PREFACE

MBA is a stepping-stone to the management carrier and to develop good manager it is

necessary that the theoretical must be supplemented with exposure to the real
environment.
Theoretical knowledge just provides the base and it’s not sufficient to produce a good
manager that’s why practical knowledge is needed.
Therefore the research product is an essential requirement for the student of MBA. This
research project not only helps the student to utilize his skills properly learn field
realities but also provides a chance to the organization to find out talent among the
budding managers in the very beginning.
In accordance with the requirement of MBA course I have summer training project on
the topic “Comparitive Analysis of Mutual funds and Ulips”. The main objective of the
research project was to study the two instruments and make a detailed comparison of
the two.
For conducting the research project sample size of 50 customers of SBIMF
and SBOP was selected. The information regarding the project research was collected
through the questionnaire formed by me which was filled by the customers there.
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 INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business.
Though it is perhaps the smallest segment of 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
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 asset
managers.
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.
 Major players in Indian mutual fund industry and their AUM

No. of
Mutual Fund Name
Schemes* As on Corpus
337 July 31, 7803
ABN AMRO M F
2008
54 July 31, 3513
AIG GlobalM F
2008
177 July 31, 29151.00
SBI Mutual Fund
2008
343 July 31, 37497.00
Birla Mutual Fund
2008
22 July 31, 56.00
BOB Mutual Fund
2008
54 July 31, 4576.00
Canara Robeco Mutual Fund
2008
80 July 31, 1853.00
DBS Chola Mutual Fund
2008
187 July 31, 10792.00
Deutsche Mutual Fund
2008
DSP Merrill Lynch Mutual Fund 211 Feb 29, 2008 19483.00
Escorts Mutual Fund 26 Feb 29, 2008 177.00
Fidelity Mutual Fund 39 Mar 31, 2008 7464.00
230 July 31, 24441.00
Franklin Templeton Investments
2008
371 July 31, 50,752.0
HDFC Mutual Fund
2008 0
221 July 31, 16,385.0
HSBC Mutual Fund
2008 0
431 July 31, 55,161.0
ICICI Prudential Mutual Fund
2008 0
262 July 31, 7091.00
ING Mutual Fund
2008
9 July 31, 3054.00
JPMorgan Mutual Fund
2008
185 July 31, 18,782.0
Kotak Mahindra Mutual Fund
2008 0
112 July 31, 17,499.0
LIC Mutual Fund
2008 0
 216 July 31, 7831.00
Lotus India Mutual Fund
2008
3 July 31, 2,814.00
Morgan Stanley Mutual Fund
2008
151 July 31, 11,359.00
PRINCIPAL Mutual Fund
2008
6 July 31, 66.00
Quantum Mutual Fund
2008
345 July 31, 84,564.0
Reliance Mutual Fund
2008 0
45 July 31, 175.00
Sahara Mutual Fund
2008
255 July 31, 2546.00
Mirae asset mutual fund
2008
219 July 31, 11,898.00
Sundaram Mutual Fund
2008
389 July 31, 20,443.0
Tata Mutual Fund
2008 0
14 July 31, 289.00
Taurus Mutual Fund
2008
315 July 31, 46,120.0
UTI Mutual Fund
2008 0
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 the
Reserve Bank of India and functioned under the Regulatory and administrative control
of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of
1988 UTI had Rs.6,700 crores of assets under management.

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 Baroda
Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set
up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of
Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families.

Also, 1993 was the year in which the first Mutual Fund Regulations came into being,
under which all mutual funds, except UTI were to be registered and governed. The
erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private
sector mutual fund registered in July 1993.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain
other schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes.
GROWTH IN ASSETS UNDER MANAGEMENT

ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

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 AMC’s 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

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 and
actual returns. The service levels were also very bad. Most of these AMCs have
not been able to retain staff, float new schemes etc.
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.
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 regulatory changes that prevent
malpractices that emerge from time to time.

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.

To disseminate information on Mutual Fund Industry and to undertake studies and

research directly and/or in association with other bodies.
 MEMBERS OF AMFI:

○ 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

○ Institutions
1. LIC Mutual Fund Asset Management Company Limited
○ Private Sector

1. Indian

1. Benchmark Asset Management Company Pvt. Ltd.

2. DBS Cholamandalam Asset Management Ltd.
3. Deutsche Asset Management (India) Pvt. Ltd.
4. Edelweiss Asset Management Limited
5. Escorts Asset Management Limited
6. IDFC Asset Management Company Private Limited
7. JM Financial Asset Management Private Limited
8. Kotak Mahindra Asset Management Company Limited(KMAMCL)
9. Quantum Asset Management Co. Private Ltd.
10. Reliance Capital Asset Management Ltd.
11. Sahara Asset Management Company Private Limited
12. Tata Asset Management Limited
13. Taurus Asset Management Company Limited
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.
 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
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.
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.
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;

(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 instruments and carry out the custodian activities as may be authorized by
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.

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.
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.

(3) Any change in the appointment of the asset management company shall be subject
to prior approval of the Board and the unitholders.
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 to rupees ten crores :
Provided [further] that the period specified in the first proviso may be extended in
appropriate cases by the Board up to three years for reasons to be recorded in writing :
Provided further that 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,—
(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 :

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 further that 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.

(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
of these regulations and the guidelines or circulars issued in relation thereto from time
to time and that the investments made by the fund managers are in 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.

(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 further that 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 further that 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,
(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.
(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.

(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

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 manager’s
investment strategy

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 make investing easy.
Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a 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
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 don’t 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.
Management Risk
When you invest in mutual fund, you depend on fund manager to make the right
decisions regarding the fund’s portfolio. If the manager does not perform as well as you
had hoped, you might not make as much money on your investment as you expected.
Of course, if you invest in index funds, you forego management risk because these
funds do not employ managers.
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.
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 a
sponsor 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.

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
can be made either in the debt Securities or equity .The table below gives an overview
into the existing types of schemes in the Industry.

TYPES OF MUTUAL FUND SCHEME

 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
created. An investor can make payment by regular payments by issuing cheques, post
dated cheques, ECS, standing Mandate etc. SIP can be started in the any open-ended
fund if there is provision of it. There are some entry and exit load barriers for
discontinuation and redemption of the fund before the said period.

According to Structure

Open – Ended Funds

An open – ended fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value (NAV) related prices. The key feature of open – ended schemes is liquidity.

Close – Ended Funds

A close – ended fund has a stipulated maturity period which generally ranging from 3
to 15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the same time of the initial public issue and thereafter they
can buy and sell the units of the scheme on the stock exchanges where they are listed.
In order to provide an exit route to the investors, some close – ended funds give an
option of selling back the units to the mutual fund through periodic repurchase at NAV
related prices.
Interval Funds
Interval funds combine the features of open – ended and close – ended schemes.
They are open for sales or redemption during pre-determined intervals at their NAV.

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.
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 in
equities and fixed income securities in the proportion indicated in their offer
documents. In a rising stock market, the NAV of these schemes may not normally
keep pace or fall equally when the market falls. These are ideal for investors
looking for a combination of income and moderate growth.
Money Market Funds
The main aim of money market funds is to provide easy liquidity, preservation
of capital and moderate income. These schemes generally invest in safe short
term 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.

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.
FREQUENTLY USED TERMS

Advisor - Is employed by a mutual fund organization to give professional advice on

the fund’s 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.
ULIPS
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

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
policyholder’s 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 a group 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 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 .

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

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.

• 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 individual’s disposal. ULIPS generally come in three broad variants:

 Aggressive ULIPS (which can typically invest 80%-100% in equities, balance in

debt)

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

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

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 don’t
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

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.
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
COMPARISON
BETWEEN ULIPS
AND MUTUAL
FUNDS
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 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.

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
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