ABSTRACT

MBA is a stepping-stone to the management career and to develop good

manager it is necessary that the theoretical must be supplemented with
exposure to the real environment. Theoretical knowledge just provides the base
and it’s not sufficient to produce a good manager that’s why practical
knowledge is needed. Therefore the research product is an essential
requirement for the student of MBA. This research project not only helps the
student to utilize his skills properly learn field realities but also provides a
chance to the organization to find out talent among the budding managers in
the very beginning. In accordance with the requirement of MBA course I have
summer training project on the topic “Comparative Investment Analysis of
Mutual funds and Ulips”. The main objective of the research project was to
study the two instruments and make a detailed comparison of the two.

CONTENTS

CHAPTER-1
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INTRODUCTION OF MUTUAL FUNDS 08-28
INTRODUCTION OF ULIPS 29-41

CHAPTER-2
COMPARISION OF MUTUAL FUNDS VERSUS ULIPS 42-48

CHAPTER-3
COMPANY PROFILE 49-59

CHAPTER-4
RESEARCH METHODLOGY 60-64

CHAPTER-5
DATA ANALYSIS 65-75

CHAPTER-6 76-79
CONCLUSION
FINDINGS
BIBLIOGRAPHY

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CHAPTER -1

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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. .

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.

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.

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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 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: -

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First Phase – 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up
by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked
from the RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched
by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of
assets under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of
India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual
fund in June 1989 while GIC had set up its mutual fund in December 1990. At the
end of 1993, the mutual fund industry had assets under management of Rs.47,
004 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

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return and certain other schemes. The Specified Undertaking of Unit Trust of
India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund
Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It
is registered with SEBI and functions under the Mutual Fund Regulations. With
the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,
000 crores of assets under management and with the setting up of a UTI Mutual
Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers
taking place among different private sector funds, the mutual fund industry has
entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108
crores under 421 schemes

STRUCTURE OF MUTUAL FUND

There are many entities involved and the diagram below illustrates the structure

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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.

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.

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 3. The AMC should have and must at all times maintain a minimum net
worth of Cr. 100 million.
4. The director of the AMC should be a person having adequate professional
experience.
5. The board of directors of such AMC has at least 50% directors who are not
associate of or associated in any manner with the sponsor or any of its
subsidiaries or the trustees.

The Transfer Agents

The transfer agent is contracted by the AMC and is responsible for

maintaining the register of investors / unit holders and every day settlements of
purchases and redemption of units. The role of a transfer agent is to collect data
from distributors relating to daily purchases and redemption of units.

Custodian

The mutual fund is required, under the Mutual Fund Regulations, to appoint a
custodian to carry out the custodial services for the schemes of the fund. Only
institutions with substantial organizational strength, service capability in terms of
computerization and other infrastructure facilities are approved to act as
custodians. The custodian must be totally delinked from the AMC and must be
registered with SEBI.

Unit Holders

They are the parties to whom the mutual fund is sold. They are ultimate
beneficiary of the income earned by the mutual funds.

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 Some of the AMCs operating currently are:

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 Private foreign
Limited
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

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 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.
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.
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 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. Though they are affected by the interest rate risk in general, the
returns generated are more as they pick securities with different duration that
have different yields and so are able to increase the overall returns from the
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 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

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 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.
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

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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.

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

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 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:

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.

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

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 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. 2500 crores but more than Rs. 500
crores) and Small-Cap companies have market capitalization of
less than Rs. 500 crores. 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.

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
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 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
BSEBANKEX or CNX Bank Index etc). Narrow indices are less
diversified and therefore, are more risky.
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.

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 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 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 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

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 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 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.
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 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.

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.

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 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
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)

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 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.
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:

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FREQUENTLY USED TERMS

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

on the fund’s investments and to supervise the management of its asset.

Diversification – The policy of spreading investments among a range of

different securities to reduce the risk.

Net Asset Value (NAV) - Net Asset Value is the market value of the assets of
the scheme minus its liabilities. The per unit NAV is the net asset value of the
scheme divided by the number of units outstanding on the Valuation Date.

Sales Price - Is the price you pay when you invest in a scheme. Also called Offer
Price. It may include a sales load.

Repurchase Price - Is the price at which a close-ended scheme repurchases its

units and it may include a back-end load. This is also called Bid Price.

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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.

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.

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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.

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
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 way, in case of adverse market conditions, you can even lose your capital
invested.

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 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
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 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.

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.

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 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

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 benefit of such plans, an investor needs to compare important points like
structure, costs and benefits. Below is a brief comparison for the same.

A Comparison of Term Plan + ELSS and ULIP Type 2 will give the best:

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 Life

Benefit will be paid Sum assured will be paid

Long Term Costs Good for long term Mutual Funds charge close
investing as there are high to 2.25% of Annual Fund
upfront charges. In the Management charge till
Long term total charges you remain invested.
are lower than Mutual
Funds

Switching Costs During Mostly ULIPs have 3 Switches are charged at 3-

a long tenure of Switches Free 4%.
investment, switching
funds is very important.

Switching Tax Costs No Tax Implication Profits on switching are

charged at 10%
Discipline Compulsion of Investment No Compulsion. Planning
every year. Helps you plan to be implemented by you.
you child’s future or
retirement.

Tax All profits are tax free Tax payable on short term
gains

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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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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

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 Combining equity investment with Medium
Funds 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.

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.

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 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.

 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.

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  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 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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 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.

o Liquidity

To cope with unforeseen circumstances, ULIPs offer the
benefit of partial withdrawal; wherein after 3 years you can
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 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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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.

 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

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 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.

 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

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 CHAPTER -2
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COMPARISON BETWEEN ULIPS AND MUTUAL
FUNDS:

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to

mutual funds in terms of their structure and functioning. As is the 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.

1. Mode of investment/ investment amounts

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 Mutual fund investors have the option of either making lump sum investments
or investing using the systematic investment plan (SIP) route which entails
commitments over longer time horizons. The minimum investment amounts are
laid out by the fund house.
ULIP investors also have the choice of investing in a lump sum (single premium)
or using the conventional route, i.e. making premium payments on an annual,
half-yearly, quarterly or monthly basis. In ULIPs, determining the premium paid
is often the starting point for the investment activity.
This is in stark contrast to conventional insurance plans where the sum assured
is the starting point and premiums to be paid are determined thereafter.
ULIP investors also have the flexibility to alter the premium amounts during the
policy’s tenure. For example an individual with access to surplus funds can
enhance the contribution thereby ensuring that his surplus funds are gainfully
invested; conversely an individual faced with a liquidity crunch has the option of
paying a lower amount (the difference being adjusted in the accumulated value
of his ULIP). The freedom to modify premium payments at one’s convenience
clearly gives ULIP investors an edge over their mutual fund counterparts.

2. Expenses
In mutual fund investments, expenses charged for various activities like fund
management, sales and marketing, administration among others are subject to
pre-determined upper limits as prescribed by the Securities and Exchange
Board of India.
For example equity-oriented funds can charge their investors a maximum of
2.5% per annum on a recurring basis for all their expenses; any expense above
the prescribed limit is borne by the fund house and not the investors.
Similarly funds also charge their investors entry and exit loads (in most cases,
either is applicable). Entry loads are charged at the timing of making an
investment while the exit load is charged at the time of sale.
Insurance companies have a free hand in levying expenses on their ULIP
products with no upper limits being prescribed by the regulator, i.e. the
Insurance Regulatory and Development Authority. This explains the complex
and at times ‘unwieldy’ expense structures on ULIP offerings. The only restraint
placed is that insurers are required to notify the regulator of all the expenses
that will be charged on their ULIP offerings.
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 Expenses can have far-reaching consequences on investors since higher
expenses translate into lower amounts being invested and a smaller corpus
being accumulated. ULIP-related expenses have been dealt with in detail in the
article “Understanding ULIP expenses”.

3. Portfolio disclosure
Mutual fund houses are required to statutorily declare their portfolios on a
quarterly basis, albeit most fund houses do so on a monthly basis. Investors get
the opportunity to see where their monies are being invested and how they
have been managed by studying the portfolio.
There is lack of consensus on whether ULIPs are required to disclose their
portfolios. During our interactions with leading insurers we came across
divergent views on this issue.
While one school of thought believes that disclosing portfolios on a quarterly
basis is mandatory, the other believes that there is no legal obligation to do so
and that insurers are required to disclose their portfolios only on demand.
Some insurance companies do declare their portfolios on a monthly/quarterly
basis. However the lack of transparency in ULIP investments could be a cause
for concern considering that the amount invested in insurance policies is
essentially meant to provide for contingencies and for long-term needs like
retirement; regular portfolio disclosures on the other hand can enable investors
to make timely investment decisions.
ULIPs vs. Mutual Funds

ULIPs Mutual Funds

Minimum investment
Determined by the amounts are
Investment investor and can determined by the
amounts be modified as well fund house
No upper limits, Upper limits for
expenses expenses chargeable
determined by the to investors have
insurance been set by the
Expenses company regulator
Quarterly disclosures
Portfolio disclosure Not mandatory* are mandatory
Generally
permitted for free Entry/exit loads have
Modifying asset or at a nominal to be borne by the
allocation cost investor

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 Section 80C Section 80C benefits
benefits are are available only on
available on all investments in tax-
Tax benefits ULIP investments saving funds

4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and ULIPs
segment are largely comparable. For example plans that invest their entire
corpus in equities (diversified equity funds), a 60:40 allotment in equity and
debt instruments (balanced funds) and those investing only in debt instruments
(debt funds) can be found in both ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fund wishes to shift his corpus
into a debt from the same fund house, he could have to bear an exit load
and/or entry load.
On the other hand most insurance companies permit their ULIP inventors to
shift investments across various plans/asset classes either at a nominal or no
cost (usually, a couple of switches are allowed free of charge every year and a
cost has to be borne for additional switches).
Effectively the ULIP investor is given the option to invest across asset classes as
per his convenience in a cost-effective manner.
This can prove to be very useful for investors, for example in a bull market
when the ULIP investor’s equity component has appreciated, he can book profits
by simply transferring the requisite amount to a debt-oriented plan.

5. Tax benefits
ULIP investments qualify for deductions under Section 80C of the Income Tax
Act. This holds well, irrespective of the nature of the plan chosen by the
investor. On the other hand in the mutual funds domain, only investments in
tax-saving funds (also referred to as equity-linked savings schemes) are eligible
for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for
example diversified equity funds, balanced funds), if the investments are held
for a period over 12 months, the gains are tax free; conversely investments
sold within a 12-month period attract short-term capital gains tax @ 10%.

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 Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%,
while a short-term capital gain is taxed at the investor’s marginal tax rate.
Despite the seemingly similar structures evidently both mutual funds and ULIPs
have their unique set of advantages to offer. As always, it is vital for investors
to be aware of the nuances in both offerings and make informed decisions.

Growth of Ulips and Mutual Funds

ULIPS VERSUS MUTUAL FUNDS

Unit Links Insurance Plan (ULIP) and Mutual Fund (MF) are the two most
preferred options for a part time investor to invest into equity. But how do we
decide which one should we go for. Though it is very easy to decide, people
tend to confuse themselves most of the time. This article talks about some
points that you need to consider while deciding which option we want to take.
Mutual Fund is pure investments. ULIP are combination of Insurance and
Investment.

Now let us compare ULIP and MF based on certain well known facts:

1) Insurance
ULIPs provide you with insurance cover.MFs don’t provide you with insurance
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cover. A point in favor of ULIPs. But let me tell you that you don’t get this
insurance cover for free. Mortality charges (i.e. the price you pay for the
insurance cover) get deducted from your investment.

2) Entry Load
ULIPs generally come with a huge entry load. For different schemes, this can
vary between 5 to 40% of the first years premium.MFs do not have any entry
load. Here MFs have a huge advantage. If we consider a conservative market
return of about 10-15% you may get a zero percent return in the first year in
case of ULIPs.

3) Maturity
ULIPs generally come with a maturity of 5 to 20 years. That what ever money
you put in, most of it will be locked-in till the maturity.
Taxes saving MF (Popularly called as Equity Linked Saving Scheme or ELSS)
come with a lock-in period of 3 years. Other MFs don’t have a lock-in period.
Again MFs have advantage over ULIPs. ULIPs do allow you to take money out
prematurely but they also put penalties on you for doing that.

4) Compulsion of Investing
ULIPs would generally make you pay at least first three premiums.
MFs don’t have any compulsion on future investments.
If you have invested in a MF this year, and in the next year you don’t have
enough income or money to do investments you can decide not to make any
investments. Also if you notice that the MF that you invested in is not giving
good returns as compared to some other Funds scheme, you can decide to
invest in some other MF.

5) Tax Saving
Both the ELSS and ULIP come under 80C and can save you tax. Returns in the
both form of investments are tax free.

6) Market exposure

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ULIPs give you both moderate and aggressive exposure to equity market
Debt and Liquid MF let invest with low risk, but don’t give you tax benefit.
ULIPs need not be aggressive in equity exposure. That is ULIPs need not keep
more that 60% of their funds in equity market. ULIPS also allow to change
your equity market exposure. Thus it can help you time the market and still
give you tax savings. If a MF has a less than 60% exposure to equity market
the returns from it are not tax free. Thus you don’t get to take a conservative
stand on returns.

7) Flexibility of time of redemption

ULIP will get redeemed on maturing. Premature redemption is allowed with
some penalty. In MF premature redemption is not allowed. For a open ended
scheme one can redeem the MF anytime after maturiryThis is mainly useful if
the market is down at the maturity time of the investment. In case of ELSS
you can wait till the market comes up again and then redeem them. ULIP
scheme won’t allow you to wait.

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 CHAPTER -3

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COMPANY PROFILE

The Kotak Mahindra group is a financial organization established in 1985 in

India. It was previously known as the Kotak Mahindra Finance Limited, a non-
banking financial organization. In February 2003, Kotak Mahindra Finance Ltd,
the group's flagship company was given the license to carry on banking
business by the Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the
first company in the Indian banking history to convert to a bank.
Kotak Mahindra is one of India's leading financial organizations, offering a wide
range of financial services 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 diverse financial needs of
individuals and corporate.
The group has a net worth of over Rs. 6,523 core 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 6.2 million customer
accounts.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management
Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. 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.
Since then it's been a steady and confident journey to growth and success.

 .1986 Kotak Mahindra Finance Limited starts the activity of Bill

Discounting
 1987 Kotak Mahindra Finance Limited enters the Lease and Hire
Purchase market

 1990 The Auto Finance division is started

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  1991 The Investment Banking Division is started. Takes over FICOM,
one of India's largest financial retail marketing networks
 1992 Enters the Funds Syndication sector
 1995 Brokerage and Distribution businesses incorporated into a
separate company - Kotak Securities. Investment Banking division incorporated
into a separate company - Kotak Mahindra Capital Company
 1996 The Auto Finance Business is hived off into a separate company
- Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus
Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra
Limited, for financing Ford vehicles. The launch of Matrix Information Services
Limited marks the Group's entry into information distribution.
 1998 Enters the mutual fund market with the launch of Kotak
Mahindra Asset Management Company.
 2000 Kotak Mahindra ties up with Old Mutual plc. For the Life
Insurance business.Kotak Securities launches its on-line broking site (now
www.kotaksecurities.com). Commencement of private equity activity through
setting up of Kotak Mahindra Venture Capital Fund.
 2001 Matrix sold to Friday Corporation Launches Insurance Service.
 2003 Kotak Mahindra Finance Ltd. converts to a commercial bank -
the first Indian company to do so.
 2004 Launches India Growth Fund, a private equity fund.

 2005 Kotak Group realigns joint venture in Ford Credit; Buys Kotak
Mahindra Prime (formerly known as Kotak Mahindra Primus Limited).
 2006 Bought the 25% stake held by Goldman Sachs in Kotak
Mahindra Capital Company and Kotak Securities

STRENGTHS

 Financial Acumen - Holds a stable and diversified portfolio and has

received some of the highest ratings in financial strength from industry’s
independent rating agencies.

 Disciplined fund management - Years of experience in asset

management, and a strong track record in managing funds - backed by the
acclaimed expertise of Old Mutual plc

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 Innovativeness - Known for being an innovator in providing world-
class pragmatic financial solutions, with a constant focus on customization and
flexibility

 Unrelenting Customer Focus - A highly committed sales force, with

customer satisfaction as the key driving force - a major differentiator

 Transparency in Services - Daily declaration of fund performances,

regular performance benchmarking, well regulated asset management, and
monthly newsletter on market updates

MISSION:
We focus on the needs of our customers and create confidence, trust and
loyalty by offering a wide range of innovative insurance solutions.
Strengthened by our commitment to professional management, we ensure the
continued growth and advancement of our employees.

VISION

Kotak Life Insurance has a deep rooted commitment to improve the

quality of life of its customers, employees and stakeholders. We aim at
improving the long term value in our relationship by continuous
innovation and improvements. We do this by our three-prong effort
which strives to make Kotak Life Insurance a corporate with values.

Increase Customer Value

Kotak Life Insurance has gone to the heart of its customer's
requirements and developed products which are unique and serve the
customer needs perfectly. We built a relationship of mutual trust and
benefit to serve the Indian customer. At Kotak Life Insurance the
customer always comes first.

Cohesive Work Environment

we form long-term partnership with our employees by offering them an
invigorating work experience. We not only demand loyalty, sincerity

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 and values but also give it back in equal measures. Kotak Life
Insurance will like to offer its employees space to grow, innovate and
build a long-term career.

Work with Honour

Kotak Life Insurance delivers everyday services in the marketplace with
the high sense of duty and commitment. Our employees strive to build
the long-term value for all those come in contact with Kotak Life
Insurance. Our consumers, distributors, employees, shareholders and
the nation have our commitment that we will uphold the values of
trust, integrity and a Sense of Honour in every thought, act and deed in
order to positively contribute to individual, society and nation growth.

AREAS OF BUSINESS

Kotak Mahindra is one of India's leading financial organizations, offering

a wide range of financial services 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 diverse financial
needs of individuals and corporate.

The group has a net worth of over Rs. 6,523 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 6.2 million customer accounts.

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JOURNEY SO FAR

In October 2005, Kotak Group acquired the 40% stake in Kotak Prime held by
Ford Credit International (FCI) and FCI acquired the stake in Ford Credit Kotak
Mahindra (FCKM) held by Kotak Group. In May 2006, Kotak Group bought 25%
stake held by Goldman Sachs in Kotak Capital and Kotak Securities.

Kotak Mahindra Bank

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

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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.
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
(through www.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
15,916 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.
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
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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.

KMOM – THE PARTNERSHIP AND LINEAGE

A 26%-74% JOINT VENTURE BETWEEN

And

KOTAK MAHINDRA AND OLD MUTUAL

KOTAK LIFE INSURANCE

 Brand equity
 Entrepreneurial employees
 Branch network
 Knowledge of the Indian market
 Access to customer base
 Distribution associates

OLD MUTUAL PLC

 Domain knowledge

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  Technology
 Product innovation
 Training expertise
 Global perspective
 System and processes
 Multi channel management

OLD MUTUAL FUND HISTORY

Old Mutual is an international savings and wealth management company based

in the UK. Originating in South Africa in 1845, it is among the top 100 largest
companies in the FTSE100. The group has a balanced portfolio of businesses
Offering Asset Management, Life Assurance, Banking and General Insurance
Services in over 40 countries, with a focus on South Africa, Europe and the
United States, and a growing presence in Asia Pacific. Old Mutual employs
approximately 54,000 employees worldwide with its primary listing on the
London, secondary listing on the Johannesburg stock exchanges as well as in
Namibia, Malawi and Zimbabwe. Based in London with global operations
spanning life assurance, asset management, banking and general insurance,
Old Mutual plc is listed on the London Stock Exchange as well as the
Johannesburg (South African), Namibian, Malawian and Zimbabwe stock
exchanges .We operate in Africa, North America, Europe, Latin America and
Asia, and have more than 57 000 employees. Our vision is to focus on
leveraging our strongest businesses (South Africa and Long-Term Savings), to
streamline the Group, and to drive value creation within, and between
businesses.
Old Mutual plc's lines of business:

 Long-term savings
 Old Mutual Asset Management (US)
 Nedbank Group
 Mutual & Federal
 Old Mutual Bermuda

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 PRODUCT AND SERVICES

Proposal Forms
Protection Plans • Kotak Proposal Form
o Kotak Loan Protection Plan • Kotak Retirement Plans Proposal Form
Kotak Term/Preferred Term Plan
Kotak Eternal Life Plans

Savings & Investments Plans

o Kotak Super Advantage
Kotak Platinum Edge
Kotak Single Invest
Kotak Capital Multiplier Plan
Kotak Money Back Plan
Kotak Endowment Plan
Kotak Premium Return Plan
Kotak Surakshit Jeevan
Kotak Gramin Bima Yojana

Retirement Plans
o Kotak Long Life Wealth Plus
Kotak Long Life Secure Plus
Kotak Second Innings Plan
Kotak Guaranteed Pension Builder
Kotak Retirement Income Plan

Child Plans
o Kotak Headstart Child Plans
Kotak Child Advantage Plan

Riders
o Riders

CAREER PROGRESSION
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Member-Kotak Living National Vice-
Legends Galaxy President

Financial Advisor Area/Regional Manager

Regional
Training Head
Branch Manager
Sr. Financial
Consultant

Trainer
Financial Consultant Sales Manager

Life Advisor

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 CHAPTER -4

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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?

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

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OBJECTIVES:

 To study about the mutual funds industry.

 To study the approach of investors towards mutual funds and ULIPs.

 To study the behavior of the investors whether they prefer mutual funds
or ULIPs?

SCOPE OF THE STUDY:

 Subject matter is related to the investor’s approach towards mutual funds

and Ulips.
 People of age between 20 to 60
 Area limited to Hyderabad
 Demographics include names, age, qualification, occupation, marital
status and annual income.

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 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.

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  Construct and pretest a questionnaire: - A questionnaire is a
formalized set of questions for obtaining information from respondents.
Where as 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:

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 Hyd 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.

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 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.

 Plan for data analysis: Analysis of data is planned with

the help of mean and analysis of variance.

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 CHAPTER -5

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DATA ANALYSIS

1) How many people invest their money in Mutual Funds?

Invest [ ] not invest [ ]

response Frequency Percentage

invest 19 62%
Not invest 31 38%
total 50 100

38%
yes
no
62%

INTERPRETATION:

For the above question how many people invest their money in Mutual Funds are
62%. It means more than half of people are aware about the Mutual Funds.

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2) What is your source of information while investing in mutual funds?
a) Internet [ ]
b) Advertisement [
c) Newspaper [ ]
d) Financial Advisor [ ]

Options Frequency percentage

Internet 22 44%
Advertisement 12 24%
Newspapers 7 14%
Financial 9 18%
Advisor
total 50 100

45% 44%

40%
35%
30%
25% 24%

18% Series1
20%
15% 14%

10%
5%
0%
1 2 3 4

Interpretation: It means that all the modes of information are not the same.It
clearly shows that internet is the popular mode of information investing in Mutual
Funds i.e. 44%

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 3) In which sector do you prefer to invest your money?

a) Government Sector b) Private Sector

Options Frequency Percentages

Government sector 27 54
Private sector 23 46
total 50 100

frequency

46%
government sector

54% private sector

Interpretation: Mostly people invest there money in both the sector, but majority
of people interested to invest there money in Government sector i.e. 54 %.

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4) Which Features attract you the most while choosing a specific Mutual
Fund?

a) Flexibility [ ]
b) Return [ ]
c) Managed by professional people [ ]
d) Risk Diversion [ ]

Options Frequency percentage

Flexibility 25 50%
returns 12 24%
Professional 5 10%
people
Risk diversion 8 16%

total 50 100

50%
40%
30% 50%
20% Series1
24%
10% 10% 16%
0% S1
1 2 3 4

Interpretation: Mostly the investor is interested in having a flexibility feature then

any other features. Flexibility having 50% which is higher than compare to others
features.

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5) What type of return you expect?
Monthly [ ] Quarterly [ ] semi annual [ ] annual [ ]

Options Frequency percentage

Monthly 12 24%
Quarterly 16 32%
Semi annual 10 20%
Annual 12 24%

total 50 100

35%

30%

25%

20%
32% Series1
15%
24% 24%
10% 20%

5%

0%
1 2 3 4

Interpretation: From the investor’s point of view, maximum investors are

interested to have quarterly return i.e. 32% which is highest in remaining all.

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 6) Most preferred form of investment?

Ulip [ ] Mutual Funds [ ] Post Office [ ] Equity Trading [ ]

Options Frequency percentage

Ulip 12 24%
Mutual Funds 22 44%
Post office 7 14%
Equity trading 9 18%

total 50 100

50%
45% 44%
40%
35%
30%
25% 24% Series1
20%
18%
15% 14%
10%
5%
0%
1 2 3 4

Interpretation: Most of investors are interested in all the different types of

investment police. But from the above it clearly indicates that Mutual Funds has
more investment then compare to others i.e. 44%

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7) How long Options Frequency percentage
do you plan 3-5yrs 25 50%
to stay 5-7yrs 12 24%
invested in 7-10yrs 5 10%
ULIP? 10-20yrs 8 16%

3-5 years [ ] total 50 100

5-7 years [ ] 7-10 years [ ] 10-20 years [ ]

16%

10% 1
2
50%
3
4

24%

Interpretation: From the above its clearly indicates that mostly investors are
interested for period of 3-5 years, so that there can get back the returns. It
shows 3-5 years i.e. 50%

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 8) Which factor do you consider before investing in mutual fund or
Ulips (tick?)

Safety of principal low risk higher returns maturity period

Options frequency percentages

Safety of 14 28
principal
Low risk 15 30
Higher 14 28
returns
Maturity 4 8
period
Total 50 100

frequency

8% 6%
28% safety of principal
low risk
high returns
28% maturity period
30% terms and conditions

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Interpretation: Mostly people before investing in any securities whether its may
be Mutual Funds or ULIPs are interested to have low risk and minimum risk i.e.
30%

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9) What percentage of your income do you invest?

0-5% [ ] 5-10% [ ] 10-15% [ ]

Options Frequency percentages

0- 5% 26 52
5-10% 13 26
10- 11 22
15%
total 50 100

frequency

22%

upto 5%
5-10%
52%
10% % above
26%

Interpretation: Mostly maximum people are from middle class, so there invest
only 0-5% of income which is nearly i.e. 52% compares to others sectors.

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 10) Imagine that stock market drops immediately after you invest in
it then what will you do?

Withdraw your money [ ] wait n watch [ ] Invest more [ ]

Options frequency percentages

Withdraw 8 16%

Wait n 26 52%
watch
Invest 16 32%
more
Total 50 100

16%

32%

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2
3

52%

Interpretation: Mostly investors who have invested money in shares will wait and
watch. In the hope that market will grow. So 52% i.e. majority of investor’s waits
and watch.

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 CHAPTER -6

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 CONCLUSION

A mutual fund is the ideal investment vehicle for today’s complex and modern
financial scenario. Markets for equity shares, bonds and other fixes income
instruments, real estate, derivatives and other assets have become mature and
information driven. Today each and every person is fully aware of every kind of
investment proposal. Everybody wants to invest money, which entitled of low
risk, high returns and easy redemption. In my opinion before investing in mutual
funds, one should be fully aware of each and everything.

At the same time Ulips as an investment avenue is good for people who have
interest in staying for a longer period of time, that is around 10 years and above.
Also in the coming times, Ulips will grow faster. Ulips are actually being publicized
more and also the other traditional endowment policies are becoming
unattractive because of lower interest rate. It is good for people who were
investing in ULIP policies of insurance companies as their investments earn them
a better return than the other policies.

Investors who want to invest money after detailed study of equity market should
go ahead for Mutual Funds.
If you feel that you cannot pay the regular investment and need a relaxation time
in your investment plan then Ulip is best.
If you prefer to get life insurance cover along with good returns on investment
then ULIPs would be good.

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 FINDINGS

• Highest number of investors comes from the salaried class.

• Highest number of investors comes from the age group of 25-35.

• Most of the people have been investing their money n the share markets
belong to Rs.400000 and above income group.
• Mostly investors prefer monitoring their investment on monthly basis.

• Most of the people invest up to 6% of their annual income in mutual

funds.

• Most of the people between the age group of 25– 35 invest their money
in share market.

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 BIBLIOGRAPHY

• www.kotak.com

• www.mutualfundsindia.com

• www.investorsguide.com

• www.google.com

• www.irda.com

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