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HISTORY OF LIFE INSURANCE IN INDIA

Life Insurance in its present form came to India from United Kingdom (UK) with the establishment of the British firm, ORIENTAL LIFE INSURANCE CO. in Calcutta in 1818, followed by Bombay Life Insurance Co. in 1823; Madras Equitable Life Insurance Society in 1829 & Oriental Government Security Life Insurance Co. in 1874. Prior to 1871, Indian lives were treated substandard & charged an extra premium of 15 20 %. Bombay Mutual Life assurance Society, an Indian insurer, which came into existence in 1871, was the first one to cover Indian lives at standard rates. Later in 1928, the Indian Insurance Companies Act was enacted to enable the government to collect statistical information about both life & non life insurance business transacted in India by the foreign & Indian insurers, including the provident insurance societies. BY 1956, 154 Indian insurers, 16 non-Indian insurers & 75 provident societies were carrying on life insurance business in India. was taken over by the Central Government & then nationalized on 1st September 1956, when the LIFE INSURANCE CORPORATION came into existence. As these companies grew, the government began to exercise control on them. The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into investments, expenditure and management of these companies' funds. By the mid-1950s, there were around 170 insurance companies and 80 provident fund societies in the country's life insurance scene. However, in the absence of regulatory systems, scams and irregularities were almost a way of life at most of these companies. As a result, the government decided nationalizes the life assurance business in India. The Life Insurance Corporation of India was set up in 1956 to take over around 250 life companies.

ESTABLISHMENT OF IRDA:
Life Insurance in India was nationalized by incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance companies at that time were taken over by LIC. In 1993 the Government of Republic of India appointed RN Malhotra Committee to lay down a road map for privatization of the life insurance sector. While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000.The same year that the newly appointed insurance regulator - Insurance Regulatory and Development Authority IRDA -- started issuing licenses to private life insurers.

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The Insurance sector in India has gone through a number of phases and changes, particularly in the recent years when the Govt. of India in 1999 opened up the insurance sector by allowing private companies to solicit insurance and also allowing FDI up to 26%.Life and general insurance in India is still a nascent sector with huge potential for various global players with the life insurance premiums accounting to 2.5% of the country's GDP while general insurance premiums to 0.65% of India's GDP

TYPES OF LIFE INSURANCE (IN INDIA):


Taking out a life insurance policy covers the risk of dying early, by providing for ones family in the event of ones death. It also manages the risk of retirement providing an income for one in non-earning years. There are a variety of policies available in the market, ranging from Term Endowment and Whole Life Insurance, to Money Back Policies, ULIPs, and Pension plans. 1) Term Insurance Term Insurance, as the name implies, is for a specific period, and has the lowest possible premium among all insurance plans. You can select the length of the term for which you would like coverage, up to 35 years.Payments are fixed and do not increase during your term period. In case of an untimely death, your dependents will receive the benefit amount specified in the term life insurance agreement. You can customise Term life insurance with the addition of riders, such as Child, Waiver of Premium, or Accidental Death. 2) Endowment Insurance Endowment Insurance is ideal if you have a short career path, and hope to enjoy the benefits of the plan (the original sum and the accumulated bonus) in your life time.Endowment plans are especially useful when you retire; by buying an annuity policy with the sum received, it generates a monthly pension for the rest of your life. 3) Whole Life Insurance Whole Life Policies have no fixed end date for the policy; only the death benefit exists and is paid to the named beneficiary. The policy holder is not entitled to any money during his or her own lifetime, i.e., there is no survival benefit..Primary advantages of Whole Life Insurance are guaranteed death benefits, guaranteed cash values, and fixed and known annual premiums. 4) Money-Back Plan In a Money-Back plan, you regularly receive a percentage of the sum assured during the lifetime of the policy. Money-Back plans are ideal for those who are looking for a product that provides both - insurance cover and savings.It creates a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax except under specified situations.
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5) ULIP Unit-linked Insurance Plans (ULIPs), introduced by the private players, are hugely popular, because they combine the benefits of life insurance policies with mutual funds. A certain part of the premium is invested in listed equities/debt funds/bonds, and the balance is used to provide for life insurance and fund management expenses. 6) Pension Plan Insurance companies offer two kinds of pension plans - endowment and unit linked. Endowment plans invest in fixed income products, so the rates of return are very low.Unit-linked plans are more flexible. You can stop contributing after 10 years and the fund will keep compounding your corpus till the vesting date. You can opt for higher exposure in the stock market for your plan if your risk appetite allows it. Lower risk options like balanced funds are also offered.

PRIVATE MARKET PLAYERS IN LIFE INSURANCE INDUSTRY


1. HDFC Standard Life Insurance Company Ltd. 2. Max New York Life Insurance Co. Ltd. 3. ICICI Prudential Life Insurance Company Ltd. 4. Kotak Mahindra Old Mutual Life Insurance Limited 5. Birla Sun Life Insurance Company Ltd. 6. Tata AIG Life Insurance Company Ltd. 7. SBI Life Insurance Company Limited . 8 8. ING Vysya Life Insurance Company Private Limited 9. Bajaj Allianz Life Insurance Company Limited 10. Metlife India Insurance Company Ltd. 11. Future Generali India Life Insurance Company Limited 12. IDBI Fortis Life Insurance Company Ltd. 13. Reliance Life Insurance Company Limited. 14. Aviva Life Insurance Co. India Pvt. Ltd. 15. Sahara India Insurance Company Ltd. 16. Shriram Life Insurance Company Ltd. 17. Bharti AXA Life Insurance Company Ltd. 18. Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. 19. Aegon Religare Life Insurance Company Ltd. 20. DLF Pramerica Life Insurance Company Ltd.

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MARKET SHARES OF THE PRIVATE PLAYERS IN THE LIFE INSURANCE INDUSTRY

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OVERVIEW ABOUT THE COMPANY-

Established in 2000, Birla Sun Life Insurance Company Limited (BSLI) is a joint venture between the Aditya Birla Group, a well known and trusted name globally amongst Indian conglomerates and Sun Life Financial Inc, leading international financial services organization from Canada. The local knowledge of the Aditya Birla Group combined with the domain expertise of Sun Life Financial Inc., offers a formidable protection for its customers future.

Vision

To be a leader and role model in a broad based and integrated financial services business.

Mission To help people mitigate risks of life, accident, health, and money at all stages and under all circumstances Enhance the financial future of our customers including enterprises

Values

Integrity Commitment Passion Seamlessness Speed

A US $28 billion corporation, the Aditya Birla Group is in the league of Fortune 500 worldwide. It is anchored by an extraordinary force of 100,000 employees, belonging to 25 different nationalities. The group operates in 25 countries across six continents truly India's first multinational corporation.

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Known for its innovation and creating industry benchmarks, BSLI has several firsts to its credit. It was the first Indian Insurance Company to introduce Free Look Period and the same was made mandatory by IRDA for all other life insurance companies. Additionally, BSLI pioneered the launch of Unit Linked Life Insurance plans amongst the private players in India. To establish credibility and further transparency, BSLI also enjoys the prestige to be the originator of practice to disclose portfolio on monthly basis. These category development initiatives have helped BSLI be closer to its policy holders expectations, which gets further accentuated by the complete bouquet of insurance products (viz. pure term plan, life stage products, health plan and retirement plan) that the company offers. Add to this, the extensive reach through its network of 600 branches and 1,75,000 empanelled advisors. This impressive combination of domain expertise, product range, reach and ears on ground, helped BSLI cover more than 2 million lives since it commenced operations and establish a customer base spread across more than 1500 towns and cities in India. To ensure that our customers have an impeccable experience, BSLI has ensured that it has lowest outstanding claims ratio of 0.00% for FY 2008-09. Additionally, BSLI has the best Turn Around Time according to LOMA on all claims Parameters. Such services are well supported by sound financials that the Company has. The AUM of BSLI stood at Rs. 8165 crs as on February 28, 2009, while as on March 31, 2009, the company has a robust capital base of Rs. 2000 crs.

Products offered by the company The many pioneering activities by Birla Sunlife include Unit Linked Life Insurance Solutions, Investment Linked Insurance Products and Web-Based Insurance Policies sale. Birla Sun Life Insurance Company Limited also offers MF (Mutual Fund), international equity funds, ULIPS, Dream plans in insurance products that give you complete transparency and value-formoney. Policies of the company Protection Plans Saving Plans Health Solution Plans Retirement Plans Children Plans Rural Plans Group Plans
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INTRODUCTION TO PORTFOLIO THEORY


Two basic principles of Finance form the basis of Portfolio theory, namely, Time value of Money and Safety of Money. Rupee today is worth than rupee of tomorrow or a year hence and as parting with money involves the loss of present consumption, it has to be rewarded by a return commensurate with time of waiting. Secondly, a safe rupee is preferred to an unsafe rupee at any point of time. Due to risk aversion of investor, they feel risk is inconvenient and has to be rewarded by a return. The larger the risk taken, the higher should be the return. Present values and future values are related by a discount factor comprising of firstly the interest rate component and secondly the time factor. The future flows are to be discounted to the present by a required rate of discount to make them comparable and equal in value. As regards the risk factor, there is a direct relationship between the expected return and unavoidable risk. Avoidable risk can be reduced or even eliminated by measures like diversification.

BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT


There are two basic principles for effective portfolio management. Effective investment planning for the investment in securities by considering the following factors: Fiscal, financial and monetary policies of the Government of India and the Reserve Bank of India. Industries and economic environment and its impact on industry prospects in terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects. Constant review of investment: Portfolio managers are required to review their investment in securities and continue selling and purchasing their investment in more profitable avenues. For this purpose they will have to carry the following analysis. Assessment of quality of management of the companies in which investment has been already made or is proposed to be made.

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Financial and trend analysis of companies balance sheets/profit and loss accounts to identify sound companies with optimum capital structure and better performance and to disinvest the holding of those companies whose performance is found to be slackening. The analysis of securities market and its trend is to be done on a continuous basis The above analysis will help the portfolio manager to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If, so the timing for investment or dis-investment is also revealed.

OBJECTIVES OF PORTFOLIO MANAGEMENT

Security / Safety of principal: Security not only involves keeping the principal sum intact but also keeping its purchasing power. Stability of income so as to facilitate planning more accurately and systematically the reinvestment or consumption of income. Capital growth, which can be attained by reinvesting in growth securities or through purchase of growth securities. Marketability i.e. the case with which a security can be bought or sold. This is essentially for providing flexibility to investment portfolio. Liquidity i.e. nearness to money. It is desirable for the investor so as to take advantage of attractive opportunities upcoming in the market. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and/or income by investing in various types of securities and over a wide range of securities. Favourable tax status: The effective yield an investor gets from his investment depends on tax to which he is subject. By minimizing the tax burden, yield can be effectively improved.

FACTORS AFFECTING INVESTMENT DECISIONS IN PORTFOLIO MANAGEMENT


Objectives of Investment Portfolio: This is the crucial point, which a finance manager must consider. There can be many objectives of making an investment. The manager of a provident fund portfolio has to look for security (low risk) and may be satisfied with none too high a return. As aggressive investment company may, however, be willing to take higher risk in order to have capital appreciation. How the objectives
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can affect in investment decision can be seen from the fact that the Unit Trust of India has two major schemes : Its capital units are meant for those who wish to have a good capital appreciation and a moderate return. The ordinary units are meant to provide a steady return only. The investment managers under both the schemes will invest the money of the Trust in different kinds of shares and securities. It is obvious; therefore, that the objectives must be clearly defined before an investment decision is taken. It is on this basis of the objectives that a finance manager decides upon the type of investment to be purchased. The objectives of an investment portfolio are normally expressed in terms of risk and return. Risk and return have direct relationship. Higher the return that one wishes to have from the investment portfolio, higher could be the risk that one has to take. Thus, if one wishes to double his investment in one year, he can attempt the same by purchasing high-risk shares, in which there is a great amount of risk that he may be even lose his initial investment itself.

VARIOUS TYPES OF RISKS INVOLVED IN AN INVESTMENT ARE AS FOLLOWS:-

Interest rate risk: This arises due to variability in the interest rates from time to time. A change in the interest rates establishes in an inverse relationship in the price of security i.e. price of securities tends to move inversely with change in rate of interest, long term securities show greater variability in the price with respect to interest rate changes than short term securities. Interest rate risk vulnerability for different securities is as under:1)

Types Cash Equivalent Long Term Bonds

Risk Extent Less vulnerable to interest rate risk More vulnerable to interest rate risk

2) Purchasing power risk: It is also known as inflation risk. It arises because inflation affects the purchasing power adversely. Nominal return contains both the real return component and an inflation premium in a transaction involving risk of the above type to compensate for inflation over an investment-holding period. Inflation rates vary over time and investors are caught unaware when rate of inflation changes unexpectedly causing erosion in the value of

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realised rate of return and expected return. Purchasing power risk is more in inflationary conditions especially in respect of bonds and fixed income securities. It is not desirable to invest in such securities during inflationary periods. Purchasing power risk is however, less in flexible income securities like equity shares or common stock where rise in dividend income offsets increase in the rare of inflation and provides advantage of capital gains.

3) Business risk : Business risk emanates from sale and purchase of securities affected by business cycles technological changes etc. Business cycles affect all types of securities viz; there is cheerful movement in boom due to bullish trend in stock prices whereas bearish trends in depression brings down fall in the prices of types of securities. Flexible income securities are more affected than fixed rate securities during depression due to decline in their market price.

4) Financial risk: It arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in terms of debt-equity ratio. Excess of debt vis--vis equity in the capital structure indicates that the company is highly geared. Although a leveraged companys earning per share are more but dependence on borrowings exposes it to the windingup for its inability to honour its commitment towards lenders / creditors. The risk is known as leveraged or financial risk of which investors should be aware and portfolio manager should be very careful.

WHAT ARE THE GOALS OF AN INVESTOR


There are specific needs for all types of investors. For individual investors, retirement, childrens marriage / education, housing etc. are major event triggers that cause an increase in the demands for funds. An investment decision will depend on the investors plans for the above needs. Similarly, there are certain specific needs for institutional investors also. For example, for a pension fund the investment policy will depend on the average age of the plans participants. In addition to the few mentioned here, there are other constraints like the level of requisite knowledge (investors may not be aware of certain financial instruments and their pricing), investment size (e.g., small investors may not be able to invest in Certificate of Deposits), regulatory provisions (country may impose restriction on investments in foreign countries) etc. which also serve to outline the investment choices faced by investors

Risk & Profile questionnaire will help an investor to understand the financial markets, & how he may react during certain investment market & economic conditions. This

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Questionnaire aims to uncover investors inappendices -

attitude to investing,which is enclosed

MOTIVES FOR INVESTMENT


The investor has to set out his priorities keeping the following motives in mind. All investors would like to have: 1. 2. 3. 4. 5. Capital appreciation Income Liquidity or marketability Safety or Security Hedge against inflation

The investor gets his income from the dividend or yield or interest. There will be no capital appreciation also in the case of enquiries. The liquidity and safety of an investment will depend upon the marketability and credit rating of the borrower, namely the company or the issuer of securities. These characteristics vary between assets and securities. These characteristics vary between assets and securities. An investor is also concerned in having a tax plan to reduce his tax commitments so as to maximise the take home income. For this purpose, investor should specify his income bracket, his liabilities and his preference, tax planning, etc. The investment avenues have certain characteristics of risk and return and also of some tax concessions attached to them. These tax provisions as such can influence the investor in a big way as these provisions will alter the risk return scenario of investment alternatives. It is therefore, necessary that all these avenues should be assessed in terms of yields, capital appreciation, liquidity, safety and tax implications.

WHAT IS ASSET ALLOCATION?

An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

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The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time. Asset allocation is all about putting your eggs in different baskets. Its a kind of insurance or protection, should one of your investments go bad. If the stock market crashes, your non-stock holdings can help bail you out. Or if real estate plunges, you will thank God for your PPF account. In actual fact, whether you realise it or not, you are already allocating your assets as most of us have our wealth divided into different assets gold, real estate, stocks, bank account, etc. The question is whether you are doing so consciously and strategically, or simply in a random or haphazard manner. The two phrases, asset allocation and diversification are often used interchangeably. But not many know that there is a subtle difference between the two terms. This is because they have similar objectives: To minimise risk and provide exposure to differing growth opportunities within an investment portfolio. Diversification is often likened to the old adage; Dont put all your eggs in one basket. By doing this, you can help prevent losing it all on one poor choice-just as all your eggs would break if your dropped the basket. A diversified portfolio help protect against large losses because, typically, if some securities crash, other may perform well.

Asset allocation is similar to diversification, but involves some amount of strategy.

The

cornerstone of this is allocation of assets over different asset classes. In a diversified stock portfolio, we not only have a stock portfolio, but a bond portfolio, a cash equivalent portfolio, and maybe some other types of assets as well. The combination of multiple asset classes offers the growth potential of stocks, combined with regular income and relative stability of bonds and the liquidity and security of cash. Most of us spend sleepless nights trying to figure out which stocks to buy or sell, or whether to own mutual funds or derivatives. These are no doubt real concerns, but much of the tension could be minimized by some prior planning. And it is this planning that is called asset allocaton.

Several studies in the recent past have shown that asset allocation is the single greatest determinant of investment performance. Depending on whose research you look at, you will find that the distribution of our money amongst types of asset.

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DIFFERENT ASSET CLASSES RISK V/S RETURN

Essentially, the allocation process needs to first categorise different assets into broad classes with similar characteristics. In the investment world, there are two parameters that are of paramount importance. The first is the return that one gets from a particular investment, and the second is the risk that one takes to achieve that return. Also, it is known that there is a direct relationship between the two. Typically, the greater the returns, the greater the risk. It is very difficult to foresee the future risks or returns that a particular investment will have, so we tend to use historical data for classification purposes. Conservative investments, such as cash or bank accounts offer minimal risk, and essentially seek to preserve existing capital and offer minimal risk. Moderate-risk investments include highly debt instruments (such as company fixed deposits or bonds issued by corporate) as well as bonds with shorter maturities. Stocks typically offer greater growth possibilities-as well as greater risk potential. But it is not simple. Within each of these individual asset classes lie further segments, such as value and growth stocks, corporate and government bonds, bank deposits and PPF. There are also other assets like gold or real estate that may not fit into the three commonly accepted categories. Also, certain types of assets like cyclical stocks are often treated as separate assets classes because they have different historical performance characteristics from other stocks. While talking of real estate, though these investments have been very popular in the Indian context, their lack of liquidity and high unit value makes them intrinsically unsuitable as investments for most of us. For the purpose of this discussion, we will restrict ourselves to the three basic asset classes comprised of financial securities. Once the basic principles are understood, an investor can choose to define further classes as per his needs and perceptions. A Profile of the Three Basic Asset Classes each of these three-asset class offers measurably different tradeoffs between risk and return, and each benefits your portfolio in a different way.

Cash Equivalents: money market funds, Treasury Bills, bank deposits, post office savings and the like provide for low risk, and the preservation of principal but generally do not provide returns high enough to outpace inflation.

Bonds (fixed-income investment): represent loans to a business or government, provide for preservation of principal and a fixed rate of return when held to maturity. While most

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bonds generate current income, they offer limited potential for increasing returns. Examples of these in India are company fixed deposits, ICICI bonds and the like.

Stocks (equities) : represent shares (or part ownership) of a company. While stocks can and do experience significant volatility, historically, they have provided the best record of long term growth of principal.

We have compiled a broad comparison of the risk versus return equation for various investment opportunities for the Indian investor, in the table below:-

Risk-Return Comparison of various Investment Avenues

Type of Investment

Historical Returns

Risk Level

Cash equivalents Liquid Funds Bank Fixed Deposits Post Office, NSC (Govt.) Govt. Securities PF/PPF/Pension Bonds Company FD 10-14% Low 7-8% 7-10% 10-12% 8.5-12% 11-12% Low Low Low Low Low

Bonds Income Mutual Funds

10-15% 10-14% Low

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Equity Equity Mutual Funds Equities 18-22% 18-22% High High

Note 1: In India, though PPF and similar accounts appear to have higher returns for lower risk (because the government guarantees them), this is illusory. These instruments are very illiquid, and given that liquidity is an important measure of risk (you should get the money when you need it) some would argue that these instruments should be classified as bonds. Note 2: At some point of time, company FDs offered much higher returns (similar to equities), and as was found later, bore a huge risk as most of the issuers defaulted. By now, most of you have a pretty good idea of what the different asset classes are, and their historical riskreturn profiles.

ASSET ALLOCATION IS NEVER COMPLETE REBALANCING

Now that you have allocated your money to different assets, you might think its time to forget all about them. However, nothing could be further from the truth. Unfortunately for us, the only constant is change. Not only will the external environment keep changing but your individual situation will change too. Hence, asset allocation is a process that you re-visit again and again. Constant review is required and depending on the circumstances your will have to re-allocate or rebalance your assets. There are various events that could trigger the need for rebalancing. Broadly, the kind of changes you could fall into four categories. These are: Changes in time frame: As you approach your goal for example, retirement or your childs college going age, it is usually a good idea to shift to a more conservative strategy. After all, with less time left, it should be more difficult to recover from a market crash. Hence, it may make sense to take your capital gains on stocks and reinvest this in bonds or cash equivalents. Changes in life circumstances: This could be of various types. You may fall ill or may retire or you may have children. On the other hand you might inherit a large sum unexpectedly. Any change in your circumstances might force a review and rebalancing of your portfolio.

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Changes in Portfolio Performance: You might find that the stock market enjoys several years of phenomenal performance. This will ensure that they may represent far more than your original target allocation, exposing you to more risk. Also, good recent performance might suggest that stocks as a class are overvalued. At this point, selling stocks and reinvesting in bonds or cash can bring your portfolio back into balance. Conversely, poor market performance might lead to a lower weightage for sticks-suggesting that you increase weightage to equity during a bull market. Changes to goal: For some other reason, you might find that your investment goals change. For instance, you may suddenly start dreaming of a larger house or plan to move to a more expensive city. After all, we cannot predict our future desires, and our asset allocation strategy must adapt to our changing goals.

All the above factors essentially serve to change your goals, time horizon, financial resources or risk profile. Any other situation that affects these factors will also call for a review of your allocations and you may find that these needs to be rebalanced.

At the same time, it does not make sense to check your portfolio and re-balance it every month. Not only this cause more tension and take up time, it will also lead to unnecessary transaction costs. Hence, it is a good idea to check your portfolio at a specific interval, may be six months or once a year. See where you are as compared with your target asset mix. And if you are off target, you could make the necessary corrections by transferring some assets into others.

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COMPANYS PRODUCT UNIT LINKED INSURANCE PLAN:

When people see how investments in the capital market have grown over the last few years, they prefer to use their funds in ways that help them to participate in the boom in the capital market. Insurers have developed plans that combine the benefits of life insurance as well as giving various options of participating in the growth of the capital market. Such plans are called Linked Life Insurance Plans. They are also called Unit Linked Insurance Plans or ULIPs, in short. A ULIP is a life insurance policy which provides a combination of life insurance protection and investment. ULIPs contribute nearly 50% of the premium for some insurers and more than 85% of the premium for some others. In case of a ULIP, the proposer offers to pay a certain sum towards premium. Insurers insist that this amount should be in multiples of say Rs.500 or Rs. 1000 with a minimum of say, Rs.5000 or Rs.10000. The term of the policy is also specified. It should not be less than 5 years or age 70 for Whole Life plans. The premium may be paid as a Single premium at the start or periodically over the term or less, as in the case of limited payment policies in yearly, half-yearly, quarterly or monthly installments. The SA (Sum Assured) or death cover, payable in the event of death during the term, is related to this premium, usually as a multiple like 5 times the annual premium or 1.5 times the single premium. The minimum Sum Assured, according to IRDA guidelines, has to be 1.25 times single premium or 5 times annual premium. Out of the premium, annual or otherwise as the case may be, a certain amount is adjusted towards the cost of the insurance (death) cover. Some portion may be adjusted towards the charges. The balance, called allocated premium, is invested in a fund that the proposer chooses, from among a set of options. The allocated premium is more in the second year and still more in the third and later years because some charges are not levied in every year. The allocated premium is used to buy a certain number of units in the chosen fund at the price at which the units are being offered on that day. This price is called the NAV, which varies every day. The death benefit is fixed but the maturity benefit is not guaranteed. The maturity benefit depends on the market conditions and the fund in which the premium has been invested, on that date of maturity. In linked policies, the sum assured may be expressed as an integrated benefit, which means that on the happening of the event, the sum assured or the value of units in the fund, whichever is higher, is payable. In this case, the life cover will reduce as the value of the units increases. As the risk cover decreases, the premium adjusted towards the cover will decrease and the amount allocated to investment will increase.

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The alternative to the integrated benefit is to pay a fixed sum assured as an additional benefit on death, in addition to the value of units in the fund. In this case, the charge for the risk cover will increase and the allocation to the fund will decrease every year. This is sometimes called the Double Death Benefit.

Some of the other features offered by insurers along with ULIPs are the following. The policyholder can pay additional premium for investment at any time. Partial or total withdrawal is allowed. Sometimes there are conditions attached. Some insurers, not all, charge a redemption fee in such cases. These policies will not be entitled to any bonus. There is no annual bonus, but there may be a loyalty bonus paid at the end.

Options of Funds

Insurers offer policyholders a choice of funds in which their moneys may be invested like Equity Funds: In this type of fund, sometimes also called Growth funds, there would be investments in equities. Debt Funds: In this type of fund, also called Bond Fund, the investments are in government and government guaranteed securities and such safe debts and other high investment grade corporate bonds. Money Market Funds: In this type of fund, sometimes also called Liquid Funds, the investment is in short-term money market instruments such as treasury bills, commercial papers, etc. Balanced Funds: In this type of funds, the investments are in both equity as well as debts.

All these funds will remain invested in a mix of instruments, the differences being mainly in the proportions in various kinds of instruments. One fund may have more of debt instruments, which guarantee a certain fixed return, while another fund will have a larger proportion of equity

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shares, which may appreciate in value more than debt instruments. Insurers use different names to differentiate between funds. Some of these names are Accelerated, Builder, Cash-plus, Conservative, Defensive, Dynamic, Enhancer, Gilt, Income, Magnifier, Maximiser, Multiplier, Preserver, Protector and Secured. The name does not indicate the manner in which the funds will be invested or will grow. It would be necessary to track the record of the fund to evaluate how well it is doing.

Insurers allow policyholders to switch their moneys from one fund to another during the term of the policy. Some insurers charge a fee for every such switch. Some others allow a certain number of switches free and then charge a fee for every switch thereafter.

Flexibility

ULIPs provide lot flexibility to the policyholder. The option of switching is one provision that gives the flexibility. Policyholders are also allowed to make a lump sum additional contribution at any time. The risk cover will remain the same, but the amount going into the fund for investment will change. Top-up is the expression used to refer to the policyholder increasing the contribution for investment. There could be a top-up charge. The IRDA guidelines stipulate that top-up is allowed only if the regular premium is paid up-to-date and also that if the top-up amount is more than 25% of the regular premiums paid up-to-date, the life cover will increase by 1.25 times the excess top-up amount. There will also be a lock-in period of three years for each top-up amount, except during the last 3 years of the policy.

Policyholders may also be allowed to redirect the current premium into any fund, in any proportion, irrespective of the fund in which the earlier premiums have been invested. This facility allows the policyholder to take advantage of the market conditions, without exercising the switching option. Policyholders may not pay the premium in a year, subject to certain conditions. If that happens, no new units will be added to his fund but some units will be reduced to pay for the annual

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charges for cover, for administration, for fund management, etc. This is called premium holiday. The arrangement can also be terminated at any time and the amount in the fund withdrawn. The loss will only be a nominal fee.

NAV (Net Assets Value)


The NAV of a fund represents the net value of the fund on a particular date and reflects the total value of the asset of that fund, after some adjustments for expenses. For example, the Equity Fund comprising of contributions from many policyholders would have been invested in a variety of equity shares in the share market along with other instruments. The total market value of these shares and other instruments on any day, divided by Units in that Equity fund would be the NAV for that day. As market values of shares vary, the NAV will keep varying from day to day. The NAV becomes the basis for new entrants and for exits from the fund. For example, if a policyholder wishes to have Rs.10000 invested in an Equity Fund and on that particular day, the NAV of that fund is Rs.20, he will be allotted 500 units from that fund. When he wishes to exit from that fund, because of switching or final termination of the contract, he will get 500 units at the NAV of that date, which may be less than or more than Rs.20, at which he got in. If he is getting into another fund on that day, he will be given the number of units of that fund, calculated at the NAV of that fund, on that day. In actual practice, the NAV used at the time of entry, called the Offer price, and the NAV used while exiting, called the Bid price, will be different, like the difference between the buying and selling rates of foreign currency. This difference is called the bid-offer spread and is normally around 0.5%. Some insurers do not have this difference for some plans. Both offer and bid prices are the same as NAV. Some insurers offer units at Rs.10 per unit for a specified period from the date the scheme begins. Insurers publish the NAVs of the various funds, which are offered to the policyholders. This enables policyholders to track the growth of the various funds and to decide whether to continue in the same fund or to switch to other funds. The value of a persons investment on any day is the number of units held by him multiplied by the NAV.

Lock In:

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Lock-in period during which withdrawal is not allowed. It is 3 years according to IRDA guidelines. The surrender value will be allowed only after 3 years.

Riders: As in traditional policies, additional benefits are made available through riders. Usually riders provide for 1) Accident benefit 2) Disability benefits 3) Increase/decrease in death benefits 4) Hospital cash benefit 5) Spouse insurance benefit

Charges: The following charges are applicable in the case of ULIPs.. They are subject to various conditions, and vary between insurers. They may be related to SA or to premium, may be constant figures or percentages, and may have minimum and maximum limits. The charges are recovered 1) by way of deduction from the premium and/or 2) by cancelling some of the units. Accident benefit charges if the accident rider is availed of Administration or fixed charges are the fees for administration of the plan. Flat fee which will be charged every month, regardless of the size of premium. Fund administration charges being a percentage of the fund and deducted daily. Fund switching charges levied when there is a switch from one fund to another. Insurance or risk cover charge is the premium for the death cover. Service Tax is also charged, usually on a monthly basis.

ULIP DREAM PLAN OF BIRLA SUNLIFE INSURANCE COMPANY LTD


In this policy, investment risk in investment portfolio is borne by the Policyholder In life there are some dreams like giving your child the best possible education, planning for their career or wedding or helping them start their life on an assured footing. And you would ideally like to guarantee this against any eventuality. Birla Sun Life Insurance brings its Dream Plans that can meet these needs and give you the confidence to live your life with freedom. Presenting the BSLI Dream Child Plan, a plan that gives you the guarantee of receiving your
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chosen Basic Sum Assured on the Guaranteed Savings date chosen by you. What's more, you retain the freedom to keep pace with the ever changing world of your dreams for your child.

The salient benefits of the plan are You will receive a minimum amount of no less than the Basic Sum Assured chosen by you on the Guaranteed Savings Date of your choice You have the freedom to increase the financial security for your loved ones by choosing an Enhanced Sum Assured You have the freedom to increase your savings by choosing an Enhanced Savings Premium You have the freedom to meet any emergency funds requirements by making partial withdrawals You enjoy tax benefits under section 80C and section 10(10D) of the IncomeTax act, 1961

Plan at a glance 18 - 65 years, provided age on Entry Age - Grand/Parent - Child Guaranteed Savings Date is 75 or less 30 days - 17 years Guaranteed Savings Date Child's age 18 - 27, subject to minimum of 10 policy years Policy Term Pay Term Basic Sum Assured Guaranteed Savings Date + 20 years Years to Guaranteed Savings Date Minimum Rs. 2,00,000 subject to minimum Basic Premium Rs. 8,000 Enhanced Sum Assured Enhanced Savings Premium Minimum Rs. 50,000 Minimum Rs. 5,000

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This is a joint life insurance policy wherein the grand/parent is the primary life insured and the child is the secondary life insured. On the Guaranteed Savings Date, the child becomes the primary life insured and the grand/parent becomes the secondary life insured. Basic benefits

Benefits from policiesSurrender Benefit - in case of emergencies, you can surrender your policy and receive the Basic Fund Value less applicable surrender charge. There is no surrender charge once you have completed 5 policy years.

Maturity Benefit - is payable once your policy matures at the end of the policy term. You will receive the Basic Fund Value at maturity.

Death Benefit - in the unfortunate event the primary life insured dies while the policy is in effect, we will pay to the beneficiary the Basic Sum Assured. The policy will continue as long as the secondary life insured is alive.

CHARGES
Fund Management Charge 1.25% p.a. for Enhancer and Creator. We may change the fund management charge under any investment fund at any time in the future subject to IRDA approval.

Policy Administration Charge The policy administration charge is based on Basic Premium and deducted monthly by cancelling units from the investment fund/s at that time. This charge is guaranteed to never increase for the first three policy years, after which it can be increased by no more than 5% p.a. since inception. Mortality Charge The policy administration charge is based on Basic Premium and deducted monthly by cancelling units from the investment fund/s at that time. This charge is guaranteed to never increase for the first three policy years, after which it can be increased by no more than 5% p.a. since inception.

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Mortality charge is deducted every month for providing you with the insurance cover. It is charged by cancelling units from the investment fund/s at that time. This charge is per 1000 of Basic Sum Assured and will vary based on gender and attained age of primary life insured. Policy Continuation Charge is deducted to provide the continuation of the policy benefits after the demise of the grand/parent before the Guaranteed Savings Date. We will take these charges by cancelling units proportionately from each of the investment fund/s at that time. This charge will depend on the Guaranteed Savings Date, issue age and gender of the primary life insured. Mortality, Policy Continuation and Enhanced Sum Assured charges are guaranteed never to increase Surrender Charge Surrender charge is applicable if policy is surrendered before the completion of 5 policy years. The amount you will receive on surrendering the policy is the Fund Value less the surrender charges. These charges are guaranteed to never increase. IRDA Approval Only when specified and within stated limits, we may increase a particular charge at any time in the future. We, however, need to get prior approval from the IRDA before such charge increase is effective. Otherwise, all other charges in this policy are guaranteed to never increase during the tenure of the policy.

Birla sunlife insurance has a ULIP product which invest in mutual funds as well as in insurance. Mutual fund-Enhancer funds & its allocations under various classes is enclosed in Appendices-2

RECENT SCENARIO OVER ULIPS

Unit-linked insurance plans (Ulips), equity-oriented mutual fund schemes and a number of other popular savings and investment instruments will lose their tax immunity, and with it, their attractiveness when the Direct Taxes Code (DTC) comes into operation. The government has said it hopes to operationalise the code by April 2011.

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Ulips, which are hybrid products incorporating investment and insurance cover as traits, are particularly popular. In the 2009-10 fiscal, such products accounted for more than four-fifths of the total insurance premium of around Rs 2.60 lakh crore that was collected. Ulips will be out of the exempt, exempt, exempt (EEE) tax regime, said a senior finance ministry official, referring to the different stages at which financial instruments may be taxed. At present, individuals who invest in Ulips do not pay tax at any stageat the time of investment or contribution, during the tenure of investment, or at maturity. It qualifies for tax deduction along with a host of other savings schemes, including bank deposits, equity-oriented mutual funds, national savings certificate deposits and principal repayment on home loans. Taxpayers can claim a deduction of up to Rs 1 lakh a year on these instruments. The revised proposals make it clear that only six schemespublic provident fund (PPF), the pension scheme administered by the Pension Fund Development Regulatory Authority, general provident fund, recognized provident funds and pure life insurance and annuity schemeswill be tax-free. Tax will not be levied at any stage on these schemes. The new pension scheme will also be covered by the EEE method of taxation and withdrawals will not be taxed at maturity. However, investments made before the DTC comes into force will continue to be eligible for the EEE method of tax treatment for the full duration of the financial instrument. This means an investor who buys a Ulip before the DTC comes into force will not be taxed at any stage during the full tenure. Ulips could be taxed at the time of maturity, but the government has not clarified yet the tax treatment of the products. The existing tax treatment of Ulips is beneficial as it helps in the flow of funds to the infrastructure sector, besides contributing significantly to the capital market, said R Kannan, member-actuary, Irda. The original code had proposed the concept of savings intermediaries that would invest the amounts deposited with them in Ulips, equity-linked mutual fund schemes, debt-oriented mutual fund schemes or other financial products depending on investors choice. Withdrawals would be taxed, but not a rollover. Turf- war between IRDA & SEBI over ULIPS -

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ULIP is saving-cum-investment product that offers the option of life cover along with market liked returns. These products are increasingly gaining popularity among the investors on account of its multi-purpose catering of life cover and equity market linked returns both. Additionally, they also provide Tax savings, so they could very called All-in-One Policies. However, SEBIs contention is that ULIPs are not pure insurance products and such products are coupled with investment products which fall under its purview of regulation. The investment component of the ULIPs, which ultimately finds its way into the equity markets, is in the nature of mutual funds which falls under the jurisdiction of SEBIs governance So SEBI wanted the control over ULIP as majority of portion is invested in equities market, and as a whole securities market is controlled by SEBI. But finally, The government has brought down curtains on the two-month long tussle between two regulators by ruling that Unit-linked Insurance Products (Ulips) will be governed by the Insurance Regulatory and Development Authority (IRDA). An amendment favoring IRDA over the Securities and Exchange Board of India was signed by President Pratibha Patil on June 18.

MUTUAL FUNDS
A Mutual Fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The fund belongs to all investors with each investors ownership depending on the proportion of his contribution to the fund, i.e. the more the contribution the higher the ownership and vice-versa.

Origins of a Mutual Fund The concept of a mutual fund originated in 1870s with Robert Fleming establishing the first investment trust in Scotland in 1890. The mutual fund industry in India was started by the Unit Trust of India (UTI) in 1963 with the introduction of the Unit Scheme64 (US64). This scheme is the largest in the country. The year 1987 saw the entry of public sector mutual funds into the market. These were mainly public sector banks and financial institutions, which established their own Mutual Funds. SBI Mutual Fund, Canbank Mutual Fund, LIC Mutual Fund and Indian Bank Mutual Fund were among the first to launched.

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The private sector entered the scene in 1993. These were mainly foreign fund management companies entering India through joint ventures with Indian Companies.

How does a Mutual Fund work? A Mutual Fund is set up by a sponsor who contributes a portion of the Mutual Funds net worth. The sponsor gets the Mutual Fund registered with SEBI and sets up a trust and an Asset Management Company (AMC). The Sponsor, the Trust and the AMC form the core entities of a Mutual Fund. The Trust is represented by a Board of Trustees the guardians of the investors funds. They ensure that the investors interests are safeguarded. The AMC is the investment manager of the investors funds. It invests funds on behalf of the investors. The activities of the AMC are monitored by the Board of Trustees. The AMC creates various schemes, which the Mutual Fund advertises, inviting the public to deposit their faith and their money with the Mutual Fund. These investors fill in application forms giving their personal details and how much money they want to deposit with the Mutual Fund and submit these forms along with their cheques with either the Mutual Fund or its bankers. Against this money collected, the Mutual Fund issues units, usually with a face value of Rs.10/each. For instance, if the investor invests Rs.5,000, he will be allotted 500 units of the Mutual Fund. The AMC then takes over and decides where to invest the money collected from these investors. All these investments are made in the name of the Mutual Fund and not in the name of the individual investors. For instance, if Kothari Pioneer Mutual Fund invests in 100 shares of Reliance Industries Ltd., the latter will issue its shares in the name of Kothari Pioneer Mutual Fund.

The Mutual Fund then starts collecting income on the investments like dividends and interest, which it will either reinvest or distribute among its investors. The Fund Managers also buy and sell the investments in the market and collect the sale proceeds on behalf of the investors. When the Mutual Fund distributes the income among its investors, it does so on a pro-rata basis. For instance, an investor holding 300 units of the Mutual Fund will get more dividend than an investor holding 100 units.
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Why investing through a Mutual Funds There are a number of good reasons for an investor to invest through the Mutual Fund vehicle. These are enumerated below:

Lower Risk Each investor in the Mutual Fund owns a proportionate part of all the Mutual Funds assets. Even with a small amount of investments, he becomes a part owner of a large asset value spread over a number of investments. This is explained below with a specific situation. You have Rs.10,000 to invest. You want to invest in software stocks. With this amount, you will be able to purchase in only one or at the most two IT shares. A fall in one or both these shares can wipe you out! However, if you deposit your money with a Mutual Fund specialising in investing in IT shares, your Rs.10,000 will go into the pool of money collected from other investors like you and the Mutual Fund will buy IT shares of a larger number of companies. Your Rs.10,000 will now be spread over more than 2 companies reducing the chances of you losing your money. The downside is that if the shares were to go up, the profits to you would be higher if you directly invest in them than if you invest through a Mutual Fund. But that is a sacrifice worth making for the sake of safety. Professional Management Very few people have the time and inclination to understand and analyze finance markets while making their investments. Fund Managers of the Mutual Funds AMC are professionals with experience and tract records of managing money and closely tracking the finance markets.Mutual Funds have a team of research professionals who are constantly providing these Fund Managers with inputs of opportunities and changes happening in the markets. For an individual investor, this management services comes along with his investment in the Mutual Fund.

Easy Liquidity This is one of the most important benefits a Mutual Fund offers its investors. Very often, investors holding equity and debt cannot sell their investments easily and quickly. However, by
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investing through a Mutual Fund, they have the option of selling their units back to the Mutual Fund and receiving their money within 4 to 7 working days.

Saving Taxes Tax saving schemes of Mutual Funds offers investors a tax rebate under section 88 of the Income Tax Act. Under this section, a person investing up to Rs.10,000 in a tax saving scheme can avail of a tax rebate of 20% of his investment amount. However, the rebate is capped to 20% of a maximum investment of Rs.10,000. This implies that if an investor invests more than Rs.10,000 in a tax saving scheme, he will get a tax rebate of only Rs.2,000 (20% of Rs.10,000). This tax rebate is available every Financial Year.

Retirement Planning Mutual Funds offer investors Systematic Investment Plans (SIP) and Systematic Withdrawal Plans (SWP). These plans are very useful as a tool to provide for ones retirement needs. Systematic Investment Plans are best suited for young people who have started their careers and need to build their wealth. SIPs entail an investor to invest money at regular intervals in the Mutual Fund scheme the investor has chosen. For instance, an investor selecting Templetons SIP will need to invest a certain sum of money every month / quarter / half-year in the scheme of his choice. Systematic Withdrawal Plans are best suited for people nearing retirement. In these plans, an investor invests in a Mutual Fund scheme and is allowed to withdraw money at regular intervals to take care of his expenses.

Index Investing Index schemes of Mutual Funds give investors the opportunity to invest in index scripts in the same proportion of weightage these scripts have in the index. Thus the investors return on investment mirrors the index he invests in.

G-Sec Investing Gilt and money market schemes of Mutual Funds give investors the opportunity to invest in Government securities and money markets (including inter-bank call money market), which, an

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investor, on his own would not have access to (i.e. these investment options are normally not available to individual investors).

TYPES OF MUTUAL FUNDS


Nature of investment

1.

Equity schemes

These schemes invest most of their corpuses in equities of companies in various industries / sectors / businesses. A very small portion of the corpus is invested in debt securities in order to enable the scheme to repay money to outgoing investors. Since there is no investment focus on a particular type of business or sector, these are called diversified equity schemes.

2.

Debt / Income schemes

These schemes invest most of their corpuses in debt instruments issued by the Government, corporates, banks, financial institutions and entities engaged in infrastructure / utilities. Since these schemes dont focus on capital appreciation but on earning higher incomes, they are also called income schemes.

3.

Balanced schemes

Portfolios of these schemes consist of debt instruments, convertible securities, preference shares and equities. The investment in equity and debt is more or less in equal proportion. These schemes objective is to earn income with moderate capital appreciation.

4.

Money Market schemes

These schemes invest in securities with maturities of less than one year. These securities are mainly Treasury Bills issued by the Government, Certificates of Deposits issued by banks and Commercial Paper issued by companies. These scheme also invest in the inter-bank call money market.

5.

Gilt schemes
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These schemes invest in Government securities with medium to long term maturities i.e. more than one year. Although these securities have zero risk (Sovereign ratin), fluctuations in interest rates bring about changes in market prices of these securities resulting in gain or loss to the investor.

6.

Sector Specific schemes

These schemes invest in only one industry or sector of the market such as Information Technology, Pharmaceuticals or Fast Moving Consumer Goods. Being a very focused investment option, these schemes carry a high level of sector and company specific risk.

7.

Index schemes

These schemes track the performance of a specific stock market index. The objective is to match the performance of the index by investing in shares that constitute the index. Not only do these schemes invest in the same shares that make up the index, they invest in these share in the same proportion as the weightage they are given in the index. For instance, if the index tracked constitutes shares of Hindustan Lever Ltd. (HLL) wherein HLLs shares make up 25% of the index, the scheme will also invest 25% of its corpus in HLL shares.

8.

Tax saving schemes

These schemes are essentially diversified equity schemes with an additional benefit of offering a tax rebate under Section 88 to the investor. This section stipulates that an investor gets a tax rebate of 20% on a maximum investment amount of Rs.10,000 per Financial Year in a tax saving scheme. However, the investor has to remain invested for a minimum period of three years in order not to have the tax rebate cancelled.

9.

Bond schemes

These are focused debt schemes investing primarily in corporate debentures and bonds or in infrastructure or municipal bonds.

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Tenure a. Open-ended schemes

These schemes are available for sale and repurchase at all times. An investor can buy units from or redeem units to the Mutual Fund itself, at a price based on the schemes Net Asset Value (NAV).

b.

Close-ended schemes

These schemes offer units for sale and repurchase at all times. An investor can buy units from or redeem units to the Mutual Fund itself, at a price based on the schemes Net Asset Value (NAV)

WHAT ARE EQUITY FUNDS?

These are by far the most widely known category of funds though they account for broadly 40% of the industrys assets, while the remaining 60% is contributed by debt oriented funds. Equity funds essentially invest the investors money in equity shares of companies. Fund managers try and identify companies with good future prospects and invest in the shares of such companies. They generally are considered as having the highest levels of risks (equity share prices can fluctuate a lot), and hence, they also offer the probability of maximum returns. However, High Risk, High Return should not be understood as If I take high risk I will get high returns. Nobody is guaranteeing higher returns if one takes high risk by investing in equity funds, hence it must be understood that If I take high risk, I may get high returns or I may also incur losses. This concept of Higher the Risk, Higher the Returns must be clearly understood before investing in Equity Funds, as it is one of the important characteristic s of Equity fund investing. Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors asset allocation point of view, but the tax laws do not recognize these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments (which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities). Equity Funds come in various flavours and the industry keeps innovating to make products available for all types of investors. Relatively safer types of Equity Funds include Index Funds and diversified Large Cap Funds, while the riskier varieties are the
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Sector Funds. However, since equities as an asset class are risky, there is no guaranteeing return for any type of fund. International Funds, Gold Funds (not to be confused with Gold ETF) and Fund of Funds are some of the different types of funds, which are designed for different types of investor preferences. Equity Funds can be classified on the basis of market capitalization of the stocks they invest in namely Large Cap Funds, Mid Cap Funds or Small Cap Funds or on the basis of investment strategy the scheme intends to have like Index Funds, Infrastructure Fund, Power Sector Fund, Quant Fund, Arbitrage Fund, Natural Resources Fund, etc.

EQUITY FUNDS

Index funds

Large cap funds

Midcap funds

Sectoral funds

Arbitrage funds

Quant funds

Multi-cap funds

P/E Ratio fund

Index fundsIndex Funds invest in stocks comprising indices, such as the Nifty 50, which is a broad based index comprising 50 stocks. There can be funds on other indices which have a large number of stocks such as the CNX Midcap 100 or S&P CNX 500. Here the investment is spread across a large number of stocks. In India today we find many index funds based on the Nifty 50 index, which comprises large, liquid and blue chip 50 stocks.
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Large cap fundsThese are funds which restrict their stock selection to the large cap stocks typically the top 100 or 200 stocks with highest market capitalization and liquidity. It is generally perceived that large cap stocks are those which have sound businesses, strong management, globally competitive products and are quick to respond to market dynamics. Therefore, diversified large cap funds are considered as stable and safe. Mid cap fundsAfter large cap funds come the midcap funds, which invest in stocks belonging to the mid cap segment of the market. Many of these midcaps are said to be the emerging bluechips or tomorrows large caps. There can be actively managed or passively managed mid cap funds. There are indices such as the CNX Midcap index which tracks the midcap segment of the markets and there are some passively managed index funds investing in the CNX Midcap companies. Sectoral fundsFunds that invest in stocks from a single sector or related sectors are called Sectoral funds. Examples of such funds are IT Funds, Pharma Funds, Infrastructure Funds, etc. Regulations do not permit funds to invest over 10% of their Net Asset Value in a single company. This is to ensure that schemes are diversified enough and investors are not subjected to undue risk. This regulation is relaxed for sectoral funds and index funds.

Arbitrage fundsThese invest simultaneously in the cash and the derivatives market and take advantage of the price differential of a stock and derivatives by taking opposite positions in the two markets (for e.g. stock and stock futures). Quant fundsA typical description of this type of scheme is that The system is the fund manager, i.e. there are some predefined conditions based upon rigorous backtesting entered into the system and as and when the system throws buy and sell calls, the scheme enters, and/ or exits those stocks.

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Multicap fundsThese funds can, theoretically, have a smallcap portfolio today and a largecap portfolio tomorrow. The fund manager has total freedom to invest in any stock from any sector. P/E Ratio fundA fund which invests in stocks based upon their P/E ratios. Thus when a stock is trading at a historically low P/E multiple, the fund will buy the stock, and when the P/E ratio is at the upper end of the band, the scheme will sell.

DEBT FUNDS
Debt funds are funds which invest money in debt instruments such as short and long term bonds, government securities, t-bills, corporate paper, commercial paper, call money etc. The fees in debt funds are lower, on average, than equity funds because the overall management costs are lower. The main investing objectives of a debt fund is usually preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration. Investments in the equity markets are considered to be fraught with uncertainties and volatility. These factors may have an impact on constant flow of returns. Which is why debt schemes, which are considered to be safer and less volatile have attracted investors. Debt markets in India are wholesale in nature and hence retail investors generally find it difficult to directly participate in the debt markets. Not many understand the relationship between interest rates and bond prices or difference between Coupon and Yield. Therefore venturing into debt market investments is not common among investors. Investors can however participate in the debt markets through debt mutual funds.

OPTIONS & FUTURESOptions Options are financial instruments whose value depends on an underlying asset, which could be anything from stocks through indices to commodities. Options are the most versatile trading instrument ever invented. Since options cost less than stock they provide a high leverage approach to trading that can significantly limit overall risk of a trade or provide additional income. Options give the holder the right but not the obligation to buy or sell the underlying asset at a pre-specified price for a fixed duration. Options are either call or put. Call options gives the buyer the right to buy the underlying asset whereas put options gives the buyer the right to sell the underlying asset. For every buyer

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of an option there is a seller, called the writer. The seller receives an amount called the premium from the buyer. The premium is the per share price that the option holder pays upfront to the seller to acquire the option. The seller keeps the premium regardless of whether the option is exercised or not. The minimum option lot is 100 shares. The premium is dependent on many factors like the underlying asset price, the strike price (the price, which the holder of the option has to pay (or receive), when he decides to exercise his option. It is fixed by the exchange for the entire duration of the option), the volatility of the asset price, the risk free rate of return and the corporate benefits at the time to maturity of the option. Forwards A forward contract can be regarded as the simplest mode of derivative transaction. It is an agreement to buy or sell an asset (of a specified quantity) at a certain future time for a certain price. No cash is exchanged when the contract is entered into. Such a contract is usually between two financial institutions or a financial institution and one of its corporate clients. One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset at the specified future date at the specified price. The other party to the contract assumes a short position and agrees to sell the asset at the same date for the same price. The specified price in the forward contract is referred to as the delivery price. At the time the contract is entered into, the value of the forward contract is zero to both the parties. A forward contract is settled at maturity. The holder of the short position delivers the asset to the holder of the long position in return for a cash amount equivalent to the delivery price. On the settlement date the forward contract can have a positive or negative value depending on the movement of the price of the underlying asset. It is pertinent to note that the forward price and delivery price of the underlying asset are both equal at the time the contract is entered into. Over a period of time the forward price tends to fluctuate but the delivery price remains constant. The difference between the price as on the settlement date and the price at which the forward contract was entered into determines the value of the contract to both the buyer and the seller. Futures A futures contract is a contract to buy or sell a certain asset at a specified future time and price; such contracts are normally traded on a stock exchange. This leads to a standardization, imparts liquidity and creates a set of rules and regulations that have to be adhered to by the parties to the transaction. Infact the exchange provides a mechanism, which gives the two parties a guarantee that the contract will be honoured. A clearinghouse becomes counterparty to both sides of the transaction. As the buyers and the sellers do not know each other it is the clearinghouse which guarantees the trade. Another difference between forwards and futures is that when the contract
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is entered into the exact delivery date is not specified. The contract is referred to by the delivery month and the exchange specifies the period between which the delivery has to be made.

BASICS OF TECHNICAL ANALYSIS


Difference between fundamental analysis and technical analysis: There are two important questions which one has to answer when one wants to buy/sell shares? They are "What to buy/sell" and "When to buy/sell" ? Fundamental Analysis answers the question "What to buy"? It a study of companies Financial statements , cash books , markets study to find out the future prospects of a company. It answers the question "Will this company be a good buy for long term" ? , "Will it be more valuable than what it is now " etc." Even though you have picked up some excellent companies for your long term investments , That's not the end of the story . Now the biggest challenge and question you have is "When to buy it" ? You should not just go next day and buy the share , that's not the right approach . There can be a price area where buying is best in terms of risk/reward . Technical Analysis is the study of charts , price and volume patterns and other indicators derived from price and volume . Technical Analysis gives us hint on what can happen in future , understand that it only gives you chances, not a guarantee . So everything should be taken with crossed fingers , Decisions taken on basis of TA only increases your risk/reward scenario . Fundamental Analysis and Technical Analysis is a personal choice and one may work for you and other may not work for you. Support and Resistance: Support : Support for a price is a price area where there are lots of buyers ready to buy the stocks rather than sellers . At that price point , the general perception is that its a good buy , and lots of buyers come to buy it . Hence buyers outnumber sellers and there is a higher possibility that prices will bounce back from that point . This is a point where Buying has less risk . In other words, at support levels demand is thought to be strong enough to prevent the price from declining further. Please understand that Support point is not a place from where it will for sure bounce back, Its only the higher probability that it will bounce back . Also understand that its not exactly a fixed price which should be considered as Support, generally its a range like 98-100 or 560-570 .. Which point is Support point : Every Low made by the price can be considered as Support Area . Support Example : Below chart is for Jaiprakash Associates (click to enlarge) , It made a low of Rs 53 (closing price) on 27th Oct 2008 and then bounced up from there . Now Rs 53 is the support point , Prices went up from that point and after reaching Rs 90 , it again started heading down , You can clearly see in charts that it reached Rs 53 levels , but could not break down from that point and again bounced back from there .

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It was a very good "BUY" around Rs 53 .Understand that buying around Rs 53 , is only a less-risky trade , not a "no-risk" trade . Prices can break down from there also.

Resistance : Resistance is just opposite of Support , At this price levels there are more sellers than buyers and with high probability prices reverses from this point . At this point there are enough sellers in the market to prevent it from rising further .Resistance point is the High made by a price . All the high's will act as some kind of resistance points. Resistance Example : Below is Reliance Charts , You can see that reliance made a high of Rs 1400 around Dec 2008 , After that you can see how it reversed from that point 2 times in Jan and Feb 2009 . It was a wise decision to sell at those points.

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CONCLUSION

This project has been undertaken in order to track the performance of various debt based mutual funds. The methodology for carrying out the project was very simple that is through secondary data obtained through various mediums like fact sheet of the funds, the Internet, AMFI book, Newspaper, etc. An investor is interested in tracking the value of his investments, for that he invests directly in the market or indirectly through Mutual Funds. This dynamic change has taken place because of a number of reasons. With globalization and the growing competition in the investments opportunity available he would have to make guided and rational decisions on whether he gets an acceptable return on his investments in the funds selected by him, or if he needs to switch to another fund. Hence this project has helped in terms of achieving such an end. By understanding the basis of the different measures of evaluating the performance of the fund, the right decision has been taken in terms of selection of the fund.

Tolani College Of Commerce

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Tolani College Of Commerce

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Tolani College Of Commerce

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Tolani College Of Commerce

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