mutual fund ulip

7/29/2019 Mutual Fund ULIP

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Acknowledgement

This project would be incomplete without the expression of

words of simple gratitude to the people who made it possible,so I take this opportunity to thank them all who directly orindirectly helped me a lot to complete this project successfully.

First of all, I would like to thank my project guide Miss.Rajeshwari Nidgundi, Branch in charge for having provided mean opportunity to undertake my project in their organizationand also for her co-operation which helped me a lot tocomplete my project.

I am also grateful to Preetha Saldanha, who helped me byproviding information relating to the project.

I would like to express my great respect to Dr. T. Rangarajandirector, K.L.E.Societys Institute of Management Studies andResearch for his encouragement.

I express my heartily gratitude to our faculty, Prof. M.M Kuri forhis excellence guidance ,ever-endeavoring support to undergo

60 days project i.e from 1/7 /2005 to 30/8/2005 with whosesupport made me submit this project report.

Vanita Shettangoudar


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PARTICULARS PAGENO

Executive SummaryIndustry overviewCompany background

Project details1. Objective & Sub objective

2. Factors influencing investment decisions3. About mutual fund industry4. Structure of mutual fund5. Types of mutual funds

6. Regulators of mutual fund

7. Advantages of Mutual Fund Investing

8. Disadvantages of Mutual Fund Investing9. Introduction To ULIP

10. ULIP - Key Features

11. Advantages of ULIP12. Limitations of ULIP13. Calculation of SD & return

FindingsConclusionsSuggestionsLimitation

Bibliography


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Executive summary

The main aim of the investor is to minimize the risk involved ininvestment & maximize return. Decreasing value of money isthe main reason which makes people to invest money formaintaining their standard of living and purchasing power ofthe money. And today there are number of option available toinvestor like Post office, bank deposit, Real estate, debenture,


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Govt.securities, stoke market, insurance & gold etc. amongthese mutual fund & ULIP introduced by the insurancecompany are the two option which require less capital & givethe benefit of Professional Management & suitable for allespecially to the persons who doesnt have time to watch themarket regularly.

Origin of Mutual Fund Investing: When three Boston securitiesexecutives pooled their money together in 1924 to create thefirst mutual fund. The mutual fund industry in India started in1963 with the formation of Unit Trust of India. Mutual fundindustry today manage near about Rs.1.50 lac Crore.ULIP came into play in the 1960s and became very popular inWestern Europe and Americas. In India also it has becomepopular. Today ULIP contribute 80% of the premium collectedby the insurance company

Title of the projectComparative study of ULIP & mutual fund industry

Main Objective:To know the difference in investing money in ULIP & mutualfund, which one is preferable between two & whether thesetwo options are substitute for each other or no?

Sub objective:

To know the factors that influence investor while takinginvestment decisions.To know the mutual fund industry.To know the merits & demerits of mutual funds.To know the legal & regulatory body of mutual fund

industry.To know what is ULIP & how it works.To know the advantages & disadvantages of investing in

ULIP

To know how ULIP is one stop solution for the investor.To know the impact of introduction of ULIP to the market

on mutual fund industry.To know to whom ULIP & mutual funds are suitable.To know what is the response of mutual fund industry to

the competition given by the ULIP


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To know innovative scheme introduced by mutual fundindustry to meet the competition.

Rationale behind choosing this topicThe big question mark in front of every investor is where toinvest money to get real income (inflation adjusted).Thereareso many options available to them but it is very difficult tochoose among them, as every option has its own merits &demerits. Investor has to be fully aware of all these options &he should be in a position to choose which one is suitable forhim on the basis of his risk appetite, investment objective andexpected return etc. Option that is suitable for one person maynot suit other persons requirement. This process of choosingsuitable product/option take long time & a lot of homework, thebest way for the person who has no time & expertise inselecting investment avenue can either go for ULIP or mutual

fund which provide one stop solution to all type of investor .Around 80 per cent of the premium income of life insurers iscoming through unit-linked plans in 2004.Which gives anindication that mutual fund companies are losing out on a hugemarket that would have otherwise been theirs. Today mutualfund facing great challenge by ULIP .This situation made me totake this topic & this project is small effort in that direction tofind to whom the scheme is suitable.

Methodology:

For this study, monthly NAV of growth, balance, debt schemesof two fund house i.e JM Financial mutual fund & PrudentialICICI mutual fund is taken which represent performance of themutual fund industry & monthly NAV of two ULIP plans of twoinsurance companies i.e Bajaj Allianz life insurance & ICICIPrudential life insurance is taken which will representperformance of ULIP in this project .With the help of these NAVSD & Sharpe ratio is calculated, which will represent riskassociated with option, excess return earned over & above thereturn of risk less security for each unit of risk respectively.Primary source:

Personal interview was held with the financial advisor ofmutual fund & insurance to get the input for my project.

Secondarysource:1. Web site of respective mutual fund & insurance

companies.


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2. Web site of Amfindia.com for collecting NAV of mutual

fund scheme.


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Industry overview

The idea of pooling money together for investing purposesstarted in Europe in the mid-1800s. The first pooled fund in theU.S. was created in 1893 for the faculty and staff of HarvardUniversity. On March 21st, 1924 the first official mutual fundwas born. It was called the Massachusetts Investors Trust.After one year, the Massachusetts Investors Trust grew from$50,000 in assets in 1924 to $392,000 in assets (with around

200 shareholders).The mutual fund industry in India started in 1963 with theformation of Unit Trust of India, at the initiative of the ReserveBank and the Government of India. The objective then was toattract the small investors and introduce them to marketinvestments. Since then, the history of mutual funds in Indiacan be broadly divided into three distinct phases.

Phase 1- 1964-87 (Unit Trust of India)

In 1963, UTI was established by an Act of Parliament and givena monopoly. Operationally, UTI wasset up by the Reserve Bank of India, but was later de-linkedfrom the RBI. The first, and still one of the largest schemes,launched by UTI was Unit Scheme 1964.Later in 1970s and 80s, UTI started innovating and offeringdifferent schemes to suit the needs of different classes ofinvestors. Unit Linked Insurance Plan (ULIP) was launched in1971. Six new schemes were introduced between 1981 and

1984. During 1984-87, new schemes like Children's Gift GrowthFund (1986) and Mastershare (1987) were launched.Mastershare could be termed as the first diversified equityinvestment scheme in India. The first Indian offshore fund,India Fund, was launched in August 1986. During 1990s, UTIcatered to the demand for income-oriented schemes by
http://clk.about.com/?zi=1/XJ&sdn=mutualfunds&zu=http%3A%2F%2Fwww.harvard.edu%2Fhttp://clk.about.com/?zi=1/XJ&sdn=mutualfunds&zu=http%3A%2F%2Fwww.harvard.edu%2Fhttp://clk.about.com/?zi=1/XJ&sdn=mutualfunds&zu=http%3A%2F%2Fwww.mfs.com%2Fproducts%2Ffunds%2Finfo%2FfundProfileComplete.jhtml%3FclassifId%3D97%26amp%3BportId%3D158http://clk.about.com/?zi=1/XJ&sdn=mutualfunds&zu=http%3A%2F%2Fwww.harvard.edu%2Fhttp://clk.about.com/?zi=1/XJ&sdn=mutualfunds&zu=http%3A%2F%2Fwww.harvard.edu%2Fhttp://clk.about.com/?zi=1/XJ&sdn=mutualfunds&zu=http%3A%2F%2Fwww.mfs.com%2Fproducts%2Ffunds%2Finfo%2FfundProfileComplete.jhtml%3FclassifId%3D97%26amp%3BportId%3D158


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launching Monthly Income Schemes, a somewhat unusualmutual fund product offering "assured returns".

The mutual fund industry in India not only started with UTI, butstill counts UTI as its largest player with the largest corpus ofinvestible funds among all mutual funds currently operating in

India. Until 1980s, UTI's operations in the stock market oftendetermined the direction of market movements. Now, manyIndian investors have taken to direct investing on the stockmarkets. Foreign and other institutional players have beenbrought in. So direct influence of UTI on the markets may beless than before, though it remains the largest player in thefund industry. In absolute terms, the investible funds corpus ofeven UTI was still relatively small at about Rs. 600 crores in1984. But, at the end of this Phase One, UTI had grown large as

evidenced by the following statistics:

1987-88

Amount Assets UnderMobilised Management

(Rs. Crores) (Rs. Crores)

UTI 2,175 6,700

Total 2,175 6,700


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

1987 marked the entry of non-UTI, Public Sector mutualfunds, bringing in competition. With the opening up of theeconomy, many public sector banks and financialinstitutions were allowed to establish mutual funds. The

State Bank of India established the first non-UTI mutualfund- SBI Mutual Fund - in November 1987. This wasfoI1owed by Canbank Mutual Fund (launched in December,1987), LIC Mutual Fund (1989), and Indian Bank MutualFund (1990) followed by Bank of India Mutual Fund, OICMutual Fund

. and PNB Mutual Fund. These mutual funds helped enlargethe investor community and the investible funds. From1987 toI992-93, the fund industry expanded nearly seven

times in terms of Assets Under Management, as seen in thefollowing figures:

. 1992-93

Amount Assets UnderMobilised Management


UTI 11,057 38,247

Public Sector 1,964 8,757

Total 13,021 47,004

Phase 3 - 1993-1996 (Emergence of Private Funds)

A new era in the mutual fund industry began with thepermission granted for the entry of private sector funds in1993, giving the Indian investors a broader choice of 'fund

families' and increasing competition for the existing publicsector funds. Quite significantly, foreign fund managementcompanies were also allowed to operate mutual funds,most of them coming into India through their joint ventureswith Indian promoters. These private funds have brought inwith them the latest product innovations, investmentmanagement techniques and investor servicing technology


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that make the Indian mutual fund industry today a vibrantand growing financial intermediary.During the year 1993-94, five private sector mutual fundslaunched their schemes followed by six others in 1994-95.Initially, the mobilisation of funds by the private m_tualfunds was slow. But, this segment of the fund industry now

has been witnessing much greater investor confidence inthem. One influencing factor has been the development ofa SEBI driven regulatory framework for mutual funds. Butanother important factor has been the steadily improvingperformance of several funds themselves. Investors in Indianow clearly see the benefits of investing through mutualfunds and have started becoming selective.

Phase 4 - 1996 (SEBI Regulation for Mutual Funds)

The entire mutual fund industry in India, despite initialhiccups, has since scaled new heights in terms ofmobilisation of funds and number of players. Deregulationand liberalisation of the Indian economy has introducedcompetition and provided impetus to the growth of theindustry. Finally, most investors - small or large - havestarted shifting towards mutual funds as opposed to banksor direct market investments.

More investor friendly regulatory measures have beentaken both by SEBI to protect the investor and by theGovernment to enhance investors' returns through taxbenefits. A comprehensive set of regulations for all mutualfunds operating in India was introduced with SEBI (MutualFund) Regulations, 1996. These regulations set uniformstandards for all funds and will eventually be applied in fullto Unit Trust of India as well, even though UTI is governedby its own UTI Act. In fact, UTI has been voluntarily doptingSEBI guidelines for most of its schemes. Similarly, the 1999

Union Government Budget took a' big step in exempting allmutual fund dividends from income tax in the hands ofinvestors. Both the 1996 regulations and the 1999 Budgetmust be considered of historic importance, given their far-reaching impact on the fund industry and investors.1999 marks the beginning of a new phase in the history ofthe mutual fund industry in India, a phase of significant


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growth in terms of both amounts mobilised from investorsand assets under management. Consider the growth inassets as seen in the figures below:

Gross Amount MobilisedAssets UnderManagement


1998-99 1999-2000 1998-99 1999-20

UTI 11,679 13,536 53,320 76,5

(77.87%) (67.75%

Public Sector 1,732 4,039 8,292 11,4(12.11 %) (10.09%

Private Sector 7,966 42,173 6,860 25,0

(10.02%) (22.16%

Total 21,377 59,748 68,4 72 113,0

The size of the industry is growing rapidly, as seen by thefigure of assets under management which have gone fromover Rs. 68,000 crores to Rs.113,005 crores, a growth ofnearly 60% in just one year. Within the growing industry, byMarch 2000, the relative market shares of different playersin terms of amount mobilized and assets undermanagement have undergone a change.Mutual fundA mutual fund is a common fool of money into whichinvestors place their contributions that are to be invested inaccordance with a stated objective. The ownership of thefund is thus joint or mutual; the fund belongs to all

investors. A single investors ownership of the fund is in thesame proportion as the amount of the contribution made byhim or her bears to the total amount of the fund.A mutual fund is the ideal investment vehicle for todayscomplex and modern financial scenario. Markets for equityshares, bonds and other fixed income instruments, realestate, derivatives and other assets have become mature


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and information driven. Price changes in these assets aredriven by global events occurring in faraway places. Atypical individual is unlikely to have the knowledge, skills,inclination and time to keep track of events, understandtheir implications and act speedily. An individual also findsit difficult to keep track of ownership of his assets,

investments, brokerage dues and bank transactions etc.

Market trends in mutual fund industry

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

Many nationalized banks got into the mutual fund businessin the early nineties and got off to a good start due to thestock market boom prevailing then. These banks did not

really understand the mutual fund business and they justviewed it as another kind of banking activity. Few hiredspecialized staff and generally chose to transfer staff fromthe parent organizations. The performance of most of theschemes floated by these funds was not good. Someschemes had offered guaranteed returns and their parentorganizations had to bail out these AMCs by paying largeamounts of money as the difference between theguaranteed and actual returns. The service levels were also

very bad. Most of these AMCs have not been able to retainstaff, float new schemes etc. and it is doubtful whether,barring a few exceptions, they have serious plans ofcontinuing the activity in a major way.

The experience of some of the AMCs floated by privatesector Indian companies was also very similar. They quickly


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realized that the AMC business is a business, which makesmoney in the long term and requires deep-pocketedsupport in the intermediate years. Some have sold out toforeign owned companies, some have merged with othersand there is general restructuring going on.

The foreign owned companies have deep pockets and havecome in here with the expectation of a long haul. They canbe credited with introducing many new practices such asnew product innovation, sharp improvement in servicestandards and disclosure, usage of technology, brokereducation and support etc. In fact, they have forced theindustry to upgrade itself and service levels oforganizations like UTI have improved dramatically in thelast few years in response to the competition provided by

these. SECURITIES AND EXCHANGE BOARD OF INDIA

INVESTMENT MANAGEMENT DEPARTMENT

Trends in Transactions on Stock Exchanges by Mutual Funds(since January 2000)

Equity (Rs in Crores) Debt (Rs in Crores)

GrossPurchase

GrossSales

NetPurchase/

SalesGross

PurchaseGrossSales

NetPurcha

Sale

Jan 2000-March 2000. 11070.54 11492.19 -421.65 2764.72 1864.29 90April 2000 -March 2001. 17375.78 20142.76 -2766.98 13512.17 8488.68 502April 2001-March 2002. 12098.11 15893.99 -3795.88 33583.64 22624.42 1095April 2002-March 2003 14520.89 16587.59 -2066.70 46663.83 34059.41 1260April 2003-March 2004 36663.58 35355.67 1307.91 63169.93 40469.18 2270April 2004-March 2005 45045.25 44597.23 448.02 62186.46 45199.17 1698April 2005. 4347.95 2883.04 1464.91 9568.20 4533.42 503May 2005. 7000.72 3660.61 3340.11 10687.90 5982.47 470

June 2005. 4567.84 6384.63 -1816.79 10686.86 7089.49 359July 2005 (as on 5th) 503.73 754.18 -250.45 1667.89 863.84 80Total (April '05 - July'05) 16420.24 13682.46 2737.78 32610.85 18469.22 1414

Company background


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The gentle, fragile butterfly doesnt trust easily.Its world is fraught with risks & dangers. It willchoose a location to sit on only if it feels

completely secure. Investors in todaysvolatile & unpredictable financial markets findthemselves in a situation similar to thebutterflys , flitting from one investment optionto another in their quest for satisfactory

returns. What they need is an expert they can trust whosesolid foundations in finance & reputation for integrity willgrow their money , while ensuring their peace of mind . JMmutual fund , with its broad (Krishnamurthy vijayan)based experience, local expertise & steadfast performance ,

inspires such trust & faith .

History of JM Financial Asset Management Pvt. Ltd.

JM Financial Mutual Fund is one of India's first privatesector mutual funds-an integral part of the first wave thatcommenced operations in 1993-94. Today, JM is the topten mutual funds in the country, ranked by assetsmanaged, and enjoy a superior performance record. JM is

the one of the many successful companies that haveemerged out of JM Group's strong foundation in financialservices.

JM Group's origins can be traced back to the1950s when the Kampani family began to get involved inIndia 's then nascent capital markets. On September 15,1973 , J.M. Financial and Investment Consultancy Serviceswas jointly founded by Nimesh N. Kampani,Naveenchandra Kampani and Mahendra Kampani. Under

the leadership of Chairman Nimesh N. Kampani, the JMGroup has played a stellar and multi-faceted role in thedevelopment of India 's capital markets. Apart fromhelping companies raise finance, JM has also beeninstrumental in educating a burgeoning and prosperingmiddle class about the advantages of investing in bluechip companies. In 1999, we commenced a joint venture


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with Morgan Stanley Dean Witter, that today spansinvestment banking, broking, fixed income and retaildistribution.

JM Financial Asset Management Private Limited, theAsset Management Company of JM Financial Mutual

Fund, is not a part of this joint venture. Sponsored by J.M.Financial and Investment Consultancy Services Pvt. Ltd.,and co-sponsored by JM Financial Ltd., JM Financial AssetManagement Private Limited started operations inDecember 1994 with a simultaneous launch of threefunds-JM Liquid Fund (now JM Income Fund), JM EquityFund and JM balanced Fund. Today, JM Financial MutualFund offers a bouquet of funds that caters to the diverseneeds of both its institutional and individual investors.

Mission:

JM Financial Asset Management Pvt. Ltd mission is tomanage risk effectively while generating top quartilereturns across all product categories. They believe that tocultivate investor loyalty, they must provide a safe havenfor their investments.

They are focused on helping their investors realize their

investment goals through prudent advice, judicious fundmanagement, impeccable research, and strong systems ofmanaging risk scientifically.

JM Financial Asset Management Pvt. Ltd. genuinely strive tobe their investors' 'friend in the new world of risk'

They have 16 branches all over India

Branches

1. Ahmedabad Mangalore2. Patna Nagpur3. New Delhi12. Pune

Surat VadodaraMumbai Bangalore


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Chennai CoimbatoreHyderabad HubliKolkata Ludhiana

SPONSORS:

J.M. FINANCIAL & INVESTMENT CONSULTANCY SERVICES PRIVATELIMITED ("The Sponsor"):

The Sponsor was incorporated on 15th September 1973 and hadmaintained its position as a leading private sector Investment Bankerin the country till 1999. The Sponsor has lead managed issues with anaggregate monetary value of over Rs. 63,000 Crores during the period1993-1999 and also been awarded "The Best Domestic InvestmentBank in India" by Asia Money for two consecutive years in 1996 and

1997. Consequent to the Joint venture of the JM Financial Group withMorgan Stanley Group, the business operations are carried through thejoint venture companies. The Sponsor was holding a Category IMerchant Banking registration with SEBI valid till 15.08.2002.Thereafter, the Sponsor did not seek renewal of registration with SEBIas Merchant Banker.

Rs. In CroresFinancial performance of the Sponsor

2001-02 2002-03 2003-Total Income 4.94 2.68 4.92Profit After Tax 0.62 0.81 0.94Equity capital 21.00 21.00 21.00Reserves & Surplus 32.81 32.23 33.01Networth 59.54 58.24 59.02Earnings per Share (Rs.) 0.08 0.17 0.23Book Value per Share(Rs.) 25.63 25.35 25.72Dividend Paid (%) 0.50 0.50 0.50

JM FINANCIAL LIMITED (" The Co-Sponsor ")

The Co-Sponsor was a securities brokerage company promoted by theSponsor and is a listed company. Consequent to a joint venture of JMFinancial Group with Morgan Stanley Group, institutional equity sales


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and trading business has been transferred to JM Morgan StanleySecurities Private Limited.Financial performance of the Co-Sponsor

Rs. In Crore

2001-02 2002-2003 2003-Total Income 5.36 0.78 4.29Profit After Tax 1.61 0.03 2.61Equity Capital (Paid up) 11.25 11.25 11.25Reserves & Surplus 15.07 13.84 14.42Networth 26.32 25.09 25.67Earnings per Share (Rs.) 1.42 0.02 2.30

Book Value per Share (Rs.) 23.24 22.15 22.67Dividend Paid (%) 9.00 10.00 16.00

TRUSTEE COMPANY - JM FINANCIAL TRUSTEE COMPANY PRIVATELIMITEDJM FINANCIAL TRUSTEE COMPANY PRIVATE LIMITED (formerly known asJ.M. Trustee Company Private Limited) has been promoted by J.M.Financial & Investment Consultancy Services Pvt Ltd., and JM FinancialLtd. JM Financial Trustee Company Pvt Ltd., is registered under theCompanies Act, 1956 and was incorporated on 9th June 1994. The

Sponsors have executed a Trust Deed on 1st September 1994appointing JM Financial Trustee Company Pvt Ltd., as Trustee Companyof JM Financial Mutual Fund.

Board of trustees:1. Mr. Nimesh N. Kampani,Chairman2. Mr. Darius Udwadia3. Mr. Anant V. Setalvad , Industrialist4. Mr. Anant V. Setalvad, Industrialist5. Mr. Jalaj Ashwin Dani, Industrialist6. Mr. Sharad M. Kulkarni, Business Consultant & Corporate Advisor

Board of the asset management company

JM Financial Asset Management Pvt. Ltd:


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Dr. Vijay KelkarChairmanRetired Civil Servant

2. Mr. Rajendra Chitale , Partner, M.P. Chitale & Co.3.Mr. Vishal Kampani, Investment Banker4. Dr. R. Srinivasan, Former Chairman, IBA and various

nationalised banks5. Mr. Nityanath P. Ghanekar,Consultant6. Mr. J.K. Modi Broker (Delhi Stock Exchange)

Management team Mr. Krishnamurthy Vijayan,Chief Executive Officer Mr Jimmy A. Patel,Chief Operating Officer Mr. Prabal Nag,Senior Vice President, HeadMarketing

& Sales Mr. Nandkumar Surti,Head - Fixed Income Ms Shalini Tibrewala,Fund Manager, Debt Mr Aditya Palwankar,Fund Manager, Equity Mr Sandeep Neema,Fund Manager, Equity Mr Biren Mehta,Fund Manager-Derivatives Mr. George Cherian,Vice President, Technology & Risk

Management Mr. Sarath Sarma,Head corporate Sales

Mr. Sanjay Lakra,Compliance Officer


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Title of the projectComparative study of ULIP & mutual fund industry

Objective:To know the difference in investing money in ULIP & mutualfund, which one is preferable among two & whetherthese two options are substitute for each other or no?

Sub-objective: To know the factors that influence investorwhile taking investment decisions.

To know the mutual fund industry.To know the legal & regulatory body of mutual

fund industry.To know the merits & demerits of mutual funds. To know what is ULIP & to understand the

modes operandi of ULIP.To know the advantages & disadvantages of

investing in ULIPTo know how ULIP is one stop solution for the

investor.


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To know the impact of introduction of ULIP tothe market on mutual fund industry.

To know to whom ULIP & mutual funds aresuitable.

To know what is the response of mutual fund

industry to the competition given by the ULIPTo know innovative scheme introduced by

mutual fund industry to meet the competition.Following are the factors which influence investor whiletaking investment decisions:

Stability of income:Even though the return is less investor go for thatinvestment which gives uniform/stable income.Capital growth:Some investors go for those investments where there is ascope for capital growth.Liquidity:Liquidity is the one more factor which investor considerbefore investing .So that he can meet his emergency easily.Tax benefits:

To plan an investment programme without regard to onestax status may be costly to the investor. There are really

two problems involved here, one concerned with theamount of income paid by the investment & the other withthe burden of income taxes upon that income . Wheninvestors incomes are small, they are anxious to havemaximum cash returns on their investments, & are proneto take excessive risks. On the other hand, investors whoare not pressed for cash income often find that incometaxes deplete certain types of investment incomes lessthan others, thus affecting their choices.

Purchasing power stability:Investment involves the commitment of current funds withthe objective of receiving greater amounts of future funds,because of this they consider the purchasing powerstability, and for this they study the degree of price levelinflation in future.


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Risk:Risk appetite of the investor also influence investor whiletaking investment decisions:Following are the two type of risk that investor face

1. systematic risk2. unsystematic risk

Systematic risks are out of external & uncontrollablefactors, arising out of the market, nature of industry7 thestate of economy etc.Unsystematic risks emerge out of the known & controllablefactors, internal to the issuer or the companies.Examples of Systematic risks

i. Market risk: This arises out of changes in demand &supply pressures in the markets, following thechanging flow of the information or expectations.

ii. Interest rate risk: the return on an investmentdepends on the interest rate promised on it & thechanges in the market rates of interest from time totime

iii. Purchase power risk: The return expected byinvestors will change due to change in real value ofreturns. One more reason for investing is not toearn but to preserve their economic position overtime, they utilise investment outlets whose valuesvary with the price level. They select investmentswhose market values change with consumer priceswhich compensates them for cost of living increase.If they do not, they will find that their total wealthhas been diminished.

Examples of Unsystematic risks:i. Business risk: This relates to the variability of the

business, sales, income, profits etc., which in turndepends on the marked condition for the productmix, input supplies, strength of the competitors,etc.

ii. Financial risk: this relates to the method offinancing, adopted by the company, high leverageleading to larger debt servicing problems or short-


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term liquidity problems due to bad debts, delayedreceivables & fall in current assets or rise in currentliabilities. These problems could be solved but theymay lead to fluctuations in earnings, profits &dividends to shareholders.

iii. Default or insolvency risk: the borrower or issuer of

securities may become insolvent or may default, ordelay the payments due, such as interestinstallments or in principal repayments. In suchcases, the investor may get no return or negativereturns.

About mutual fund industryMutual funds today manages near about RS 1.50 lac crore2004-05 97 new schemes were launched mobilizing fundsto the tune of RS 25000 Crore in that 36 schemes were

equity schemes mobilizing RS 11756 Crore from investor.Equity mutual fund accounts for 25% of the total assetsmanaged by the Indian mutual fund industry. In U.S it ismore than 50% even when compared to US based retailinvestors. There are clear indications that the Indian mutualfund industry has tremendous potential in terms ofinvestors exposure to it. as Nishid Shah. chief investment


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officer, Birla sun life puts it ,a recent study reveals that noteven 1% of Indian investors were found to be investing infunds. In contrast one out of every two house holds in US isa mutual fund investor

In US, second household is a mutual fund holder. In US, the mutual fund industry size is about 67% of

the US GDP, whereas the Indian mutual fund industryis just about 6% of our GDP

In US, mutual fund assets are around 1.5% times thebank deposits.

In India though, bank deposits are about 10.50 timesthe MF assets.

MF product range can suit the needs of almost each &every individual

NAME OF SEBI REGISTERED MUTUAL FUNDS

1. ABN AMRO Mutual Fund 2. AllianceCapital Mutual Fund3. Benchmark Mutual Fund 4. BOBMutual Fund,5. Birla Mutual Fund 6. BOI MutualFund7. Canbank Mutual Fund 8. CRB MutualFund(suspended)9. Chola Mutual Fund, 10. Deutsche

Mutual Fund11. DSP Merrill Lynch Mutual Fund, 12. DundeeMutual Funds,13. Escorts Mutual Fund, 14. FidelityMutual Fund


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15. GIC Mutual Fund 16. HDFCMutual Fund,17. HSBC Mutual Fund, 18. ICICISecurities Fund,19. IL & FS Mutual Fund, 20. ING VysyaMutual Fund,

21. J M Financial Mutual Fund 22. KotakMahindra Mutual Fund,

23. KJMC Mutual Fund, 24. LIC MutualFund25. Morgan Stanley Mutual Fund 26. PNB MutualFund27. Principal Mutual Fund 28. PrudentialICICI Mutual Fund29. Reliance Mutual Fund 30. Sahara

Mutual Fund,31. SBI Mutual Fund 32. ShriramMutual Fund33. Sun F&C Mutual Fund 34. StandardChartered Mutual Fund,

35. Sundaram Mutual Fund, 36. TaurusMutual Fund37. Tata Mutual Fund, 38. FranklinTempleton Mutual Fund

39. UTI Mutual Fund

Status of Mutual Funds for the period April 2005 - June 2005

(Figs in Rs. Crore)

PrivateSector

Public Sector Mutual Funds GrandTotal


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MutualFunds

A UTI

(i)

Others

(ii)

Sub-total

(i)+(ii)

B

A+B

Mobilisation ofFunds 181071.43 13061.72 14862.38 27924.10 208995.53

Repurchase /Redemption Amt. 167783.10 12557.72 14381.43 26939.15 194722.25

Net Inflow/Outflow

(-ve) of funds 13288.34 504.00 480.94 984.94 14273.29Cumulative

Position of netassets as on June

30, 2005

(%)

130584.74

(79.36%)

21975.57

(13.36%)

11986.03

(7.28%)

33961.60

(20.64%) 164546.35

Structure of mutual fund

Sponsor is the person who acting alone or in combinationwith another body corporate establishes a mutual fund.

Sponsor must contribute atleast 40% of the networth of theInvestment Manged and meet the eligibility criteriaprescribed under the Securities and Exchange Board ofIndia (Mutual Funds) Regulations, 1996.The Sponsor is notresponsible or liable for any loss or shortfall resulting fromthe operation of the Schemes beyond the initialcontribution made by it towards setting up of the MutualFund.Trust

The Mutual Fund is constituted as a trust in accordancewith the provisions of the Indian Trusts Act, 1882 by theSponsor. The trust deed is registered under the IndianRegistration Act, 1908.Trustee


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Trustee is usually a company (corporate body) or a Board ofTrustees (body of individuals). The main responsibility ofthe Trustee is to safeguard the interest of the unit holdersand inter alia ensure that the AMC functions in the interestof investors and in accordance with the Securities andExchange Board of India (Mutual Funds) Regulations, 1996,

the provisions of the Trust Deed and the Offer Documentsof the respective Schemes. Atleast 2/3rd directors of the

Trustee are independent directors who are not associatedwith the Sponsor in any manner.Asset Management Company (AMC)

The AMC is appointed by the Trustee as the InvestmentManager of the Mutual Fund. The AMC is required to beapproved by the Securities and Exchange Board of India(SEBI) to act as an asset management company of the

Mutual Fund. Atleast 50% of the directors of the AMC areindependent directors who are not associated with theSponsor in any manner. The AMC must have a networth ofatleast 10 crore at all times.

TYPES OF FUNDS

Mutual fund can be classified into 3 types from theinvestors' perspective:

Firstly, funds are usually classified in terms of theirconstitution - as closed-end or open-end. The distinctiondepends upon whether they give the investors the option toredeem and buy units at any time from the fund itself(open end) or whether the investors have to await a givenmaturity before they can redeem their units to the fund(closed end).

Secondly,Funds can also be grouped in terms of whether

they collect from investors any charges at the time of entryor exit or both, thus reducing the investible amount or theredemption proceeds. Funds that make these charges areclassified as load funds, and funds that do not make any ofthese charges are termed no-load funds.

Finally, funds can also be classified as being tax-exempt or


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non-tax-exempt, depending on whether they invest insecurities that give tax-exempt returns or not. Currently inIndia, this classification may be somewhat less important,given the recent tax exemptions given to investorsreceiving any dividends from all mutual funds.

Under each broad classification, we may then distinguishbetween several types of funds on the basis of the natureof their portfolios, meaning whether they invest in equitiesor fixed income securities or some combination of both.Every type of fund has a unique risk-profile that isdetermined by its portfolio, for which reason funds areoften separated into more or less risk-bearing.

Mutual Fund Types

All mutual funds would be either closed-end or open-end,and either load or no-load. These classifications aregeneral. For example all open-end funds operate the sameway; or in case of a load fund a deduction is made frominvestors' subscription or redemption and only the netamount used to determine his number of shares purchasedor sold.

Funds are generally distinguished from each other by theirinvestment objectives and types of securities they invest in.

a) Broad Fund Types by Nature of InvestmentsMutual funds may invest in equities, bonds or other fixedincome securities, or short-term money market securities.So we have Equity, Bond and Money Market Funds. All ofthem invest in financial assets. But there are funds thatinvest in physical assets. For example, we may have Goldor other Precious Metals Funds, or Real Estate Funds.


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b) Broad Fund Types by Investment ObjectiveInvestors and hence the mutual funds pursue different objectiveswhile investing. Thus, Growth Funds invest for medium to long termcapital appreciation. Income Funds invest to generate regularincome, and less for capital appreciation. Value Funds invest inequities that are considered under-valued today, whose value will be

unlocked in the future.

c) Broad Fund Types by Risk ProfileThe nature of a fund's portfolio and its investment objective implydifferent levels of risk undertaken.Funds are therefore often grouped in order of risk. Thus, EquityFunds have a greater risk of capital loss than a Debt Fund that seeksto protect the capital while looking for income. Money Market Fundsare exposed to less risk than even the Bond Funds, since they invest

in short-term fixed income securities, as compared to longer-termportfolios of Bond Funds.

1. Money Market FundsOften considered to be at the lowest run in the order of risk level,Money Market Funds invest in securities of a short-term nature,which generally means securities of less than one-year maturity. Thetypical, short-term, interest-bearing instruments these funds investin include Treasury Bills issued by governments, Certificates ofDeposit issued by banks and Commercial Paper issued bycompanies. In India, Money Market Mutual Funds also invest in theinter-bank call money market.

The major strengths of money market funds are the liquidity andsafety of principal that the investors can normally expect from short-term investments. .

2. Gilt FundsGilts are government securities with medium to long-term

maturities, typically of over one year (under one-year instrumentsbeing money market securities). In India, we have now seen theemergence of Government Securities or Gilt Funds that invest ingovernment paper called dated securities (unlike Treasury Bills thatmature in less than one year). Since the issuer is the Government/sof India/States,

These funds have little risk of default and hence offer better


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protection of principal. However, investors have to recognize thepotential changes in values of debt securities held by the funds thatare caused by changes in the market price of debt securities quotedon the stock exchanges (just like the equities). Debt securities'prices fall when interest rate levels increase (and vice versa).

3. Debt Funds (or Income Funds)Next in the order of risk level, investor has Debt Funds. Debt fundsinvest in debt instruments issued not only by governments, but alsoby private companies, banks and financial institutions and otherentities such as infrastructure companies/utilities. By investing indebt, these funds target lowrisk and stable income for the investor as their key objectives.However, as compared to the money market. funds, they do higherprice fluctuation risk, since they invest in longer-term securities.

Similarly, as compared to Gilt Funds, general debt funds do have ahigher risk of default by their borrowers.Debt Funds are largely considered as Income Funds as they do nottarget capital appreciation, look for high current income, andtherefore distribute a substantial part of their surplus to investors.Income funds that target returns substantially above market levelscan face more risks

a) Diversified Debt Funds

A debt fund that invests in all available types of debt securities,issued by entities across all industries and sectors is a properlydiversified debt fund. While debt funds offer high income and lessrisk than equity funds, investors need to recognise that debtsecurities are subject to risk of default by the issuer on payment ofinterest or principal. A diversified debt fund has the benefit of riskreduction through diversification and sharing of any default-relatedlosses by a large number of investors. Hence a diversified debt fundis less risky than a narrow-focus fund that invests in debt securities

of a particular sector or industry.

b) Focused Debt Funds

Some debt funds have a narrower focus, with less diversification in

its investments. Examples include sector, specialized debt funds.


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One category of specialised funds that invests in the housing sector,but offers greater security and safety than other debt instruments, isthe Mortgage Backed Bond Funds that invest in special securitiescreated after securitisation of (and thus secured by) loan receivablesof housing finance companies


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c) High Yield Debt Funds

Usually, Debt Funds control the borrower default risk by investing insecurities issued by borrowers who are rated by credit ratingagencies and are considered to be of "investment grade". There are,however, High Yield Debt Funds that seek to obtain higher interest

returns by investing in debt instruments that are considered "belowinvestment grade". Clearly, these funds are exposed to higher risk.In the U.S.A., funds that invest in debt instruments that are notbacked by tangible assets and rated below investment grade(popularly known as junk bonds) are called Junk Bond Funds. Thesefunds tend to be more volatile than other debt funds, although theymay earn higher returns as a result of the higher risks taken.

d) Assured Return Funds

UTI and other funds have offered "assured return" schemes toinvestors. The most popular variant of such schemes is the MonthlyIncome Plans of UTI. Returns are indicated in advance for all of thefuture years of these closed-end schemes. If there is a shortfall, it isborne by the sponsors. Assured Return or Guaranteed MonthlyIncome Plans are essentially Debt/Income Funds. Assured returndebt funds certainly reduce the risk level considerably, as comparedto all other debt or equity funds, but only to the extent that theguarantor has the required financial strength. Hence, the marketregulator SEBI permits only those funds whose sponsors haveadequate net-worth to offer assurance of returns. If offered, explicitguarantee is required from a guarantor whose name has to bespecified in advance in the offer document of the scheme.

While Assured Return Funds may certainly be considered to be thelowest risk type within the debt funds category, they are still notentirely risk-free, as investors have to normally lock in their fundsfor the term of the scheme or at least a specified period such as

three years. During this period, changes in the financial marketsmay result in the investor losing the opportunity to obtain higherreturns later in other debt or equity funds. Besides, the investordoes carry some credit risk on the guarantor who must remainsolvent enough to honour his guarantee during the lock in period.

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4 .Equity Funds

As investors move from Debt Fund category to Equity Funds, theyface increased risk level. However, there is a large variety of EquityFunds and all of them are not equally risk-prone.

Equity funds invest a major portion of their corpus in equity sharesissued by companies, acquired directly in initial public offerings orthrough the secondary market. Equity funds would be exposed tothe equity price fluctuation risk at the market level, at the industryor sector level and at the company-specific level. Equity Funds' NetAsset Values fluctuate with all these price movements. These pricemovements are caused by all kinds of external factors, political andsocial as well as economic. The issuers of equity shares offer no

guaranteed repayment as in case of debt instruments. Hence, EquityFunds are generally considered at the higher end of the riskspectrum among all funds available in the market. On the otherhand, unlike debt instruments that offer fixed amounts ofrepayments, equities can appreciate in value in line with the issuer'searnings

Potential, and so offer the greatest potential for growth in capital.

Equity funds adopt different investment strategies resulting indifferent levels of risk. Hence, they are generally separated intodifferent types in terms of their investment styles.

a) Aggressive Growth Funds

There are many types of stocks/shares available in the market; BlueChips that are recognized market leaders, less researched stocksthat are considered to have future growth potential, and even somespeculative stocks of somewhat unknown or unproven issuers. Fundmanagers seek out and invest in different types of stocks in line withtheir own perception of potential returns and appetite for risk.

As the name suggests, aggressive growth funds target maximumcapital appreciation, invest in less researched or speculative sharesand may adopt speculative investment strategies to attain their


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objective of high returns for the investor. Consequently, they tend tobe more volatile and riskier than other funds.

b) Growth Funds

Growth funds invest in companies whose earnings are expected to

rise at an above average rate. These companies may be operating insectors like technology considered to have a growth potential, butnot entirely unproven and speculative. The primary objective ofGrowth Funds is capital appreciation over a three to five year span.Growth funds are therefore less volatile than funds that targetaggressive growth.

c) Specialty Funds

These funds have a narrow portfolio orientation and invest in onlycompanies that meet pre-defined criteria. For example, at the heightof the South African apartheid regime, many funds in the U.S.offered plans that promised not to invest in South Africancompanies. Some funds may build portfolios that will exclude

Tobacco companies. Funds that invest in particular regions such asthe Middle East or the ASEAN countries are also an example ofspecialty funds. Within the Specialty Funds category, some fundsmay be broad-based in terms of the types of investments in theportfolio. However, most specialty funds tend to be concentratedfunds, since diversification is limited to one type of investment.Clearly, concentrated specialty funds tend to be more volatile thandiversified funds.

i. Sector Funds

Sector funds' portfolios consist of investments in only one industryor sector of the market such as Information Technology,Pharmaceuticals or Fast Moving Consumer Goods that have recently

been launched in India. Since sector funds do not diversify intomultiple sectors, they carry a higher level of sector and companyspecific risk than diversified equity funds.

ii. Offshore Funds

These funds invest in equities in one or more foreign countries


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thereby achieving diversification across the country's borders.However they also have additional risks - such as the foreignexchange rate risk - and their performance depends on theeconomic conditions of the countries they invest in. Offshore EquityFunds may invest in a single country (hence riskier) or manycountries (hence more diversified).


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iii.Small-Cap Equity Funds

These funds invest in shares of companies with relatively lowermarket capitalization than that of big, blue chip companies. Theymay thus be more volatile than other funds, as smaller companies'shares are not very liquid in the markets. We can think of these

funds as a segment of specialty funds. In terms of riskcharacteristics, small company funds may be aggressive-growth or

just growth type. In terms of investment style, some of these fundsmay also be "value investors"

d) Diversified Equity Funds

A fund that seeks to invest only in equities, except for a very smallportion in liquid money market securities, but is not focused on

anyone or few sectors or shares, may be termed a diversified equityfund. While exposed to all equity price risks, diversified equity fundsseek to reduce the sector or stock specific risks throughdiversification. They have mainly market risk exposure. Suchgeneral purpose but diversified funds are clearly at the lower risklevel than growth funds.

i. Equity Linked Savings Schemes: an Indian Variant

In India, the investors have been given tax concessions toencourage them to invest in equity markets through these specialschemes. Investment in these schemes entitles the investor to claiman income tax rebate, but usually has a lock-in period before theend of which funds cannot be withdrawn. These funds are subject tothe general SEBI investment guidelines for all 'equity' funds, andwould be in the Diversified Equity Fund category. However, as thereare no specific restrictions on which sectors these funds ought toinvest in, investors should clearly look for where the FundManagement Company proposes to invest and accordingly judge the

level of risk involved.

e) Equity Index FundsAn index fund tracks the performance of a specific stock marketindex. The objective is to match the performance of the stockmarket by tracking an index that represents the overall market. Thefund invests in shares that constitute the index and in the same


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proportion as the index. Since they generally invest in a diversifiedmarket index portfolio, these funds take only the overall market risk,while reducing the sector and stock specific risks throughdiversification.

f) Value Funds

In contrast to the growth investing, other funds follow ValueInvesting approach. Value Funds try to seek out fundamentallysound companies whose shares are currently under-priced in themarket. Value Funds will add only those shares to their portfoliosthat are selling at low price-earnings ratios, low market to bookvalue ratios and are undervalued by other yardsticks.

Value Funds have the equity market price fluctuation risks, but

stand often at a lower end of the risk spectrum in comparison withthe Growth Funds. Value Stocks may be from a large number ofsectors and therefore diversified. However, value stocks often comefrom cyclical industries.g) Equity Income Funds

Usually income funds are in the Debt Funds category, as they targetfixed income investments.However, there are equity funds that can be designed to give theinvestor a high level of current income along with some steadycapital appreciation, investing mainly in shares of companies withhigh dividend yields. As an example, an Equity Income Fund wouldinvest largely in Power l Utility companies' shares of establishedcompanies that pay higher dividends and whose prices do notfluctuate as much as other shares. These equity funds shouldtherefore be less volatile and less risky than nearly all other equityfunds.

5. Hybrid Funds - Quasi Equity/Quasi Debt

In terms of the nature of financial securities held, there are threemajor mutual fund types: money market, debt and equity. Manymutual funds mix these different types of securities in theirportfolios. Thus, most funds, equity or debt, always have somemoney market securities in their portfolios as these securities offerthe much-needed liquidity. However, money market holdings willconstitute a lower proportion in the overall portfolios of debt or


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equity funds. There are funds that, however, seek to hold arelatively balanced holding of debt and equity securities in theirportfolios. Such funds are termed "hybrid funds" as they have a dualequity & bond focus. Some of the funds in this category aredescribed below.

a) Balanced Funds

A balanced fund is one that has a portfolio comprising debtinstruments, convertible securities, and preference and equityshares. Their assets are generally held in more or less equalproportions between debt/money market securities and equities. Byinvesting in a mix of this nature, balanced funds seek to attain theobjectives of income, moderate capital appreciation andpreservation of capital, and are ideal for investors with a

conservative and long-term orientation.

b) Growth-and-Income Funds

Unlike income-focused or growth-focused funds, these funds seek tostrike a balance between capital appreciation and income for theinvestor. Their portfolios are a mix between companies with gooddividend paying records and those with potential for capitalappreciation. These funds would be less risky than pure growthfunds, though more risky than income funds.

c) Asset Allocation Funds

Normally, an Equity Fund would have its primary portfolio in equitiesmost of the time. Similarly, a Debt Fund would not have majorequity holdings. In other words, their "asset allocation" ispredetermined within certain parameters. However, there do existfunds that follow variable asset allocation policies and move in andout of an asset class (equity, debt, money market, or even non-

financial assets) depending upon their outlook for specific markets.

In many ways, these funds have objectives similar to balanced fundsand may seek to diversify into foreign equities, gold and real estatebacked securities in addition to debt instruments, convertiblesecurities, preference and equity shares. Asset allocation funds thatfollow more stable allocation policies (which hold relatively fixed


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proportions of specific categories) are more like balanced funds. Onthe other hand, funds that follow more flexible allocation policies(which vary their weightings depending on the fund manager'soutlook) are more akin to aggressive growth or speculative funds.

The former are for investors who prefer low risk and stable return.The latter carry higher risk and potential for higher return because

of the flexibility enjoyed by the fund managers.

6. Commodity Funds

While all of the debt/equity/money market funds invest in financialassets, the mutual fund vehicle is suited for investment in any other- for example - physical assets. Commodity funds specialise ininvesting in different commodities directly or through shares ofcommodity companies or through commodity futures contracts.

Specialised funds may invest in a single commodity or a commoditygroup such as edible oils or grains, while diversified commodityfunds will spread their assets over many commodities.

A most common example of commodity funds is the so-calledPrecious Metals Funds. Gold Funds invest in gold, gold futures orshares of gold mines. Other precious metals funds such as Platinumor Silver are also available in other countries.

7. Real Estate Funds

Specialised Real Estate Funds would invest in Real Estate directly, ormay fund real estate developers, or lend to them, or buy shares ofhousing finance companies or may even buy their securitisedassets. The funds may have a growth orientation or seek to giveinvestors regular income. There has recently been an initiative tooffer such an income fund by the HDFC.


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LEGAL AND REGULATORY ENVIRONMENT

Regulators in India

1. SEBI - the Capital. Markets Regulator

The Government of India constituted Securities and Exchange Boardof India, by an Act of Parliament in 1992, as the apex regulator of allentities that either raise funds in the capital markets or invest incapital market securities such as shares and debentures listed onstock exchanges. Mutual funds have emerged as an importantinstitutional investor in capital market securities. Hence they comeunder the purview of

SEBI. SEBI requires all mutual funds to be registered with them. Itissues guidelines for all mutual fund operations including where theycan invest, what investment limits and restrictions must be compliedwith, how they should account for income and expenses, how theyshould make disclosures of information to the investors andgenerally acts in the interest of investor protection. Other entitiesthat SEBI alsoregulates are companies when they issue equity or debt, shareregistrars, custodians, bankers in the primary markets, stockexchanges and brokers in the secondary markets, and foreign andinstitutional investors such as FIls, offshore mutual funds withdedicated Indian mutual funds or venture capital investors.

3. Ministry of Finance

The Ministry of Finance, which is charged with implementing thegovernment policies, ultimately supervises

. both the RBI and the SEBI. Besides being the ultimate policy making

and supervising entity, the MOF has also been playing the role of anAppellate Authority for any major disputes over SEBI guidelines oncertain specific capital market related guidelines - in particular anycases of insider trading or mergers and acquisitions.

4. Company Law Board, Department of Company Affairs andRegistrar of Companies


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Mutual fund Asset Management Companies and corporate trusteesare companies registered under the Companies Act, 1956 and aretherefore answerable to regulatory authorities empowered by theCompanies Act.

The primary legal interface for all companies is the Registrar ofCompanies (RoC). RoCs in turn are supervised by the Department ofCompany Affairs. The DCA forms part of the Company Law Board,which is part of the Ministry of Law and Justice of the Govt. of India.

The RoC ensures that the AMC, or the Trustee company as the casemay be is in compliance with all Companies Act provisions.

The overall responsibility for formulating and modifying regulationrelating to companies lies with the Department of Company Affairs

(DCA).The Company Law Board (CLB) is the apex regulatory authorityunder the Companies Act. While the CLB guides the DCA, anotherarm of the CLB called the Company Law Bench is the AppellateAuthority for corporate offences.

5. Stock Exchanges

Stock exchanges are self-regulatory organizations supervised bySEBI. Many closed-end schemes ofmutual funds are listed on one or more stock exchanges. Suchschemes are subject to regulation by the concerned stockexchange(s) through a listing agreement between the fund and thestock exchange.6. Office of the Public Trustee

Mutual Funds, being Public Trusts are governed by the Indian TrustAct, 1882. The Board of Trustees or the Trustee Company isaccountable to the Office of the Public Trustee, which in turn reports

to the Charity Commissioner. These regulators enforce provisions ofthe Indian Trusts Act, to be complied with by the fund trustees.


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Advantages of Mutual Fund Investing

Identifying stocks that have growth potential is a difficultprocess involving detailed research & monitoring of themarket. Mutual funds specialize in this area &possess therequisite resources to carry out research & continuous

market monitoring. This is clearly beyond the capability ofmost individual investors

DiversificationDiversification requires substantial investment that may bebeyond the means of most individual investors. mutual fundspool the resources of many investors & thus have the fundsnecessary to build a diversified portfolio ,&by investing evena small amount in a mutual fund ,an investor can, through

his proportionate share, reap the benefit of diversification.

Professional ManagementBy purchasing mutual funds, investor are essentially hiring aprofessional manager at an especially inexpensive price.

These managers have been around the industry for a longtime and have the academic credentials to back it up.EfficiencyBy pooling investors' monies together, mutual fundcompanies can take advantage of economies of scale. With

large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms.Ease of Usekeeping track of a portfolio consisting of hundreds of stocks& The bookkeeping duties involved with stocks are muchmore complicated than owning a mutual fund.

CostMutual funds are excellent for the new investors because

they can invest small amounts of money and they can alsoinvest at regular intervals with no trading costs. Stockinvesting, however, carries high transaction fees making itdifficult for the small investor to make money. If an investorwanted to put in 100 a month into stocks and the brokercharged 15 per transaction, their investment is automatically


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down 15 percent every time they invest. That is not a goodway to start off!RiskIn general, mutual funds carry much lower risk than stocks.

Disadvantages of Investing Through Mutual Funds

1. No guarantee of returns in mutual fund

2. MFs return is the average return of the entireportfolio & not that of the best performinginstruments in the portfolio.

3. Unit holder of the mutual fund do not enjoy any

right to attend the meeting of the company &exercise voting rights.

4. performance of the mutual fund is determinedby the conditions prevailing in the stock market.

5. No Control over Costs: An investor in a mutual fundhas no control over the overall cost of investing. Hepays investment management fees as long as heremains with the fund, albeit in return for theprofessional management and research. Fees areusually payable as a percentage of the value of hisinvestments, whether the fund value is rising ordeclining. A mutual fund investor also pays funddistribution costs, which he would not incur in directinvesting. However, this shortcoming only means thatthere is a cost to obtain the benefits of mutual fundservices. However, this cost is often less than the costof direct investing by the investors.

6. No Tailor-made Portfolios: Investors who invest ontheir own can build their own portfolios of shares, bondsand other securities. Investing through funds means hedelegates this decision to the fund managers. The veryhigh-net-worth individuals or large corporate investorsmay find this to be a constraint in achieving their


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objectives. However, most mutual funds help investorsovercome this constraint by offering families ofschemes - a large number of different schemes - withinthe same fund. An investor can choose from differentinvestment plans and construct a portfolio of his choice.

7. Managing a Portfolio of Funds: Availability of a largenumber of funds can actually mean too much choice forthe investor. He may again need advice on how toselect a fund to achieve his objectives, quite similar tothe situation when he has to select individual shares orbonds to invest in.

Introduction To ULIPULIP came into play in the 1960s and became very popularin Western Europe and Americas. The reason that isattributed to the wide spread popularity of ULIP is because ofthe transparency and the flexibility which it offers. As timesprogressed the plans were also successfully mapped alongwith life insurance need to retirement planning. In todaystimes, ULIP provides solutions for insurance planning,financial needs, financial planning for childrens future andretirement planning. Features of ULIP distinguishes itselfthrough the multiple benefits that it provides to theconsumer. The plan is a one-stop solution providing:Life protection Investment and Savings Flexibility-Adjustable Life Cover- Investment Options TransparencyOptions to take additional cover against- Death due toaccident- Disability- Critical Illness- Surgeries Liquidity.

Mutual funds is the 'safety of the principal' guaranteed, plusthe added advantage of capital appreciation together withthe income earned in the form of interest or dividend.Insurance is a provision against risk and it is a device withwhich man tries to protect himself from risk in life. Therecent development in the financial innovation is Unit Link


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Insurance Policy (ULIP), which covers the concept ofmutual fund and insurance.

ULIP is a unique, multiple benefits plan which combines thebasic benefit of life insurance with good returns, tax benefitsand accident insurance cover. It offers free accident

insurance cover up to Rs 50,000. The investment objectiveof the plan is primarily to provide returns through growth inNAV or through income distribution and reinvestmentthereof in further units at NAV.

ULIPs work on the premise that there is class of investorswho regularly invest their savings in products like fixeddeposits (FDs), coupon-bearing bonds, debt funds,diversified equity funds and stocks. There is another class of

individuals who take insurance to provide for their family incase of an eventuality. So typically both these categories ofindividuals (which also overlap to a large extent) have aportfolio of investments as well as life insurance. ULIP asa product combines both these life insurance) into a singleproduct. This saves the investor/insurance-seeker thehassles of managing and tracking a portfolio of products.

The premium paid is invested in either debt or equityproducts or a combination of the two. In other words, it

enables the buyer to secure some protection for his family inthe event of his untimely death and at the same timeprovides him an opportunity to earn a return on his premiumpaid. In the event of the insured person's untimely death, hisnominees would normally receive an amount that is thehigher of the sum assured or the value of the units(investments). To put it simply, ULIP attempts to fulfillinvestment needs of an investor withprotection/insurance needs of an insurance seeker. It

saves the investor/insurance-seeker the hassles ofmanaging and tracking a portfolio or products.

Various Schemes

However, there are some schemes in which the policyholderreceives the sum assured plus the value of the investments.


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Various schemes have been tailored to suit differentcustomer profiles and, in that sense, offer a great deal ofchoice. The advantage of ULIP is that since the investmentsare made for long periods, the chances of earning a decentreturn are high. Just as in the case of mutual funds, buyerswho are risk averse can buy debt schemes while those who

have an appetite for risk can opt for balanced or equityschemes.

ULIP - Key Features

A multi-purpose tax saving plan with a choice of 10years or 15 years duration( for some plans there is nomaturity).

Sale of units will be at NAV

No medical examination is required at the time of joining the plan.Investment can be made in ones spouses or childrens name. Totally exempt from the levy of gift tax and wealth tax.

Premiums paid can be single, regular or variable. Thepayment period too can be regular or variable. The riskcover can be increased or decreased.

As in all insurance policies, the risk charge (mortalityrate) varies with age.

The maturity benefit is not typically a fixed amount andthe maturity period can be advanced or extended.

The policyholder can switch between schemes, forinstance, balanced to debt or gilt to equity, etc.

The maturity benefit is the net asset value of the units. The costs in ULIP are higher because there is a life

insurance component in it as well, in addition to theinvestment component.

Insurance companies have the discretion to decide ontheir investment portfolios.

They are simple, clear, and easy to understand. Being transparent the policyholder gets the entire

episode on the performance of his fund. Lead to an efficient utilisation of capital. ULIP products are exempted from tax and they provide

life insurance. Provides capital appreciation.


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Investor gets an option to choose among debt,balanced and equity funds.

4reasons why ULIPs get the thumbs up

ULIPs have been selling like proverbial `hot cakes' in the

recent past and they are likely to continue to outsell theirplain vanilla counterparts going ahead. So what is it thatmakes ULIPs so attractive to the individual is,

1. Insurace cover plus savingsTo begin with, ULIPs serve the purpose of providing lifeinsurance combined with savings at market-linked returns.

To that extent, ULIPs can be termed as a two-in-one plan interms of giving an individual the twin benefits of lifeinsurance plus savings. This is unlike comparableinstruments like a mutual fund for instance, which does notoffer a life cover.

2. Multiple investment optionsULIPs offer a lot more variety than traditional life insuranceplans. So there are multiple options at the individual'sdisposal. 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% inequities)

Conservative ULIPs (can typically invest upto 20% inequities)

Although this is how the ULIP options are generally designed,the exact debt/equity allocations may vary across insurance

companies. Individuals can opt for a variant based on theirrisk profile. For example, a 30-Yr old individual looking atbuying a life insurance plan that also helps him build acorpus for retirement can consider investing in the Balancedor even the Aggressive ULIP. Likewise, a risk-averseindividual who is not comfortable with a high equityallocation can opt for the Conservative ULIP.


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3. FlexibilityIndividuals may well ask how ULIPs are any different frommutual funds. After all, mutual funds also offerhybrid/balanced schemes that allow an individual to select aplan according to his risk profile. The difference lies in theflexibility that ULIPs afford the individual. Individuals can

switch between the ULIP variants outlined above tocapitalize on investment opportunities across the equity anddebt markets. Some insurance companies allow a certainnumber of `free' switches. This is an important feature thatallows the informed individual/investor to benefit from thevagaries of stock/debt markets. For instance, when stockmarkets were on the brink of 7,000 points (Sensex), theinformed investor could have shifted his assets from anAggressive ULIP to a low-risk Conservative ULIP.

Switching also helps individuals on another front. They canshift from an Aggressive to a Balanced or a ConservativeULIP as they approach retirement. This is a reflection of thechange in their risk appetite as they grow older.

4. Works like an SIPRupee cost-averaging is another important benefitassociated with ULIPs. Individuals have probably alreadyheard of the Systematic Investment Plan (SIP) which is

increasingly being advocated by the mutual fund industry.With an SIP, individuals invest their monies regularly overtime intervals of a month/quarter and don't have to worryabout `timing' the stock markets. These are not benefitspeculiar to mutual funds. Not many realise that ULIPs alsotend to do the same, albeit on a quarterly/half-yearly basis.As a matter of fact, even the annual premium in a ULIPworks on the rupee cost-averaging principle. An addedbenefit with ULIPs is that individuals can also invest a one-

time amount in the ULIP either to benefit from opportunitiesin the stock markets or if they have an investible surplus in aparticular year that they wish to put aside for the future.

The chart below shows how ULIP can meet multiple needs atdifferent life stages.
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Integrated Financial Planning

Starting ajob,Singleindividual

Recentlymarried, nokids

Married, withkids

Kids going toschool,college

Higher studies forchild,marriage

Childrenindependentnearing thegolden years

ureed

Low protection,high asset

creation andaccumulation

Reasonableprotection, still

high on assetcreation

Higherprotection, still

high on assetcreation butsteadieroptions,increasesavings forchild

HigherProtection, high

on assetcreation butsteadieroptions,liquidity foreducationexpenses

Lumpsum money foreducation,

marriage. Facility tostop premium for 2-3 yrs for these extraexpenses

Safe accumulfor the golden

yrs.Consideralower life insuas thedependanciesdecreased

exibilit Choose lowdeath benefit,choosegrowth/balance

d option forasset creation

Increase deathbenefit,choosegrowth/balanced option for

asset creation

Increase deathbenefit, choosebalanced optionfor asset

creation.Choose ridersfor enhancedprotection.Usetop-ups toincrease youraccumulation

Withdrawalfrom theaccount for theeducation

expenses of thechild

Withdrawal from theaccount for highereducation/marriageexpenses of the

child. Premiumholiday-to stoppremium for aperiod withoutlapsing the policy

Decrease thedeath benefit-reduce it to thminimum

possible.Choothe incomeinvestmentoption.Top-upform theaccumulation reduced expefor the goldencash accumul

The key to good financial planning is to understand one'scurrent and future financial goals, risk appetite and portfoliomix. This done, the next step is to allocate assets acrossdifferent categories and systematically adhere to aninvestment pattern, so that they work in tandem to meetone's requirements over the next month, year or decade.

Because of their flexibility to adjust to different life stageneeds, ULIPs fit in very well with financial planning efforts.Moreover, as a systematic investment plan, ULIPs greatlydiminish the hazards of investing in a volatile market, andusing the concept of 'Rupee Cost Averaging', allow thepolicyholder to earn real returns over the long term.


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it is important for investor must monitor ULIP on aregular basis, though not as frequently as investorwould a stock or mutual fund. ULIP is a long-terminvestment and daily fluctuations in the NAV should

not impact investor.The mutual fund industry is all set to get aggressiveto counter competition from the insurance industrysunit linked risk products. For mutual funds the unitlinked insurance products launched by life insurancecompanies are an encroachment on their territory,Following statement will prove this: Around 80 percent of the premium income of life insurers has comein through unit-linked plans in 2004.Which means

mutual fund companies are losing out on a hugemarket that would have otherwise been theirs. Theseproducts are investment avenues that provide marketrelated returns to the investor with an element ofinsurance thrown in. For the customer the attractionof market related returns with insurance is anattractive option. On the contrary though mutual fundcompanies also have unit-linked products what isabsent is the insurance cover

Expenses

One area where unit-linked plans come in for widespreadcriticism relates to the expenses that insurers charge underthree broad heads: mortality charges (which goes towards


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paying for your insurance cover), general expenses (agents'commissions and underwriting costs), and fund managementcosts. The second head, general expenses, accounts for thebiggest component-typically, around 40 per cent (of thepremium paid) in the first two years, which goes downsharply in later years. The actual expense structure may

vary from one product to another depending on, amongother things, the amount invested, the investment tenureand the period beyond which withdraws are permitted.

A ULIP policyholder has the option to invest in a varietyfunds, depending on his risk profile. If one does not haveappetite to invest in equity, they can choose a debt or

balanced fund. However, the structure of a ULIP takes careof quite a bit of the uncertainty in the markets. Insurancecompanies understand the need to give insurance seekersthe flexibility to rethink their investment strategy in view ofmarket histrionics. It is the investors to make the rightswitch they need to track markets actively and be wellinformed, which is actually the job of the investmentadvisor/consultant.

ULIP is suitable for individuals who are already adequately

insured and are reasonably well informed and savvy to takeactive investment decisions by using the 'switch option' thatis provided to a ULIP policyholder. Also policyholders withregular endowment plans that are not satisfied with the 4-6per cent returns can consider taking a ULIP with a lowerequity component. this is a viable option for those who havethe time and skill to manage several products separately.

However, for those who want a convenient, economical, one-stop solution, ULIPs are the best bet.& ULIP also get thebenefit of bancassurance.

India has an extensive bank network established over theyears. What Insurance companies have to do is to


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just take advantage of the customers' long-standing trustand relationships with banksIn bancassurance tie up, banks have many advantagesapart from increasing return on assets by building feeincome through the sale of insurance product the banks 7increasing productivity of the employees . Furthermore,

improvement of overall customer satisfaction resulting inhigher customer retention levels, cross selling of theinsurance products like term insurance products.

The other partner insurer is not only benefited from thebanks customer database but can also exploit authenticinformation about customers financial standing,spending habits, investment & purchase capability.Needless to mention the wide network of the branchesform the ideal distribution channel. Urban as well as rural

both markets are tapped simultaneously. Not only thisalready established relationship with customers also isincluded in the package.bancassurance as a tool for increasing their marketpenetration in India. It is also good for the one who seesbancassurance in terms of reduced price, high qualityproduct and delivery at doorsteps. Everybody is a winnerhere. The creation of bancassurance operations has madean important impact on the financial services industry atlarge. This is though a new concept but it has gained a lotof importance in the industry at present and has a greatfuture.

Limitation:

1. It is prudent to make equity-oriented investments basedon an established track record of at least three years overdifferent market cycles. ULIPs do not fulfil this criterion now.

2. Insurance and savings are two different goals and it isbetter to address them separately rather than bundle theminto a single product. A combination of a term plan and amutual fund could give better results over the long term.


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3.The free hand given to ULIPs might prove risky if thetiming of exit happens to coincide with a bearish marketphase, because of the inherently high equity component ofthese schemes

4. An initial allocation charge is deducted from investor

premiums for selling, marketing and broker commissions.These charges could be as high as 65 per cent of the firstyear premiums. Premium allocation charges are usually veryhigh (5-65 per cent) in the first couple of years, but taper offlater. The high initial charges mainly go towards fundingagent commissions, which could be as high as 40 per cent ofthe initial premium as per IRDA (Insurance Regulatory andDevelopment Authority) regulations.

The charges are higher for a linked plan than a non-linkedplan, as the former require lot more servicing than the latter,such as regular disclosure of investments, switches, re-direction of premiums, withdrawals, and so on. Insurancecompanies have the discretion to structure their expensesstructure whereas a mutual fund does not have that luxury.

The expense ratios in their case cannot exceed 2.5 per centfor an equity plan and 2.25 per cent for a debt planrespectively. The lack of regulation on the expense frontworks to the detriment of investors in ULIPs.

5. The front-loading of charges does have an impact onoverall returns as investor lose out on the compoundingbenefit. Insurance companies explain that charges getevened out over a long term. Thus investor are forced tostay with the plan for a longer tenure to even out the effectof initial charges as the shorter the tenure, the lower will bethe investor real returns

6. When investor choose a mutual fund, they look for anestablished track record of three to five years of consistentreturns across various market cycles to judge a fund'sperformance.

It is early days for insurance companies on this score;


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investing substantially in linked plans might not be advisableat this juncture.

7. In effect, when investor lock in their money in a ULIP,despite the promise of flexibility and liquidity, investor will

stuck with one fund management style. This is all the morereason to look for an established track record beforecommitting investor hard-earned money.

8. investor life cover charges would depend on theaccumulation in investor investment account. Asaccumulation increases, the amount at risk for the insurancecompany decreases. However, with increasing age, the costper Rs 1,000 sum assured increases, effectively increasing

policy holder overall insurance costs. A lower life cover couldyield better returns.

9. it would deal with the fact that expenses on ULIPs were onthe higher side in the initial years and therefore, the exitoption would hardly prove to be beneficial for the investors.

10. ULIPs face tough competition from mutual funds, whichare short-term instruments. Hence, a liquidity option makesULIPs as attractive but because of the high front-end chargeson policy, investor may not be left with much to withdraw atthe end of 3 years.
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Protector (Income) Plan

DATE NAV RETURN(x) X - x (X - x)(X - x)2/8/2004 13.431/9/2004 13.49 0.00446761 0.001434194 2.05691E-061/10/2004 13.48 -0.00074129 -0.003774706 1.42484E-051/11/2004 13.47 -0.00074184 -0.003775256 1.42526E-051/12/2004 13.54 0.005196733 0.002163317 4.67994E-063/1/2005 13.63 0.006646972 0.003613556 1.30578E-051/2/2005 13.62 -0.000733676 -0.003767092 1.4191E-051/3/2005 13.66 0.002936858 -9.65584E-05 9.32353E-094/4/2005 13.7208 0.004450952 0.001417536 2.00941E-06

2/5/2005 13.7461 0.001843916 -0.0011895 1.41491E-061/6/2005 13.8203 0.005397895 0.002364479 5.59076E-061/7/2005 13.8717 0.003719167 0.000685751 4.70254E-071/8/2005 13.9266 0.003957698 0.000924282 8.54297E-07TOTAL 0.036400994 7.28355E-05

N=12

X = x Reward for per unit risk

n

= 0. 3033416 0. 24662=0.036400994 *100

=1.2299

12

=0. 3033416

SD=(X - x)(X - x) n=0. 2463662


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Maximiser (Growth) Plan

DATE NAV RETURN X - x(X - x)(X - x)

2/8/2004 19.361/9/2004 19.7 0.017561983 -0.013750968 0.000189089

1/10/2004 20.86 0.058883249 0.027570298 0.000760121

1/11/2004 21.31 0.021572387 -0.009740564 9.48786E-05

1/12/2004 23.55 0.105114969 0.073802018 0.005446738

3/1/2005 25.17 0.068789809 0.037476858 0.001404515

1/2/2005 24.64 -0.021056814 -0.052369765 0.002742592

1/3/2005 25.35 0.028814935 -0.002498016 6.24008E-06

4/4/2005 24.61 -0.029191321 -0.060504272 0.003660767

2/5/2005 23.55 -0.043071922 -0.074384873 0.005533109

1/6/2005 24.95 0.059447983 0.028135032 0.000791581/7/2005 26.17 0.048897796 0.017584845 0.000309227

1/8/2005 27.74 0.059992358 0.028679407 0.000822508

Total 0.375755412 0.021761366

N=12

X = X

nReward for per unit risk

=3.1312951 0.375755412

= *100 4.2584586 12

=3.1312951 =0.7353

SD=(X - x)(X - x) n=4.2584586


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Life time I (Balancer (Balanced) Plan)

DATE

NAV RETURN X - x(X - x)(X - x)

2/8/2004 15.891/9/2004 16.04 0.009439899 -0.003861769 1.49133E-05

1/10/2004 16.42 0.023690773 0.010389105 0.000107934

1/11/2004 16.54 0.007308161 -0.005993507 3.59221E-05

1/12/2004 17.24 0.042321644 0.029019976 0.000842159

3/1/2005 17.76 0.030162413 0.016860745 0.000284285

1/2/2005 17.6 -0.009009009 -0.022310677 0.000497766

1/3/2005 17.81 0.011931818 -0.00136985 1.87649E-06

4/4/2005 17.67 -0.007860752 -0.02116242 0.000447848

2/5/2005 17.39 -0.015846067 -0.029147735 0.00084959

1/6/2005 17.82 0.024726855 0.011425187 0.0001305351/7/2005 18.18 0.02020202 0.006900352 4.76149E-05

1/8/2005 18.59 0.022552255 0.009250587 8.55734E-05Total 0.159620011 0.003346017

N=12

X = X

nReward for per unit risk

0.159620011

= *100 = 1.330166812

1.6698353

= 1.3301668 =0.7966

SD=

(X - x)(X - x) n

=1.6698353


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Unit gain plus (equity plus)

Date

(MM/DD/YYYY) NAV return X - x(X - x)(X - x)

8/2/2004 10.1149/1/2004 10.194 0.00791 -0.029818172 0.000889123

10/1/2004 10.958 0.074946 0.037218047 0.001385183

11/1/2004 11.167 0.019073 -0.018655176 0.000348016

12/1/2004 12.051 0.079162 0.041433816 0.001716761

1/3/2005 13.467 0.117501 0.079772622 0.006363671

2/1/2005 13.601 0.00995 -0.027777751 0.000771603

3/1/2005 14.152 0.040512 0.002783727 7.74914E-06

4/11/2005 13.756 -0.02798 -0.065709911 0.004317792

5/2/2005 13.357 -0.02901 -0.066733525 0.004453363

6/1/2005 14.18 0.061616 0.023887632 0.0005706197/1/2005 14.415 0.016573 -0.021155362 0.000447549

8/1/2005 15.604 0.082484 0.044755524 0.002003057Total 0.452737 0.023274488

N=12

X = X

n Reward for per unit risk

0.452737= *100 = 3.772812

4.404022=3.7728

=0.8567

SD=(X - x)(X - x) n

=4.404022

7/29/2019