1. DEFINITION:
Mutual fund is the pool up savings of small investors to raise funds called mutual funds.
Mutual funds are invested in diversified portfolio to spread risk. While it opens an
investment channel to small investors, it reduces risks, improves liquidity and results in
stable returns and better capital appreciation in the long run.
CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized are shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is
the most suitable investment for the common man as it offers an opportunity to invest
in a diversified, professionally managed basket of securities at a relatively low cost.
Mutual fund is a trust that pools money from a group of investors (sharing common
financial goals) and invest the money thus collected into asset classes that match the
stated investment objectives of the scheme. Since the stated investment objective of a
mutual fund scheme generally forms the basis for an investor's decision to contribute
money to the pool, a mutual fund can not deviate from its stated objectives at any
point of time.
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2. Every Mutual Fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return than
what an investor can manage on his own. The capital appreciation and other incomes
earned from these investments are passed on to the investors (also known as unit
holders) in proportion of the number of units they own.
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3. UNIT LINKED INSURANCE PLANS
Unit Linked Insurance (ULIP) plans are designed to help you meet your financial
goals by ensuring you the value of your investments, or your nominee sum assured,
which is the life cover of your policy. To make sure that your ULIP is truly working
to assure your goal, you should choose a life cover that provides your family with
adequate finances and hence security even in your absence, so that important life
goals of your family are always secured.
Let us take the example of a 35-year-old man with 2 young children. He could begin
with a sum assured of Rs 5 lakh. As the children grow and thereby the financial
liabilities increase, he might want to increase the level of protection, which can be
done by increasing his sum assured.
When you decide the amount of premium to be paid and the amount of life cover you
want from the ULIP, the insurer deducts some portion of the ULIP premium upfront.
This portion is known as the Premium Allocation charge, and varies from product to
product. The rest of the premium is invested in the fund or mixture of funds chosen
by you. Mortality charges and ULIP administration charges are thereafter deducted
on a periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fund
management charges are adjusted from NAV on a daily basis.
Since the fund of your choice has an underlying investment – either in equity or debt
or a combination of the two – your fund value will reflect the performance of the
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4. underlying asset classes. At the time of maturity of your plan, you are entitled to
receive the fund value as at the time of maturity.
NEED AND IMPORTANCE OF THE STUDY
1. Mutual funds are dynamic financial intuitions which play crucial role in an
economy by mobilizing savings and investing them in the capital market.
2. The activities of mutual funds have both short and long term impact on the savings
in the capital market and the national economy.
3. Mutual funds, trust, assist the process of financial deepening & intermediation.
4. To banking at the same time they also compete with banks and other financial
intuitions.
5. India is one of the few countries to day maintain a study growth rate is domestic
savings.
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5. SCOPE OF THE STUDY:
 Subject matter is related to the investor‘s approach towards mutual funds and
Ulips.
 A study on comparative analysis of mutual funds in Kotak Mutual Fund
schemes, are effecting on the financial performance of the company.
 People of age between 20 to 60 i.e. the range is wide
 Area limited to Hyderabad
 Demographics include names, age, qualification, occupation, marital status
and annual income.
OBJECTIVES:
 To study the behavior of the investors whether they prefer mutual funds or
ULIPs.
 To know how the KOTAK Mutual funds are participating in the stock market.
 To know how the KOTAK Mutual funds are effecting on the overall
performance of the KOTAK Company.
 To know the brand awareness of KOTAK and customer‘s preference
towards KOTAK.
 Conduct market survey on a sample selected from the entire population and
derived opinion on that research.
 As KOTAK well reputed company in India it‘s great chance for me to
observed different product launch by other competitor companies like
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6. LIC,TATA AIG etc. In all, it is to understand the overall working of Life
insurance sector.
RESEARCH METHODOLGY
Research always starts with a question or a problem. Its purpose is to question
through the application of the scientific method. It is a systematic and intensive
study directed towards a more complete knowledge of the subject studied.
Marketing research is the function which links the consumer, customer and public to
the marketer through information- information used to identify and define marketing
opportunities and problems generate, refine, and evaluate marketing actions,
monitor marketing actions, monitor marketing performance and improve
understanding of market as a process.
Research specifies the information required to address these issues, designs, and the
method for collecting information, manage and implemented the data collection
process, analyses the results and communicate the findings and their implication. I
have prepared our project as descriptive type, as the objective of the study demands
the answers of the question related to find the potentiality of Mutual Funds and
Ulips in Hyderabad. How much potential is there in Hyderabad.
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7. Research Process
As marketing research is a systemic and formalized process, it follows a certain
sequence of research action. The marketing process has the following steps:
 Formulating the problems
 Developing objectives of the research
 Designing an effective research plan
 Data collection techniques
 Evaluating the data and preparing a research report
STEPS OF RESEARCH DESIGN:
 Define the information needed: -This first step states that what the
information that is actually required is. Information in this case we require is
that what is the approach of investors while investing their money in mutual
funds and Ulips e.g. what do they consider while deciding as to invest in
which of the two i.e. Mutual funds or Ulips. Also, it studies the extent to
which the investors are aware of the various costs that one bears while making
any investment. So, the information sought and information generated is only
possible after defining the information needed.
 Design the research: - A research design is a framework or blueprint for
conducting the research project. It details the procedures necessary for
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8. obtaining the information needed to solve research problems. In this project,
the research design is explorative in nature.
 Specify the scaling procedures: - Scaling involves creating a continuum
on which measured objects are located. Both nominal and interval scales have
been used for this purpose.
 Construct and pretest a questionnaire: - A questionnaire is a formalized set
of questions for obtaining information from respondents. Whereas presetting
refers to the testing of the questionnaire on a small sample of respondents in
order to identify and eliminate potential problems.
 Sample Unit Investors and non-investors.
 Sample Size This study involves 50 respondents.
 Sampling Technique: The sample size has been taken by non-random
convenience sampling technique
 Data Collection: After the research methodology, research problem in
marketing has been identified and selected; the next step is together the
requisite data. There are two types of data collection method – primary data
and secondary data. In our live project; we decided primary data collection
method because our study nature does not permit to apply observational
method. In survey approach we had selected a questionnaire method for taking
a customer view because it is feasible from the point of view of our subject &
survey purpose. Data has been collected both from primary as well as
secondary sources as described below:
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9. There are two types of data collection method use in my project report.
Primary data
Secondary data.
For my project, I decided on primary data collection method for observing
working of company and approaching customers directly in the field, tele-calling,
cold calling, campaigning and through references to know their interest in business
with company in my project and also make questionnaire for creating database of
business class people is Hyderabad city for company. I decided on Secondary data
collection method was used by referring to various websites, books, magazines,
journals and daily newspapers for collecting information regarding project under
study.
Primary sources
 Primary data was obtained through questionnaires filled by
people and through direct communication with respondents in
the form of Interview.
 Secondary sources
 The secondary sources of data were taken from the various
websites, books, journals reports, articles etc. This mainly
provided information about the mutual fund and ULIPs
industry in India.
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10.  Plan for data analysis: Analysis of data is planned with the
help of mean and analysis of variance.
LIMITATIONS
Mostly the data is related to the secondary data.
To collect the primary data from the company is difficult task and it is a
confidential matter to the company.
The product is restricted to only mutual funds.
The data is only limited to financial performance of the mutual funds.
The collected primary data is only from the one branch head of Hyderabad.
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11. COMPANY PROFILE
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, A.A.Sidney , Pinto and Kotak
& Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in
1986, and that's when the company changed its name to Kotak Mahindra Finance
Limited.
The Kotak Mahindra Group
Kotak Mahindra is one of India's leading financial conglomerates, offering complete
financial solutions that encompass every sphere of life. From commercial banking, to
stock broking, to mutual funds, to life insurance, to investment banking, the group
caters to the financial needs of individuals and corporates.
The group has a net worth of over Rs. 6,799 crore and has a distribution network of
branches, franchisees, representative offices and satellite offices across cities and
towns in India and offices in New York, London, San Francisco, Dubai, Mauritius
and Singapore. The Group services around 6.4 million customer accounts.
Kotak Group Products & Services:
Bank
Life Insurance
Mutual Funds
Car Finance
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12. Securities
Institutional Equities
Investment Banking
Kotak Mahindra International
Kotak Private Equity
Kotak Realty Fund
Group Management:
Mr. Gaurang Shah - Director
Mr.G Muralidhar – Managing Director
Mr. Andrew Cartwright - Appointed Actuary
Mr. Sudhakar Shanbag - Chief Investment Officer
Mr. Sugata Dutta - Head Human Resources
Mr. Suresh Agarwal - Head of Alternate channel
Ms. Kirti Patil – Sr. Vice-President & Head Information Technology
Mr. Anand Dewan - Head Business Impact Group (BIG)
Mr. Cedric Fernandas – Sr. Vice President & Chief Financial Officer
Ms. Elizabeth Venkataraman - Senior Vice President Marketing
Mr. Hitesh Veera – Sr. Vice President & Head Operations, CustomerService,
Underwriting , Claims
Mr. Sandip Shrikhande - Head of Group Business
Mr. Subhasish Ghosh - Sr. VP, Financial Institutions Group
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13. Our Corporate Identity
Kotak Mahindra Bank: The Kotak Mahindra Group's flagship company, Kotak
Mahindra Finance Ltd which was established in 1985, was converted into a bank-
Kotak Mahindra Bank Ltd in March 2003 becoming the first Indian company to
convert into a Bank. Its banking operations offer a central platform for customer
relationships across the group's various businesses. The bank has presence in
Commercial Vehicles, Retail Finance, Corporate Banking, Treasury and Housing
Finance.
Kotak Mahindra Capital Company: Kotak Mahindra Capital Company Limited
(KMCC) is India's premier Investment Bank. KMCC's core business areas include
Equity Issuances, Mergers & Acquisitions, Structured Finance and Advisory
Services.
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14. Kotak Securities: Kotak Securities Ltd. is one of India's largest brokerage and
securities distribution houses. Over the years, Kotak Securities has been one of the
leading investment broking houses catering to the needs of both institutional and non-
institutional investor categories with presence all over the country through franchisees
and coordinators. Kotak Securities Ltd. offers online
(throughwww.kotaksecurities.com) and offline services based on well-researched
expertise and financial products to non-institutional investors.
Kotak Mahindra Prime: Kotak Mahindra Prime Limited (KMP) (formerly known as
Kotak Mahindra Primus Limited) has been formed with the objective of financing the
retail and wholesale trade of passenger and multi utility vehicles in India. KMP offers
customers retail finance for both new as well as used cars and wholesale finance to
dealers in the automobile trade. KMP continues to be among the leading car finance
companies in India.
Kotak Mahindra Asset Management Company: Kotak Mahindra Asset
Management Company Kotak Mahindra Asset Management Company (KMAMC), a
subsidiary of Kotak Mahindra Bank, is the asset manager for Kotak Mahindra Mutual
Fund (KMMF). KMMF manages funds in excess of Rs 30,000 crore and offers
schemes catering to investors with varying risk-return profiles. It was the first fund
house in the country to launch a dedicated gilt scheme investing only in government
securities.
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15. Figure 1.0
Kotak Mahindra Old Mutual Life Insurance Limited: Kotak Mahindra Old
Mutual Life Insurance Limited is a joint venture between Kotak Mahindra Bank Ltd.
and Old Mutual plc. Kotak Life Insurance helps customers to take important financial
decisions at every stage in life by offering them a wide range of innovative life
insurance products, to make them financially independent.
Kotak's International Business With a presence outside India since 1994, the
international subsidiaries of Kotak Mahindra Bank Ltd. operating through offices in
London, New York, Dubai, San Francisco, Singapore and Mauritius specialize in
providing asset management services to specialist overseas investors seeking to invest
into India. The offerings are differentiated India investment solutions that span all
major asset classes including listed equity, private equity and real estate. The
subsidiaries also lead manage and underwrite international issuances of securities.
With its commendable track record, large presence on the ground and a team of
dedicated staff in India, Kotak‘s international arm is suitably positioned for managing
assets in the Indian Capital markets.
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16. Business Strategy:
BUSINESS CONSULTING
The greatest accomplishments begin with an architect plan. We believe that KOTAK
Group is the advisor that the company needs most as you begin to conceptualize the
business road map.
Our business consulting team is the cohesive mortar that unites our various
disciplines. By focusing on company's strategic objectives, we are able to design,
develop, and implement the solutions that will produce measurable change across the
enterprise.
As the foundation of KOTAK Group , this business-centric philosophy permeates our
various discipline leaders. Whether a developer or a designer, the goal of producing
custom business solutions is paramount.
DEFINING DIRECTIONS
Our ability to offer guidance throughout the highest levels of leadership is cultivated
by our ability to architect and execute solutions that matter most. This focus on sound
strategic direction provides a high-level road map that can manage and expand
channels, enhance revenue, and penetrate markets that may have previously been
inaccessible. Our knowledge and use of business intelligence tools allows our clients
to make calculated decisions based on real-time data, thus providing accurate and
effective results.
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17. FORMING A STRUCTURE
Our skill in analyzing company's internal structure enables KOTAK Group to
enhance business processes, operational efficiencies and manage or reduce overall
costs. By optimizing supply chain through supplier collaboration and rationalization
we can improve the relationships that support business.
EXTENDING RELATIONSHIP
By helping to orientate leadership direction and formulate operational practices,
KOTAK Group can also effectively refine how company goes to market. By
improving the ways in which the company deploy their sales force, manage
traditional customer relationships and build an integrated marketing and
communications plan, we can help the craft every touch point between the company
and customers.
E-Business/Web services:
E-Business is much more than buying and selling over the Web. In the simplest sense,
it is the use of Internet technologies to improve core business processes. And, while
technology makes e-business possible, e-business isn't about technology. It's about
connecting core business systems and processes to customers, suppliers, and
employees—24 hours a day, 7 days a week.
E-business:
E-Business can help companies meet today's business challenges head-on. Whether
it's increasing revenue or decreasing costs, reaching new customers or better serving
existing ones, a solid e-business infrastructure provides the foundation to deliver true
value to stakeholders.
Important reasons to become an e-business include the following:
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18. Increase revenue
Decrease costs
Improve employee efficiency
Expand market reach
Strengthen business relationships
Improve customer satisfaction
At KOTAK Group, we know that the success of our company depends on our ability
to provide world-class, e-business solutions with real business value to our clients.
We understand the business impact of e-business. Our experts have helped many
companies leverage the Internet with the following solutions:
E-commerce—allows companies to buy and sell products and services online.
Business intelligence—allows companies to acquire data about their customers to
provide better service.
Customer relationship management—provides the ability to support and retain
profitable customers.
Supply chain management—streamlines end-to-end processes associated with the
flow of products.
Enterprise Application Integration
KOTAK Group development team is designed to partner with our clients to address
many business critical issues and objectives. KOTAK Group knows how to use state-
of-the-art technologies to provide targeted, world-class integration solutions that
address unique business needs.
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19. Integrated Marketing:
Successful Integrated Marketing solutions take three key elements in order to produce
value: solid strategy, quality design, and measurability.
SOLID STRATEGY
By understanding competitive landscapes, identifying audiences, and estimating the
return on investment, KOTAK Group can help out making intelligent marketing
decisions that provide maximum returns. We analyze the company business
objectives and determine a path of communication that will reach the consumer or
client base on a more consistent basis.
QUALITY DESIGN
Integrated Marketing utilizes a variety of media and channels. It employs designers
that understand these mediums and can translate their designs into effective
communications. KOTAK Group designers have the expertise to match visual design
with the appropriate language and elements, essential in improving response rates and
reaching near to intended audience.
MEASURABILITY
KOTAK Group specializes in business intelligence tools that can analyze data,
response rates, and demographics. By having access to this information in real time,
we can effectively tailor communications to increase response rates, measure return
on investment, and make Intel suited for your business objectives.
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20. KOTAK Group can enable the company to take advantage of the technology and
talent that is available to drive consumer demand, sales, and the message of the
organization.
IT Strategy Development
Over the past few years the role of technology in business has become a critical
success factor. Many organizations leverage information technology to help them
deliver their products and services. But few organizations truly realize the business
benefits that can be achieved from an effective technology strategy. The rapid pace of
change in technology provides companies with new, cost-effective mechanisms to
communicate with their customers, suppliers, employees, and key business partners.
Properly harnessed, technology initiatives can enrich customer relationships, shorten
supply chains, and streamline a number of internal processes so that a true return on
investment is realized. The first step is to create alignment and consensus within the
organization and build an action plan around those initiatives that will deliver the
highest return.
STRATEGIC PLANNING SOLUTIONS
KOTAK Group Strategic solutions leverage a proven methodology to help our clients
fundamentally align and leverage technology in order to achieve enterprise business
objectives. We devise these strategies by examining the current position of the
individual, IT organizations, business processes, organizational behavior, and key
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21. stakeholders. Then we align technology solutions in a way that ties these stakeholders
to the business systems and processes within the organization.
Strategic Planning Service Features
Aligns technology infrastructure and initiatives with high-priority business
processes and organizational objectives
Focuses on the needs of the key stakeholders (customers, suppliers,
employees) and not on the limitations of technology.
Provides qualitative and quantitative measures of the success of the strategy or
business continuity plan.
Creates alignment, consensus, and accountability for the prioritized initiatives
among executive leadership and line of business management.
Our strategic planning solutions can be used to help the organization during its annual
planning, or throughout the year as industry and market trends demand. Strategic
planning may be necessary in the following situations:
When a competitive advantage is needed to demonstrate quality of service
When the organization seeks to expand while maintaining existing operational
infrastructure (capital and human resources)
When audits have identified gaps or weaknesses in business or IT capability
When structural organizational changes occur (acquisition, merger, or
divestiture)
When no business continuity, disaster recovery, or emergency management
plan exists
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22. Process Development
KOTAK Group Business Process Improvement solutions are designed to help the
company to streamline the processes that are critical to managing business.
Organizations need to optimize the business process, but seldom do. That‘s where
KOTAK Group Business Process Improvement solutions come in.
Using our proven methodology and toolsets, we deliver key business results in a
timely fashion. We help to achieve improved customer service, cost reductions, and
capacity expansion.
ONSITE MAINTAINENCE
In this approach, the KOTAK Group team at onsite will carry out all the maintenance
and support for the application. However the offshore team based at KOTAK Group
development center will be extending the support for the onsite team on any technical
issues that they may have. They act as a backup and in the event of any emergency;
can immediately act as a replacement.
OFFSHORE / REMOTE MAINTAINENCE
The remote maintenance approach adopted by KOTAK Group. to carry out the
maintenance is explained below.
Receiving the issue: The onsite technical support team receives the issue from client
either through any of the following media like e-mail, telephone, mobile phone or
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23. instant messenger services. A ticket number generated would help the offsite team
identify each issue.
Study and Analysis: Once the problem Ticket issue is received, the Onsite technical
team makes a careful study of the issue and analyzes its complexity.
Estimation: After a through analysis the work estimation is made and it is placed
before the client through an offsite support Manager. Based on the estimated time and
priority, the issue is then scheduled to be resolved either by the onsite team or by the
offshore team.
Scheduling: Identify the best suitable team member(s) for solving the issue and
assign the tasks to that particular resource(s).
Solution: The assigned team member(s) provides the solution as specified in the
given task document in a scheduled time adhering to the quality standards, he also
provides a standard document describing the work done.
Testing: Test the changed code as per the Maintenance Manual. Update the
documentation as required
Log Maintenance: Logs will be maintained for future use by the offsite as well as
offshore team for all the support issues that have come up.
Our Value Proposition
KOTAK Group Strategic Partnership with the client would help the client
leverage our Technology and Development facilities, quickly build resource
pools consisting of focused R & D teams for new initiatives in specific
technologies
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24. Our dedicated Technology labs for the client's R&D division acts as Virtual
Extension in terms of Vision, People, and Infrastructure
Protect client's Intellectual Property Rights (IPR) by following established
processes for secure communication and protection
Our strong focus is towards the quality of solution we deliver and support we
offer to our client
Our extensive skills in developing re-usable components, frameworks and
expertise in executing complex solutions gives advantage of high-quality,
cost-effective development to our customers
We make sure that our work is towards minimizing the business risks and
speeding up the entry of new products in the market.
Inbound Teleservices
Our call handling and inbound telemarketing services for business-to-business and
business-to-consumer campaigns will help drive customer acquisition, increase
customer retention, improve sales and rapidly expand your markets. Our inbound
supports include:
Help Desk: 24 Hours /Day, 365 Days /Year
Technical Support Requests For Maintenance Support
Requests For Maintenance Support
Inbound Telemarketing / Up-Selling & Cross-Selling
Requests for Samples
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25. Order Status: Customers can check on the status of their order at any time
Dealer Locate: Callers are given information on the store or dealer nearest to them.
Ticketing Sales
Subscriptions
Fundraising
Advertising Co-Op Claim Processing
Rebate Processing
Insurance Claims Processing
Product Recall Management
Customized Interactive Voice Services
Overflow, Off-Hour And Weekend Call Handling
Fax on Demand: An access channel for those customers who need documented
answers or written confirmation.
Outbound Teleservices
Our tele-professionals help out to turn the company prospects into customers, and
then our customers into advocates. We focus on building a relationship that lasts by
using a personalized approach that provides the value addition necessary to maintain
and grow your client base. Our outbound capabilities include:
Telemarketing and Sales: We use predictive dialing to connect to customers. Our tele-
sales techniques also include:
Reactivation: Approaching your 'expired' customers with the right offer
Targeting: Isolating key decision-makers and discovering their budgets before you
spend resources on more costly mail or sales calls
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26. New Movers: Tapping people who have just moved residence, for example, and
asking them to pre-register for your service or organization
Renewals: for publishing and finance, telemarketing is by far the most efficient way
to secure repeat buyers
Aftermarket Sales: Contacting new customers and securing additional sales, even
when other products are seemingly unrelated.
PRODUCTS
Term Plans
Kotak Term Assurance Plan
Kotak Preferred Term Plan
Endowment Plans
Kotak Endowment Plan
Kotak Money Back Plan
Kotak Child Advantage Plan
Kotak Capital Multiplier Plan
Kotak Retirement Income Plan
Kotak Premium Return Plan
Unit Linked Plans
Kotak Retirement Income Plan (Unit-linked)
Kotak Safe Investment Plan II
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27. Kotak Flexi Plan
Kotak Easy Growth Plan
Kotak Privilege Assurance Plan
Group
Employee Benefits
Kotak Term Grouplan
Kotak Credit-Term Grouplan
Kotak Complete Cover Grouplan
Kotak Gratuity Grouplan
Kotak Superannuation Group Plan
Rural
Kotak Gramin Bima Yojana
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28. INTRODUCTION OF MUTUAL FUNDS
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized is shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is
the most suitable investment for the common man as it offers an opportunity to
invest in a diversified, professionally managed basket of securities at a relatively
low cost. The flow chart below describes broadly the working of mutual funds.
Figure 1.1
Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as
disclosed in offer document.
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29. Investments in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all
stocks may not move in the same direction in the same proportion at the same time.
Mutual fund issues units to the investors in accordance with quantum of money
invested by them. Investors of mutual funds are known as unit holders.
The investors in proportion to their investments share the profits or losses. The
mutual funds normally come out with a number of schemes with different
investment objectives that are launched from time to time. A mutual fund is required
to be registered with Securities and Exchange Board of India (SEBI), which
regulates securities markets before it can collect funds from the public.
Different investment avenues are available to investors. Mutual funds also offer
good investment opportunities to the investors. Like all investments, they also carry
certain risks. The investors should compare the risks and expected yields after
adjustment of tax on various instruments while taking investment decisions.
History of the Indian Mutual Fund
The Indian mutual fund industry is dominated by the Unit Trust of India, which has
a total corpus of Rs700bn collected from more than 20 million investors. The UTI
has many funds/schemes in all categories i.e. equity, balanced, income etc with
some being open-ended and some being closed-ended. The Unit Scheme 1964
commonly referred to as US 64, which is a balanced fund, is the biggest scheme
with a corpus of about Rs200bn. Most of its investors believe that the UTI is
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30. government owned and controlled, which, while legally incorrect, is true for all
practical purposes.
The second largest category of mutual funds is the ones floated by nationalized
banks. Can bank Asset Management floated by Canara Bank and SBI Funds
Management floated by the State Bank of India are the largest of these. GIC AMC
floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated
by the LIC are some of the other prominent ones. 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
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31. 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
cores.
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.
31

32. 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.
STRUCTURE OF MUTUAL FUND
There are many entities involved and the diagram below illustrates the structure
Figure 1.2
32

33. 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 is 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.
33

34. 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.
34

35. 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.
35

36. Some of the AMCs operating currently are:
Table 1.0
Name of the AMC Nature of ownership
Alliance Capital Asset Management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company Limited Banks
Bank of India Asset Management Company Limited Banks
Can bank Investment Management Services Limited Banks
Cholamandalam Cazenove Asset Management Company Limited Private foreign
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian
GIC Asset Management Company Limited Institutions
IDBI Investment Management Company Limited Institutions
Indfund Management Limited Banks
ING Investment Asset Management Company Private Limited Private foreign
J M Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management Company Limited Private Indian
Kothari Pioneer Asset Management Company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company Limited Institutions
Morgan Stanley Asset Management Company Private Limited Private foreign
Punjab National Bank Asset Management Company Limited Banks
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Banks
Shriram Asset Management Company Limited Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institutions
Zurich Asset Management Company (I) Limited Private foreign
36

37. ADVANTAGES:
The benefits on offer are many with good post-tax returns and reasonable safety
being the hallmark that we normally associate with them. Some of the other major
benefits of investing in them are:
Number of available options
Mutual funds invest according to the underlying investment objective as specified at
the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and
many others that cater to the different needs of the investor. The availability of these
options makes them a good option. While equity funds can be as risky as the stock
markets themselves, debt funds offer the kind of security that aimed at the time of
making investments. Money market funds offer the liquidity that desired by big
investors who wish to park surplus funds for very short-term periods. The only
pertinent factor here is that the fund has to selected keeping the risk profile of the
investor in mind because the products listed above have different risks associated
with them. So, while equity funds are a good bet for a long term, they may not find
favor with corporate or High Net worth Individuals (HNIs) who have short-term
needs.
Diversification
Investments spread across a wide cross-section of industries and sectors and so the
risk is reduced. Diversification reduces the risk because not all stocks move in the
same direction at the same time. One can achieve this diversification through a
Mutual Fund with far less money than one can on his own.
37

38. Professional Management
Mutual Funds employ the services of skilled professionals who have years of
experience to back them up. They use intensive research techniques to analyze each
investment option for the potential of returns along with their risk levels to come up
with the figures for performance that determine the suitability of any potential
investment.
Potential of Returns
Returns in the mutual funds are generally better than any other option in any other
avenue over a reasonable period. People can pick their investment horizon and stay
put in the chosen fund for the duration. Equity funds can outperform most other
investments over long periods by placing long-term calls on fundamentally good
stocks. The debt funds too will outperform other options such as banks.
Get Focused
I will admit that investing in individual stocks can be fun because each company has
a unique story. However, it is important for people to focus on making money.
Investing is not a game. Your financial future depends on where you put you hard-
earned dollars and it should not take lightly.
Efficiency
By pooling investors' monies together, mutual fund companies can take advantage
of economies of scale. With large sums of money to invest, they often trade
commission-free and have personal contacts at the brokerage firms.
Ease of Use
Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The
bookkeeping duties involved with stocks are much more complicated than owning a
38

39. mutual fund. If you are doing your own taxes, or are short on time, this can be a big
deal.
Wealthy stock investors get special treatment from brokers and wealthy bank
account holders get special treatment from the banks, but mutual funds are non-
discriminatory. It doesn't matter whether you have $50 or $500,000; you are getting
the exact same manager, the same account access and the same investment.
Risk
In general, mutual funds carry much lower risk than stocks. This is primarily due to
diversification (as mentioned above). Certain mutual funds can be riskier than
individual stocks, but you have to go out of your way to find them.
With stocks, one worry is that the company you are investing in goes bankrupt.
With mutual funds, that chance is next to nil. Since mutual funds, typically hold
anywhere from 25-5000 companies, all of the companies that it holds would have to
go bankrupt.
I will not argue that you should not ever invest in individual stocks, but I do hope
you see the advantages of using mutual funds and make the right choice for the
money that you really care about.
DISADVANTAGES
Mutual funds have their drawbacks and may not be for everyone:
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 a mutual fund runs the risk of losing money.
39

40. 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 adviser, 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 if you reinvest the
money you made.
Management risk: When you invest in a mutual fund, you depend on the fund's
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.
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.
40

41. Figure 1.3
1. Equity Funds
Equity funds are considered to be the more risky funds as compared to other
fund types, but they also provide higher returns than other funds. It is advisable
that an investor looking to invest in an equity fund should invest for long term
i.e. for 3 years or more. There are different types of equity funds each falling
into different risk bracket. In the order of decreasing risk level, there are
following types of equity funds:
41

42. a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers
aspire for maximum capital appreciation and invest in less researched shares
of speculative nature. Because of these speculative investments Aggressive
Growth Funds become more volatile and thus, are prone to higher risk than
other equity funds.
b. Growth Funds - Growth Funds also invest for capital appreciation (with
time horizon of 3 to 5 years) but they are different from Aggressive Growth
Funds in the sense that they invest in companies that are expected to
outperform the market in the future. Without entirely adopting speculative
strategies, Growth Funds invest in those companies that are expected to post
above average earnings in the future.
c. Specialty Funds - Specialty Funds have stated criteria for investments and
their portfolio comprises of only those companies that meet their criteria.
Criteria for some specialty funds could be to invest/not to invest in
particular regions/companies. Specialty funds are concentrated and thus, are
comparatively riskier than diversified funds.. There are following types of
specialty funds:
i. Sector Funds: Equity funds that invest in a particular sector/industry
of the market are known as Sector Funds. The exposure of these
funds is limited to a particular sector (say Information Technology,
Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods)
which is why they are more risky than equity funds that invest in
multiple sectors.
42

43. ii. Foreign Securities Funds: Foreign Securities Equity Funds have
the option to invest in one or more foreign companies. Foreign
securities funds achieve international diversification and hence they
are less risky than sector funds. However, foreign securities funds
are exposed to foreign exchange rate risk and country risk.
iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies
having lower market capitalization than large capitalization
companies are called Mid-Cap or Small-Cap Funds. Market
capitalization of Mid-Cap companies is less than that of big, blue
chip companies (less than Rs. 2500crores but more than Rs.500
crores) and Small-Cap companies have market capitalization of less
than Rs. 500crores. Market Capitalization of a company can be
calculated by multiplying the market price of the company's share by
the total number of its outstanding shares in the market. The shares
of Mid-Cap or Small-Cap Companies are not as liquid as of Large-
Cap Companies which gives rise to volatility in share prices of these
companies and consequently, investment gets risky.
iv. Option Income Funds*: While not yet available in India, Option
Income Funds write options on a large fraction of their portfolio.
Proper use of options can help to reduce volatility, which is
otherwise considered as a risky instrument. These funds invest in
big, high dividend yielding companies, and then sell options against
their stock positions, which generate stable income for investors.
43

44. D.)Diversified Equity Funds - Except for a small portion of
investment in liquid money market, diversified equity funds invest mainly
in equities without any concentration on a particular sector(s). These funds
are well diversified and reduce sector-specific or company-specific risk.
However, like all other funds diversified equity funds too are exposed to
equity market risk. One prominent type of diversified equity fund in India
is Equity Linked Savings Schemes (ELSS). As per the mandate, a
minimum of 90% of investments by ELSS should be in equities at all
times. ELSS investors are eligible to claim deduction from taxable income
(up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually
has a lock-in period and in case of any redemption by the investor before
the expiry of the lock-in period makes him liable to pay income tax on
such income(s) for which he may have received any tax exemption(s) in
the past.
e.)Equity Index Funds - Equity Index Funds have the objective to match
the performance of a specific stock market index. The portfolio of these
funds comprises of the same companies that form the index and is
constituted in the same proportion as the index. Equity index funds that
follow broad indices (like S&P CNX Nifty, Sensex) are less risky than
equity index funds that follow narrow sectored indices (like BSE
BANKEX or CNX Bank Index etc). Narrow indices are less diversified
and therefore, are more risky.
44

45. f) Value Funds - Value Funds invest in those companies that have sound
fundamentals and whose share prices are currently under-valued. The
portfolio of these funds comprises of shares that are trading at a low Price
to Earning Ratio (Market Price per Share / Earning per Share) and a low
Market to Book Value (Fundamental Value) Ratio. Value Funds may
select companies from diversified sectors and are exposed to lower risk
level as compared to growth funds or specialty funds. Value stocks are
generally from cyclical industries (such as cement, steel, sugar etc.) which
make them volatile in the short-term. Therefore, it is advisable to invest in
Value funds with a long-term time horizon as risk in the long term, to a
large extent, is reduced.
g) Equity Income or Dividend Yield Funds - The objective of Equity
Income or Dividend Yield Equity Funds is to generate high recurring
income and steady capital appreciation for investors by investing in those
companies which issue high dividends (such as Power or Utility
companies whose share prices fluctuate comparatively lesser than other
companies' share prices). Equity Income or Dividend Yield Equity Funds
are generally exposed to the lowest risk level as compared to other equity
funds.
2. Debt / Income Funds
Funds that invest in medium to long-term debt instruments issued by private
companies, banks, financial institutions, governments and other entities
belonging to various sectors (like infrastructure companies etc.) are known as
Debt / Income Funds. Debt funds are low risk profile funds that seek to
45

46. generate fixed current income (and not capital appreciation) to investors. In
order to ensure regular income to investors, debt (or income) funds distribute
large fraction of their surplus to investors. Although debt securities are
generally less risky than equities, they are subject to credit risk (risk of
default) by the issuer at the time of interest or principal payment. To minimize
the risk of default, debt funds usually invest in securities from issuers who are
rated by credit rating agencies and are considered to be of "Investment
Grade". Debt funds that target high returns are more risky. Based on different
investment objectives, there can be following types of debt funds:
a. Diversified Debt Funds - Debt funds that invest in all securities
issued by entities belonging to all sectors of the market are known as
diversified debt funds. The best feature of diversified debt funds is that
investments are properly diversified into all sectors which results in
risk reduction. Any loss incurred, on account of default by a debt
issuer, is shared by all investors which further reduces risk for an
individual investor.
b. Focused Debt Funds* - Unlike diversified debt funds, focused debt
funds are narrow focus funds that are confined to investments in
selective debt securities, issued by companies of a specific sector or
industry or origin. Some examples of focused debt funds are sector,
specialized and offshore debt funds, funds that invest only in Tax Free
Infrastructure or Municipal Bonds. Because of their narrow
orientation, focused debt funds are more risky as compared to
46

47. diversified debt funds. Although not yet available in India, these funds
are conceivable and may be offered to investors very soon.
c. High Yield Debt funds - As we now understand that risk of default is
present in all debt funds, and therefore, debt funds generally try to
minimize the risk of default by investing in securities issued by only
those borrowers who are considered to be of "investment grade". But,
High Yield Debt Funds adopt a different strategy and prefer securities
issued by those issuers who are considered to be of "below investment
grade". The motive behind adopting this sort of risky strategy is to
earn higher interest returns from these issuers. These funds are more
volatile and bear higher default risk, although they may earn at times
higher returns for investors.
d. Assured Return Funds - Although it is not necessary that a fund will
meet its objectives or provide assured returns to investors, but there
can be funds that come with a lock-in period and offer assurance of
annual returns to investors during the lock-in period. Any shortfall in
returns is suffered by the sponsors or the Asset Management
Companies (AMCs). These funds are generally debt funds and provide
investors with a low-risk investment opportunity. However, the
security of investments depends upon the net worth of the guarantor
(whose name is specified in advance on the offer document). To
safeguard the interests of investors, SEBI permits only those funds to
offer assured return schemes whose sponsors have adequate net-worth
to guarantee returns in the future. In the past, UTI had offered assured
47

48. return schemes (i.e. Monthly Income Plans of UTI) that assured
specified returns to investors in the future. UTI was not able to fulfill
its promises and faced large shortfalls in returns. Eventually,
government had to intervene and took over UTI's payment obligations
on itself. Currently, no AMC in India offers assured return schemes to
investors, though possible.
e) Fixed Term Plan Series - Fixed Term Plan Series usually are
closed-end schemes having short term maturity period (of less than
one year) that offer a series of plans and issue units to investors at
regular intervals. Unlike closed-end funds, fixed term plans are not
listed on the exchanges. Fixed term plan series usually invest in debt /
income schemes and target short-term investors. The objective of fixed
term plan schemes is to gratify investors by generating some expected
returns in a short period.
3. Gilt Funds
Also known as Government Securities in India, Gilt Funds invest in
government papers (named dated securities) having medium to long term
maturity period. Issued by the Government of India, these investments have
little credit risk (risk of default) and provide safety of principal to the
investors. However, like all debt funds, gilt funds too are exposed to interest
rate risk. Interest rates and prices of debt securities are inversely related and
any change in the interest rates results in a change in the NAV of debt/gilt
funds in an opposite direction.
48

49. 4. Money Market / Liquid Funds
Money market / liquid funds invest in short-term (maturing within one year)
interest bearing debt instruments. These securities are highly liquid and
provide safety of investment, thus making money market / liquid funds the
safest investment option when compared with other mutual fund types.
However, even money market / liquid funds are exposed to the interest rate
risk. The typical investment options for liquid funds include Treasury Bills
(issued by governments), Commercial papers (issued by companies) and
Certificates of Deposit (issued by banks).
5. Hybrid Funds
As the name suggests, hybrid funds are those funds whose portfolio includes a
blend of equities, debts and money market securities. Hybrid funds have an
equal proportion of debt and equity in their portfolio. There are following
types of hybrid funds in India:
a. Balanced Funds - The portfolio of balanced funds include assets like debt
securities, convertible securities, and equity and preference shares held in a
relatively equal proportion. The objectives of balanced funds are to reward
investors with a regular income, moderate capital appreciation and at the same
time minimizing the risk of capital erosion. Balanced funds are appropriate for
conservative investors having a long term investment horizon.
49

50. b. Growth-and-Income Funds - Funds that combine features of growth funds
and income funds are known as Growth-and-Income Funds. These funds
invest in companies having potential for capital appreciation and those known
for issuing high dividends. The level of risks involved in these funds is lower
than growth funds and higher than income funds.
c. Asset Allocation Funds - Mutual funds may invest in financial assets like
equity, debt, money market or non-financial (physical) assets like real estate,
commodities etc.. Asset allocation funds adopt a variable asset allocation
strategy that allows fund managers to switch over from one asset class to
another at any time depending upon their outlook for specific markets. In
other words, fund managers may switch over to equity if they expect equity
market to provide good returns and switch over to debt if they expect debt
market to provide better returns. It should be noted that switching over from
one asset class to another is a decision taken by the fund manager on the basis
of his own judgment and understanding of specific markets, and therefore, the
success of these funds depends upon the skill of a fund manager in
anticipating market trends.
6.Commodity Funds
Those funds that focus on investing in different commodities (like metals,
food grains, crude oil etc.) or commodity companies or commodity futures
contracts are termed as Commodity Funds. A commodity fund that invests in
a single commodity or a group of commodities is a specialized commodity
fund and a commodity fund that invests in all available commodities is a
50

51. diversified commodity fund and bears less risk than a specialized commodity
fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold
futures or shares of gold mines) are common examples of commodity funds.
7. Real Estate Funds
Funds that invest directly in real estate or lend to real estate developers or
invest in shares/securitized assets of housing finance companies, are known as
Specialized Real Estate Funds. The objective of these funds may be to
generate regular income for investors or capital appreciation.
8. Exchange Traded Funds (ETF)
Exchange Traded Funds provide investors with combined benefits of a closed-
end and an open-end mutual fund. Exchange Traded Funds follow stock
market indices and are traded on stock exchanges like a single stock at index
linked prices. The biggest advantage offered by these funds is that they offer
diversification, flexibility of holding a single share (tradable at index linked
prices) at the same time. Recently introduced in India, these funds are quite
popular abroad.
9. Fund of Funds
Mutual funds that do not invest in financial or physical assets, but do invest in
other mutual fund schemes offered by different AMCs, are known as Fund of
Funds. Fund of Funds maintain a portfolio comprising of units of other mutual
fund schemes, just like conventional mutual funds maintain a portfolio
comprising of equity/debt/money market instruments or non financial assets.
51

52. Fund of Funds provide investors with an added advantage of diversifying into
different mutual fund schemes with even a small amount of investment, which
further helps in diversification of risks. However, the expenses of Fund of
Funds are quite high on account of compounding expenses of investments into
different mutual fund schemes.
Risk Hierarchy of Different Mutual Funds
Thus, different mutual fund schemes are exposed to different levels of risk and
investors should know the level of risks associated with these schemes before
investing. The graphical representation hereunder provides a clearer picture of the
relationship between mutual funds and levels of risk associated with these funds:
52

53. Figure 1.4
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.
53

54. 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.
54

55. The Insurance Regulatory and Developmet
Authority (IRDA)
The Insurance Act,1938 had provided for setting up of the Controller of Insurance to
act as a strong and powerful supervisory and regulatory authority for insurance. Post
nationalization, the role of Controller of Insurance diminished considerably in
significance since the Government owned the insurance companies.
But the scenario changed with the private and foreign companies foraying in to the
insurance sector. This necessitated the need for a strong, independent and
autonomous Insurance Regulatory Authority was felt. As the enacting of legislation
would have taken time, the then Government constituted through a Government
resolution an Interim Insurance Regulatory Authority pending the enactment of a
comprehensive legislation.
The Insurance Regulatory and Development Authority Act,1999 is an act to provide
for the establishment of an Authority to protect the interests of holders of insurance
policies, to regulate , promote and ensure orderly growth of the insurance industry
and for matters connected therewith or incidental thereto and further to amend the
Insurance Act,1938, the Life Insurance Corporation Act, 1956 and the General
55

56. Insurance Business (Nationalization) Act,1972 to end the monopoly of the Life
Insurance Corporation of India ( for life insurance business) and General Insurance
Corporation and its subsidiaries ( for general insurance business).
The act extends to the whole of India and will come into force on such date as the
Central Government may, by notification in the Official Gazette specify. Different
dates may be appointed for different provisions of this Act.
The Act has defined certain terms ; some of the most important ones are as follows
Appointed day means the date on which the authority is establishes under the act.
Authority means the establishes under this Act. Interim Insurance Regulatory
Authority means the Insurance Regulatory Authority setup by the Central
Government through Resolution No . 17(2)/94-Ins-V dated the 23rd January, 1996.
Words and Expressions used and not defined in this Act but defined in the insurance
Act, 1938 or the Life Insurance Corporation Act, 1956 or the General Insurance
Business (Nationalization) Act, 1972 shall have the meanings respectively assigned to
them in those Acts.
A New definition of ―Indian Insurance Company‖ has been inserted. ―Indian
Insurance Company‖ means any insurer being a company : (a)Which is formed and
registered under the companies Act,1956 .
(b) In which the aggregate holdings of equity shares by a foreign company, either by
itself or through its subsidiary companies or its nominees , do not exceed twenty-six
percent (26 %). Paid-up capital in such Indian Insurance Company.
56

57. (c) Whose sole purpose is to carry on life insurance business , general insurance
business or re-insurance business.
INTRODUCTION OF ULIPS
ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life
insurance policy which provides a combination of risk cover and investment. The
dynamics of the capital market have a direct bearing on the performance of the
ULIPs. REMEMBER THAT IN A UNIT LINKED POLICY; THE
INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.
Unit linked insurance plan (ULIP) is life insurance solution that provides for the
benefits of risk protection and flexibility in investment. The investment is denoted as
units and is represented by the value that it has attained called as Net Asset Value
(NAV). The policy value at any time varies according to the value of the underlying
assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the charges
and premium for risk cover under all policies in a particular fund as chosen by the
policy holders are pooled together to form a Unit fund. A Unit is the component of
the Fund in a Unit Linked Insurance Policy.
57

58. The returns in a ULIP depend upon the performance of the fund in the capital market.
ULIP investors have the option of investing across various schemes, i.e, diversified
equity funds, balanced funds, debt funds etc. It is important to remember that in a
ULIP, the investment risk is generally borne by the investor.
In a ULIP, investors have the choice of investing in a lump sum (single premium) or
making premium payments on an annual, half-yearly, quarterly or monthly basis.
Investors also have the flexibility to alter the premium amounts during the policy's
tenure. For example, if an individual has surplus funds, he can enhance the
contribution in ULIP. 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). ULIP investors can shift their investments across various
plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a
nominal or no cost.
Ulips vs. Traditional life insurance plans
Unit-linked insurance plans, popularly known as Ulips are life insurance policies
which offer a mix of investment and insurance similar to traditional life insurance
policies such as endowment, money-back and whole-life, but with one major
difference. Unlike traditional policies, in Ulips investment risk lies with the insured
(i.e., policy holder) and not with the insurance company. Put another way, in case of
adverse market conditions, you can even lose your capital invested.
58

59. 1. Potential for better returns: Under IRDA guidelines, traditional plans have to
invest at least 85% in debt instruments which results in low returns. On the other
hand, Ulips invest in market linked instruments with varying debt and equity
proportions and if you wish you can even choose 100% equity option.
2. Greater transparency: Unlike Ulips, in a traditional life insurance policy you‘re
not aware of how your money is invested, where it is invested and what is the value
of your investment.
3. Flexibility in investment: The top most advantage which Ulips offer over
traditional plans is the flexibility offered to you to customized the product according
to your needs:
a. Flexibility to invest the money the way you want: Unlike traditional plans,
Ulips allow you full discretion to choose the fund option most appropriate to your
risk appetite.
b. Flexibility to change the fund allocation: Ulips also give you the option to
change the fund allocation at a later stage through fund switching facility.
c. Flexibility to invest more via top-Ups: Unlike traditional plans where you‘ve to
invest a ‗FIXED‘ premium every year, Ulips allow you flexibility to invest more
than the regular premium via top-ups which are additional investments over and
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60. above the regular premium. To understand the significance and mystery of top-ups,
For the purpose of tax deduction under section 80C, there‘s no difference between
regular premium and top-ups. In other words, top-ups are also allowed deduction
under section 80C.
d. Flexibility to skip premium: In case of traditional plans, you‘ve to pay premium
for the entire duration of the plan. And if by chance you skip even a single premium,
your policy lapses. Whereas Ulips allow you the flexibility to stop paying premium
usually after three policy years. Your life cover continues by deducting the mortality
charges from the existing investment corpus.
4. Flexibility in insurance coverage:
a. Option to choose coverage: While in case of traditional insurance plans, the
premium is calculated based on sum assured, for Ulips premium payment is the key
component based on which you can decide about the insurance coverage. Put
simply, on the basis of premium, Ulips allow you to opt for any amount of sum
assured within the specified range of minimum and maximum life coverage.
b. Option to increase risk cover: Unlike traditional plans where you‘ve to buy a
new policy each time you want to increase your risk cover, Ulips allow you to
increase your insurance cover anytime.
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61. 5. Higher Liquidity (Better exit options): The possibility to withdraw your money
before maturity (through surrender or partial withdrawals) is higher in case of Ulips
as compared to traditional plans and also the exit costs are lower.
TYPES OF ULIPS
One of the big advantages that a ULIP offers is that whatever be your specific
financial objective, chances are that there is a ULIP which is just right for you. The
figure below gives a general guide to the different goals that people have at various
age-groups and thus, various life-stages. Depending on your specific life-stage and
the corresponding goal, there is a ULIP which can help you plan for it
Type I and Type II Ulips
Ulips are life insurance policies where the insurance cover is bundled with
investment. Unlike traditional insurance-cum-investment policies such as
endowment and money-back policies which offer very low returns, Ulips offer
market-linked returns. There are 2 types of ULIP plans. Type 1 is a ULIP where
Sum Assured or Fund Value whichever is higher is paid. In case of Type 2 of a
ULIP, both Sum Assured and Fund Value are paid. However, to derive the full
benefit of such plans, an investor needs to compare important points like structure,
costs and benefits. Below is a brief comparison for the same.
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62. A Comparison of Term Plan + ELSS and ULIP Type 2 will give the best:
Table 1.1
ULIP Type 2 ELSS + Term
Good for More than 10 Years Less than 10 years
Investments investments.
On Maturity Fund Value Fund Value will be paid
by ELSS and No Survival
Benefit on Term
On Death Fund Value + Death Fund Value and Term
Benefit will be paid Life Sum assured will be
paid
Long Term Costs Good for long term Mutual Funds charge
investing as there are high close to 2.25% of Annual
upfront charges. In the Fund Management charge
Long term total charges till you remain invested.
are lower than Mutual
Funds
Switching Costs During a Mostly ULIPs have 3 Switches are charged at 3-
long tenure of investment, Switches Free 4%.
switching funds is very
important.
Switching Tax Costs No Tax Implication Profits on switching are
charged at 10%
Discipline Compulsion of No Compulsion. Planning
Investment every year. to be implemented by
Helps you plan you you.
child‘s future or
retirement.
Tax All profits are tax free Tax payable on short term
gains
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63. Most insurance agents peddle Ulips by telling the investor that he is free to exit from
the plan after three years. But it is only after three years that the real benefit of a Ulip
kicks in. These long-term investment products have high initial charges so an early
exit isn‘t usually a sensible decision. With Free Switching option and Tax free
returns it is a good investment for the Long Term.
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64. Figure 1.5
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65. TYPES OF FUNDS IN ULIPS
When you will buy any ULIP, the insurer will give you various options of
investment funds and will also allow some free swaps between these funds within a
year. Generally there are four types of funds, each insurer gives the name differently
to them, you can check out with you insurer before investing. The basic four type of
funds in which ULIP‘s invest are:
Table 1.2
GENERAL NATURE OF INVESTMENT RISK
DISCRIPTION CATEGORY
Equity Funds Primarily invested in company Medium to High
stocks with the general aim of
capital appreciation
Debt Funds Invested in pure debt market Low
Money market Invested in Money market and govt Low
Fund institutions
Balanced Funds Combining equity investment with Medium
fixed interest instruments
Equity Funds: In this type the investment component of your premium is invested
into a pure equity fund. As the fund invests only in equity the risk is high but if
markets perform well the returns are outstanding. As ULIP‘s are a long term
instrument you can safely invest into equity funds as it has been proved that over a
long term equities give best returns than any other investment instrument.
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66. Balanced Funds: In this type the investment is made in a mix of equity and debt.
The ratio of investment will be available with the insurer. A person who is not
willing to take much risk but still wants decent returns can opt for this type.
Debt Funds: This type of fund invests in pure debt instruments. The risk is very
low and so are returns from such funds.
Money Market Funds: Few insurers provide this kind of fund. These funds
generally invest into money market which is a short term debt market mainly
governed by institutions. Apart from these insurers can mix and provide other types
of funds for Ulips. With taking into interest your risk appetite and the goal for which
you want to invest you can opt the right fund.
IRDA GUIDELINES FOR ULIPS
As IRDA is a regulating authority for Insurance, so it has its total control over the
business of all Insurance companies. On July 1, 2006, the IRDA introduced revised
ULIP guidelines. The following are the provisions of the latest guidelines:
 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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67.  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.
 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.
 Surrender value
The surrender value would be payable only after completion of 3 policy
years.
 Top-ups
Insurance companies can accept top-ups only if the client has paid regular
premiums 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
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68. 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).
 Partial withdrawals
The client can make partial withdrawals only after 3 policy years.
 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.
 Loans
No loans will be granted under the new ULIP.
 Charges
The insurance company must state the ULIP charges explicitly. They must
also give the method of deduction of charges.
 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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69.  Benefits of Ulips
Unit Linked Plans offer unique opportunity to combine protection with investments.
Some special features of Unit Linked Life Insurance Policies (ULIPs) are:
o Provides flexibility in investments
 ULIPs offer a complete selection of high, medium and low risk
investment options under the same policy. You can choose an
appropriate policy according to your risk taking appetite,
coupled with the opportunity to switch between fund options
without any additional expense. ULIPs provide the flexibility
to choose the sum assured and investment ratio in the annual
targeted premium. It also offers the flexibility of one time
increase in investment portfolio, through top-ups to avail
investment opportunity offered by external environment or
own income flows.
o Transparency
 The charge structure, value of investment and expected IRR
based on 6% and 10% rate of returns, for the complete tenure
of the policy are shared with you before you buy a product.
Similarly, the annual account statement, quarterly investment
portfolio and daily NAV reporting, ensures that you are aware
of the status of your investment portfolio at all times. Most
companies publish latest NAVs on their respective websites.
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70. o Liquidity
To cope with unforeseen circumstances, ULIPs offer the benefit of
partial withdrawal; wherein after 3 years you can withdraw funds from
our Unit Linked account, retaining only the stipulated minimum amount.
o Disciplined and regular savings
 ULIPs help you inculcate a regular saving habit. Also, the
average unit costs tend to be lower than one time investment.
o Multiple benefits bundled in one product
 ULIP is an outstanding solution for risk cover, long term
investments with the benefit of various investment
opportunities, coupled with tax benefits.
o Spread of risk
 ULIPS are ideal for those investors who wish to avail the
benefit of market linked growth without actually participating
in the stock market, with the added benefit of risk-cover.
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71. ULIP‘s Offer:
1.PERSONAL ACCOUNT BENEFIT
2. FLEXIBILITY
3.LIFE PROTECTION
4.TRANSPARENCY
5.SAVINGS
6.TAX BENEFIT
7.CHOICE
8.INVESTMENT
9.LIQUIDITY
CHARGES, FEES, DEDUCTIONS IN ULIPS
Ulips offered by different insurers have varying charge structures. Broadly, the
different types of fees and charges are given below. However it may be noted that
insurers have the right to revise fees and charges over a period of time.
Figure 1.6
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72.  Premium Allocation Charge
This is a percentage of the premium appropriated towards charges before
allocating the units under the policy. This charge normally includes initial and
renewal expenses apart from commission expenses.
 Mortality Charges
These are charges to provide for the cost of insurance coverage under the plan.
Mortality charges depend on number of factors such as age, amount of coverage,
state of health etc
 Fund Management Fees
These are fees levied for management of the fund(s) and are deducted before
arriving at the Net Asset Value (NAV).
 Policy/ Administration Charges
These are the fees for administration of the plan and levied by cancellation of
units. This could be flat throughout the policy term or vary at a pre-determined
rate.
 Surrender Charges
A surrender charge may be deducted for premature partial or full encashment of
units wherever applicable, as mentioned in the policy conditions.
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73.  Fund Switching Charge
Generally a limited number of fund switches may be allowed each year without
charge, with subsequent switches, subject to a charge.
 Service Tax Deductions
Before allotment of the units the applicable service tax is deducted from the risk
portion of the premium.
Investors may note, that the portion of the premium after deducting for all
charges and premium for risk cover is utilized for purchasing units
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 cases 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.
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74. 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.
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75. 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 restraint placed is that insurers are
required to notify the regulator of all the expenses that will be charged on their
ULIP offerings.
Expenses can have far-reaching consequences on investors since higher expenses
translate into lower amounts being invested and a smaller corpus being
accumulated. ULIP-related expenses have been dealt with in detail in the article
―Understanding ULIP expenses‖.
3. Portfolio disclosure
Mutual fund houses are required to statutorily declare their portfolios on a quarterly
basis, albeit most fund houses do so on a monthly basis. Investors get the
opportunity to see where their monies are being invested and how they have been
managed by studying the portfolio.
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