market share, UTI still remains a formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones for the
industry. New players have come in, while others have decided to close shop by either
selling off or merging with others. Product innovation is now pass with the game
shifting to performance delivery in fund management as well as service. Those directly
associated with the fund management industry like distributors, registrars and transfer
agents, and even the regulators have become more mature and responsible.
The industry is also having a profound impact on financial markets. While UTI
has always been a dominant player on the bourses as well as the debt markets, the new
generations of private funds, which have gained substantial mass, are now seen flexing
their muscles. Fund managers by their selection criteria for stocks have forced
corporate governance on the industry. By rewarding honest and transparent
management with higher valuations, a system of risk-reward has been created where the
corporate sector is more transparent then before.
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Funds have shifted their focus to the recession free sectors like pharmaceuticals,
FMCG and technology sector. Funds performances are improving. Funds collection,
which averaged at less than Rs100bn per annum over five-year period spanning 1993-
98 doubled to Rs210bn in 1998-99. In the current year mobilization till now have
exceeded Rs300bn. Total collection for the current financial year ending March 2000 is
expected to reach Rs450bn.
What is particularly noteworthy is that bulk of the mobilization has been by the
private sector mutual funds rather than public sector mutual funds. Indeed private MFs
saw a net inflow of Rs. 7819.34 crore during the first nine months of the year as against
a net inflow of Rs. 604.40 crore in the case of public sector funds.
Mutual funds are now also competing with commercial banks in the race for
retail investors savings and corporate float money. The power shift towards mutual
funds has become obvious. The coming few years will show that the traditional saving
avenues are losing out in the current scenario. Many investors are realizing that
investments in savings accounts are as good as locking up their deposits in a closet.
The fund mobilization trend by mutual funds in the current year indicates that money is
going to mutual funds in a big way. The collection in the first half of the financial year
1999-2000 matches the whole of 1998-99.
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ASSET MANAGEMENT COMPANIES
I 1 UTI Asset Management Co. Ltd.
II BANK SPONSORED
1 BOB Asset Management Services Ltd.
2 Canbank Investment Management Services Ltd.
3 PNB Asset Management Co. Ltd.
4 SBI Funds Management Ltd.
III INSTITUTIONS
1 GIC Asset Management Co Ltd;
2 Idbi Principal Asset Management Co. Ltd.
3 IL & FS Asset Management Co. Ltd.
4 Jeevan Bima Sahayoog Asset Management Co. Ltd.
IV PRIVATE SECTOR
1 Benchmark Asset Management co. Ltd.
2 Cholamandalam Asset Management Co. Ltd.
3 Escorts Asset Management Ltd.
4 J.M.Capital Management Pvt. Ltd.
5 Kotak Mahindra Asset Management Co. Ltd.
6 Reliance Capital Asset Management Ltd.
7 Sundaram Asset Management Company Ltd.
V JOINT VENTURES-PREDOMINANTLY INDIAN
1 Birla Sun Life Asset Management Co. Ltd.
2 Credit Capital Asset Management Co. Ltd.
3 DSP Merrill Lynch Fund Managers Ltd.
4 First Indian Management Private Ltd.
5 HDFC Asset Management Co. Ltd.
6 Tata TD Waterhouse Asset Management Private Ltd.
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VI JOINT VENTURES-PREDOMINANTLY FOREIGN
1 Alliance Capital Asset Management (India) Pvt. Ltd.
2 Deutsche Asset Management (India) Pvt. Ltd.
3 Dundee Investment management & Research (Pvt.) Ltd.
4 HSBC Asset Management (India) Pvt. Ltd.
5 ING Investment Management (India) Pvt. Ltd.
6 Morgan Stanley Dean Writer Investment Management Pvt. Ltd.
7 Prudential ICICI Asset management Co. Ltd.
8 Standard Chartered Asset Management Co. Pvt. Ltd.
9 Sun F & C Asset Management (India) Pvt. Ltd.
10 Templeton Asset Management (India) Pvt. Ltd.
11 Zurich Asset Management Co. (India) Pvt. Ltd.
VALUE CHAIN
As a business organisation, a mutual fund management company or fund
complex (firm) undertakes a series of activities designed to generate value ofr its
customers. By arraying a firms strategically important activities, one can construct a
firms value chain representation. This analytic tool has been advanced by Micheael
Porter. In grouping a firms activities the analyst must consider the manner in which
the economies of various activities differ and how rivals distinguish themselves on the
basis of these activities. We identify five links in the value chain for a typical mutual
fund, as shown in the figure (previous page).
The first activity is the investment selection. Mutual funds implement their
investments strategy through their selection of security holdings. Funds vary in the
amount of latitude they grant to portfolio managers. Investments may be dectated
completely by fund charter, as is done in an S& P 500 index fund,or security selection
may be left completely to the fund managers discretion, as in a growth fund. To
support this function, funds require research which may be conducted in-house or
purchased from vendors either with cash or with soft-dollar payment from brokers.
The next activity is trading and execution. Once the decision has been made
to buy or sell a particular security, a trade must be executed in the capital markets. This
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process involves not only getting the best price for the security, but also administering
backoffice functions such as custodial servies. This particular link in the chain may
seem minor at first glance, trading and execution expertise are increasingly being
recognised as critical activities.
The third item in the chain is customer record keeping and reporting. This
refers to the tasks performed by transfer agents and to the activities and resources
required to produce periodic statements for funds share holders.
The fourth activity, marketing and distribution, describes how the funds
communicate with potential customers and sell their products. Traditionally, open-
ended mutual funds were categorized as either no-laid funds used print and electronic
media, word of mouth, and mailing to appeal to consumers directly whereas load funds
hired sales people to market and sell their products. To pay the sales people, load funds
charged customers one-time fees, called loads.
The final activity in our value chain is investor liquidity services. By this we
mean the activities funds undertake to permit investors to switch among various
investment or to liquidate portfolios.
SYSTEMATIC PORTFOLIO MANAGEMENT
The goal of portfolio management is to assemble various securities and other
assets into portfolios that address investor needs and then to manage those protfolios so
as to achieve investment objectives. The investors needs are defined in term of risk,
and the portfolio manager maximizes return for investment undertaken.
Asset allocation
Security selection within asset classes asset allocation can best be characterized
as the blending together of major asset classes to obtain the highest long-run return at
the lowest risk. Managers can make opportnistic shifts in asset class weightings in
order to improve return prospects over the long-term objective. Also managers can
improve return prospects by selecting securities that have above average expected
return within the individual asset classes.
Investment managers
Multitudes of investment management organization offer portfolio management
services to clients including mutual funds. Investments organization differ not only in
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size and degree of specialization but also in their approaches to investment analysis and
portfolio management. On the whole, however the business portfolio management has
tended toward greater structure and discipline in the investment process and toward
greater use of systematic approaches to investing. Those organizations at the forefront
in implementing systematic approaches to portfolio management have gained market
share at the expense of other firms, in large part because they have been more effective
in addressing client needs and achieving investment objectives.
Participants
Several groups other than professional portfolio managers are important
participants in the portfolio management process.
In marketing the asset allocation decision, major portfolio investors employ the service
of investment management consultants. These are organizations that specialize in not
only advising on asset allocation but other critical aspects, such as setting of goal and
selection of investment managers.
Asset classes
Developing the appropriate asset allocation is a critical phase of the portfolio
management process.
Equities, bonds and money market instruments are major asset categories that are large,
are generally highly marketable and have tradionally been used extensively by longterm
portfolio investors.
Asset classes for portfolio investment
Corporates
Common stocks
Domestic equities
Large-capitalization
Small-capitalization
International equities
Major-country markets
Emerging markets
Bonds
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Government and agencies
AAA-rated
Highly-yield (junk) bonds
Mortgage-backed securities
International bonds
Money market instruments
Treasury bills
CDs and commercial paper
Guaranteed investment contracts
Real estate
Venture capital
The portfolio management industry has evolved over the last two decades into a
structure with several distinct groupings of highly professional participants. Although
the current structure differs from the past, the critical components of the investment
decision process remain the same. Investors need to establish goals and be aware of the
capital market tradeoff in developing an asset allocation that the best meets the return
target at an acceptable level.
There are three based areaswhich investing styles differ. All influence the risk,
returns and period of investment and involve finding a sport between the extremes that
suits the fund and investors the best.
Attitude: does it follow a top-down approach (first list industries or sectors for
investment and then select specific companies within these industries) or a bottom-up
approach (individual stocks which are likely to outperform the market are identified
first and only then study the industry or macro level factors)?
Intensity of management: is the scheme actively (review the portfolios regularly) or
passively (less intensely managed stocks)?
Distribution network:
The rapid accumulation in assets of mutual funds creates more challenges, most
important among them being the distribution network. For the long-term health of the
industry, it is crucial that investors who come into a fund come with a full
understanding of the risks involved in the investment. And distributors play an
important role in dissemination of such information. At present, the majority of funds
rely on branch network of banks in order to sell their products since the branch network
of most fund houses is restricted to a few cities.
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After-sales service:
In India typically the distributors role comes to an end as soon as the product is
sold to the investor. For subsequent transactions-redemption or switchovers-the
investors often has to get back to the fund itself. An investors interface with a fund
would be simpler if the whole range of services, from deciding on the right product to
processing the final redemption request, is handled by a singled entity.
BASIC MUTUAL FUND INVESTMENT INSTRUMENT
Mutual Funds are investing in 3 types of funds:
Stocks
Bonds
Money market instruments
Broadly, Mutual Funds invest basically in 3 types of asset classes.
1. Stocks:- Stocks represent ownership or equity in a company popularly known
as shares.
2. Bonds:- These represent debt from companies, financial institutions or
government agencies.
3. Money Market Instruments:- These include short term dent instrument such
as treasury bills, certificate of deposits, and inter bank call money.
Mutual Fund can be classified based on their objectives as:
Sector equity schemes:- These schemes invest in share of companies in as
specific sector.
Diversified equity schemes:- These schemes invest in shares and fixed income
of the economy of companies across different sectors.
Hybrid economy schemes:- These schemes invest in a mix shares and fixed
income instruments.
Income schemes:- These schemes invest in fixed income instruments such as
bonds issued by corporate and financial institutions, and government securities.
Money Market schemes:- These schemes invest in short term instrument
such as certificate of deposits, treasury bills and short term bonds.
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ANALYSIS OF MUTUAL FUND
Broadly the analysis categories in 3 types:
Fundamental analysis
Technical analysis
Beta/Modern portfolio theory (MPT)
FUNDAMENTAL ANALYSIS:
The analysis of such fundamental factor general business conditions,
industry outlook, earnings, dividends, quality of management etc.,
In this take consideration on the some following factors:-
1. Company net asset value.2. Estimation of True.
3. Value of profit earning ratio.
4. Estimating the market value of current and forecasting.
5. Compare with various ratios like US, UK.
6. Estimate the future yield dividends.
Stock rating:
The rating for common stock depends over the certain of dividend in take the
consideration followings.
1. Ingredients of security analysis.
2. It include historical data, sales, capital etc.,
Economic analysis:
1. Cyclic effect
2. Economic analysis (fashions)
Financial analysis:
1. EPS
2. EBIT
3. ROI
4. PAT
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Bond rating;
1. AAA high investment grade: Debentures rated AAA are judged tooffer highest safety of timely payment and interest and principles.
2. AA high safety: It is offer highest safety of timely payment and interest
and principles.
Investment grades
3. A adequate safety: Debentures rates A are judged offer highest safety
of timely payment and interest and principles.
4. BBB moderate safety BBB are judged to offer sufficient safety of timely
payment and interest and principles.
Speculative grade:
5. BB Inadequate safety: Debentures rated BB are judged to offer timely
payment and interest and principles.
6. B high risk
7. C substantial risk: Timely payment possible only in favorable
circumstances continues.
8. D- In default
BETA / MPT ANALYSIS
Analysis the responsiveness of the price of a particular company
stock to change in the value some market average.
TECHNICAL ANALYSIS:
An analysis of market based factors such as Stock price
movements, charts etc.,
TYPES OF MUTUAL FUND SCHEMES
BY STRUCTURE:
OPEN ENDED SCHEME
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CLOSED ENDED SCHEME
INTERVAL SCHEME
BY INVESTMENT OBJECTIVE:
GROWTH SCHEME
INCOME SCHEME
MONEY MARKET SCHEME
OTHER SCHEMES:
TAX SAVING SCHEME
SPECIAL SCHEME
INDEX SCHEME
Mutual Fund broadly classified into TWO categories:
1. Open Ended Scheme funds
2. Closed Ended Scheme funds
Now discuss details regarding above fund
OPEN - ENDED SCHEME FUND:
The concept of these funds is that the investors are free to enter or exit
the scheme at any point of time during the fund period. The investors can purchase/ sale
units of mutual fund through mutual fund trust. The prices at which the units are
purchased/ sold depend on the NAV of the fund. At that point of time as specified by
the funds. The NAV of fund is the current market value of their investments. Besides
the Net Asset Value, certain funds take an additional charge from the investors in the
form of Entry load or Exit load. Some Examples of Open Ended scheme funds are:
Templeton India Growth Fund.
PruICICI Discovery Fund.
Kotak Opportunities
Principal Dividend Yield Fund.
Reliance Growth Fund.
CLOSED ENDED SCHEME FUND:
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In the care of close ended fund, the investors have to look their funds
with the trust for particular periods of time as a specified y the terms of the offer. The
main problem for the investor is that they cannot move in out of the fund freely. In the
case of Closed Ended schemes the prices of the units are calculated in the same
manner as in the case of Open Ended schemes. However these schemes do not charge
an Entry/ Exit load as in the case of open ended scheme.
INTERVAL SCHEME FUND:
The concept of these funds is that the investors are free to Enter/ Exit the
scheme at any point of time during the fund period and the investors have to lock their
funds with the trust for a particular periods of time as a specified by the terms of the
offer.
GROWTH FUND:
It is primarily look for growth of capital such funds invests in shorter
with potential for growth and capital appreciation. They invest in well established
companies where the company it self and the industry in which it operates are thought
to have well long term growth potential and hence growth fund provide low current
income. Growth potential generally incurred higher risks than Income Fund, in an effort
to secure more pronounced growth. Some growth funds concentrate on one or more
industry sectors and also invest in a Broad range of industries. Growth funds are
suitable for investors who can offer to assume the risk of potential loss in value their
investment in the short term in the hope of achieving substantial and risings gains.
Eventually they are not suitable for investors who must conserve their
principal or who must maximize current income.
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GROWTH AND INCOME FUND:
Growth and Income funds seek long term growth of capital as well as
current income. The investment strategies used to reach there goals very among funds.
Some invest in a dual portfolio consisting of growth stock and income stocks, or a
combination of growth stocks paying high dividends preferred stock, convertible
securities or fixed income securities such as corporate bonds and money market
instruments.
Growth and Income funds have low to moderate stability of principal
and moderate potential for current income and growth they are suitable for investors
who can assume some risk to achieve growth of capital but who also want to maintain a
moderate level of current income.
MONEY MARKET SCHEME:
It is invested only in high liquidity; short- term top rated money market
instruments. Money market funds are suitable for investors who want high stability of
principal and current income with immediate liquidity.
LAW RELATING TO TAX SAVINGS U/S 80
B.Deductions in respect of certain payments
75[Deduction in respect of life insurance premia, deferred annuity, contributions to
provident fund, subscription to certain equity shares or debentures, etc.
7680C. 77(1) In computing the total income of an assessee, being an individual or a
Hindu undivided family, there shall be deducted, in accordance with and subject to the
provisions of this section, the whole of the amount paid or deposited in the previous
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year, being the aggregate of the sums referred to in sub-section (2), as does not exceed
one lakh rupees.
(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the
previous year by the assessee
(i) to effect or to keep in force an insurance on the life of persons specified in sub-
section (4);
(ii) to effect or to keep in force a contract for a deferred annuity, not being an annuity
plan referred to in clause (xii), on the life of persons specified in sub-section (4):
Provided that such contract does not contain a provision for the exercise by the insured
of an option to receive a cash payment in lieu of the payment of the annuity;
(iii) by way of deduction from the salary payable by or on behalf of the Government to
any individual being a sum deducted in accordance with the conditions of his service,
for the purpose of securing to him a deferred annuity or making provision for his spouse
or children, in so far as the sum so deducted does not exceed one-fifth of the salary;
(iv) as a contribution by an individual to any provident fund to which the Provident
Funds Act, 1925 (19 of 1925) applies;
(v) as a contribution to any provident fund set up by the Central Government and
notified78 by it in this behalf in the Official Gazette, where such contribution is to an
account standing in the name of any person specified in sub-section (4);
(vi) as a contribution by an employee to a recognised provident fund;
(vii) as a contribution by an employee to an approved superannuation fund;
(viii) as subscription to any such security of the Central Government or any such
deposit scheme as that Government may, by notification in the Official Gazette, specify
in this behalf;
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(ix) as subscription to any such savings certificate as defined in clause (c) of section 279
of the Government Savings Certificates Act, 1959 (46 of 1959), as the Central
Government may, by notification80 in the Official Gazette, specify in this behalf;
(x) as a contribution, in the name of any person specified in sub-section (4), for
participation in the Unit-linked Insurance Plan, 1971 (hereafter in this section referred
to as the Unit-linked Insurance Plan) specified in Schedule II of the Unit Trust of India
(Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);
(xi) as a contribution in the name of any person specified in sub-section (4) for
participation in any such unit-linked insurance plan of the LIC Mutual Fund
80a[notified under] clause (23D) of section 10, as the Central Government may, by
notification81 in the Official Gazette, specify in this behalf;
(xii) to effect or to keep in force a contract for such annuity plan of the Life Insurance
Corporation or any other insurer as the Central Government may, by notification82 in
the Official Gazette, specify;
(xiii) as subscription to any units of any Mutual Fund 82a[notified under] clause (23D)
of section 10 or from the Administrator or the specified company under any plan
formulated in accordance with such scheme as the Central Government may, by
notification83 in the Official Gazette, specify in this behalf;
(xiv) as a contribution by an individual to any pension fund set up by any Mutual Fund
83a[notified under] clause (23D) of section 10 or by the Administrator or the specified
company, as the Central Government may, by notification84 in the Official Gazette,
specify in this behalf;
(xv) as subscription to any such deposit scheme of, or as a contribution to any such
pension fund set up by, the National Housing Bank established under section 3 of the
National Housi
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