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PROJECT REPORT

ON

A COMPARATIVE STUDY OF MUTUAL FUND AND ULIP

In partial fulfillment of the requirement of Masters in BusinessAdministration Course (MBA)

International School of Informatics And

Management

SUBMITTED TO: SUBMITTED BY:

Dr. DEEPALI BHATNAGAR RAHUL SHARMA

MBA/10/1831

2ND SEMESTER


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Introduction.

A financial system plays a vital role in the economic growth of a country. It

intermediates between the flow of funds belonging to those who save a part of their

income and those who invest in productive assets. It mobilizes and usefully

allocates scarce resources of a country.

A financial system is a complex, well integrated set of sub systems of financial

institutions, markets, instruments and services which facilitates the transfer and

allocation of funds, efficiently and effectively.

The Indian financial system can be broadly classified into formal (organized) and

informal (unorganized) financial system. The formal financial system come under

the purview of the ministry of finance (Move), the reserve bank of India (RBI), the

securities and exchange board of India (SEBI), and other bodies.

The informal financial system consists of individual money lenders, group of

persons operating as funds or associations, partnership firms consisting of local

brokers and non banking financial intermediaries such as finance, investment, and

chit-fund companies.

Savings are the basis of all the investments. The difference between the income

and consumption forms the Word called SAVING. But saving will only b

benefited if that is invested in some investment instrument instead of keeping safe

at home because concept of time value of money itself dictate that 100 Rs. Today

will not be equal to the 100 Rs. after 10 years. So it is very important to have a

saving and investment combination together.

There are various investment instrument available for an investor like Bank saving

{fix deposits and recurring deposits}, government tax savings { RBI bonds, RBI


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relief bonds}, Post office savings {Post office time deposits, Post office recurring

deposits, Post office monthly income scheme, National saving certificates, kisaan

vikaas patra, Public provident fund} Other savings { Infrastructure Bonds,

Company fixed deposits, Life insurance policies, mutual funds, Equity shares,

Money market funds, Gold etc. The type of investment or saving instrument

chosen by an individual depends upon the risk he can afford to take and return he

is expecting.

Objective of the report

The basic objective of this report is to present an comparative analysis betweenMutual funds and insurance. There is always a kind of confusion in the investors

mind that either he should go with insurance {ULIP} or mutual fund.

After the emergence of ULIP {unit linked insurance plan} mutual fund always be

compared with it. Although the basic purpose of any insurance plan whether it is

unit linked or a traditional plan, in insurance and mutual fund is completely related

to investment and return.

Seeking the Customer awareness about the mutual fund and ULIP through

questionnaire.


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Table of content

1. Introduction to Mutual fund. 42. Emergence of mutual fund in india. 73. Types of mutual fund scheme. 94. Structure of mutual fund in India. 135. Net asset value. 156. Introduction to ULIP. 177. Funds available in ULIP 19

(a ) Equity fund

(b) Debt fund

(c) Money market fund

(d) Balanced fund

8. Net asset value 219. Key features of ULIP 2210.Difference between ULIP and Traditional Plan 2611.Charges in ULIP 2712.IRDA guidelines 2813.Are ULIP similar to Mutual fund? 2814.Data analysis and interpretation 31


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Introduction to mutual fund

A mutual fund is a financial intermediary that pools the savings of investors for

collective investment in a diversified portfolio of securities. A mutual fund is

mutual as all of its returns, minus its expenses, are shared by the funds

investors.

A fund establishes in the form of a trust to raise money through the sale of units to

the public or a section of the public under one or more schemes for investing in

securities, including money market instruments.

{SEBI (mutual fund) regulations 1996}

According to the above definition, a mutual fund in India can raise resources

through sale of units to the public. It can be set up in the form of a trust under the

Indian trust act.

The definition has been further extended by allowing mutual funds to diversify

their activities in the following areas.

Portfolio management services. Management of offshore funds. Providing advice to offshore funds. Management of pension or provident funds. Management of venture capital funds. Management of money market funds. Management of real estate funds.

A mutual fund serves as a link between the investor and the securities market by

mobilizing savings from the investors and investing them in the securities market

to generate returns. Thus, a mutual fund is akin to portfolio management services.

Although both are conceptually same, they are different from each other.


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Portfolio management services are offered to high net worth individuals; taking

into account their risk profile, their investments are managed separately. In the

case of mutual funds, savings of small investors are pooled under a scheme and the

returns are distributed in the same proportion in which the investments are made by

the investors/unit holders.

Mutual fund is a collective savings scheme.

Mutual fund play an important role in mobilizing the savings of small investors

and channelizing the same for productive ventures in the Indian economy.

Benefits of MF.

An investor can invest directly in individual securities or indirectly through a

financial intermediary. Globally mutual funds have established themselves as themeans of investment for the retail investors.

Professional management: An average investor lacks the knowledge of capital

market operations and does not have large resources to reap the benefits of

investments. Hence he requires the help of an expert. It is not only expensive to

hire the services of an expert but it is more difficult to identify a real expert.

Mutual funds are managed by professional managers who have the requisite skills

and experience to analyse the performance and prospects of companies.

They make possible an organized investment strategy, which is hardly possible for

an individual investor.

Portfolio diversification: an investor undertakes risk if he invests all his funds in

a single scrip. Mutual funds invest in a number of companies across various

industries and sectors. This diversification reduces the riskiness of the

investments.

Reduction in Transaction Costs: Compared to direct investing in the capitalmarket, investing through the fund is relatively less expensive as the 6benefits of

economies of scale are passed on the investors.

Liquidity: often investors cannot sell the securities held easily, while in case in

mutual fund, they can easily encash their investment by selling their units to the


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fund if it is open ended skim or selling them on a stock exchange if it is a close

ended skim.

Convenience: investing in mutual fund reduces paper work, saves time and makes

investment easy.

Flexibility: mutual funds offer a family of skims, and investors have the option of

transferring their holding from one skim to the other.

Tax benefits: mutual funds investors now enjoy income tax benefits. Dividend

received from mutual fund that skims are tax exempt to the overall limit of Rs.

9000 allowed under Section SOL of the income Tax Act.

Transparency: Mutual funds transparently declare their portfolio every month.

Thus, an investor knows where his or her money is being deployed and in casethey are not happy with the portfolio they can withdraw at a short notice.

Stability to the stock market: mutual funds have a large amount of funds which

provide the economies of scale by which they can absorb any losses in the stock

market and continue investing in the stock market. In addition, mutual funds

increase liquidity in the money and capital market.

Equity research: Mutual funds can afford information and data required for

investments as they have large amount of funds and equity research teamsavailable with them.

A brief history of mutual funds.

The history of mutual funds dates back to nineteen century Europe, in particular,

great Britain. Robert fleming setup in 1868 the first investment trust called foreign

and colonial investment trust which promised to manage the finances of the

moneyed classes of Scotland by spreading the investment over a number of

different stocks. The investment trust and other investment trusts which weresubsequently set up in Britain and US, resembled todays close ended mutual

funds. The first mutual fund in the US, Massachusetts Investors trust was setup

in March 1924. This was the first open-ended mutual fund.


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Emergence of mutual funds in INDIA

The Indian mutual fund industry has evolved over distinct stages. The growth of

the mutual fund in India can be divided into four phases:

Phase I (1964-87)

Phase II (1987-92)

Phase III (1992-97)

Phase IV (beyond 1997)

Phase I: The mutual fund concept was introduced in India with the setting up of

UTI in 1963. The unit trust of India was the first mutual fund set up under the UTI

act 1963, a special act of the parliament. It became operational in 1964 with a

major objective of mobilizing saving through the sale of units and investing them

in corporate securities for maximizing yield and capital appreciation. This phase

commenced with the launch of the Unit scheme 1964, the first open ended and the

most popular scheme

UTI launched innovative schemes during this phase. Its fund family included five

income oriented, open ended schemes, which were sold largely through its agent

network built up over the years. Master share, the equity gowth fund launched in

1986, proved to be a grand marketing success.

Phase II: The second phase witnessed the entry of mutual fund companies

sponsored by nationalized banks and insurance companies. In 1987, SBI mutual

fund and canbank mutual fund were setup as trusts under the Indian Trust act,

1882. In 1988, UTI floated another offshore fund, namely, The India growth fundwhich was listed on the new York stock exchange. By 1990, the two nationalized

insurance giants LIC and GIC, and nationalized banks namely, Indian bank, Bank

of India, and Punjab national bank had started operations of wholly-owned mutual

fund subsidiaries. Subsequently government of India issued comprehensive

guidelines in 1990 covering all mutual funds. These guidelines emphasized


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compulsory registration with the SEBI and an arms length relationship be

maintained between the sponser and asset management company(AMC).

Phase III: The year 1993 marked a turning point in the history of mutual funds in

India. The SEBI issued the mutual fund regulations in January 1993. The SEBInotified regulations bringing all mutual funds except UTI under a common

regulatory framework. Private domestic and foreign players were allowed entry in

the mutual fund industry. The Kothari group of companies in joint venture with

pioneer, a US fund company, set up the first private mutual fund, the Kothari

pioneer mutual fund, in 1993. Kothari pioneer introduced first open ended fund

prima in 1993.several other private sector mutual funds were set up during this

phase.

Phase IV: during this phase, the flow of funds into the kitty of mutual fundssharply increased. This significant growth was aided by a more positive sentiment

in the capital market, significant tax benefits and improvement in the customer

service quality. The Indian mutual fund industry stagnated at around Rs 1,00,000

crore asset during the years 2000-01 and 2001-02. The unit trust of India lost out to

other private sector players during this period.


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Types of mutual fund scheme.

The objectives of mutual funds are to provide continuous liquidity and higher yield

with higher degree of safety to investors. Based on these objectives, different types

of mutual fund schemes have evolved.

1.Functional classification of mutual funds

Open ended schemes Close ended schemes

Open ended schemes: In open ended schemes the mutual fund continuously to

sell and repurchase its units at NAV or NAV related prices. Open ended ones do

not have to be listed on the stock exchange and can also offer repurchase soon after

allotment. Investor can enter and exit the scheme any time during the life of the

fund. Open ended schemes do not have a fixed corpus. The corpus of fund

increases or decreases, depending upon the purchase or redemption of units by

investors. There is no fixed redemption period in open ended schemes, which can

be terminated whenever the need arises. The fund offers a redemption price at

which the holder can sell units to the fund and exit. Besides, an investor can enter

the fund again by buying units from the fund at its offer price.

The key feature of open ended funds liquidity. They increase liquidity of the

develop their income or saving plan due to free entry and exit frame of funds.

Open ended schemes usually come as a family of schemes which enable the

investors to switch over from one scheme to another of same family.

Close ended schemes: close ended schemes have a fixed corps and a stipulated

maturity period raging from two to five years. Investors can invest in the scheme


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when it is launched. The scheme remains open for a period not exceeding 45 days.

Investors in close ended schemes can buy units only from the market, once initial

subscriptions are over and thereafter the units are listed on the stock exchanges

where they can be bought and sold. The fund has no interaction with investors till

redemption except for paying dividend/bonus.

In order to provide an alternate exit route to the investors, some close ended funds

give an option of selling back the units to the mutual through periodic repurchase

at NAV-related prices.

Interval Scheme: Interval schemes combines the features of open ended and close

ended schemes.

2. Portfolio Classification

Income funds: The aim of income funds is to provide safety of investments and

regular income to investors. Such schemes invest predominantly in income-bearing

instruments like bonds, debentures, government securities, and commercial paper.

The return as well as the risk is lower in income funds as compared to growth

funds.

Portfolioclassification

Growthfunds

Balancedfunds

Moneymarketfunds

Incomefunds


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Growth funds: The main objective of growth fund is capital appreciation over the

medium to long term. They invest most of the corpus in equity shares with

significant growth potential and they offer higher return to investors in the long

term. They assume that risk associated with the equity investments. There is no

guarantee or assurance of returns. These schemes are usually close-ended and

listed on stock exchange.

Balanced funds: The aim of balanced scheme is to provide both capital

appreciation and regular income. They divided their investment between equity

shares and fixed interest bearing instruments in such a proportion that the portfolio

is balanced. The portfolio of such funds usually comprises companies with good

profit and dividend track records.

Money market funds: They specialize in investing in short term money marketinstruments like treasury bills, and certificate of deposits. The objective of such

funds is liquidity with low rate of return. Corporates invest in these funds to park

their short-term surplus funds.

3. Geographical classification

Domestic funds Offshore funds

Domestic Funds: funds which mobilise resources from a particular geographical

locality like a country or region are domestic funds. The market is limited and

confined to the boundries of a nation in which the fund operates. They can invest

only in the securities which are issued and traded in the domestic financial

markets.


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Offshore Funds: Offshore funds attract foreign capital for investment in the

country of the issuing company. They facilitate cross border fund flow which leads

to an increase in foreign currency and foreign exchange reserves.

Such mutual funds can invest in securities of foreign companies. They opendomestic capital market to international investors. Many mutual funds in India

have launched a number of offshore funds, the Indian fund was launched by Unit

trust of India in july 1986 in collaboration with the US fund manager, Merril

Lynch.

Others:

Tax savings schemes

Equity linked saving schemes Special schemes Gilt funds Load funds Index funds P/E ratio fund Exchange traded funds Fund of funds Floating rate funds Theme based mutual funds Derivatives arbitrage Funds Fixed maturity plans Real estate mutual funds Capital protected schemes Gold exchange traded funds Systematic investment Plan


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MUTUAL FUNDS: STRUCTURE IN INDIA

For anybody to become well aware about mutual funds, it is imperative for Him or

her to know the structure of a mutual fund.

How does a mutual fund come into being?Who are the important people in a mutual fund?

What are their roles? etc.

We will start our understanding by looking at the mutual fund structure in brief.

Custodian (depository participant)

Mutual Funds in India follow a 3-tier structure.

There is a Sponsor (the First tier), who thinks of starting a mutual fund. The

Sponsor approaches the

Securities & Exchange Board of India (SEBI), which is the market regulator and

also the regulator for mutual funds.

AMC

Unit holders

Sponsor

Trustees

The mutual fund Transfer Agent

SEBI


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Not everyone can start a mutual fund. SEBI checks whether the person is of

integrity, whether he has enough experience in the financial sector, his Net worth

etc.

Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as

per the Indian Trusts Act, 1882.

Trusts have no legal identity in India and cannot enter into contracts, hence the

Trustees are the people authorized to act on behalf of the Trust.

Contracts are entered into in the name of the Trustees. Once the Trust is created, it

is registered with SEBI after which this trust is known as the mutual fund.

It is important to understand the difference between the Sponsor and the Trust.

They are two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the

Mutual Fund. It is the Trust which is the Mutual Fund.

The Trustees role is not to manage the money. Their job is only to see, whether themoney is being managed as per stated objectives. Trustees may be seen as the

internal regulators of a mutual fund.

Now comes the role of the Asset Management Company (the Third tier).

Trustees appoint the Asset Management Company (AMC), to manage

Investors money. The AMC in return charges a fee for the services provided and

this fee is borne by the investors as it is deducted from the money collected from

them. The AMCs Board of Directors must have at least 50% ofDirectors who are independent directors. The AMC has to be approved by SEBI.

The AMC functions under the supervision of its Board of Directors, and also

under the direction of the Trustees and SEBI. It is the AMC, which in the name of

the Trust, floats new schemes and manage these schemes by buying and selling

securities. In order to do this the AMC needs to follow all rules and regulations

prescribed by SEBI and as per the Investment Management

Agreement it signs with the Trustees.

If any fund manager, analyst intends to buy/ sell some securities, the permission of

the Compliance Officer is a must.

A compliance Officer is one of the most important persons in the AMC. Whenever

the fund intends to launch a new scheme, the AMC has to submit a Draft Offer

Document to SEBI. This draft offer document, after getting SEBI approval


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becomes the offer document of the scheme. The Offer Document (OD) is a legal

document and investors rely upon the information provided in the OD for investing

in the mutual fund scheme. The Compliance Officer has to sign the Due Diligence

Certificate in the OD. This certificate says that all the information provided inside

the OD is true and correct. This ensures that there is accountability and somebody

is responsible for the OD. In case there is no compliance officer, then senior

executives like CEO, Chairman of the AMC has to sign the due diligence

certificate.

The certificate ensures that the AMC takes responsibility of the OD and its

contents.

CUSTODIAN:

A custodians role is safe keeping of physical securities and also keeping a tab onthe corporate actions like rights, bonus and dividends declared by the companies in

which the fund has invested. The Custodian is appointed by the Board of Trustees.

The custodian also participates in a clearing and settlement system through

approved depository companies on behalf of mutual funds, in case of

dematerialized securities. In India today, securities (and units of mutual funds) are

no longer held in physical form but mostly in dematerialized form with the

Depositories. The holdings are held in the Depository through Depository

Participants (DPs). Only the physical securities are held by the Custodian. Thedeliveries and receipt of units of a mutual fund are done by the custodian or a

depository participant at the instruction of the AMC and under the overall direction

and responsibility of the Trustees.

Regulations provide that the Sponsor and the Custodian must be separate entity.

NET ASSET VALUE (NAV)

The net asset value of a fund is market value of the asset minus the liabilities onthe day of valuation.

In other words it is the amount which the shareholders will collectively get if the

fund is dissolved or liquidated.The net asset value of a unit is the net asset value of

fund divided by the number of outstanding units.


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Concept clarifier-NAV

Assets Rs. crore Liability Rs. crore

Shares 345 Unit capital 300

Debenture 23 Researve & surplus 85.7Money marketinstrument

12

Accured income 2.3 Accured

expenditure

1.5

Other current assest 1.2 Other currentexpenditure

0.5

Deferred revenue

expenditure

4.2

387.7 387.7

Units issued(cr.) 30

Face value(Rs) 10

Net assest(Rs) 385.7

NAV 12.86

All Figures in Rs. Cr

The above table shows a typical scheme balance sheet. Investments are entered

under the assets column. Adding all assets gives the total of Rs.387.7 cr. From this

if we deduct the liabilities of Rs. 2 cr. i.e.

Accrued Expenditure and Other Current Liabilities, we get Rs. 385.7 cr. as Net

Assets of the scheme.

The scheme has issued 30 crs. Units @ Rs. 10 each during the NFO.

This translates in Rs. 300crs. Being garnered by the scheme then. This is

represented by Unit Capital in the Balance Sheet. Thus, as of now, the net assets

worth Rs. 385.7 cr. are to be divided amongst 30 crs. units. This means the scheme

has a Net Asset Value or NAV of Rs.

12.86.

The important point that the investor must focus here is that the Rs. 300 crs.

garnered by the scheme has increased to Rs. 387 crs., which translates into a


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29.23% gain, whereas, the return for the investor is 28.57% (12.86-10/ 10 =

28.57%).

What is Unit linked insurance policy

When people see how investments in the capital market have grown over thelast few years, they prefer to use their funds in way that help them to

participate in the boom in the capital market. Insurer have developed plans

that combine the benefits of life insurance as well as giving various option of

participating in the growth of the capital market. Such plans are called

Linked Life Insurance Plan. They are also called Unit Linked Insurance

Plans or ULIPs, in short. A ULIP is a life insurance policy which provides a

combination of the life insurance protection and investment. ULIPs

contribute nearly 50% of the premium for some insurers and more than 85%

of the premium for some others.

In the case of a ULIP, the proposer offers to pay a certain sum towardspremium. Insurers insist that this amount should be in multiples of say

Rs.500 or Rs. 1000 with a minimum of say, Rs.5000 or Rs. 10000. The term

of the policy is also specified it should not be less than 5 years or age 70 for

whole life plans. The premium may be paid as a single premium at the start


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or periodically over the term or less, as in the case of limited payment

policies in yearly,half yearly, quarterly or monthly instalments. The SA or

death cover, payable in the event of death during the term, is related to this

premium, usually as a multiple like 5 times the annual premium or 1.5 times

the single premium. The minimum SA, according to IRDA guidelines, has to

be1.25 times single premium or 5 times annual premium.

Out of the premium, annual or otherwise as the case may be,a certainamount is adjusted towards the cost of the insurance (death) cover. Some

portion may be adjusted towards charges. The balance, called the allocated

premium, is invested in a fund that the proposer chooses, from among a set

of options. The allocated premium is more in the second year and still more

in the third and later years because some charges are not levied in every

year. The allocated premium is used to buy a certain number of units in the

choosen fund at a price at which the units are being offered on that day. This

price called the NAV, which varies every day. The death benefit is fixed out

the maturity benefit is not guaranteed. The maturity benefit depends on

market conditions and the fund in which the premium has been invested, on

the date of maturity.

In linked policies, the SA may be expressed as an integrated benefit, whichmean that on the happening of the event, the SA or the value of units in the

fund, whichever is higher, is payable. In this case, the life cover will reduce

as the value of unit increases. As the risk cover decreases, the premium

adjusted towards the cover will decrease and amount allocated to investment

will increase.


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The alternative to the integrated benefit, is to pay a fixed SA as an additionalbenefit on death, in addition to the value to the units in the fund. In this case,

the charge for the risk cover will increase and the allocation of the fund will

decrease every year. This is sometimes called the Double Death Benefit.

Some of the other features offered by insurers along with ULIPs are thefollowing. These are not offered by the insurer. They are also not available

with the ULIPs offered by the same insurer.

The policy holder can pay additional premium for investment at any time. Partial or total withdrawal is allowed. Sometimes there are conditions

attached. Some insurers, not all, charge a redemption fee in such cases.

These policies will not be entitled to any bonus. There is no annual bonus, but there may be a loyalty bonus paid at the end.

Funds available in ULIPs

Insurers offer policyholders a choice of funds in which their money may beinvested like

Equity Funds: in this type of fund sometimes also called Growth funds,there would be more investments in equities which are shares/stocks tradedin the stock market.

Debt Funds: In this type of fund, also called Bond funds, the investmentsare primarily in government and government guaranteed securities and such

safe debts and other high investment grade corporate bonds.


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date, the life cover will increase by 1.25 times the excess top up amount. There

will also be a lock in period of three years for each top up amount, except during

the last 3 years of the policy.

Net Assets Value (NAV)

The NAV of a fund represents the net value of the fund on a particular date and

reflects the total value of the assets of that fund, after some adjustments for

expenses. For example the equity fund comprising of contributions from many

policyholders would have been invested in a variety of equity shares in the stock

market along with other instruments.

The NAV becomes the basis for new entrants and for exists from the fund. For

example if a new policy holder wishes to have Rs. 10000 invested in an equity

fund and on that particular day, the NAV of that fund is Rs.20, he will be allotted

500 units from that fund when he wishes to exit from that fund, because of

switching of final termination of the contract, he will get 500 units at the NAV of

that date, which may be less than or more than Rs. 20, at which he got in. if he is

getting into another fund on that day, he will be given the number of units of thatfund, calculated at the NAV of that fund , on that Day.

In actual practice, the NAV used at the time of entry, called the offer price, and the

NAV used while exiting, called the Bid price, will be different, like the difference

between the buying and selling rates of foreign currency.

This difference is called the Bid-offer spread and is normally around 0.5%. some

insurers do not have this difference for some plans. Both offer and bid prices are

the same as NAV. Some insurers offer units at Rs. 10 per unit for a specified

period from the date the scheme begins.

LOCK IN:


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Lock in period is that period during which withdrawal is not allowed. It is 3 years

according to IRDA guidelines. The surrender value will be allowed only after 3

years.

KEY FEATURES OF ULIPs

Insurers love ULIPs for several reasons. Most important of all, insurers can sell

these policies with less capital of their own than what would be required if theysold traditional policies.

In traditional with profits policies, the insurance company bears the investment

risk to the extent of the assured amount. In ULIPs, the policyholder bears most of

the investment risk.

Since ULIPs are devised to mobilise savings, they give insurance companies an

opportunity to get a large chunk of the asset management business, which has been

traditionally dominated by mutual funds.

1. Term/Tenure

The ULIP client must have the option to choose a term/tenure.

If no term is defined, then the term will be defined as '70 minus the age of the

client'. For example if the client is opting for ULIP at the age of 30 then the policy

term would be 40 years.

The ULIP must have a minimum tenure of 5 years.


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2. Sum Assured

On the same lines, now there is a sum assured that clients can associate with. The

minimum sum assured is calculated as: (Term/2 * Annual Premium) or (5 *Annual Premium) whichever is higher.

There is no clarity with regards to the maximum sum assured. The sum assured is

treated as sacred under the new guidelines; it cannot be reduced at any point during

the term of the policy except under certain conditions - like a partial withdrawal

within two years of death or all partial withdrawals after 60 years of age. This way

the client is at ease with regards to the sum assured at his disposal.

3. Premium payments

If less than first 3 years premiums are paid, the life cover will lapse and policy will

be terminated by paying the surrender value. However, if at least first 3 years

premiums have been paid, then the life cover would have to continue at the option

of the client.

4. Surrender value

The surrender value would be payable only after completion of 3 policy years.

5. Top-ups

Insurance companies can accept top-ups only if the client has paid regularpremiums till date. If the top-up amount exceeds 25% of total basic regular

premiums paid till date, then the client has to be given a certain percentage of sum

assured on the excess amount. Top-ups have a lock-in of 3 years (unless the top-up

is made in the last 3 years of the policy).


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6. Partial withdrawals

The client can make partial withdrawals only after 3 policy years.

7. Settlement

The client has the option to claim the amount accumulated in his account after

maturity of the term of the policy up to a maximum of 5 years. For instance, if the

ULIP matures on January 1, 2007, the client has the option to claim the ULIP

monies till as late as December 31, 2012. However, life cover will not be available

during the extended period.

8. Loans

No loans will be granted under the new ULIP.

9. Charges

The insurance company must state the ULIP charges explicitly. They must also

give the method of deduction of charges.

10. Benefit Illustrations

The client must necessarily sign on the sales benefit illustrations. These

illustrations are shown to the client by the agent to give him an idea about the

returns on his policy.

Agents are bound by guidelines to show illustrations based on an optimistic

estimate of 10% and a conservative estimate of 6%. Now clients will have to sign

on these illustrations, because agents were violating these guidelines and projecting

higher returns.


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While what the IRDA has done is commendable, a lot more needs to be done. At

Personal, we have our own wish list with regards to ULIP portfolios:

Regular disclosure of detailed ULIP portfolios. This is a problem with the industry;for all their talk on being just like (or even better than) mutual funds, ULIP

portfolios are nowhere near theirMutual fundcounterparts in frequency as well as

in transparency.

On the same lines, other data points like portfolio turnover ratios need to be

mentioned clearly so clients have an idea on whether the fund manager is investing

or punting.

ULIPs (especially the aggressive options) need to mention their investment

mandate, is it going to aim for aggressive capital appreciation or steady growth. In

other words will it be managed aggressively or conservatively? Will it invest in

large caps, mid caps or across both segments? Will it be managed with the growth

style or the value style?

Exposure to a stock/sector in a ULIP portfolio must be defined. Diversified equity

funds have a limit to how much they can invest in a stock/sector. Investment

guidelines for ULIPs must also be crystallized.

Our interaction with insurance companies indicates that there is little clarity on this

front; we believe that since ULIPs invest so heavily in stock markets they must

have very clear-cut investment guidelines.


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The important differences between traditional plans and ULIPs are

ULIPs Traditional Plans

The premiums, in excess of risk cover, is

invested as desired by the policyholder.

All the premiums go into a common fund and

are invested at the insurers discretion.

The investment return may vary depending

on the market movements and the investment

risk is borne entirely by the policy holder.

There are two categories of benefits-

guaranteed and non-guaranteed. For

guaranteed benefits, the insurer bears the

investment risk. However, non-guaranteed

benefits, such as bonuses, depend on the

performance of the insurer.

Benefits are variable

Loss is likely

Benefits are pre-determined

Loss in unlikely

Gains likely depending on market

movements.

Gains unlikely except through bonuses.

There are no bonuses, except loyalty bonus in

some cases.

For participating policies, bonuses are

payable.


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The amount of premium used for insurance

coverage, other charges and the purchase of

units are unbundled and transparent.

The premium amount used for insurance

coverage, other charges and investment are

bundled up and not know.

Charges in ULIP

Accident benefit charges Administration or fixed charges Flat fee Fund administration charges Fund switching charges Insurance or risk cover charges Service tax

Charges may be related to SA or to premium, may be constant figure or

percentages, and may have minimum and maximum limits. The charges are

recovered

1.By the way of deduction from the premium.

2. By cancelling some of the units.


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IRDA guidelines

The IRDA has issued guidelines on various matters relating to ULIPs some of

these are

The limits on SA, and top-up conditions referred to earlier in this chapter Surrender benefit only after 3rd policy anniversary First partial withdrawal only after 3rd policy anniversary SA can be reduced up to the extent of partial withdrawals during 2 years

prior to death and after age 60

Death benefits to be guaranteed Policy to become paid up, if there is default in premium after 3 years. Opportunity to be given to revive lapsed policy No risk cover after policy term Ways of calculating various charges are stipulated. No auto cover facility if at least 3 years premium not paid. Auto cover facility allowed for full SA for limited period.

ARE ULIPS SIMILAR TO MUTUAL FUNDS?

In structure, yes; in objective, no. Because of the high first-year charges, mutualfunds are a better option if you have a five-year horizon.

But if you have a horizon of 10 years or more, then ULIPs have an edge. To

explain this further a ULIP has high first-year charges towards acquisition


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30

(including agents commissions).

As a result, they find it difficult to outperform mutual funds in the first five years.

But in the long-term, ULIP managers have several advantages overMutual fund

managers.

Since policyholder premiums come at regular intervals, investments can be

planned out more evenly.

Mutual fundmanagers cannot take a similar long-term view because they havebulk investors who can move money in and out of schemes at short notice.

FIVE STEPS OF SELECTING THE RIGHT ULIP

1. Understand the concept of ULIPs

Do as much homework as possible before investing in an ULIP. This way you willbe fully aware of what you are getting into and make an informed decision.

More importantly, it will ensure that you are not faced with any unpleasant

surprises at a later stage. Our experience suggests that investors on most occasionsfail to realize what they are getting into and unscrupulous agents should get a lot of'credit' for the same.

Gather information on ULIPs, the various options available and understand their

working. Read ULIP-related information available on financial Web sites,newspapers and sales literature circulated by insurance companies.

2. Focus on your need and risk profile


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Identify a plan that is best suited for you (in terms of allocation of money between

equity and debt instruments). Your risk appetite should be the deciding criterion inchoosing the plan.

As a result if you have a high-risk appetite, then an aggressive investment optionwith a higher equity component is likely to be more suited. Similarly your existinginvestment portfolio and the equity-debt allocation therein also need to be given

due importance before selecting a plan.

Opting for a plan that is lop-sided in favour of equities, only with the objective ofclocking attractive returns can and does spell disaster in most cases.

3. Compare ULIP products from various insurance companies

Compare products offered by various insurance companies on parameters likeexpenses, premium payments and performance among others. For example,information on premium payments will help you get a better picture of the

minimum outlay since ULIPs work on premium payments as opposed to sumassured in the case of conventional insurance products.

Compare the ULIPs' performance i.e. find out how the debt, equity and balanced

schemes are performing; also study the portfolios of various plans. Expenses are asignificant factor in ULIPs, hence an assessment on this parameter is warranted aswell.

Enquire about the top-up facility offered by ULIPs i.e. additional lump suminvestments, which can be made to enhance the policy's savings portion. This

option enables policyholders to increase the premium amounts, thereby providingpresenting an opportunity to gainfully invest any surplus funds available.

Find out about the number of times you can make free switches (i.e. change the

asset allocation of your ULIP account) from one investment plan to another. Someinsurance companies offer multiple free switches every year while others do so

only after the completion of a stipulated period.


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4. Go for an experienced insurance advisor

Select an advisor who is not only conversant with the functioning of debt and

equity markets, but also independent and unbiased. Ask for references of clients hehas serviced earlier and crosscheck his service standards.

When your agent recommends a ULIP from a given company, put forth some

product-related questions to test him and also ask him why the products from otherinsurers should not be considered.

Insurance advice at all times must be unbiased and independent; also your agent

must be willing to inform you about the pros and cons of buying a particular plan.His job should not be restricted to doing paper work like filling forms and

delivering receipts; instead he should keep track of your plan and offer you advice

on a regular basis.

5. Does your ULIP offer a minimum guarantee?

In a market-linked product, protecting the investment's downside can be a huge

advantage. Find out if the ULIP you are considering offers a minimum guarantee

and what costs have to be borne for the same.


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Data analysis and interpretation

Q.1. Which one you will prefer at present?

No. of respondent

Mutual fund 26

ULIP 15

Both 9

Inference- 30% people preferred ULIPs while 51% people want to go with Mutual

Fund and 19% people chose both.

30%

51%

19%

0%

10%

20%

30%

40%

50%

60%

ULIPS Mutual fund Both


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34

Q.2.Which factor you consider before investing in ULIP and Mutual

fund?

No, of respondent

Safety of principal 19

High return 21

Maturity period 6

Terms and condition 4

Inference- 39% consider safety of principal, 42% will go with high return, 12%

will choose maturity period and 7% consider terms and conditions.

39%42%

12%

7%

0%

5%

10%

15%20%

25%

30%

35%

40%

45%

Safety of

Principal

High Return Maturity

Period

Terms and

Conditions


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35

Q.3. Which information source helpful to the investors in making

investment decision?

No. of respondent

Journals 2

Refrence group 11

Television 2

Brokers 33

News paper 2

Inference- 66% investors take investment decisions through brokers.

5%

21%

5%

66%

3%0%

10%

20%30%40%50%60%70%


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36

Q.4.preference of investors regarding different type of funds?

No. of respondent

Equity fund 20Debt fund 5

Balanced fund 12.5

Open ended fund 5

Close ended fund 7.5

Inference- most of the investors are interested in equity fund.

0

5

10

15

20

25

Equity fund Debt fund Balanced fund Open ended

fund

Close ended

fund

No. of respondent

No. of respondent


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37

Q.5. Preference of ULIP or Mutual Fund on the basis of following factor?

Mutual fund ULIP

Diversification 62% 38%

Professional management 60% 40%

Low cost 66% 34%

Liquidity 83% 17%

flexibility 88% 12%

Inference- the major advantage of Mutual Fund is diversification and professional

management.

38% 40% 34%17% 12%

62% 60% 66%83% 88%

0%

20%

40%

60%

80%

100%120%

Mutual fund

ULIPS


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38

INVESTING IN ULIP WILL NOT GIVE HIGH RETURNS REALLY???

DATE

Maximiser

fund

Balancer

fund

3/1/2003 11.3 12.12

2/6/2003 11.71 12.48

31/12/2003 21 16

17/08/2004 19 15

31/12/2004 24 17

10/3/2005 26 18

10/3/2006 38 21

10/12/2006 45 23

10/12/2007 67 28

10/12/2008 36 24

10/12/2009 62 32

10/3/2010 63 33

10/12/2010 71 34

2/1/2011 74 35

2/2/2011 66 33

2/3/2011 67 34

2/4/2011 72 35


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39

11.3 11.71

2119

2426

38

45

67

36

62 63

7174

66 67

72

12.1212.48

16 1517 18

21

23

28

24

32 3334 35 33 34

35

0

10

20

30

40

50

60

70

80

NAV

INR

S.

DATE

GROWTH CHART

Maximiser fund

Balancer fund


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40

Company

% Of Net

Assets

Industry

totalCorporate Securities Rating % Of NetAssets

Metals & Minerals 6.36 %Housing Development FinanceCorpn. Ltd.

AAA 3.93 %

TATA STEEL LTD. 2.01 % L I C Housing Finance Ltd. AAA 3.08 %

STERLITE INDUSTRIES (INDIA)LTD.

1.97 % POWER FINANCE CORPN. LTD. AAA 2.77 %

Jindal Steel & Power Ltd. 1.5 %Infrastructure DevelopmentFinance Co. Ltd.

AAA 2.38 %

HINDUSTAN ZINC LTD. 0.88 % RELIANCE INDUSTRIES LTD. AAA 2.29 %

Novo Trust Iv- Indian Railways AAA 1.75 %

Oil & Gas 5.32 %

NUCLEAR POWER CORPN. OF

INDIA LTD. AAA 1.31 %

RELIANCE INDUSTRIES LTD. 3.27 %RURAL ELECTRIFICATION CORPN.LTD.

AAA 0.87 %

Oil & Natural Gas Corpn. Ltd. 0.81 % Tata Sons Ltd. AAA 0.8 %

Hindustan Petroleum Corpn. Ltd. 0.64 % State Bank of India AAA 0.79 %

Indian Oil Corpn. Ltd. 0.4 % BRITANNIA INDUSTRIES LTD. AAA 0.58 %

Bharat Petroleum Corpn. Ltd. 0.19 %INDIAN RAILWAY FINANCECORPN. LTD.

AAA 0.34 %

I C I C I HOME FINANCE CO. LTD. AAA 0.32 %

Bank 4.66 % GE Money Financial Services Ltd AAA 0.21 %

H D F C Bank Ltd. 3.4 %Small Industries Development

Bank of IndiaAAA 0.17 %

Axis Bank Ltd. 0.61 %POWER GRID CORPN. OF INDIALTD.

AAA 0.15 %

Oriental Bank of Commerce 0.33 % EXPORT-IMPORT BANK OF INDIA AAA 0.12 %

Punjab National Bank 0.27 % Axis Bank Ltd. AAA 0.06 %

UNION BANK OF INDIA 0.05 %G E CAPITAL SERVICES INDIALTD.

AAA 0.05 %

GRASIM INDUSTRIES LTD. AAA 0.05 %

Auto 3.28 % H D F C Bank Ltd. AAA 0.02 %

MAHINDRA & MAHINDRA LTD. 1.87 % Tata Motors Ltd. AAA 0.02 %

MARUTI SUZUKI INDIA LTD. 1 % Novo Trust Iv- Indian Railways AAA(SO) 1.03 %

APOLLO TYRES LTD. 0.41 % Cairn India Ltd. CAAA 2.48 %

L I C Housing Finance Ltd. CAAA 0.34 %

Consumer 2.85 % I C I C I HOME FINANCE CO. LTD. CAAA 0.02 %

I T C Ltd. 2.51 % I D B I BANK LTD. AA+ 0.73 %

DABUR INDIA LTD. 0.22 % H C L TECHNOLOGIES LTD. AA+ 0.7 %

I C I INDIA LTD. 0.12 % Jindal Steel & Power Ltd. AA+ 0.3 %


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41

Shree Cement Ltd. AA+ 0.27 %

Capital Goods 2.52 % TATA STEEL LTD. AA 2.45 %

BHARAT HEAVY ELECTRICALSLTD.

2.24 % Tata Bluescope Steel Ltd. AA 1.48 %

Kalpataru Power Transmission

Ltd.0.15 % Jindal Steel & Power Ltd. AA 0.36 %

EMCO Ltd. 0.13 % TATA POWER CO. LTD. AA 0.29 %

Kotak Mahindra Prime Ltd. AA 0.19 %

Cement 2.23 % BHARAT FORGE LTD. LAA- 0.63 %

A C C LTD. 0.99 %Housing Development FinanceCorpn. Ltd.

A1+ 1.3 %

GRASIM INDUSTRIES LTD. 0.61 % State Bank of Hyderabad A1+ 0.87 %

ULTRATECH CEMENT LTD. 0.32 % Bank of Baroda A1+ 0.7 %

Shree Cement Ltd. 0.32 % State Bank of Patiala A1+ 0.35 %

STATE BANK OF BIKANER &JAIPUR

A1+ 0.31 %

Telecom 2.16 % STATE BANK OF MYSORE A1+ 0.28 %

Bharti Airtel Ltd. 2.16 % I D B I BANK LTD. A1+ 0.18 %

I C I C I Bank Ltd. A1+ 0.12 %

Technology 1.79 % INDIAN BANK F1+ (SO) 0.15 %

INFOSYS TECHNOLOGIES LTD. 1.4 % Bank of India P1+ 2.3 %

Tata Consultancy Services Ltd. 0.27 % Corporation Bank P1+ 1.24 %

K P I T CUMMINS INFOSYSTEMSLTD.

0.11 % Vodafone Essar Ltd P1+ 1.02 %

UNION BANK OF INDIA P1+ 0.3 %

Infrastructure 0.78 % State Bank of Travancore P1+ 0.3 %

POWER GRID CORPN. OF INDIALTD.

0.78 % State Bank of India P1+ 0.29 %

STATE BANK OF BIKANER &JAIPUR

P1+ 0.27 %

Pharma & Healthcare 0.69 % CANARA BANK P1+ 0.19 %

Lupin Ltd. 0.69 % Oriental Bank of Commerce P1+ 0.17 %

Federal Bank Ltd. P1+ 0.16 %

EPC 0.68 % INDIAN OVERSEAS BANK P1+ 0.15 %

I V R C L INFRASTRUCTURES &PROJECTS LTD.

0.29 % Kotak Mahindra Prime Ltd. P1+ 0.15 %

NAGARJUNA CONSTRUCTION CO.

LTD.

0.25 % Axis Bank Ltd. P1+ 0.15 %

Madhucon Projects Ltd. 0.09 %National Bank for Agriculture &Rural Development

P1+ 0.12 %

Ramky Infrastructure Limited 0.04 % Bank of Baroda P1+ 0.03 %

Punjab National Bank PR1+ 1.19 %

Finance 0.57 % Syndicate Bank PR1+ 0.61 %

Shriram Transport Finance Co.Ltd.

0.57 % ANDHRA BANK PR1+ 0.27 %


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42

CENTRAL BANK OF INDIA PR1+ 0.26 %

Retail 0.46 % Bank of India PR1+ 0.16 %

PANTALOON RETAIL (INDIA) LTD. 0.45 %

Total 46.91 %

Real Estate 0.25 %

Government securities / T Bills Rating% Of Net

AssetsHousing Development &Infrastructure Ltd.

0.23 %

Oberoi Realty Ltd 0.02 % 9.81% GOI ( 30-May-2013 ) Sovereign 1.03 %

11.83% GOI ( 12-Nov-2014 ) Sovereign 0.11 %

Others 0.2 % 10.25% GOI ( 30-May-2021 ) Sovereign 0.11 %

A B G SHIPYARD LTD. 0.2 % 7.36% GOI ( 04-Nov-2014 ) Sovereign 0.05 %

11.43% GOI ( 07-Aug-2015 ) Sovereign 0.04 %

Total 34.78 % 9.1% GOI ( 06-Nov-2011 ) Sovereign 0.03 %

7.36% GOI ( 04-Nov-2014 ) Sovereign 0.01 %

Total 1.36 %

Fixed deposits with banks 15.25 %

Other current assets & eq 1.69 %

100 %

Assets Held (Rs. Million) 20,285.68

Asset MixPercentage as

per F&UActual %

Debt, Money Market and Cash Minimum 60% 65 %

Equity and Equity relatedsecurities

Maximum 40% 35 %

Total 100 % 100 %


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44

Company% Of Net

AssetsIndustry

totalCorporate Securities Rating % Of NetAssets

Metals & Minerals 15.2 % INDIAN OVERSEAS BANK A1+ 0.83 %

STERLITE INDUSTRIES (INDIA) LTD. 5.6 % I C I C I Bank Ltd. A1+ 0.56 %

TATA STEEL LTD. 4.94 % State Bank of Hyderabad A1+ 0.53 %

Jindal Steel & Power Ltd. 3.74 % Bank of India A1+ 0.45 %

HINDUSTAN ZINC LTD. 0.91 % Axis Bank Ltd. P1+ 0.99 %

Bank of India P1+ 0.83 %

Bank 13.42 % UNION BANK OF INDIA P1+ 0.8 %

H D F C Bank Ltd. 8.99 % Oriental Bank of Commerce P1+ 0.4 %

Axis Bank Ltd. 1.77 %STATE BANK OF BIKANER& JAIPUR

P1+ 0.33 %

Oriental Bank of Commerce 1.39 % Corporation Bank P1+ 0.18 %

Punjab National Bank 0.66 % Tata Teleservices Limited PR1+ 0.25 %

UNION BANK OF INDIA 0.61 % CENTRAL BANK OF INDIA PR1+ 0.1 %

Oil & Gas 11.87 % Total 6.24 %

RELIANCE INDUSTRIES LTD. 8.81 %

Oil & Natural Gas Corpn. Ltd. 2.1 % Government securities /T Bills

% Of NetAssetsHindustan Petroleum Corpn. Ltd. 0.55 %

Indian Oil Corpn. Ltd. 0.27 %

Bharat Petroleum Corpn. Ltd. 0.15 %

Fixed deposits with banks 0.16 %

Auto 8.89 % Other current assets & eq 0.12 %

MAHINDRA & MAHINDRA LTD. 5.03 %

MARUTI SUZUKI INDIA LTD. 2.86 %100 %

APOLLO TYRES LTD. 1 %

Assets Held (Rs. Million) 87,020.11

Consumer 8.44 %

I T C Ltd. 7.17 %Asset Mix

Percentage as perF&U

Actual %DABUR INDIA LTD. 0.69 %

Kansai Nerolac Paints Ltd. 0.43 %Equity and Equity relatedsecurities

Maximum 100% 93 %

I C I INDIA LTD. 0.15 %Debt, Money Market andCash

Maximum 25% 7 %

Total 100 % 100 %

Cement 6.69 %

A C C LTD. 4.04 %

GRASIM INDUSTRIES LTD. 1.51 %

ULTRATECH CEMENT LTD. 0.58 %

Shree Cement Ltd. 0.56 %


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45

Capital Goods 6.03 %

BHARAT HEAVY ELECTRICALS LTD. 5.45 %

Kalpataru Power Transmission Ltd. 0.5 %

EMCO Ltd. 0.08 %

Telecom 5.68 %

Bharti Airtel Ltd. 5.68 %

Technology 5.51 %

INFOSYS TECHNOLOGIES LTD. 4.18 %

Tata Consultancy Services Ltd. 0.91 %

K P I T CUMMINS INFOSYSTEMSLTD.

0.41 %

Finance 4.2 %

Shriram Transport Finance Co. Ltd. 3.67 %

BAJAJ HOLDINGS & INVST. LTD. 0.35 %

RURAL ELECTRIFICATION CORPN.LTD.

0.18 %

Pharma & Healthcare 1.95 %

Lupin Ltd. 1.95 %

Infrastructure 1.92 %

POWER GRID CORPN. OF INDIA LTD. 1.77 %

N T P C LTD. 0.15 %

EPC 1.5 %

I V R C L INFRASTRUCTURES &PROJECTS LTD.

0.68 %

Madhucon Projects Ltd. 0.34 %

Ramky Infrastructure Limited 0.26 %

NAGARJUNA CONSTRUCTION CO.LTD.

0.22 %

Retail 1.19 %

PANTALOON RETAIL (INDIA) LTD. 1.18 %

Agre Developers Limited 0.01 %

Real Estate 0.61 %


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Housing Development &Infrastructure Ltd.

0.56 %

Oberoi Realty Ltd 0.05 %

Others 0.37 %

A B G SHIPYARD LTD. 0.37 %

Total 93.48 %

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