rohinsbi mutusal funds

8/4/2019 RohinSBI Mutusal Funds

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EXECUTIVE SUMMARY

In few years Mutual Fund has emerged as a tool for ensuring ones

financial wellbeing. Mutual Funds have not only contributed to theIndia growth story but have also helped families tap into the success of

Indian Industry. As information and awareness is rising more and more

people are enjoying the benefits of investing in mutual funds. The

main reason the number of retail mutual fund investors remains small

is that nine in ten people with incomes in India do not know that

mutual funds exist. But once people are aware of mutual fund

investment opportunities, the number who decide to invest in mutual

funds increases to as many as one in five people. The trick for

converting a person with no knowledge of mutual funds to a new

Mutual Fund customer is to understand which of the potentialinvestors are more likely to buy mutual funds and to use the right

arguments in the sales process that customers will accept as important

and relevant to their decision.

This Project gave me a great learning experience and at the same time it

gave me enough scope to implement my analytical ability. The analysis

and advice presented in this Project Report is based on market

research on the saving and investment practices of the investors and

preferences of the investors for investment in Mutual Funds. This

Report will help to know about the investors Preferences in MutualFund means Are they prefer any particular Asset Management

Company (AMC), Which type of Product they prefer, Which Option

(Growth or Dividend) they prefer or Which Investment Strategy they

follow (Systematic Investment Plan or One time Plan). This Project as a

whole can be divided into two parts.

The first part gives an insight about Mutual Fund and its various aspects, theCompany Profile, Objectives of the study, Research Methodology. One can have abrief knowledge about Mutual Fund and its basics through the Project.

The second part of the Project consists of data and its analysis collected throughsurvey done on 200 people. For the collection of Primary data I made aquestionnaire and surveyed of 200 people. I also taken interview of many Peoplethose who were coming at the SBI Branch where I done my Project. I visited otherAMCs in Hyderabad to get some knowledge related to my topic. I studied about theproducts and strategies of other AMCs in Hyderabad to know why people prefer toinvest in those AMCs. This Project covers the topic THE MUTUAL FUND IS BETTER


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INVESTMENT PLAN.The data collected has been well organized and presented. Ihope the research findings and conclusion will be of use.

ALL ABOUT MUTUAL FUNDS

WHAT IS MUTUAL FUND

BY STRUCTURE

BY NATURE

EQUITY FUND

DEBT FUNDS

BY INVESTMENT OBJECTIVE

OTHER SCHEMES

PROS & CONS OF INVESTING IN MUTUAL FUNDS

ADVANTAGES OF INVESTING MUTUAL FUNDS

DISADVANTAGES OF INVESTING MUTUAL FUNDS

MUTUAL FUNDS INDUSTRY IN INDIA

MAJOR PLAYERS OF MUTUAL FUNDS IN INDIA

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY


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CATEGORIES OF MUTUAL FUNDS

INVESTMENT STRATEGIES

WORKING OF A MUTUAL FUND

GUIDELINES OF THE SEBI FOR MUTUAL FUND

COMPANIES DISTRIBUTION CHANNELS

DOES FUND PERFORMANCE AND RANKING PERSIST?

PORTFOLIO ANALYSIS TOOLS

RESEARCH REPORT

OBJECTIVE OF RESEARCH

SCOPE OF THE STUDY

DATA SOURCES

SAMPLING

DATA ANALYSIS

QUESTIONNAIRE


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INTRODUCTION TO MUTUAL FUND AND ITS VARIOUS

ASPECTS.Mutual fund is a trust that pools the savings of a number of investors who share acommon financial goal. This pool of money is invested in accordance with a statedobjective. The joint ownership of the fund is thus Mutual, i.e. the fund belongs toall investors. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earnedthrough these investments and the capital appreciations realized are shared by itsunit holders in proportion the number of units owned by them. Thus a Mutual Fundis the most suitable investment for the common man as it offers an opportunity toinvest in a diversified, professionally managed basket of securities at a relativelylow cost. A Mutual Fund is an investment tool that allows small investors access to a

well-diversified portfolio of equities, bonds and other securities. Each shareholderparticipates in the gain or loss of the fund. Units are issued and can be redeemed asneeded. The funds Net Asset value (NAV) is determined each day.

Investments in securities are spread across a wide cross-section of industries andsectors and thus the risk is reduced. Diversification reduces the risk because allstocks may not move in the same direction in the same proportion at the sametime. Mutual fund issues units to the investors in accordance with quantum ofmoney invested by them. Investors of mutual funds are known as unit holders.

When an investor subscribes for the units of a mutual fund, he becomes part ownerof

the assets of the fund in the same proportion as his contribution amount put up withthecorpus (the total amount of the fund). Mutual Fund investor is also known as amutualfund shareholder or a unit holder.

Any change in the value of the investments made into capital market instruments(suchas shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme.NAVis defined as the market value of the Mutual Fund scheme's assets net of itsliabilities.

NAV of a scheme is calculated by dividing the market value of scheme's assets bythetotal number of units issued to the investors.


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ADVANTAGES OF MUTUAL FUND

Portfolio Diversification

Professional management

Reduction / Diversification of Risk

Liquidity

Flexibility & Convenience

Reduction in Transaction cost

Safety of regulated environment

Choice of schemes

Transparency

DISADVANTAGE OF MUTUAL FUND No control over Cost in the Hands of an Investor

No tailor-made Portfolios

Managing a Portfolio Funds

Difficulty in selecting a Suitable Fund Scheme


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HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust ofIndia, at the initiative of the Government of India and Reserve Bank. Though thegrowth was slow, but it accelerated from the year 1987 when non-UTI playersentered the Industry.

In the past decade, Indian mutual fund industry had seen a dramatic improvement,both qualities wise as well as quantity wise. Before, the monopoly of the market hadseen an ending phase; the Assets Under Management (AUM) was Rs67 billion. Theprivate sector entry to the fund family raised the A sum to Rs. 470 billion in March1993 and till April 2004; it reached the height if Rs. 1540 billion.

The Mutual Fund Industry is obviously growing at a tremendous space with themutual fund industry can be broadly put into four phases according to thedevelopment of the sector. Each phase is briefly described as under.

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by theReserve Bank of India and functioned under the Regulatory and administrativecontrol of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and theIndustrial Development Bank of India (IDBI) took over the regulatory andadministrative control in place of RBI. The first scheme launched by UTI was UnitScheme 1964. At the end of 1988 UTI had Rs. 6700 crores of assets under

management.

Second phase 1987 1993 (Entry of public sector funds)

1987 marked the entry of non UTI public sector mutual funds set up by publicsector banks and life insurance corporation of India (GIC). SBI Mutual funds was firstnon-UTI mutual fund established in June 1987 followed by canara bank mutual fund(Dec 87), Punjab national bank mutual fund (Aug 89), Indian bank mutual fund (Nov89), Bank of India (June 90), Bank of baroda mutual fund (Oct 92). LIOC established

its mutual funds in June 1989. While GIC had set up its mutual fund in December1990. At the end of 1993, the mutual fund industry had assets under managementof Rs. 47,004 Crores.

Third phase 1993-2003(entry of private sector funds)


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1993 was the year in which the first mutual fund regulation came into began, underwhich all mutual funds except UTI were to be registered and governed. Theerstwhile Kothari Pioneer (now merged with Fraklin Tempelton) was the first privatesector Mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a morecomprehensive and revised Mutual Fund regulation in 1996. The industry now

functions under the SEBI (Mutual Fund) regulations 1996.As at the end of January2003, there were 33 mutual funds with total assets of Rs. 1,21,805 Crores.

Fourth phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI wasbifurcated 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 ofJanuary2003, representing broadly, the assets of US 64 scheme, assured return and

certain other schemes.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations.Consolidation and growth. As at the end of September, 2004, there were 29 funds,which manage assets of Rs.153108 crores under 421 schemes.

Mutual Funds can be classified as followes:

Based on their structure:

Open-ended funds:

Investors can buy and sell the units from the fund, at any point of time.

Close-ended funds:

These funds raise funds from investors only once. Therefore after the offerperiod, fresh investments cant be made into the fund. If the fund is listed on astock exchange the units can be traded like a stocks( Eg., Morgan Stanley Growthfund). Recently most of the New fund offers of close-ended funds provided liquiditywindow on a periodic basis such as monthly or weekly. Redemption of units can bemade during specified intervals. Therefore, such funds relatively have low liquidity.


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Based on their investment Objective:

1) Equity funds: These funds invest in equities and equity related investments. With

fluctuating share prices, such funds show volatile performance, even losses.However short term fluctuations in the market, generally smoothens out in the longterm, there by offering higher returns at relatively lower volatility. At the same time,such funds can yield great capital appreciation as. Historically, equities have out putperformed all assets classes in the long term. Hence investments in equity fundsshould considered for a period of at least 3-5 years.

It can be further classified as:

a) Index funds- In this case a key stock market index, like BSE Sensex or Niftyis tracked. Their portfolio mirrors the benchmark index both in terms ofcomposition and individual stock weight ages.

b) Equity diversified funds- 100% of the capital is invested in equitiesspreading across different sectors and stocks.

c) Dividend yield funds- it is similar to the equity diversified funds except thatthey invest in companies offering high dividend yields.

d) Thematic funds- Invest 100% of the assets in sectors which are relatedthrough some theme.

e) e.g. -An infrastructure fund invests in power, construction, cements sectorsetc.

f) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A bankingsector fund will invest in banking stocks.

g) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

2) Balanced fund:

Their investment portfolio includes both debt and equity. As a result, on therisk-return ladder, they fall between equity and debt funds. Balanced funds are theideal mutual funds vehicle for investors who prefer spreading their risk acrossvarious instruments.

Following are balanced funds classes:

Debt-oriented funds - Investment below 65% in equities.


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Equity-oriented funds- Invest at least 65% in equities, remaining in debt.

3) Debt fund:

They invest only in debt instruments, and are a good option for investorsaverse to idea of taking risk associated with equities. Therefore, they investexclusively in fixed-income instruments like bonds, debentures, Government ofIndia securities and money market instruments such as certificates of deposit (CD),commercial paper(CP) and call money. Put your money into any of these debt fundsdepending on your investment horizon and needs.

a) Liquid funds- These funds invest 100% in money market instruments, alarge portion being invested in call money market.

b) Gilt funds ST- They invest 100% of their portfolio in government securities

of and T-bills.

c) Floating rate funds - Invest in short-term debt papers. Floaters invest indebt instruments which have variable coupon rate.

d) Arbitrage fund- They generate income through arbitrage opportunities dueto miss-pricing between cash market and derivatives market. Funds areallocated to equities, derivatives and money markets. Higher proportion(around 75%) is put in money markets, in the absence of arbitrageopportunities.

e) Gilt funds LT- They invest 100% of their portfolio in long-term governmentsecurities.

f) Income funds LT-Typically, such funds invest a major portion of theportfolio in long-term debt papers.

g) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and anexposure of 10%-30% to equities.

h) FMPs- fixed monthly plans invest in debt papers whose maturity is in linewith that of the fund.

INVESTMENT STRATEGIESSystematic Investment Plan: under this a fixed sum is invested each month ona fixed date of a month. Payment is made through post dated cheques or directdebit facilities. The investor gets fewer units when the NAV is high and more unitswhen the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA).


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Systematic Transfer Plan under this an investor invest in debt oriented fund andgive instructions to transfer a fixed sum, at a fixed interval, to an equity scheme ofthe same mutual fund.

Systematic Withdrawal Plan if someone wishes to withdraw from a mutual fundthen he can withdraw a fixed amount each month.

INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business.

Though it is perhaps the smallest segment of the industry, it is also the most

glamorous in that it is a young industry where there are changes in the rules

of the game everyday, and there are constant shifts and upheavals.

The mutual fund is structured around a fairly simple concept, the mitigation

of risk through the spreading of investments across multiple entities, which is

achieved by the pooling of a number of small investments into a large bucket.

Yet it has been the subject of perhaps the most elaborate and prolonged

regulatory effort in the history of the country.

A little history:

The mutual fund industry started in India in a small way with the UTI Act

creating what was effectively a small savings division within the RBI. Over a

period of 25 years this grew fairly successfully and gave investors a good

return, and therefore in 1989, as the next logical step, public sector banks

and financial institutions were allowed to float mutual funds and their success


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emboldened the government to allow the private sector to foray into this area.

The initial years of the industry also saw the emerging years of the Indian

equity market, when a number of mistakes were made and hence the mutual

fund schemes, which invested in lesser-known stocks and at very high levels,

became loss leaders for retail investors. From those days to today the retail

investor, for whom the mutual fund is actually intended, has not yet returned

to the industry in a big way. But to be fair, the industry too has focused on

brining in the large investor, so that it can create a significant base corpus,

which can make the retail investor feel more secure.

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 are 33 fund houses in

the country including 16 joint ventures and 3 whollyowned foreign assetmanagers.

According to a recent McKinsey report, the total AUM of the Indian mutual

fund industry could grow to $350-440 billion by 2012, expanding 33%

annually. While the revenue and profit (PAT) pools of Indian AMCs are pegged

at $542 million and $220 million respectively, it is at par with fund houses

in developed economies. Operating profits for AMCs in India, as a percentage

of average assets under management, were at 32 basis points in 2006-07,

while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US,

in the same time frame.


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http://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=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045


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HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit Trust of

India, at the initiative of the Government of India and Reserve Bank. The history of

mutual funds in India can be broadly divided into four distinct phases: -

First Phase 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by theReserve 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.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector

banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation

of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June

1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund

(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of BarodaMutual 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.


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consolidation and growth. As at the end of September, 2004, there were 29 funds,

which manage assets of Rs.153108 crores under 421 schemes.

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) in terms of AUM, the AUM

of the sector excluding UTI has grown over 8 times from Rs. 152 billion in March 1999

to $ 148 billion as at March 2008.

Though India is a minor player in the global mutual fund industry, its AUM as a

proportion of the global AUM has steadily increased and has doubled over its levels in

1999.

The growth rate of Indian mutual fund industry has been increasing for the last few

years. It was approximately 0.12% in the year of 1999 and it is noticed 0.25% in 2004 in

terms of AUM as percentage of global AUM.

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMCs is in the queue to enter the Indian markets.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in

mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than

800. There is a big scope for expansion.

Mutual fund can penetrate rurals like the Indian insurance industry with simple and

limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Recent trends in mutual fund industry


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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 the decline 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 andactual returns. The service 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 offering value 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.

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 the country. 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.


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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. SIP ensures that there is a regular investment that the investor

makes on specified dates making his purchases to spread out reducing the effect of the

short term volatility of markets. SWP was designed to ensure that investors who wanted

a regular income or cash flow from their investments were able 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) was incorporated on 22nd August 1995.

AMFI is an apex body of all Asset Management Companies (AMC), which has been registered

with 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 of directors. 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 well as 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. The association was created originally as

a body that would lobby with the regulator to ensure that the fund viewpoint was heard. Today, it

is usually the body that is consulted on matters long before regulations are framed, and it often

initiates many regulatorychanges 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 and improvements and other which are

adhoc committees constituted to address specific issues. These committees consist of industry

professionals from among the member mutual funds. There is now some thought that AMFI

should become a self-regulatory organization since it has worked so effectively as an industry

body.

OBJECTIVES:

To define and maintain high professional and ethical standards in all areas of operation of

mutual fund industry

To recommend and promote best business practices and code of conduct to be followed by

members and others engaged in the activities of mutual fund and asset management including

agencies connected or involved in the field of capital markets and financial services.

To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI

on all matters concerning the mutual fund industry.

To represent to the Government, Reserve Bank of India and other bodies on all matters

relating to the Mutual Fund Industry.

To develop a cadre of well trained Agent distributors and to implement a programme of

training and certification for all intermediaries and other engaged in the industry.

To undertake nation wide investor awareness programme so as to promote proper

understanding of 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 OF 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 Limited

2. UTI Asset Management Company Ltd

o Institutions

1. LIC Mutual Fund Asset Management Company Limited


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2. Foreign

1. AIG Global Asset Management Company (India) Pvt. Ltd.

2. FIL Fund Management Private Limited

3. 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

3. HDFC Asset Management Company Limited

4. ICICI Prudential Asset Mgmt.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.

6. Lotus India Asset Management Co. Private Ltd.

7. Morgan Stanley Investment Management Pvt.Ltd.

8. Principal Pnb Asset Management Co. Pvt. Ltd.


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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 monopoly represented by the

Unit Trust of India. This monopoly was diluted in the eighties by allowing nationalized

banks and insurance companies (LIC & GIC) to set up their institutions under the Indian

Trusts Act to transact mutual fund business, allowing the Indian investor the option to

choose between 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 came to 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 initially formulated

SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS)

REGULATIONS, 1993 providing detailed procedure for establishment, registration,

constitution, management of trustees, asset management 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 the guidelines 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

containing material subjects relating to regulation and conduct of business by Mutual

Funds.


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REGISTRATION OF MUTUAL FUND:

Application for registration

1. 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 application

2. 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 an opportunity

to complete such formalities within such time as may be specified by the Board.

Furnishing information

4. The Board may require the sponsor to furnish such further information or clarification as may

be required 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.


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Explanation : For the purposes of this clause sound 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

(iii) the networth in the immediately preceding year is more than the capital

contribution of the sponsor in the asset management company; and

(iv) the sponsor has profits after providing for depreciation, interest and tax in three out of the

immediately preceding five years, including the fifth year;

(b) in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed

has been approved by the Board;

(c) the sponsor has contributed or contributes at least 40% to the net worth of the asset

management company:

Provided that any person who holds 40% or more of the net worth of an asset

management company shall be deemed to be a sponsor and will be required to fulfill the

eligibility criteria specified in these regulations;

(d) the sponsor or any of its directors or the principal officer to be employed by the mutual fund

should not have been guilty of fraud or has not been convicted of an offence involving moral

turpitude or has not been found guilty of any economic

offence;

(e) appointment of trustees to act as trustees for the mutual fund in accordance with the

provisions of the regulations;


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(f) appointment of asset management company to manage the mutual fund and operate the

scheme of such funds in accordance with the provisions of these regulations;

(g) appointment of a custodian in order to keep custody of the securities 10[or gold and gold

related instrumentsand carry out the custodian activities as may be authorizedby the trustees.

Consideration of application

8. The Board, may on receipt of all information decide the application.

Grant of Certificate of Registration

9. The Board may register the mutual fund and grant a certificate in Form B on the applicant

paying the registration fee as specified in Second Schedule.

Terms and conditions of registration

10. The registration granted to a mutual fund under regulation 9, shall be subject to the following

terms and conditions:

(a) the trustees, the sponsor, the asset management company and the custodian shall comply

with the provisions of these regulations;

(b) the mutual fund shall forthwith inform the Board, if any information or particulars previously

submitted to the Board was misleading or false in any material respect;

(c) the mutual fund shall forthwith inform the Board, of any material change in the

information or particulars previously furnished, which have a bearing on the

registration granted by it;

(d) payment of fees as specified in the regulations and the Second Schedule.


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Rejection of application

11. Where the sponsor does not satisfy the eligibility criteria mentioned in regulation 7, the

Board may reject the application and inform the applicant of the same.

Payment of annual service fee:

12. A mutual fund shall pay before the 15th April each year a service fee as specified in the

Second Schedule for every financial year from the year following the year of registration:

Provided that the Board may, on being satisfied with the reasons for the delay permit the

mutual fund to pay the service fee at any time before the expiry of two months from the

commencement of the financial year to which such fee relates.


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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.

Appointment of an asset management company

15. (1) The sponsor or, if so authorised by the trust deed, the trustee, shall appoint an asset

management company, which has been approved by the Board under sub-regulation(2) of

regulation 21.

(2) The appointment of an asset management company can be terminated by majority of the

trustees or by seventy-five per cent of the unitholders of the scheme.


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(3) Any change in the appointment of the asset management company shall be subject to prior

approval of the Board and the unitholders.


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Eligibility criteria for appointment of asset management company

16. (1) For grant of approval of the asset management company the applicant has to fulfill the

following :

(a) in case the asset management company is an existing asset management company it has a

sound track record, general reputation and fairness in transactions.

Explanation: For the purpose of this clause sound track record shall mean the

networth and the profitability of the asset management company;

(aa) the asset management company is a fit and proper person;

(b) the directors of the asset management company are persons having adequate professional

experience in finance and financial services related field and not found guilty of moral turpitude

or convicted of any economic offence or violation of any securities laws;

(c) the key personnel of the asset management company 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 in any 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 networth of not less than rupees ten crores :

Provided that an asset management company already granted approval under the provisions of

Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 shall within a period

of twelve months from the date of notification of these regulations increase its networth torupees 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 be recorded in writing :


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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 to the extent not written off or

adjusted or deferred revenue expenditure, intangible assets and accumulated losses.

(2) The Board may, after considering an application with reference to the matters

specified in sub-regulation (1), grant approval to the asset management company.

Terms and conditions to be complied with

17. The approval granted under sub-regulation (2) of regulation 21 shall be subject to the

following conditions, namely:

(a) any director of the asset management company shall not hold the office of the

director in another asset management company unless such person is an independent director

referred to in clause (d) of sub-regulation (1) of regulation 21 and approval of the Board of asset

management company of which such person is a director, has been obtained;

(b) the asset management company shall forthwith inform the Board of any material change in

the information or particulars previously furnished, which have a bearing on the approval

granted by it;

(c) no appointment of a director of an asset management 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 asset management company shall be made

unless,


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(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 an

advertisement 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 is situated; and

(iii) the unitholders are given an option to exit on the prevailing Net Asset Value

without any exit load;]

(f) the asset management company shall furnish such information and documents to the

trustees as and when required by the trustees.

Procedure where approval is not granted

18. Where an application made under regulation 19 for 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 asset management 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

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 :


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Provided that the asset management company may itself or through its subsidiaries undertake

such activities if it satisfies the Board that the key personnel of the asset management

company, the systems, back office, bank and securities accounts are segregated activity-wise

and there exist systems to prohibit access to inside information of various activities :

Provided furtherthat asset management company shall meet capital adequacy

requirements, if any, separately for each such activity and obtain separate approval, if

necessary under the relevant regulations.

(3) The asset management company shall not invest in any of its schemes unless full disclosure

of its intention to invest has been made in the offer documents 34[in case of schemes launched

after the notification of these regulations :

Provided that an asset management company shall not be entitled to charge any fees on its

investment in that scheme.

Asset management company and its obligations

20. (1) The asset management company shall take all reasonable steps and exercise due

diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the

provisions of these regulations and the trust deed.

(2) The asset management company shall exercise due diligence and care in all its investment

decisions as would be exercised by other persons engaged 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

management company.


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(4) The asset management company shall submit to the trustees quarterly reports of each year

on its activities and the compliance with these regulations.

(5) The trustees at the request of the asset management company may terminate the

assignment of the asset management company at any time:

Provided that such termination shall become effective only after the trustees have accepted the

termination of assignment and communicated their decision in writing to the asset management

company.

(6) Notwithstanding anything contained in any contract or agreement or termination, the asset

management company or its directors or other officers shall not be absolved of liability to the

mutual fund for their acts of commission or omission, while holding such position or office.

(6A) The Chief Executive Officer (whatever his designation may be) of the asset

management company shall ensure that the mutual fund complies with all the provisions ofthese regulations and the guidelines or circulars issued in relation thereto from time to time and

that the investments made by the fund managers are in the interest of the unit holders and shall

also be responsible for the overall risk management function of the mutual fund.

Explanation.For the purpose of this sub-regulation, the words these regulations shall mean

and include the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as

amended from time to time.

(6B) The fund managers (whatever the designation may be) shall ensure that the funds of the

schemes are invested to achieve the objectives of the scheme and in the interest of the unit

holders.


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(7) (a) An asset management company shall not through any broker associated with the

sponsor, purchase or sell securities, which is average of 5 per cent or more of the aggregate

purchases and sale of securities made by the mutual fund in all its schemes :

Provided that for the purpose of this sub-regulation, the aggregate purchase and sale of

securities shall exclude sale and distribution of units issued by the mutual fund :

Provided furtherthat the aforesaid limit of 5 per cent shall apply for a block of any three

months.

(b) An asset management company shall not purchase or sell securities through any broker

[other than a broker referred to in clause (a) of sub-regulation (7) which is average of 5 per cent

or more of the aggregate purchases and sale of securities made by the mutual fund in all its

schemes, unless the asset management company has recorded in writing the justification for

exceeding the limit of 5 per cent and reports of all such investments are sent to the trustees on

a quarterly basis :

Provided that the aforesaid limit shall apply for a block of three months.

(8) An asset management company shall not utilise the services of the sponsor or any of its

associates, employees or their relatives, for the purpose of any securities transaction and

distribution and sale of securities :

Provided that an asset management company may utilise such services if disclosure to that

effect is made to the unitholders and the brokerage or commission paid is also disclosed in the

half-yearly annual accounts of the mutual fund :

Provided 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 lead managed by associate companies,


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(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.

(9) The asset management company shall file with the trustees the details of transactions in

securities by the key personnel of the asset management company 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 company enters 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 than 5 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 company and be disclosed in the half-yearly and annual accounts of the

respective schemes with justification for such investment 40[provided the latter

investment has been made within one year of the date of the former investment calculated on

either side.

(12) The asset management company shall file with the trustees and the Board

(a) detailed bio-data of all its directors along with their interest in other companies

within fifteen days of their appointment;

(b) any change in the interests of directors every six months; and

(c) a quarterly report to the trustees giving details and adequate justification about the purchase

and sale of the securities of the group companies of the sponsor or the asset management

company, as the case may be, by the mutual fund during the said quarter.


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(13) Each director of the asset management company shall file the details of his transactions of

dealing in securities with the trustees on a quarterly basis in accordance with guidelines issued

by the Board.

(14) The asset management company shall not appoint any person as key personnel who has

been found guilty of any economic offence or involved in violation of securities laws.

(15) The asset management company shall appoint registrars and share transfer agents who

are registered with the Board:

Provided if the work relating to the transfer of units is processed in-house, the charges at

competitive market rates may be debited to the scheme and for rates higher than the

competitive market rates, prior approval of the trustees shall be obtained and reasons for

charging higher rates shall be disclosed in the annual accounts.

(16) The asset management company shall abide by the Code of Conduct as specified in the

Fifth Schedule.

Appointment of custodian

21. (1) The mutual fund shall appoint a Custodian to carry out the custodial services for the

schemes of the fund and sent intimation of the same to the Board within fifteen days of the

appointment of the Custodian:

Provided that in case of a gold exchange traded fund scheme, the assets of the scheme being

gold or gold related instruments may be kept in custody of a bank which is registered as a

custodian with the Board.


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(2) No custodian in which the sponsor or its associates hold 50 per cent or more of the voting

rights of the share capital of the custodian or where 50 per cent or more of the directors of the

custodian represent the interest of the sponsor or its associates shall act as custodian for a

mutual fund constituted by the same sponsor or any of its associates or subsidiary company.

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.

It is managed by a team of investment professionals and other service providers.

The pool of funds is invested in a portfolio of marketable 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


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The advantages of mutual funds are given below: -

Portfolio Diversification

Mutual funds invest in a number of companies. This diversification reduces the risk

because it happens very rarely that all the stocks decline at the same time and in the

same proportion. So this is the main advantage of mutual funds.

Professional Management

Mutual funds provide the services of experienced and skilled professionals, assisted

by investment 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 other 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


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Flexibility

Flexibility is also the main advantage of mutual fund. Through this investors can

systematically invest or withdraw funds according to their needs and convenience like

regular investment plans, regular withdrawal plans, dividend reinvestment plans etc.

Convenient Administration

Investing in a mutual fund reduces paperwork and helps investors to avoid many

problems like bad deliveries, delayed payments and follow up with brokers and

companies. Mutual funds save time and makeinvesting easy.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the benefit

of its investment strategy.

Well Regulated

All mutual funds are registered with SEBI and they function with in the provisions of

strict regulations designed to protect the interest of investors. The operations of mutual

funds are regularly monitored by SEBI.

DISADVANTAGES OF MUTUAL FUNDS

Mutual funds have their following drawbacks:

No Guarantees


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No investment is risk free. If the entire stock market declines in value, the value of

mutual fund shares will go down as well, no matter how balanced the portfolio. Investors

encounter fewer risks when they invest in mutual funds than when they buy and sell

stocks on their own. However, anyone who invests through mutual fund runs the risk of

losing the money.

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.

Taxes

During a typical year, most actively managed mutual funds sell anywhere from 20 to

70 percent of the securities in their portfolios. If your fund makes a profit on its sales,

you will pay taxes on the income you receive, even you reinvest the money you made.


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Management Risk

When you invest in mutual fund, you depend on fund manager to make the right

decisions regarding the funds portfolio. If the manager does not perform as well as youhad 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

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% to the net worth of the AMC. However, if

any person holds 40% or more of the net worth of an AMC shall be deemed to be asponsor and will be required to fulfill the eligibility criteria in the Mutual Fund

Regulations. The sponsor or any of its directors or the principal officer employed by the

mutual fund should not be guilty of fraud or guilty of any economic offence.

Trustees

The mutual fund is required to have an independent Board of Trustees, i.e. two third

of the trustees should be independent persons who are not associated with the

sponsors in any manner. An AMC or any of its officers or employees are not eligible to

act as a trustee of any mutual fund. The trustees are responsible for - inter alia

ensuring that the AMC has all its systems in place, all key personnel, auditors, registrar

etc. have been appointed prior to the launch of any scheme.

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 in order 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 associated in any manner with the sponsor or any of its subsidiaries or the trustees.


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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 settlements of 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 terms of

computerization and other infrastructure facilities are approved to act as custodians.

The custodian must be totally delinked from the AMC and must be registered with SEBI .

Unit Holders

They are the parties to whom the mutual fund is sold. They are ultimate beneficiary

of the income earned by the mutual funds.

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 as financial position, risk tolerance and return expectations etc. Investment


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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.

OPTION REGARDING DIVIDEND

Systematic Investment Plan (SIP)

Systematic investment plan is like Recurring Deposit in which investor invests in

the particular scheme on regular intervals. In the case it is convenient for salaried class

and middle-income group. In this case on regular interval units of specified amount is

Dividend Growth

ReinvestedPayout


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According to Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to

long term. Such schemes normally invest a majority of their corpus in equities. It

has been proven that returns from stocks are much better than the other

investments had over the long term. Growth schemes are ideal for investors

having a long term outlook seeking growth over a period of time.

Income Funds

The aim of the income funds is to provide regular and steady income to

investors. Such schemes generally invest in fixed income securities such as

bonds, corporate debentures and government securities. Income funds are ideal

for capital stability and regular income.


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Balanced Funds

The aim of balanced funds is to provide both growth and regular income.

Such schemes periodically distribute a part of their earning and invest both inequities 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 instruments such as treasury bills, certificates of deposit, commercial paper

and inter bank call money. Returns on these schemes may fluctuate depending

upon the interest rates prevailing in the market. These are ideal for corporate and

individual investors as a means to park their surplus 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.


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Special Schemes:

Index Schemes

Index funds attempt to replicate the performance of a particular index such as

the BSE Sensex or the NSE 50.

Sector Specific Schemes

Sector funds are those which invest exclusively in a specified industry or a

group of industries or various segments such as A group shares or initial public

offerings.

Bond Schemes

It seeks investment in bonds, debentures and 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 its liabilities. The per unit NAV is the net asset value of the scheme divided by the

number of units outstanding on the Valuation Date.

Sales Price - Is the price you pay when you invest in a scheme. Also called Offer

Price. It may include a sales load.

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 Bid Price.

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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PLATFORMS OF LIFE INSURANCE- UNIT LINKED INSURANCE

PLANS

World over , insurance come in different forms and shapes . although the generic names may

find similar , the difference in product features makes one wonder about the basis on which

these products are designed .With insurance market opened up , Indian customer has suddenly

found himself in a market place where he is bombarded with a lot of jargon as well as marketing

gimmicks with a very little knowledge of what is happening . This module is aimed at clarifying

these underlying concepts and simplifying the different products available in the market.

We have many products like Endowment , Whole life , Money back etc. All these products are

based on following basic platforms or structures viz.

Traditional Life

Universal Life or Unit Linked Policies

3.1 TRADITIONAL LIFE AN OVERVIEW


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The 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 on behalf 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 company to administer schemes for benefit of the

policyholders. Policyholders played a very passive roll . In the course of time , the same concept

of sharing and a common fund was extended to different areas like saving , investment etc.

3.1.1 FEATURES OF TL :

This is the simplest way of designing product as far as concerned. He has no other

responsibility but to pay the premium regularly.

Company is responsible for the protection as well as maximization of the policyholders

funds.

There is a common fund where in all the premiums paid are accumulated. Expenses

incurred as well as claims paid are then taken out of this fund. Companies carry out the valuation of the fund periodically to ascertain the position. It is

also a practice to increase the minimum possible guarantee under a policy every year in

the form of declaring and attaching bonuses to the sum assured on the basis of this

valuation. Declaration of bonuses is not mandatory .

Based on the end objective , companies may offer different plans like saving plans,

investment plans etc.(e.g. Endowment , SPWLIP)

It helps to maintain a smooth growth and protects against the vagaries of the market. In other

words it minimizes the risk of investments for an average individual. He shares his risk with agroup of like-minded individuals.

ULIP is the Product Innovation of the conventional Insurance product. With the decline in

the popularity of traditional Insurance products & changing Investor needs in terms of


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life protection, periodicity, returns & liquidity, it was need of the hour to have an

Instrument that offers all these features bundled into one.

A Unit Link Insurance Policy (ULIP) is one in which the customer is provided with a life

insurance cover and the premium paid is invested in either debt or equity products or a

combination of the two. In other words, it enables the buyer to secure some protection for his

family in the event of his untimely death and at the same time provides him an opportunity to

earn a return on his premium paid. In the event of the insured person's untimely death, his

nominees would normally receive an amount that is the higher of the sum assured or the value

of the units (investments).

To put it simply, ULIP attempts to fulfill investment needs of an investor with

protection/insurance needs of an insurance seeker. It saves the investor/insurance-seeker the

hassles of managing and tracking a portfolio or products. More importantly ULIPs offer investors

the opportunity to select a product which matches their risk profile.

Unit Linked Insurance Plans came into play in the 1960s and became very popular in Western

Europe and Americas. In India The first unit linked Insurance 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 a mutual 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 Unit Linked 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 plans available in the market. However, the key ones

are pension, children, group and capital guarantee plans.

The pension plans come with two variations with and without life cover and are meant for

people who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at taking care of their educational and other

needs..

Apart from unit-linked plans for individuals, group unit linked plans are also available in the

market. The Group linked plans are basically designed for employers who want to offer certain

benefits for their employees such as gratuity, superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan promises the

policyholder that at least the premium paid will be returned at maturity. But the guaranteed

amount is payable only when the policy's maturity value is below the total premium paid by the

individual till maturity. However, the guarantee is not provided on the actual premium paid but

only on that portion of the premium that is net of expenses (mortality, sales and marketing,

administration).

How ULIPs work


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ULIPs work on the lines of mutual funds. The premium paid by the client (less any charge) is

used to buy units in various funds (aggressive, balanced or conservative) floated by the

insurance companies. Units are bought according to the plan chosen by the policyholder. On

every additional premium, more units are allotted to his fund. The policyholder 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 the event 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 the sum assured plus the prevailing value of the investments.

ULIP - KEY FEATURES

Premiums paid can be single, regular or variable. The payment period too can be regular

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 to decide 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.

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)


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Balanced ULIPS (can typically invest around 40%-60% in equities)

Conservative ULIPS (can typically invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity

allocations may vary across insurance companies. Individuals can opt for a variant

based on their risk profile.

Flexibility

The flexibility with which individuals can switch between the ULIP variants to capitalise

on investment opportunities across the equity and debt markets is what distinguishes it

from other instruments. Some insurance companies allow a certain number of free

switches. Switching also helps individuals on another front. They can shift from an

Aggressive to a Balanced or a Conservative ULIP as they approach retirement. This is a

reflection of the change in their risk appetite as they grow older.

Works like an SIP

Rupee cost-averaging is another important benefit associated with ULIPS. With an SIP,

individuals invest their monies regularly over time intervals of a month/quarter and dont have to

worry about timing the stock markets.

HURDLES OF ULIP

NO STANDARDIZATION

All the costs are levied in ways that do not lend to standardisation. If one company calculates

administration cost by a formula, another levies a flat rate. If one company allows a range of the

sum assured (SA), another allows only a multiple of the premium. There was also the problem

of a varying cost structure with age

LACK OF FLEXIBILITY IN LIFE COVER


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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

OVERSTATING THE YIELD

Insurance companies work on illustrations. They are allowed to show you how much

your annual premium will be worth if it grew at 10 per cent per annum. But there are

costs, so each company also gives a post-cost return at the 10 per cent illustration,

calling it the yield. some companies were not including the mortality cost while

calculating the yield. This amounts to overstating the yield.

INTERNALLY MADE SALES ILLUSTRATION

During the process of collecting information, it was found that the sales benefit illustration shown

was not conforming to the Insurance Regulatory and Development Authority (Irda) format. in

many locations30 per cent return illustrations are still rampant

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 any benchmark at all.

EARLY EXIT OPTIONS

The Ulip product works over the long term. The earlier the exit, the worse off is the investor

since he 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 than before and have begun to ask for costs, some

companies have found a way to answer that without disclosing too much. People are now

asking how much of the premium will go to work. There are plans that are able to say 92 per

cent will be invested, that is, will have a front load of just 8 per cent. What they do not say is the

much higher policy administration cost that is tucked away inside (adjusted from the fund value).

While most insurance companies charge an annual fee of about Rs 600 as administration costs,

that stay fixed over time, there are plans that charge this amount, but it grows by as much as 5

per cent a year over time. There are others that charge a multiple of this amount and that too

grows


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COMPARISON

BETWEEN ULIPS

AND MUTUAL

FUNDS


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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 net asset value (NAV) is declared for the same

on a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones

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.

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 the fund house.

ULIP investors also have the choice of investing in a lump sum (single premium) or using the

conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or


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monthly basis. In ULIPs, determining the premium paid is often the starting point for the

investment activity.

This is in stark contrast to conventional insurance plans where the sum assured is the starting

point and 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 funds can 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 his ULIP). 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 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

fund house 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 an investment while the exit load is

charged at the time of sale.


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Insurance companies have a free hand in levying expenses on their ULIP products with no

upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development

Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP

offerings. The only restraint placed is that insurers are required to notify the regulator of all the

expenses that will be charged on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher expenses translate

into lower amounts being invested and a smaller corpus being accumulated. ULIP-related

expenses have been dealt with in detail in the article "Understanding ULIP expenses".

3. Portfolio disclosure

Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit

most fund houses do so on a monthly basis. Investors get the opportunity to see where their

monies are being invested and how they have been managed by studying the portfolio.

There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our

interactions with leading insurers we came across divergent views on this issue.

While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory,

the other believes that there is no legal obligation to do so and that insurers are required to

disclose their portfolios only on demand.

Some insurance companies do declare their portfolios on a monthly/quarterly basis. However

the lack of transparency in ULIP investments could be a cause for concern considering that the

amount invested in insurance policies is essentially meant to provide for contingencies and for

long-term needs like retirement; regular portfolio disclosures on the other hand can enable

investors to make timely investment decisions.


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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 fund wishes 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 companies permit their ULIP inventors to shift investments

across various plans/asset classes either at a nominal or no cost (usually, a couple of switches

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 hisconvenience in a cost-effective manner.

This can prove to be very useful for investors, for example 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 investmen

rohinsbi mutusal funds

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