comparitive+analysis+of+mutual+funds+and+ulips project
TRANSCRIPT
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PREFACE
MBA is a stepping-stone to the management carrierand to develop good manager it is necessary that
the theoretical must be supplemented with
exposure to the real environment.
Theoretical knowledge just provides the base and
its not sufficient to produce a good manager thatswhy practical knowledge is needed.
Therefore the research product is an essential
requirement for the student of MBA. This research
project not only helps the student to utilize his skills
properly learn field realities but also provides achance to the organization to find out talent among
the budding managers in the very beginning.
In accordance with the requirement of MBA course
I have summer training project on the topic
Comparitive Analysis of Mutual funds and Ulips.The main objective of the research project was to
study the two instruments and make a detailed
comparison of the two.
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For conducting the research project
sample size of 50 customers of SBIMF and SBOP
was selected. The information regarding the projectresearch was collected through the questionnaire
formed by me which was filled by the customers
there.
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INDUSTRY PROFILE
The mutual fund industry is a lot like the film star of
the finance business.
Though it is perhaps the smallest segment of theindustry, it is also the most
glamorous in that it is a young industry where
there are changes in the rules
of the game everyday, and there are constant shifts
and upheavals.The mutual fund is structured around a fairly simple
concept, the mitigation
of risk through the spreading of investments across
multiple entities, which is
achieved by the pooling of a number of smallinvestments into a large bucket.
Yet it has been the subject of perhaps the most
elaborate and prolonged
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regulatory effort in the history of the country.
A little history:
The mutual fund industry started in India in a smallway with the UTI Act
creating what was effectively a small savings
division within the RBI. Over a
period of 25 years this grew fairly successfully and
gave investors a goodreturn, and therefore in 1989, as the next logical
step, public sector banks
and financial institutions were allowed to float
mutual funds and their success
emboldened the government to allow the privatesector to foray into this area.
The initial years of the industry also saw the
emerging years of the Indian
equity market, when a number of mistakes were
made and hence the mutualfund schemes, which invested in lesser-known
stocks and at very high levels,
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became loss leaders for retail investors. From those
days to today the retail
investor, for whom the mutual fund is actuallyintended, has not yet returned
to the industry in a big way. But to be fair, the
industry too has focused on
brining in the large investor, so that it can create a
significant base corpus,which can make the retail investor feel more
secure.
The Indian MF industry has Rs 5.67 lakh crore of
assets under management. As per data released by Association
of Mutual Funds in India,
the asset base of all mutual fund combined has
risen by 7.32% in April, the
first month of the current fiscal. As of now, there are33 fund houses in
the country including 16 joint ventures and 3
whollyowned foreign asset
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managers.
According to a recent McKinsey report, the total
AUM of the Indian mutualfund industry could grow to $350-440 billion by
2012, expanding 33%
annually. While the revenue and profit (PAT) pools
of Indian AMCs are pegged
at $542 million and $220 million respectively, it is atpar with fund houses
in developed economies. Operating profits for
AMCs in India, as a percentage
of average assets under management, were at 32
basis points in 2006-07,while the number was 12 bps in UK, 17 bps in
Germany and 18 bps in the US,
in the same time frame.
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Major players in Indian mutual fund industryand their AUM
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Mutual Fund
NameNo. of
Schemes*
As
on
Corpus
ABN AMRO M F
337 July
31,2008
7803
AIG GlobalM F
54 July
31,
2008
3513
SBI Mutual
Fund
177 July
31,
2008
29151.00
Birla Mutual Fund
343 July
31,
2008
37497.00
BOB Mutual
Fund
22 July31,
2008
56.00
Canara Robeco
Mutual Fund
54 July
31,
2008
4576.00
DBS Chola
Mutual Fund
80 July
31,
2008
1853.00
Deutsche Mutual
Fund
187 July
31,
2008
10792.0010
http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046 -
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HISTORY OF MUTUAL FUND
The mutual fund industry in India started in 1963with 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 1964-87
An Act of Parliament established Unit Trust of India
(UTI) on 1963. 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 crores of assets under management.
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http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032 -
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Second Phase 1987-1993 (Entry of Public
Sector Funds)
1987 marked the entry of non- UTI, public sectormutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC). SBI Mutual
Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Can bank
Mutual Fund (Dec 87), Punjab National Bank
Mutual Fund (Aug 89), Indian Bank Mutual Fund
(Nov 89), Bank of India (Jun 90), Bank of Baroda
Mutual Fund (Oct 92). LIC established its mutual
fund in June 1989 while GIC had set up its mutual
fund in December 1990.
At the end of 1993, the mutual fund industry had
assets under management of Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private
Sector Funds)
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http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045 -
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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 fundfamilies.
Also, 1993 was the year in which the first Mutual
Fund Regulations came into being, under which allmutual 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.
Fourth Phase since February 2003
In February 2003, following the repeal of the Unit
Trust of India Act 1963 UTI was bifurcated into two
separate entities. One is the Specified Undertaking
of the Unit Trust of India with assets under
management of Rs.29,835 crores as at the end of14
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January 2003, representing broadly, the assets of
US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trustof 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
crores 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 crores under
421 schemes.15
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GROWTH IN ASSETS UNDER MANAGEMENT
ECONOMIC ENVIRONMENT
GROWTH OF MUTUAL FUND INDUSTRY IN
INDIA
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While the Indian mutual fund industry has grown in
size by about 320% from March, 1993 (Rs. 470
billion) to December, 2004 (Rs. 1505 billion) interms of AUM, the AUM of the sector excluding UTI
has grown over 8 times from Rs. 152 billion in
March 1999 to $ 148 billion as at March 2008.
Though India is a minor player in the global mutualfund industry, its AUM as a proportion of the global
AUM has steadily increased and has doubled over
its levels in 1999.
The growth rate of Indian mutual fund industry has
been increasing for the last few years. It was
approximately 0.12% in the year of 1999 and it is
noticed 0.25% in 2004 in terms of AUM as
percentage of global AUM.
Some facts for the growth of mutual funds in
India
100% growth in the last 6 years.17
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The most important trend in the mutual fund
industry is the aggressive expansion of the
foreign owned mutual fund companies and thedecline of the companies floated by the
nationalized banks and smaller private sector
players.
Many nationalized banks got into the mutual
fund business in the early nineties and got off
to a start due to the stock market boom was
prevailing. These banks did not really
understand the mutual fund business and they
just viewed it as another kind of banking
activity. Few hired specialized staff and
generally chose to transfer staff from the
parent organizations. The performance of most
of the schemes floated by these funds was not
good. Some schemes had offered guaranteed
returns and their parent organizations had to
bail out these AMCs by paying large amounts
of money as a difference between the
guaranteed and actual returns. The service19
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levels were also very bad. Most of these AMCs
have not been able to retain staff, float new
schemes etc.
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TECHNOLOGICAL ENVIRONMENT
IMPACT OF TECHNOLOGY
Mutual fund, during the last one decade brought out
several innovations in their products and is offeringvalue added services to their investors. Some of the
value added services that are being offered are:
Electronic fund transfer facility.
Investment and re-purchase facility through
internet.
Added features like accident insurance cover,
mediclaim etc.
Holding the investment in electronic form,
doing away with the traditional form of unit
certificates.
Cheque writing facilities.
Systematic withdrawal and deposit facility.
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ONLINE MUTUAL FUND TRADING
The innovation the industry saw was in the field of
distribution to make it more easily accessible to an
ever increasing number of investors across thecountry. For the first time in India the mutual fund
start using the automated trading, clearing and
settlement system of stock exchanges for sale and
repurchase of open-ended de-materialized mutual
fund units.
Systematic Investment Plan (SIP) and Systematic
Withdrawal Plan (SWP) were options introduced
which have come in very handy for the investor to
maximize their returns from their investments. SIPensures that there is a regular investment that the
investor makes on specified dates making his
purchases to spread out reducing the effect of the
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short term volatility of markets. SWP was designed
to ensure that investors who wanted a regular
income or cash flow from their investments wereable to do so with a pre-defined automated form.
Today the SW facility has come in handy for the
investors to reduce their taxes.
LEGAL AND POLITICAL ENVIRONMENT
ASSOCIATION OF MUTUAL FUNDS IN INDIA
(AMFI)
With the increase in mutual fund players in India, a
need for mutual fund association in India was
generated to function as a non-profit organization.
Association of Mutual Funds in India (AMFI) wasincorporated on 22nd August 1995.
AMFI is an apex body of all Asset Management
Companies (AMC), which has been registered with23
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SEBI. Till date all the AMCs are that have launched
mutual fund schemes are its members. It functions
under the supervision and guidelines of board ofdirectors. AMFI has brought down the Indian Mutual
Fund Industry to a professional and healthy market
with ethical lines enhancing and maintaining
standards. It follows the principle of both protecting
and promoting the interest of mutual funds as wellas their unit holders.
It has been a forum where mutual funds have been
able to present their views, debate and participate
in creating their own regulatory framework. Theassociation was created originally as a body that
would lobby with the regulator to ensure that the
fund viewpoint was heard. Today, it is usually the
body that is consulted on matters long before
regulations are framed, and it often initiates manyregulatory changes that prevent malpractices that
emerge from time to time.
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AMFI works through a number of committees, some
of which are standing committees to address areas
where there is a need for constant vigil andimprovements and other which are adhoc
committees constituted to address specific issues.
These committees consist of industry professionals
from among the member mutual funds. There is
now some thought that AMFI should become a self-regulatory organization since it has worked so
effectively as an industry body.
OBJECTIVES:
To define and maintain high professional and
ethical standards in all areas of operation of mutual
fund industry
To recommend and promote best business practices and code of conduct to be followed by
members and others engaged in the activities of
mutual fund and asset management including
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agencies connected or involved in the field of
capital markets and financial services.
To interact with the Securities and Exchange
Board of India (SEBI) and to represent to SEBI on
all matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank
of India and other bodies on all matters relating to
the Mutual Fund Industry.
To develop a cadre of well trained Agent
distributors and to implement a programme oftraining and certification for all intermediaries and
other engaged in the industry.
To undertake nation wide investor awareness
programme so as to promote proper understandingof the concept and working of mutual funds.
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To disseminate information on Mutual Fund
Industry and to undertake studies and research
directly and/or in association with other bodies.
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MEMBERS O F AMFI:
o Bank Sponsored
1. Joint Ventures - Predominantly Indian
1. Canara Robeco Asset Management
Company Limited
2. SBI Funds Management Private Limited
2. Others
1. Baroda Pioneer Asset Management
Company Limited2. UTI Asset Management Company Ltd
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o Institutions
1. LIC Mutual Fund Asset Management
Company Limited
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o Private Sector
1. Indian
1. Benchmark Asset Management
Company Pvt. Ltd.
2. DBS Cholamandalam Asset
Management Ltd.
3. Deutsche Asset Management (India)
Pvt. Ltd.
4. Edelweiss Asset Management Limited
5. Escorts Asset Management Limited
6. IDFC Asset Management Company
Private Limited
7. JM Financial Asset Management
Private Limited
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8. Kotak Mahindra Asset Management
Company Limited(KMAMCL)
9. Quantum Asset Management Co.Private Ltd.
10. Reliance Capital Asset
Management Ltd.
11. Sahara Asset Management
Company Private Limited12. Tata Asset Management Limited
13. Taurus Asset Management
Company Limited
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2. Foreign
1. AIG Global Asset Management
Company (India) Pvt. Ltd.
2. FIL Fund Management Private
Limited3. Franklin Templeton Asset
Management (India) Private Limited
4. Mirae Asset Global Investment
Management (India) Pvt. Ltd.
3. Joint Ventures - Predominantly Indian
1. Birla Sun Life Asset Management
Company Limited
2. DSP Merrill Lynch Fund Managers
Limited
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3. HDFC Asset Management Company
Limited
4. ICICI Prudential AssetMgmt.Company Limited
5. Sundaram BNP Paribas Asset
Management Company Limited
4. Joint Ventures - Predominantly Foreign
1. ABN AMRO Asset Management
(India) Pvt. Ltd.
2. Bharti AXA Investment Managers
Private Limited
3. HSBC Asset Management (India)
Private Ltd.
4. ING Investment Management (India)
Pvt. Ltd.
5. JPMorgan Asset Management India
Pvt. Ltd.
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6. Lotus India Asset Management Co.
Private Ltd.
7. Morgan Stanley InvestmentManagement Pvt.Ltd.
8. Principal Pnb Asset Management Co.
Pvt. Ltd.
REGULATORY MEASURES BY SEBI
Like Banking & Insurance up to the nineties of the
last century, Mutual Fund industry in India was set
up and functioned exclusively in the state monopolyrepresented by the Unit Trust of India. This
monopoly was diluted in the eighties by allowing
nationalized banks and insurance companies (LIC
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& GIC) to set up their institutions under the Indian
Trusts Act to transact mutual fund business,
allowing the Indian investor the option to choosebetween different service providers. Unit Trust was
a statutory corporation governed by its own
incorporating act. There was no separate regulatory
authority up to the time SEBI was made a statutory
authority in 1992. but it was only in the year 1993,when a government took a policy decision to
deregulate Indian Economy from government
control and to transform it market oriented, that the
industry was opened to competition from private
and foreign players. By the year 2000 there cameto be established in the market 34 mutual funds
offerings a variety of about 550 schemes.
SECURITIES AND EXCHANGE BOARD OF
INDIA (MUTUAL FUNDS) REGULATIONS, 1996
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The fast growing industry is regulated by Securities
and Exchange Board of India (SEBI) since
inception of SEBI as a statutory body. SEBI initiallyformulated SECURITIES AND EXCHANGE
BOARD OF INDIA (MUTUAL FUNDS)
REGULATIONS, 1993 providing detailed
procedure for establishment, registration,
constitution, management of trustees, assetmanagement company, about schemes/products to
be designed, about investment of funds collected,
general obligation of MFs, about inspection, audit
etc. based on experience gained and feedback
received from the market SEBI revised theguidelines of 1993 and issued fresh guidelines in
1996 titled SECURITIES AND EXCHANGE
BOARD OF INDIA (MUTUAL FUNDS)
REGULATIONS, 1996. The said regulations as
amended from time to time are in force even today.
The SEBI mutual fund regulations contain ten
chapters and twelve schedules. Chapters
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containing material subjects relating to regulation
and conduct of business by Mutual Funds.
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REGISTRATION OF MUTUAL FUND:
Application for registration1. An application for registration of a mutual fund
shall be made to the Board in Form A by the
sponsor.
Application fee to accompany the application2. Every application for registration under regulation
3 shall be accompanied by nonrefundable
application fee as specified in the Second
Schedule.
Application to conform to the requirements
3. An application which is not complete in all
respects shall be liable to be rejected:
Provided that, before rejecting any such
application, the applicant shall be given anopportunity to complete such formalities within such
time as may be specified by the Board.
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Furnishing information
4. The Board may require the sponsor to furnish
such further information or clarification as may berequired by it.
Eligibility criteria
5. For the purpose of grant of a certificate of
registration, the applicant has to fulfill the following,namely :
(a) the sponsor should have a sound track record
and general reputation of fairness and integrity in all
his business transactions.
Explanation : For the purposes of this clausesound track record shall mean the
sponsor should,
(i) be carrying on business in financial services for
a period of not less than five
years; and(ii) the networth is positive in all the immediately
preceding five years; and
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(iii) the networth in the immediately preceding year
is more than the capital
contribution of the sponsor in the assetmanagement company; and
(iv) the sponsor has profits after providing for
depreciation, interest and tax in three out of the
immediately preceding five years, including the fifth
year;
(b) in the case of an existing mutual fund, such fund
is in the form of a trust and the trust deed has been
approved by the Board;
(c) the sponsor has contributed or contributes at
least 40% to the net worth of the asset
management company:
Provided that any person who holds 40% or more
of the net worth of an assetmanagement company shall be deemed to be a
sponsor and will be required to fulfill the eligibility
criteria specified in these regulations;
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(d) the sponsor or any of its directors or the
principal officer to be employed by the mutual fund
should not have been guilty of fraud or has notbeen convicted of an offence involving moral
turpitude or has not been found guilty of any
economic
offence;
(e) appointment of trustees to act as trustees for the
mutual fund in accordance with the provisions of
the regulations;
(f) appointment of asset management company tomanage the mutual fund and operate the scheme of
such funds in accordance with the provisions of
these regulations;
(g) appointment of a custodian in order to keepcustody of the securities 10[or gold and gold
related instrumentsand carry out the custodian
activities as may be authorizedby the trustees.
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Consideration of application
8. The Board, may on receipt of all informationdecide the application.
Grant of Certificate of Registration
9. The Board may register the mutual fund and
grant a certificate in Form B on the applicant payingthe registration fee as specified in Second
Schedule.
Terms and conditions of registration
10. The registration granted to a mutual fund underregulation 9, shall be subject to the following terms
and conditions:
(a) the trustees, the sponsor, the asset
management company and the custodian shall
comply with the provisions of these regulations;(b) the mutual fund shall forthwith inform the Board,
if any information or particulars previously
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submitted to the Board was misleading or false in
any material respect;
(c) the mutual fund shall forthwith inform the Board,of any material change in the
information or particulars previously furnished,
which have a bearing on the
registration granted by it;
(d) payment of fees as specified in the regulationsand the Second Schedule.
Rejection of application
11. Where the sponsor does not satisfy the
eligibility criteria mentioned in regulation 7, theBoard may reject the application and inform the
applicant of the same.
Payment of annual service fee:
12. A mutual fund shall pay before the 15th Aprileach year a service fee as specified in the Second
Schedule for every financial year from the year
following the year of registration:
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Provided that the Board may, on being satisfied
with the reasons for the delay permit the mutual
fund to pay the service fee at any time before theexpiry of two months from the commencement of
the financial year to which such fee relates.
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Failure to pay annual service fee
13. The Board may not permit a mutual fund who
has not paid service fee to launch any scheme.
CONSTITUTION AND MANAGEMENT OF ASSET
MANAGEMENT
COMPANY AND CUSTODIAN
Application by an asset management company
14. (1) The application for the approval of the asset
management company shall be made in Form D.(2) The provisions of regulations 5, 6 and 8 shall, so
far as may be, apply to the
application made under sub-regulation (1) as they
apply to the application for registration of a mutual
fund.
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convicted of any economic offence or violation of
any securities laws;
(c) the key personnel of the asset managementcompany 27[have not been found guilty of moral
turpitude or convicted of economic offence or
violation of securities laws or worked for any asset
management company or mutual fund or any
intermediary 29[during the period when its]registration has been suspended or cancelled at
any time by the Board;
(d) the board of directors of such asset
management company has at least fifty per cent
directors, who are not associate of, or associated inany manner with, the sponsor or any of its
subsidiaries or the trustees;
(e) the Chairman of the asset management
company is not a trustee of any mutual fund;
(f) the asset management company has a networthof not less than rupees ten crores :
Provided that an asset management company
already granted approval under the provisions of
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Securities and Exchange Board of India (Mutual
Funds) Regulations, 1993 shall within a period of
twelve months from the date of notification of theseregulations increase its networth to rupees ten
crores :
Provided [further] that the period specified in the
first proviso may be extended in appropriate cases
by the Board up to three years for reasons to berecorded in writing :
Provided furtherthat no new schemes shall be
allowed to be launched or managed by such asset
management company till the networth has been
raised to rupees ten crores.Explanation : For the purposes of this clause,
networth means the aggregate of the paid up
capital and free reserves of the asset management
company after
deducting therefrom miscellaneous expenditure tothe extent not written off or
adjusted or deferred revenue expenditure,
intangible assets and accumulated losses.
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(2) The Board may, after considering an application
with reference to the matters
specified in sub-regulation (1), grant approval to theasset management company.
Terms and conditions to be complied with
17. The approval granted under sub-regulation (2)of regulation 21 shall be subject to the
following conditions, namely:
(a) any director of the asset management company
shall not hold the office of the
director in another asset management companyunless such person is an independent director
referred to in clause (d) of sub-regulation (1) of
regulation 21 and approval of the Board of asset
management company of which such person is a
director, has been obtained;(b) the asset management company shall forthwith
inform the Board of any material change in the
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information or particulars previously furnished,
which have a bearing on the approval granted by it;
(c) no appointment of a director of an assetmanagement company shall be made without prior
approval of the trustees;
(d) the asset management company undertakes to
comply with these regulations;
(e) no change in the controlling interest of the assetmanagement company shall be made unless,
(i) prior approval of the trustees and the Board is
obtained;
(ii) a written communication about the proposed
change is sent to each unitholder and anadvertisement is given in one English daily
newspaper having
nationwide circulation and in a newspaper
published in the language of the
region where the Head Office of the mutual fund issituated; and
(iii) the unitholders are given an option to exit on the
prevailing Net Asset Value
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without any exit load;]
(f) the asset management company shall furnish
such information and documents to the trustees asand when required by the trustees.
Procedure where approval is not granted
18. Where an application made under regulation 19for grant of approval does not satisfy the eligibility
criteria laid down in regulation 21, the Board may
reject the application.
Restrictions on business activities of the assetmanagement company
19. The asset management company shall
(1) not act as a trustee of any mutual fund;
(2) not undertake any other business activities
except activities in the nature of
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portfolio management services,] management and
advisory services to offshore funds, pension funds,
provident funds, venture capital funds,management of insurance funds, financial
consultancy and exchange of research on
commercial basis if any of such activities are not in
conflict with the activities of the mutual fund :
Provided that the asset management company
may itself or through its subsidiaries undertake
such activities if it satisfies the Board that the key
personnel of the asset management company, the
systems, back office, bank and securities accountsare segregated activity-wise and there exist
systems to prohibit access to inside information of
various activities :
Provided furtherthat asset management company
shall meet capital adequacyrequirements, if any, separately for each such
activity and obtain separate approval, if necessary
under the relevant regulations.
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(3) The asset management company shall not
invest in any of its schemes unless full disclosure of
its intention to invest has been made in the offerdocuments 34[in case of schemes launched after
the notification of these regulations :
Provided that an asset management company
shall not be entitled to charge any fees on its
investment in that scheme.
Asset management company and itsobligations
20. (1) The asset management company shall take
all reasonable steps and exercise due diligence to
ensure that the investment of funds pertaining toany scheme is not contrary to the provisions of
these regulations and the trust deed.
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(2) The asset management company shall exercise
due diligence and care in all its investment
decisions as would be exercised by other personsengaged in the same business.
(3) The asset management company shall be
responsible for the acts of commission or omission
by its employees or the persons whose services
have been procured by the asset managementcompany.
(4) The asset management company shall submit
to the trustees quarterly reports of each year on its
activities and the compliance with theseregulations.
(5) The trustees at the request of the asset
management company may terminate the
assignment of the asset management company atany time:
Provided that such termination shall become
effective only after the trustees have accepted the
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termination of assignment and communicated their
decision in writing to the asset management
company.
(6) Notwithstanding anything contained in any
contract or agreement or termination, the asset
management company or its directors or other
officers shall not be absolved of liability to themutual fund for their acts of commission or
omission, while holding such position or office.
(6A) The Chief Executive Officer (whatever his
designation may be) of the assetmanagement company shall ensure that the mutual
fund complies with all the provisions of these
regulations and the guidelines or circulars issued in
relation thereto from time to time and that the
investments made by the fund managers are in theinterest of the unit holders and shall also be
responsible for the overall risk management
function of the mutual fund.
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Explanation.For the purpose of this sub-
regulation, the words these regulations shall mean
and include the Securities and Exchange Board ofIndia (Mutual Funds) Regulations, 1996 as
amended from time to time.
(6B) The fund managers (whatever the designation
may be) shall ensure that the funds of the schemesare invested to achieve the objectives of the
scheme and in the interest of the unit holders.
(7) (a) An asset management company shall not
through any broker associated with the sponsor,purchase or sell securities, which is average of 5
per cent or more of the aggregate purchases and
sale of securities made by the mutual fund in all its
schemes :
Provided that for the purpose of this sub-regulation, the aggregate purchase and sale of
securities shall exclude sale and distribution of units
issued by the mutual fund :
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Provided that an asset management company may
utilise such services if disclosure to that effect is
made to the unitholders and the brokerage orcommission paid is also disclosed in the half-yearly
annual accounts of the mutual fund :
Provided furtherthat the mutual funds shall
disclose at the time of declaring halfyearly and
yearly results :(i) any underwriting obligations undertaken by the
schemes of the mutual funds with respect to issue
of securities associate companies,
(ii) devolvement, if any,
(iii) subscription by the schemes in the issues leadmanaged by associate companies,
(iv) subscription to any issue of equity or debt on
private placement basis where the sponsor or its
associate companies have acted as arranger or
manager.
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(9) The asset management company shall file with
the trustees the details of transactions in securities
by the key personnel of the asset managementcompany in their own name or on behalf of the
asset management company and shall also report
to the Board, as and when required by the Board.
(10) In case the asset management companyenters into any securities transactions with any of
its associates a report to that effect shall be sent to
the trustees at its next meeting.
(11) In case any company has invested more than5 per cent of the net asset value of a scheme, the
investment made by that scheme or by any other
scheme of the same mutual fund in that company
or its subsidiaries shall be brought to the notice of
the trustees by the asset management companyand be disclosed in the half-yearly and annual
accounts of the respective schemes with
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justification for such investment 40[provided the
latter
investment has been made within one year of thedate of the former investment calculated on either
side.
(12) The asset management company shall file with
the trustees and the Board(a) detailed bio-data of all its directors along with
their interest in other companies
within fifteen days of their appointment;
(b) any change in the interests of directors every six
months; and(c) a quarterly report to the trustees giving details
and adequate justification about the purchase and
sale of the securities of the group companies of the
sponsor or the asset management company, as the
case may be, by the mutual fund during the saidquarter.
(13) Each director of the asset management
company shall file the details of his transactions of
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dealing in securities with the trustees on a quarterly
basis in accordance with guidelines issued by the
Board.
(14) The asset management company shall not
appoint any person as key personnel who has been
found guilty of any economic offence or involved in
violation of securities laws.
(15) The asset management company shall appoint
registrars and share transfer agents who are
registered with the Board:
Provided if the work relating to the transfer of unitsis processed in-house, the charges at competitive
market rates may be debited to the scheme and for
rates higher than the competitive market rates, prior
approval of the trustees shall be obtained and
reasons for charging higher rates shall be disclosedin the annual accounts.
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(16) The asset management company shall abide
by the Code of Conduct as specified in the Fifth
Schedule.
Appointment of custodian
21. (1) The mutual fund shall appoint a Custodian
to carry out the custodial services for the schemesof the fund and sent intimation of the same to the
Board within fifteen days of the appointment of the
Custodian:
Provided that in case of a gold exchange traded
fund scheme, the assets of the scheme being goldor gold related instruments may be kept in custody
of a bank which is registered as a custodian with
the Board.
(2) No custodian in which the sponsor or itsassociates hold 50 per cent or more of the voting
rights of the share capital of the custodian or where
50 per cent or more of the directors of the custodian
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represent the interest of the sponsor or its
associates shall act as custodian for a mutual fund
constituted by the same sponsor or any of itsassociates or subsidiary company.
Agreement with custodian
22. The mutual fund shall enter into a custodian
agreement with the custodian, which shall contain
the clauses which are necessary for the efficient
and orderly conduct of the affairs of the custodian:
Provided that the agreement, the service contract,terms and appointment of the
custodian shall be entered into with the prior
approval of the trustees.
CHARACTERISTICS OF MUTUAL FUNDS
The ownership is in the hands of the investors
who have pooled in their funds.
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It is managed by a team of investment
professionals and other service providers.
The pool of funds is invested in a portfolio ofmarketable investments.
The investors share is denominated by units
whose value is called as Net Asset Value
(NAV) which changes everyday. The investment portfolio is created according
to the stated investment objectives of the fund.
ADVANTAGES OF MUTUAL FUNDS
The advantages of mutual funds are given below: -
Portfolio Diversification
Mutual funds invest in a number of companies.
This diversification reduces the risk because ithappens very rarely that all the stocks decline at
the same time and in the same proportion. So this
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Professional Management
Mutual funds provide the services of
experienced and skilled professionals, assisted byinvestment research team that analysis the
performance and prospects of companies and
select the suitable investments to achieve the
objectives of the scheme.
Low Costs
Mutual funds are a relatively less expensive
way to invest as compare to directly investing in a
capital markets because of less amount of
brokerage and other fees.
Liquidity
This is the main advantage of mutual fund, that
is whenever an investor needs money he can easily
get redemption, which is not possible in most of
other options of investment. In open-ended
schemes of mutual fund, the investor gets the
money back at net asset value and on the other66
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hand in close-ended schemes the units can be sold
in a stock exchange at a prevailing market price.
Transparency
In mutual fund, investors get full information of
the value of their investment, the proportion of
money invested in each class of assets and the
fund managers investment strategy
Flexibility
Flexibility is also the main advantage of mutual
fund. Through this investors can systematicallyinvest or withdraw funds according to their needs
and convenience like regular investment plans,
regular withdrawal plans, dividend reinvestment
plans etc.
Convenient Administration
Investing in a mutual fund reduces paperwork
and helps investors to avoid many problems like
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bad deliveries, delayed payments and follow up
with brokers and companies. Mutual funds save
time and make investing easy.Affordability
Investors individually may lack sufficient funds
to invest in high-grade stocks. A mutual fund
because of its large corpus allows even a smallinvestor to take the benefit of its investment
strategy.
Well Regulated
All mutual funds are registered with SEBI andthey function with in the provisions of strict
regulations designed to protect the interest of
investors. The operations of mutual funds are
regularly monitored by SEBI.
DISADVANTAGES OF MUTUAL FUNDS
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Mutual funds have their following drawbacks:
No Guarantees
No investment is risk free. If the entire stock
market declines in value, the value of mutual fund
shares will go down as well, no matter how
balanced the portfolio. Investors encounter fewer
risks when they invest in mutual funds than whenthey buy and sell stocks on their own. However,
anyone who invests through mutual fund runs the
risk of losing the money.
Fees and Commissions
All funds charge administrative fees to cover
their day to day expenses. Some funds also charge
sales commissions or loads to compensate brokers,
financial consultants, or financial planners. Even if
you dont use a broker or other financial advisor,you will pay a sales commission if you buy shares
in a Load Fund.
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Taxes
During a typical year, most actively managed
mutual funds sell anywhere from 20 to 70 percentof the securities in their portfolios. If your fund
makes a profit on its sales, you will pay taxes on
the income you receive, even you reinvest the
money you made.
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Management Risk
When you invest in mutual fund, you depend onfund manager to make the right decisions regarding
the funds portfolio. If the manager does not
perform as well as you had hoped, you might not
make as much money on your investment as you
expected. Of course, if you invest in index funds,you forego management risk because these funds
do not employ managers.
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STRUCTURE OF MUTUAL FUND
There are many entities involved and the diagram below illustrates the structure of mutual funds: -
Structure of Mutual Funds
SEBI
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The regulation of mutual funds operating in
India falls under the preview of authority of the
Securities and Exchange Board of India(SEBI). Any person proposing to set up a mutual
fund in India is required under the SEBI (Mutual
Funds) Regulations, 1996 to be registered with the
SEBI.
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Sponsor
The sponsor should contribute at least 40% tothe net worth of the AMC. However, if any person
holds 40% or more of the net worth of an AMC shall
be deemed to be a sponsor and will be required to
fulfill the eligibility criteria in the Mutual Fund
Regulations. The sponsor or any of its directors orthe principal officer employed by the mutual fund
should not be guilty of fraud or guilty of any
economic offence.
Trustees
The mutual fund is required to have an
independent Board of Trustees, i.e. two third of the
trustees should be independent persons who are
not associated with the sponsors in any manner. An
AMC or any of its officers or employees are noteligible to act as a trustee of any mutual fund. The
trustees are responsible for - inter alia ensuring
that the AMC has all its systems in place, all key
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personnel, auditors, registrar etc. have been
appointed prior to the launch of any scheme.
Asset Management Company
The sponsors or the trustees are required to
appoint an AMC to manage the assets of the
mutual fund. Under the mutual fund regulations, the
applicant must satisfy certain eligibility criteria inorder to qualify to register with SEBI as an AMC.
1. The sponsor must have at least 40% stake in
the AMC.
2. The chairman of the AMC is not a trustee of
any mutual fund.
3. The AMC should have and must at all times
maintain a minimum net worth of Cr. 100
million.
4. The director of the AMC should be a person
having adequate professional experience.
5. The board of directors of such AMC has at
least 50% directors who are not associate of or
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associated in any manner with the sponsor or
any of its subsidiaries or the trustees.
The Transfer Agents
The transfer agent is contracted by the AMC
and is responsible for maintaining the register of
investors / unit holders and every day settlementsof purchases and redemption of units. The role of a
transfer agent is to collect data from distributors
relating to daily purchases and redemption of units.
Custodian
The mutual fund is required, under the Mutual
Fund Regulations, to appoint a custodian to carry
out the custodial services for the schemes of the
fund. Only institutions with substantial
organizational strength, service capability in termsof computerization and other infrastructure facilities
are approved to act as custodians. The custodian
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must be totally delinked from the AMC and must be
registered with SEBI.
Unit Holders
They are the parties to whom the mutual fund is
sold. They are ultimate beneficiary of the income
earned by the mutual funds.
TYPES OF MUTUAL FUND SCHEMES
In India, there are many companies, both public
and private that are engaged in the trading of
mutual funds. Wide varieties of Mutual Fund
Schemes exist to cater to the needs such asfinancial position, risk tolerance and return
expectations etc. Investment can be made either in
the debt Securities or equity .The table below gives77
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an overview into the existing types of schemes in
the Industry.
TYPES OF MUTUAL FUND SCHEME
78
By structure By Investment
Objectives
Other Schemes
Open-ended
Schemes
Interval Schemes
Sector speciffund
Index Schem
Tax saving fu
Small cap
fund
Equity
Schemes
Debt
Schemes
Close EndedSchemes
MM Mutualfund
Other DebtSchemes
FMPMid capFund
Large capfund
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Generally two options are available for every
scheme regarding dividend payout and growth
option. By opting for growth option an investor can
have the benefit of long-term growth in the stock
market on the other side by opting for the dividend
option an investor can maintain his liquidity by
receiving dividend time to time. Some time people
refer dividend option as dividend fund and growth
fund. Generally decisions regarding declaration of
the dividend depend upon the performance of stock
market and performance of the fund.
79
Any Other
Equity Fund
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OPTION REGARDING DIVIDEND
Systematic Investment Plan (SIP)
Systematic investment plan is like Recurring
Deposit in which investor invests in the particular80
Dividend Growth
ReinvestedPayout
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scheme on regular intervals. In the case it is
convenient for salaried class and middle-income
group. In this case on regular interval units ofspecified amount is created. An investor can make
payment by regular payments by issuing cheques,
post dated cheques, ECS, standing Mandate etc.
SIP can be started in the any open-ended fund if
there is provision of it. There are some entry and exitload barriers for discontinuation and redemption of
the fund before the said period.
According to Structure
Open Ended Funds
An open ended fund is one that is available for
subscription all through the year. These do not
have a fixed maturity. Investors can conveniently
buy and sell units at Net Asset Value (NAV) related
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prices. The key feature of open ended schemes is
liquidity.
Close Ended Funds
A close ended fund has a stipulated maturity
period which generally ranging from 3 to 15 years.
The fund is open for subscription only during a
specified period. Investors can invest in the schemeat the same time of the initial public issue and
thereafter they can buy and sell the units of the
scheme on the stock exchanges where they are
listed. In order to provide an exit route to the
investors, some close ended funds give an optionof selling back the units to the mutual fund through
periodic repurchase at NAV related prices.
Interval Funds
Interval funds combine the features of open ended and close ended schemes. They are open
for sales or redemption during pre-determined
intervals at their NAV.
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securities such as bonds, corporate
debentures and government securities. Income
funds are ideal for capital stability and regularincome.
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Balanced Funds
The aim of balanced funds is to provideboth growth and regular income. Such
schemes periodically distribute a part of their
earning and invest both in equities and fixed
income securities in the proportion indicated in
their offer documents. In a rising stock market,the NAV of these schemes may not normally
keep pace or fall equally when the market falls.
These are ideal for investors looking for a
combination of income and moderate growth.
Money Market Funds
The main aim of money market funds is to
provide easy liquidity, preservation of capital
and moderate income. These schemes
generally invest in safe short term instrumentssuch as treasury bills, certificates of deposit,
commercial paper and inter bank call money.
Returns on these schemes may fluctuate
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depending upon the interest rates prevailing in
the market. These are ideal for corporate and
individual investors as a means to park theirsurplus funds for short periods.
Other Schemes
Tax Saving Schemes
These schemes offer tax rebates to the
investors under specific provisions of the
Indian Income Tax laws as the government
offers tax incentives for investment in specified
avenues. Investments made in Equity Linked
Saving Schemes (ELSS) and Pension
Schemes are allowed as deduction u/s 88 of
the Income Tax Act, 1961. The Act also
provides opportunities to investors to save
capital gains.
Special Schemes:
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Index Schemes
Index funds attempt to replicate the
performance of a particular index such as theBSE Sensex or the NSE 50.
Sector Specific Schemes
Sector funds are those which invest
exclusively in a specified industry or a group ofindustries or various segments such as A
group shares or initial public offerings.
Bond Schemes
It seeks investment in bonds, debenturesand debt related instrument to generate regular
income flow.
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FREQUENTLY USED TERMS
Advisor - Is employed by a mutual fund
organization to give professional advice on the
funds investments and to supervise the
management of its asset.
Diversification The policy of spreading
investments among a range of different
securities to reduce the risk.
Net Asset Value (NAV) - Net Asset Value is the
market value of the assets of the scheme minus itsliabilities. The per unit NAV is the net asset value of
the scheme divided by the number of units
outstanding on the Valuation Date.
Sales Price - Is the price you pay when you investin a scheme. Also called Offer Price. It may include
a sales load.
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Repurchase Price - Is the price at which a close-
ended scheme repurchases its units and it may
include a back-end load. This is also called BidPrice.
Redemption Price - Is the price at which open-
ended schemes repurchase their units and close-
ended schemes redeem their units on maturity.
Such prices are NAV related.
Sales Load - Is a charge collected by a scheme
when it sells the units. Also called Front-end load.
Schemes that do not charge a load are called No
Load schemes.
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ULIPS
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3.1 TRADITIONAL LIFE AN OVERVIEWThe basic and widely used form of design is known
as Traditional Life Platform. It is based on the
concept of sharing . Each of the policy holder
contributes his contribution (premium) into the
common large fund is managed by the company onbehalf of the policy holders.
Administration of that common fund in the interest
of everybody was entrusted to the insurance
company .It was the responsibility of the companyto administer schemes for benefit of the
policyholders. Policyholders played a very passive
roll . In the course of time , the same concept of
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assured on the basis of this valuation.
Declaration of bonuses is not mandatory .
Based on the end objective , companies mayoffer different plans like saving plans,
investment plans etc.(e.g. Endowment ,
SPWLIP)
It helps to maintain a smooth growth and protects
against the vagaries of the market. In other words itminimizes the risk of investments for an average
individual. He shares his risk with a group of like-
minded individuals.
ULIP is the Product Innovation of theconventional Insurance product. With the
decline in the popularity of traditional Insurance
products & changing Investor needs in terms of
life protection, periodicity, returns & liquidity, it
was need of the hour to have an Instrument that
offers all these features bundled into one.
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A Unit Link Insurance Policy (ULIP) is one in which
the customer is provided with a life insurance cover
and the premium paid is invested in either debt orequity products or a combination of the two. In
other words, it enables the buyer to secure some
protection for his family in the event of his untimely
death and at the same time provides him an
opportunity to earn a return on his premium paid. Inthe event of the insured person's untimely death,
his nominees would normally receive an amount
that is the higher of the sum assured or the value of
the units (investments).
To put it simply, ULIP attempts to fulfill investment
needs of an investor with protection/insurance
needs of an insurance seeker. It saves the
investor/insurance-seeker the hassles of managing
and tracking a portfolio or products. Moreimportantly ULIPs offer investors the opportunity to
select a product which matches their risk profile.
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Unit Linked Insurance Plans came into play in the
1960s and became very popular in Western Europe
and Americas. In India The first unit linkedInsurance Plan , popularly known as ULIP Unit
Linked Insurance Plan in India was brought out by
Unit Trust Of India in the year 1971 by entering into
a group insurance arrangement with LIC o provide
for life cover to the investors , while UTI , as amutual was taking care of investing the unit holders
money in the capital market and giving them a fair
return .
Subsequently in the year 1989 , another UnitLinked Product was launched by the LIC Mutual
Fund called by the name of DHANARAKSHA
which was more or less on the line of ULIP of UTI .
Thereafter LIC itself came out with a Unit Linked
Insurance Product known by name BIMA PLUS in the year 2001-02 .
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Presently a number of private life insurance
companies have launched Unit Linked Insurance
Products with a variety of new features.
TYPES OF ULIP
There are various unit linked insurance plansavailable in the market. However, the key ones are
pension, children, group and capital guarantee
plans.
The pension plans come with two variations withand without life cover and are meant for people
who want to generate returns for their sunset years.
The children plans, on the other hand, are aimed at
taking care of their educational and other needs..Apart from unit-linked plans for individuals, group
unit linked plans are also available in the market.
The Group linked plans are basically designed for
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employers who want to offer certain benefits for
their employees such as gratuity, superannuation
and leave encashment.
The other important category of ULIPs is capital
guarantee plans. The plan promises the
policyholder that at least the premium paid will be
returned at maturity. But the guaranteed amount ispayable only when the policy's maturity value is
below the total premium paid by the individual till
maturity. However, the guarantee is not provided on
the actual premium paid but only on that portion of
the premium that is net of expenses (mortality,sales and marketing, administration).
How ULIPs work
ULIPs work on the lines of mutual funds. Thepremium paid by the client (less any charge) is
used to buy units in various funds (aggressive,
balanced or conservative) floated by the insurance
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companies. Units are bought according to the plan
chosen by the policyholder. On every additional
premium, more units are allotted to his fund. Thepolicyholder can also switch among the funds as
and when he desires. While some companies allow
any number of free switches to the policyholder,
some restrict the number to just three or four. If the
number is exceeded, a certain charge is levied.Individuals can also make additional investments
(besides premium) from time to time to increase the
savings component in their plan. This facility is
termed "top-up". The money parked in a ULIP plan
is returned either on the insured's death or in theevent of maturity of the policy. In case of the
insured person's untimely death, the amount that
the beneficiary is paid is the higher of the sum
assured (insurance cover) or the value of the units
(investments). However, some schemes pay thesum assured plus the prevailing value of the
investments.
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Premiums paid can be single, regular or
variable. The payment period too can beregular or variable. The risk cover can be
increased or decreased.
As in all insurance policies, the risk charge
(mortality rate) varies with age.
The maturity benefit is not typically a fixed
amount and the maturity period can be
advanced or extended.
Investments can be made in gilt funds,
balanced funds, money market funds, growth
funds or bonds.
The policyholder can switch between schemes,
for instance, balanced to debt or gilt to equity,
etc.
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The maturity benefit is the net asset value of
the units.
The costs in ULIP are higher because there is
a life insurance component in it as well, in
addition to the investment component.
Insurance companies have the discretion todecide on their investment portfolios.
Being transparent the policyholder gets the
entire episode on the performance of his fund.
ULIP products are exempted from tax and they
provide life insurance.
Provides capital appreciation.
Investor gets an option to choose among debt,
balanced and equity funds.
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USP of ULIPS
Insurance cover plus savings
ULIPs serve the purpose of providing life insurance
combined with savings at market-linked returns. To
that extent, ULIPS can be termed as a two-in-one
plan in terms of giving an individual the twin
benefits of life insurance plus savings.Multiple investment options
ULIPS offer a lot more variety than traditional life
insurance plans. So there are multiple options at
the individuals disposal. ULIPS generally come in
three broad variants:
Aggressive ULIPS (which can typically invest
80%-100% in equities, balance in debt)
Balanced ULIPS (can typically invest around
40%-60% in equities) Conservative ULIPS (can typically invest upto
20% in equities)
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Although this is how the ULIP options are generally
designed, the exact debt/equity allocations may
vary across insurance companies. Individuals canopt for a variant based on their risk profile.
Flexibility
The flexibility with which individuals can switch
between the ULIP variants to capitalise oninvestment opportunities across the equity and debt
markets is what distinguishes it from other
instruments. Some insurance companies allow a
certain number of free switches. Switching also
helps individuals on another front. They can shiftfrom an Aggressive to a Balanced or a
Conservative ULIP as they approach retirement.
This is a reflection of the change in their risk
appetite as they grow older.
Works like an SIP
Rupee cost-averaging is another important benefit
associated with ULIPS. With an SIP, individuals
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month/quarter and dont have to worry about
timing the stock markets.
HURDLES OF ULIP
NO STANDARDIZATION
All the costs are levied in ways that do not lend to
standardisation. If one company calculatesadministration cost by a formula, another levies a
flat rate. If one company allows a range of the sum
assured (SA), another allows only a multiple of the
premium. There was also the problem of a varying
cost structure with age
LACK OF FLEXIBILITY IN LIFE COVER
ULIP is known to be more flexible in nature than the
traditional plans and, on most counts, they are.However, some insurance companies do not allow
the individual to fix the life cover that he needs.
These rely on a multiplier that is fixed by the insurer
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NOT ALL SHOW THE BENCHMARK RETURN
To talk about returns without pegging them to a
benchmark is misleading the customer. Though
most companies use Sensex, BSE 100 or the Nifty
as the benchmark, or the measuring rod of
performance, some companies are not using anybenchmark at all.
EARLY EXIT OPTIONS
The Ulip product works over the long term. The
earlier the exit, the worse off is the investor sincehe ends up redeeming a high-front-load product
and is then encouraged to move into another higher
cost product at that stage. An early exit also takes
away the benefit of compounding from insured.
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CREEPING COSTS
Since the investors are now more aware thanbefore and have begun to ask for costs, some
companies have found a way to answer that without
disclosing too much. People are now asking how
much of the premium will go to work. There are
plans that are able to say 92 per cent will beinvested, that is, will have a front load of just 8 per
cent. What they do not say is the much higher
policy administration cost that is tucked away inside
(adjusted from the fund value).
While most insurance companies charge an annual
fee of about Rs 600 as administration costs, that
stay fixed over time, there are plans that charge this
amount, but it grows by as much as 5 per cent a
year over time. There are others that charge a
multiple of this amount and that too grows
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COMPARISON BETWEEN ULIPS AND MUTUALFUNDS
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COMPARISON BETWEEN ULIPS AND MUTUAL
FUNDS:
Unit Linked Insurance Policies (ULIPs) as an
investment avenue are closest to mutual funds in
terms of their structure and functioning. As is the
case with mutual funds, investors in ULIPs are
allotted units by the insurance company and a netasset value (NAV) is declared for the same on a
daily basis.
Similarly ULIP investors have the option of
investing across various schemes similar to theones found in the mutual funds domain, i.e.
diversified equity funds, balanced funds and debt
funds to name a few. Generally speaking, ULIPs
can be termed as mutual fund schemes with an
insurance component.
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However it should not be construed that barring the
insurance element there is nothing differentiating
mutual funds from ULIPs.
Points of difference between the two:
1. Mode of investment/ investment amounts
Mutual fund investors have the option of either
making lump sum investments or investing using
the systematic investment plan (SIP) route which
entails commitments over longer time horizons. The
minimum investment amounts are laid out by thefund house.
ULIP investors also have the choice of investing in
a lump sum (single premium) or using the
conventional route, i.e. making premium paymentson an annual, half-yearly, quarterly or monthly
basis. In ULIPs, determining the premium paid is
often the starting point for the investment activity.
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This is in stark contrast to conventional insurance
plans where the sum assured is the starting pointand premiums to be paid are determined thereafter.
ULIP investors also have the flexibility to alter the
premium amounts during the policy's tenure. For
example an individual with access to surplus fundscan enhance the contribution thereby ensuring that
his surplus funds are gainfully invested; conversely
an individual faced with a liquidity crunch has the
option of paying a lower amount (the difference
being adjusted in the accumulated value of hisULIP). The freedom to modify premium payments
at one's convenience clearly gives ULIP investors
an edge over their mutual fund counterparts.
2. Expenses
In mutual fund investments, expenses charged for
various activities like fund management, sales and
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marketing, administration among others are subject
to pre-determined upper limits as prescribed by the
Securities and Exchange Board of India.
For example equity-oriented funds can charge their
investors a maximum of 2.5% per annum on a
recurring basis for all their expenses; any expense
above the prescribed limit is borne by the fundhouse and not the investors.
Similarly funds also charge their investors entry and
exit loads (in most cases, either is applicable).
Entry loads are charged at the timing of making aninvestment while the exit load is charged at the time
of sale.
Insurance companies have a free hand in levying
expenses on their ULIP products with no upperlimits being prescribed by the regulator, i.e. the
Insurance Regulatory and Development Authority.
This explains the complex and at times 'unwieldy'
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expense structures on ULIP offerings. The only
restraint placed is that insurers are required to
notify the regulator of all the expenses that will becharged on their ULIP offerings.
Expenses can have far-reaching consequences on
investors since higher expenses translate into lower
amounts being invested and a smaller corpus beingaccumulated. ULIP-related expenses have been
dealt with in detail in the article "Understanding
ULIP expenses".
3. Portfolio disclosure
Mutual fund houses are required to statutorily
declare their portfolios on a quarterly basis, albeit
most fund houses do so on a monthly basis.
Investors get the opportunity to see where theirmonies are being invested and how they have been
managed by studying the portfolio.
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There is lack of consensus on whether ULIPs are
required to disclose their portfolios. During our
interactions with leading insurers we came acrossdivergent views on this issue.
While one school of thought believes that disclosing
portfolios on a quarterly basis is mandatory, the
other believes that there is no legal obligation to doso and that insurers are required to disclose their
portfolios only on demand.
Some insurance companies do declare their
portfolios on a monthly/quarterly basis. Howeverthe lack of transparency in ULIP investments could
be a cause for concern considering that the amount
invested in insurance policies is essentially meant
to provide for contingencies and for long-term
needs like retirement; regular portfolio disclosureson the other hand can enable investors to make
timely investment decisions.
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4. Flexibility in altering the asset allocation
As was stated earlier, offerings in both the mutual
funds segment and ULIPs segment are largely
comparable. For example plans that invest their
entire corpus in equities (diversified equity funds), a
60:40 allotment in equity and debt instruments(balanced funds) and those investing only in debt
instruments (debt funds) can be found in both
ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fundwishes to shift his corpus into a debt from the same
fund house, he could have to bear an exit load
and/or entry load.
On the other hand most insurance companiespermit their ULIP inventors to shift investments
across various plans/asset classes either at a
nominal or no cost (usually, a couple of switches
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are allowed free of charge every year and a cost
has to be borne for additional switches).
Effectively the ULIP investor is given the option to
invest across asset classes as per his convenience
in a cost-effective manner.
This can prove to be very useful for investors, forexample in a bull market when the ULIP investor's
equity component has appreciated, he can book
profits by simply transferring the requisite amount to
a debt-oriented plan.
5. Tax benefits
ULIP investments qualify for deductions under
Section 80C of the Income Tax Act. This holds
good, irrespective of the nature of the plan chosenby the investor. On the other hand in the mutual
funds domain, only investments in tax-saving funds
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(also referred to as equity-linked savings schemes)
are eligible for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case
of equity-oriented funds (for example diversified
equity funds, balanced funds), if the investments
are held for a period over 12 months, the gains are
tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @
10%.
Similarly, debt-oriented funds attract a long-term
capital gains tax @ 10%, while a short-term capitalgain is taxed at the investor's marginal tax rate.
Despite the seemingly similar structures evidently
both mutual funds and ULIPs have their unique set
of advantages to offer. As always, it is vital forinvestors to be aware of the nuances in both
offerings and make informed decisions.
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Investing in ulips? Remember
The high returns (above 20 per cent) are definitely
not sustainable over a long term, as they have been
generated during the biggest bull run in recent
stock market history.
The free hand given to ULIPs might prove risky if
the timing of exit happens to coincide with a bearish
market phase, because of the inherently high equity
component of these schemes.
While a debt-oriented ULIP scheme might be
superior to a debt option in a conventional mutual
fund due