Market Capitalisation of Mutual Funds

7/30/2019 Market Capitalisation of Mutual Funds

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STUDY OF CAPITALISATION OF MUTUAL FUNDS IN INDIANMARKET

A RESEARCH POJECT REPORT

Submitted to Mahamaya Technical University, Noida in partial

fulfillment of the requirement of Master of Business

Administration

In

(Finance)

Submitted By:

Aditya Chaturvedi

Roll no: 1122570004

MBA Batch (2011-13)

Accurate Institute of Management & Technology


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SUPERVISORS CERTIFICATE

This is to certify that the Research Project Report titledSTUDY OF CAPITALISATION OF MUTUAL FUNDS IN INDIAN

MARKET is an original work carried out by Mr. Aditya

Chaturvedi under my supervision, in the partial fulfillment of the

requirement for the award of MBA degree by the Mahamaya

Technical University, Noida.

This is to further certify, to the best of my knowledge, that this work

was neither published nor submitted to any other institution for award

of any other degree or diploma.

Signature

Dr. Vikas Garg

Designation: Asst. Prof.

Date:


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HEAD OF MBA PROGRAMS CERTIFICATE

This is to certify that the Research Project titled STUDY OF CAPITALISATION OF MUTUAL FUNDS IN INDIAN

MARKET is carried out by Mr. Aditya chaturvedi, a student of

MBAIV semester at Accurate Institute of Management &

Technology, Greater Noida, under the supervision of Dr. Vikas

Garg Asst. Prof.

This is an original work carried out by the said student to the best of

my knowledge and I recommend for the submission of this Research

Project report to Mahamaya Technical University, Noida in the partial

fulfillment of the requirement for the award of MBA degree.

Prof. (Dr) Amar Saxena

(Dean MBA)

AIMT, Greater Noida

Date:


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STUDENTS DECLARATION

I hereby declare that the survey, data collection and analysiswork related to Research Project report titledSTUDY OFCAPITALISATION OF MUTUAL FUNDS IN INDIAN MARKET has

been carried out exclusively on my efforts under the guidance of

Dr. Vikas Garg.

I, further declare that this work was neither published nor submitted

to any other institution for award of any other degree or diploma.

Aditya Chaturvedi

Roll no. 1122570004

Accurate Institute of Management & Technology, Greater Noida

Day/month/year


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PREFACE

MBA is a stepping-stone to the management carrier and to developgood

manager it is necessary that the theoretical must besupplemented with exposure

to the real environment. Theoreticalknowledge just provides the base and its

not sufficient to produce a goodmanager thats why practical knowledge is

needed. Therefore the researchproduct is an essential requirement for the

student of MBA. This researchproject not only helps the student to utilize his

skills properly learn fieldrealities but also provides a chance to the organization

to find out talent amongthe budding managers in the very beginning. In

accordance with the requirement of MBA course I have research project on the

topic Study of Capitalization of Mutual Funds in Indian Market . The

main objective ofthe research project was to study the two instruments and

make a detailedcomparison of the two.

For conducting the research project sample size of 50 customers ofBajajCapital was selected. The information regarding the project research

wascollected through the questionnaire formed by me which was filled by

thecustomers there.

In the growing global competition, business has taken a new shape in the

world. Todays Manager has to understand the uncertainty of businessenvironment to cope with the situation. Dissertation for each and every student

of MBA is an essential part of completion at the end of 1st year of the course.

The prime objective of this summer training to familiar with real life business

environment and apply the theoretical concept of business into reality and know

how much theory is applicable in day to day business activity. It also sharpens

their knowledge, hones their analytical and other businessacumen and develops


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better appreciation of the practical problems of business,especially from the

management point of view.

Moreover the experience acquired by student helps to decide the future

professional career. As per the module is concern I underwent in a project

entitled Market Capitalisation of Mutual Fund & ULIP.


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ACKNOWLEDGEMENTS

Successful project is fruitful culmination of efforts of many people,

somedirectly involved, and others who have quietly encouraged and

extendedtheir support, while being in the background. I take this opportunity

toextend my deep sense of gratitude and heartfelt thanks to all those who

havehelped us directly or indirectly during the course of my project.

My colleagues and associates at ACCURATE INSTITUTE OF

MANAGEMENT & TECHNOLOGY continue to have important impact on my

thinking. This dissertation could not have been written without Dr.Vikas Garg

who not only served as my supervisor but also encouraged and challenged me

throughout my academic program who patiently guided me through the

dissertation process, never accepting less than my best efforts. I am also

appreciative of all that I have learnedfrom working with industry executives

who have generously shared their insightand experiences.

I would like to give thanks to all the staff of Bajaj capital. New Delhi

for theirvaluable and sincere cooperation and plying all the database of Bajaj

capital, New Delhi. I am thankful to my parents, & my entire familywho are

always my source of brainchild & unplumbed exertion towards thejourney of

my life.

At last but not the least I am grateful to Omnipotent God for his manifold

blessingin this endeavor of mine.

Adi tya Chatur vedi


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EXECUTIVE SUMMARY

In todays corporate and competitive world, I find that insurance 7 MutualFund sector

has the maximum growth and potential as compared to theother sectors. Insurance has the

maximum growth rate of 70-80% while asFMCG sector has maximum 12-15% of growth

rate. This growth potential attractsme to enter in this sector and Bajaj Capital has given me

the opportunity to workand get experience in highly competitive and enhancing

sector.maximum 12-15% of growth rate. This growth potential attracts me to enter in this

sector and Bajaj Capital has given me the opportunity to work and get experience

in highly competitive and enhancing sector.

My project was to understand the different marketing strategies adopted by

thecompany, namely, Bajaj Capital to increase their market share and also to achieveits own

target in order to attain the zenith of its respective sector.

My SIP has helped me in learning a lot of things about the corporate world. As

aproject trainee I was required to understand the behavior of the consumer in orderto

manipulate the market and gain an advantage in the competitive scenario.

I also learned to develop the agency channel and how to create businessopportunities.

This helped me to know the issues of the competitive market andalso helped me enhance my

communication and convincing skills.

Understanding the ground reality of marketing is like stars in the eyes of every

Management Professional,& this experience becomes more profound when theinception iswith a pioneer like Bajaj Capital. During the two months SummerProject with Bajaj Capital

had a very nice Corporate World Exposure, which Ithink will serve as a stepping stone for me

in my corporate journey.

In todays corporate and competitive world, I find that insurance 7 Mutual Fund

sector has the maximum growth and potential as compared to the other sectors.Insurance has

the maximum growth rate of 70-80% while as FMCG sector hasmaximum 12-15% of growth


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rate. This growth potential attracts me to enter in thissector and Bajaj Capital has given me

the opportunity to work and get experiencein highly competitive and enhancing sector.

Unit Links Insurance Plan (ULIP) and Mutual Fund (MF) are the two mostpreferred

options for a part time investor to invest into equity. But how do wedecide which one should

we go for. Though it is very easy to decide, people tend toconfuse themselves most of the

time. This Report talks about some points that youneed to consider while deciding which

option we want to take. Mutual Fund ispure investments. ULIP are combination of Insurance

and Investment.


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Table Of Content

NAMEOFTITLE PAGENO.

CHAPTOR1;-INTRODUCTION 01

INDUSTYPROFILE 11

ULIP 22

INVESTORS 35

CHAPTOR2:-COMPANYPROFILE 47

CHAPTOR3:-RESEARCHMETHODOLOGY 58

CHAPTOR4:- ANALYSISANDINTERPRETATION 62

CHAPTOR5:- FINDINGANDRECOMMENDATIONS 81

CONCLUSION 84

BIBLIOGRAPHY 86

APPENDEX 89


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Market Capitalization of Mutual Fund and ULIPs

Chapter-01

Mutual Fund


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INTRODUCTION

A Mutual Fund is a collective investment vehicle formed with the specific objective

ofraising money from a large number of Individuals and investing it according to

aprespecified objective. The word Mutual in a Mutual Fund signifies a vehicle wherein

thebenefits of Investment accrued pro rata to all the investors in proportion to there

Investments.

Over the past decades Mutual Funds have grown intensely in popularity and have

experienced aconsiderable growth rate. Mutual Funds are popular because they make it easy

for smallinvestors to invest their money in a diversified pool of securities. As the Mutual

Fund industryhas evolved over the years.

MEANING:

Mutual Fund is a trust that pools the savings of a number of investors who share a

commonfinancial goal. Anyone with an invisible surplus of as little as few thousand rupees

can invest inMutual Funds. These investors buy units of a particular Mutual Fund scheme

that has a definedinvestment objective and strategy.

The fund manager in different types of securities then invests the money thus

collected. Thesecould range from shares to debentures to money market instruments,

depending on the schemesstated objectives. The income earned through these investments

and the capital appreciationsrealized by the scheme are shared by its unit holders in

proportion of the number of units ownedby them. Thus a Mutual Fund is the most suitable

investment for the common man as it offers anopportune investing a diversified,

professionally managed basket of securities at a relatively lowcost.

A Mutual Fund is the ideal investment vehicle for todays complex modern world. It

appointsprofessionally qualified and experienced staff that manages each of these functions

on full timebasis. The large pool of money collected in the fund allows it to hire such staff at

a very low costto each investor. In effect, the Mutual Fund vehicle exploits economies of

scale in all three areasresearch, investing and transaction processing.


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While the concept of individuals coming together to invest money collectively is not

new, theMutual Fund in its present form is a 20th century phenomenon. In fact, Mutual Funds

gainedpopularity only after the Second World War. Globally, there are thousandof firms

offerings tensof thousand of Mutual Funds with different investment objectives. Today

Mutual Fundscollectively manage almost as much money as banks.

Along with the success of Mutual Funds, inevitably there arose a need to regulate the

industry.Thus regulation and regulatory bodies came into being so that small investors were

not misled orput to loss by some unscrupulous people representing themselves as Mutual

Funds.

Characteristics of Mutual Funds:

The ownership is in the hands of the investors who have pooled in their funds.

It is managed by a team of investment professionals and other service providers.

The pool of funds is invested in a portfolio of marketable investments.

The investors share is denominated by units whose value is called as Net Asset

Value(NAV) which changes everyday.

The investment portfolio is created according to the stated investment objectives of

thefund.

ADVANTAGES OF MUTUAL FUNDS:

The advantages of Mutual Funds are given below:

Portfolio Diversification

Mutual Funds invest in a number of companies. This diversification reduces the risk because

ithappens very rarely that all the stocks decline at the same time and in the same proportion.

Sothis is the main advantage of Mutual Funds.

Professional Management

Mutual Funds provide the services of experienced and skilled professionals, assisted by

investment research team that analysis the performance and prospects of companies and

selectthe suitable investments to achieve the objectives of the scheme.

Low Costs

Mutual Funds are a relatively less expensive way to invest as compare to directly investing in

acapital markets because of less amount of brokerage and other fees.


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Liquidity

This is the main advantage of Mutual Fund, which is whenever investor needs money he

caneasily get redemption, which is not possible in most of other options of investment. In

openendedschemes of Mutual Fund, the investor gets the money back at net asset value and

on theother hand in close-ended schemes the units can be sold in a stock exchange at a

prevailingmarket price.

Transparency

In Mutual Fund, investors get full information of the value of their investment, the proportion

ofmoney invested in each class of assets and the fund managers investment strategy

Flexibility

Flexibility is also the main advantage of Mutual Fund. Through this investors can

systematicallyinvest or withdraw funds according to their needs and convenience like regular

investment plans,regular withdrawal plans, and dividend reinvestment plans etc.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps investors to avoid many problems

likebad deliveries, delayed payments and follow up with brokers and companies. Mutual

Funds savetime and make investing easy.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A Mutual

Fundbecause of its large corpus allows even a small investor to take the benefit of its

investmentstrategy.

Well Regulated

All Mutual Funds are registered with SEBI and they function with in the provisions of strict

regulations designed to protect the interest of investors. The operations of Mutual Funds are

regularly monitored by SEBI.

Disadvantages of Mutual Funds:

Mutual Funds have their following drawbacks:

No Guarantees

No investment is risk free. If the entire stock market declines in value, the value of Mutual

Fundshares will go down as well, no matter how balanced the portfolio. Investors encounter


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fewerrisks when they invest in Mutual Funds than when they buy and sell stocks on their

own.However, anyone who invests through Mutual Fund runs the risk of losing the money.

Fees and Commissions

All funds charge administrative fees to cover their day to day expenses. Some funds also

chargesales commissions or loads to compensate brokers, financial consultants, or financial

planners.Even if you dont use a broker or other financial advisor, you will pay a sales

commission if youbuy 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 profit on its sales, you will

pay taxes on the income you receive; even you reinvest the money you made.

Management Risk

When you invest in Mutual Fund, you depend on fund manager to make the right decisions

regarding the funds portfolio. If the manager does not perform well as you had hoped, you

might not make as much money on your investment as you expected. Of course, if you invest

inindex funds, you forego management risk because these funds do not employ managers.


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Types of Mutual Fund Schemes:

In India, there are many companies, both public and private that are engaged in the trading of

Mutual Funds. Wide varieties of Mutual Fund Schemes exist to cater to the needs such as

financial position, risk tolerance and return expectations etc. Investment can be made eitherinthe debt Securities or equity .The table below gives an overview into the existing types of

schemes in the Industry.

Generally two options are available for every scheme regarding dividend payout and growth

option. By opting for growth option an investor can have the benefit of long-term growth in

thestock market on the other side by opting for the dividend option an investor can maintain

hisliquidity by receiving dividend time to time. Some time people refer dividend option as

dividendfund and growth fund. Generally decisions regarding declaration of the dividend

depend uponthe performance of stock market and performance of the fund.


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Systematic Investment Plan (SIP):

Systematic investment plan is like Recurring Deposit in which investor invests in the

particularscheme on regular intervals. In the case it is convenient for salaried class and

middle-incomegroup. In this case on regular interval units of specified amount is created. An

investor can makepayment by regular payments by issuing cheques, post dated cheques, ECS,

standing Mandateetc. SIP can be started in the any open-ended fund if there is provision of it.

There are some entryand exit load barriers for discontinuation and redemption of the fund

before the said period.

According to Structure:

OpenEnded Funds:

An openended fund is one that is available for subscription all through the year. These do

nothave a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value

(NAV)related prices. The key feature of openended schemes is liquidity.

CloseEnded Funds:

A closeended fund has a stipulated maturity period which generally ranging from 3 to

15years. The fund is open for subscription only during a specified period. Investors can

investin the scheme at the same time of the initial public issue and thereafter they can buy


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and sell theunits of the scheme on the stock exchanges where they are listed. In order to

provide an exitroute to the investors, some closeended funds give an option of selling back

the units to theMutual Fund through periodic repurchase at NAV related prices.

Interval Funds:

Interval funds combine the features of openended and closeended schemes. They are

openfor sales or redemption during pre-determined intervals at their NAV.

According to Investment Objective:

Growth Funds:The aim of growth funds is to provide capital appreciation over the medium to long term.

Suchschemes normally invest a majority of their corpus in equities. It has been proven that

returns from stocks are much better than the other investments had over the long term.

Growth schemesare ideal for investors having a long term outlook seeking growth over a

period of time.

Income Funds:

The aim of the income funds is to provide regular and steady income to investors. Such

schemesgenerally invest in fixed income securities such as bonds, corporate debentures and

governmentsecurities. Income funds are ideal for capital stability and regular income.

Balanced Funds:

The aim of balanced funds is to provide both growth and regular income. Such schemes

periodically distribute a part of their earning and invest both in equities and fixed income

securities in the proportion indicated in their offer documents. In a rising stock market, the

NAVof these schemes may not normally keep pace or fall equally when the market falls.

These areideal for investors looking for a combination of income and moderate growth.

Money Market Funds:

The main aim of money market funds is to provide easy liquidity, preservation of capital and

moderate income. These schemes generally invest in safe short term instruments such as

treasurybills, certificates of deposit, commercial paper and interbank call money.


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Returns on these schemes may fluctuate depending upon the interest rates prevailing in the

market. These are ideal for corporate and individual investors as a means to park their surplus

funds for short periods.

Other Schemes:

Tax Saving Schemes:

These schemes offer tax rebates to the investors under specific provisions of the Indian

IncomeTax laws as the government offers tax incentives for investment in specified avenues.

Investments made inequity Linked Saving Schemes (ELSS) and Pension Schemes are

allowed asdeduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities

to investorsto save capital gains.

Special Schemes:

Index Schemes:

Index funds attempt to replicate the performance of a particular index such as the BSE

Sensex orthe NSE 50.

Sector Specific Schemes:

Sector funds are those which invest exclusively in a specified industry or a group of

industries orvarious segments such as A group shares or initial public offerings.

Bond Schemes:

It seeks investment in bonds, debentures and debt related instrument to generate regular

incomeflow.


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Industry Profile:

The Mutual Fund industry is a lot like the film star of the finance business. Though it

is perhapsthe smallest segment of the industry, it is also the most glamorousin that it is a

young industrywhere there are changes in the rules of the game everyday, and there are

constant shifts andupheavals. The Mutual Fund is structured around a fairly simple concept,

the mitigation of riskthrough the spreading of investments across multiple entities, which is

achieved by the poolingof a number of small investments into a large bucket. Yet it has been

the subject of perhaps themost elaborate and prolonged regulatory effort in the history of the

country.

A little history:

The Mutual Fund industry started in India in a small way with the UTI Act creating

what waseffectively a small savings division within the RBI. Over a period of 25 years this

grew fairlysuccessfully and gave investors a good return, and therefore in 1989, as the next

logical step,public sector banks and financial institutions were allowed to float Mutual Funds

and theirsuccess emboldened the government to allow the private sector to foray into this

area.The initial years of the industry also saw the emerging years of the Indian equity

market, when anumber of mistakes were made and hence the Mutual Fund schemes, which

invested in lesserknownstocks and at very high levels, became loss leaders for retail

investors. From those days totoday the retail investor, for whom the Mutual Fund is actually

intended, has not yet returned tothe industry in a big way. But to be fair, the industry too has

focused on brining in the largeinvestor, so that it can create a significant base corpus, which

can make the retail investor feelmore secure.

The Indian Mutual Fund industry has Rs 5.67 lakh crores of Assets Under

Management(AUM). As per data released by Association of Mutual Funds in India, the asset

base of allMutual Fund combined has risen by 7.32% in April, the first month of the current

fiscal. As ofnow, there are 33 fund houses in the country including 16 joint ventures and 3

wholly ownedforeign asset managers.

According to a recent McKinsey report, the total AUM of the Indian Mutual Fund

industry couldgrow to $350-440 billion by 2012, expanding 33% annually. While the revenue


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and profit (PAT)pools of Indian AMCs are pegged at $542 million and $220 million

respectively, it is at par withfund houses in developed economies. Operating profits for

AMCs in India, as a percentage ofaverage assets under management, were at 32 basis points

in 2006-07, while the number was 12bps in UK, 17 bps in Germany and 18 bps in the US, in

the same time frame.


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Major Players in Indian Mutual Fund Industry and Their AUM


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History of Mutual Fund:

The Mutual Fund industry in India started in 1963 with the formation of Unit Trust of

India(UTI), at the initiative of the Government of India and Reserve Bank. The history of

MutualFunds in India can be broadly divided into four distinct phases: -

First Phase1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was setup by

the ReserveBank of India and functioned under the Regulatory and administrative control of

the ReserveBank of India. In 1978 UTI was delinked from the RBI and the Industrial

Development Bank ofIndia (IDBI) took over the regulatory and administrative control in

place of RBI. The firstscheme launched by UTI was Unit Scheme 1964. At the end of 1988

UTI hadRs.6, 700 crores ofassets under management.

Second Phase1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector Mutual Funds set up by public

sector banksand 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 followedby Can bank Mutual Fund(Dec 87), Punjab National Bank Mutual

Fund (Aug 89), Indian BankMutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92).LICestablished its Mutual Fund in June 1989 while GIC had set up its

Mutual Fund in December1990.At the end of 1993, the Mutual Fund industry had assets

under management of Rs.47,004crores.

Third Phase1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian Mutual

Fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was the

year inwhich the first Mutual Fund Regulations came into being, under which all Mutual

Funds, exceptUTI were to be registered and governed. The erstwhile Kothari Pioneer (now

merged withFranklin Templeton) was the first private sector Mutual Fund registered in July

1993.


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Fourth Phasesince February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963UTIwas

bifurcatedinto two separate entities. One is the Specified Undertaking of the Unit Trust of

India with assetsunder management ofRs.29, 835 crores as at the end of January 2003,

representing broadly, theassets of US 64scheme, assured return and certain other schemes.

The Specified Undertaking ofUnit Trust of India, functioning under an administrator and

under the rules framed byGovernment of India and does not come under the purview of the

Mutual Fund Regulations. Thesecond is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,

BOB and LIC. It is registered withSEBI and functions under the Mutual Fund Regulations.

With the bifurcation of the erstwhileUTI which had in March2000 more thanRs.76,000 crores

of assets under management and withthe setting up of a UTI Mutual Fund, conforming to the

SEBI Mutual Fund Regulations, andwith recent mergers taking place among different private

sector funds, the Mutual Fund industryhas entered its current phase of consolidation and

growth. As at the end of September, 2004,there were 29funds, which manage assets of

Rs.153108 crores under 421 schemes.

Analysis:

First Phase1964-87(UTI was the Only Player)

Second Phase1987-1993 (Entry of Public Sector Funds):

Third Phase1993-2003 (Entry of Private Sector Funds):


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Fourth PhaseSince February 2003.

Overview of Mutual Fund Industry:

Over the past decades Mutual Funds have grown intensely in popularity and have

experienced aconsiderable growth rate. The graph indicates the growth of assets over theyears.

Growth in Assets under Management:

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the

UnitTrust of India effective from February 2003. The Assets under management of the

SpecifiedUndertaking of theUnit Trust of India has therefore been excluded from the total

assets of the industry as a wholefrom February 2003 onwards.

This is how a Mutual Fund going on. it is also called as the life cycle of Mutual Fund.


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This is the way how Mutual Fund works. Its starts from investor and it also end with investor.

Soinvestor plays a vital role in Mutual Fund. Its all about Mutual Fund. Now we are going

todiscuss about the Reliance Mutual Fund (RMF) in detail.

Economic Environment:

While the Indian Mutual Fund industry has grown in size by about 320% from March,

1993 (Rs.470 billion) to December, 2004 (Rs. 1505 billion) in terms of AUM, the AUM of

the sectorexcluding UTI has grown over 8 times from Rs.152 billion in March 1999 to $ 148

billion as atMarch 2008.

Though India is a minor player in the global Mutual Fund industry, its AUM as

proportion of theglobal AUM has steadily increased and has doubled over its levels in

1999.The growth rate ofIndian Mutual Fund industry has been increasing for the last few

years. It was approximately0.12% in the year of 1999 and it is noticed 0.25% in 2004 in

terms of AUM as percentage ofglobal AUM.


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Some facts for the growth of Mutual Funds in India:

100% growth in the last 6 years.

Number of foreign AMCs is in the queue to enter the Indian markets.

Our saving rate is over 23%, highest in the world. Only channelizing these savings inMutual Funds sector is required.

We have approximately 29 Mutual Funds which are much less than US having more

than800. There is a big scope for expansion.

Mutual Fund can penetrate rural like the Indian insurance industry with simple and

limitedproducts.

SEBI allowing the MF's to launch commodity Mutual Funds.

Emphasis on better corporate governance. Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Recent trends in Mutual Fund industry:

The most important trend in the Mutual Fund industry is the aggressive expansion of

the foreignowned Mutual Fund companies and the decline of the companies floated by the

nationalizedbanks and smaller private sector players. Many nationalized banks got into the

Mutual Fundbusiness in the early nineties and got off to a start due to the stock market boom

were prevailing.These banks did not really understand the Mutual Fund business and they just

viewed it asanother kind of banking activity. Few hired specialized staff and generally chose

to transfer stafffrom the parent organizations. The performance of most of the schemes

floated by these fundswas not good. Some schemes had offered guaranteed returns and their

parent organizations hadto bail out these AMCs by paying large amounts of money as a

difference between theguaranteed and actual returns. The service levels were also very bad.

Most of these AMCs havenot been able to retain staff, float new schemes etc.


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Members of AMFI:

Bank Sponsored

1. Joint Ventures - Predominantly Indian1. CanaraRobeco Asset Management Company Limited

2. SBI Funds Management Private Limited

2. Others

1. Baroda Pioneer Asset Management Company Limited

2. UTI Asset Management Company Ltd

Institutions

1. LIC Mutual Fund Asset Management Company Limited

Private Sector

1. Indian

1. Benchmark Asset Management Company Pvt. Ltd.

2. DBS Cholamandalam Asset Management Ltd.

3. Deutsche Asset Management (India) Pvt. Ltd.

4. Edelweiss Asset Management Limited

5. Escorts Asset Management Limited

6. IDFC Asset Management Company Private Limited

7. JM Financial Asset Management Private Limited

8. Kotak Mahindra Asset Management Company Limited (KMAMCL)

9. Quantum Asset Management Co. Private Ltd.

10. Reliance Capital Asset Management Ltd.

11. Sahara Asset Management Company Private Limited

12. Tata Asset Management Limited

13. Taurus Asset Management Company Limited

2. Foreign

1. AIG Global Asset Management Company (India) Pvt. Ltd.

2. FIL Fund Management Private Limited


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3. Franklin Templeton Asset Management (India) Private Limited

4. Mirae Asset Global Investment Management (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian

1. Birla Sun Life Asset Management Company Limited

2. DSP Merrill Lynch Fund Managers Limited

3. HDFC Asset Management Company Limited

4. ICICI Prudential Asset Management Company Limited

5. Sundaram BNP Paribas Asset Management CompanyLimited

4. Joint Ventures - Predominantly Foreign

1. ABN AMRO Asset Management (India) Pvt. Ltd.

2. Bharti AXA Investment Managers Pvt. Ltd

3. HSBC Asset Management (India) Private Ltd.

4. ING Investment Management (India) Pvt. Ltd.

5. JPMorgan Asset Management India Pvt. Ltd.

6. Lotus India Asset Management Co. Pvt. Ltd.

7. Morgan Stanley Investment Management Pvt. Ltd.

8. Principal PNB Asset Management Co. Pvt. Ltd.


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Frequently Used Terms:

Advisor - Is employed by a Mutual Fund organization to give professional advice on the

fundsinvestments and to supervise the management of its asset.

DiversificationThe policy of spreading investments among range of different securities to

reduce the risk.Net Asset Value (NAV) - Net Asset Value is the market value of the assets of

the schememinus its liabilities. The per unit NAV is the net asset value of the scheme divided

by the numberof units outstanding on the Valuation Date.

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

mayinclude a sales load.

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

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

Redemption Price - Is the price at which open-ended schemes repurchase their units and

close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load - Is a charge collected by a scheme when it sells the units. Also called Front-

endload. Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders.

Dividend Policy:

Dividend will be distributed from the available distributable surplus after the deduction of the

divided distribution surplus after the deduction of the dividend distribution tax and the

applicablesurcharge, if any. The Mutual Fund is not guaranteeing or assuring any dividend.


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ULIP(UNIT LINKED INSURANCE Policy)


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Introduction:

World over, insurance come in different forms and shapes.although the generic

names may find similar, the difference in product features makes one wonderabout the basis

on which these products are designed .With insurance marketopened up, Indian customer has

suddenly found himself in market place where he is bombardedwith a lot of jargon as well as

marketing gimmicks with a very little knowledge of what ishappening. This module is aimed

at clarifying these underlying concepts and simplifying thedifferent products available in the

market.

Current Market Share of Private Insurance Companies in India:

We have many products like Endowment, Whole life, Money back etc. All these products are

based on following basic platforms or structures viz:

Traditional Life Insurance

Universal Life or Unit Linked Insurance Policy.


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Traditional LifeAn Overview:

The basic and widely used form of design is known as Traditional Life Platform. It is

based onthe concept of sharing. Each of the policy holder contributes his contribution(premium) into thecommon large fund is managed by the company on behalf of the policy

holders.

Administration of that common fund in the interest of everybody was entrusted to the

insurancecompany .It was the responsibility of the company to administer schemes for

benefit of thepolicyholders. Policyholders played a very passive roll. In the course of time,

the same conceptof sharing and a common fund was extended to different areas like saving,

investment etc.

Features of Traditional Life:

This is the simplest way of designing product as far as concerned. He has no

otherresponsibility but to pay the premium regularly.

Company is responsible for the protection as well as maximization of the

policyholdersfunds. There is a common fund where in all the premiums paid are accumulated. Expenses

incurredas well as claim paid are then taken out of this fund.

Companies carry out the valuation of the fund periodically to ascertain the position. It

is also apractice to increase the minimum possible guarantee under a policy every

year in the form ofdeclaring and attaching bonuses to the sum assured on the basis of

this valuation.

Declaration of bonuses is not mandatory. Based on the end objective, companies may offer different plans like saving plans,

investmentplans etc.(e.g. Endowment , SPWLIP)

It helps to maintain a smooth growth and protects against the vagaries of the market. In

otherwords it minimizes the risk of investments for an average individual. He shares his risk

with agroup of like-minded individuals.


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Universal Life or Unit Linked Insurance Policy:

ULIP is the Product Innovation of the conventional Insurance product. With the

decline in thepopularity of traditional Insurance products & changing Investor needs in terms

of lifeprotection, periodicity, returns& liquidity, it was need of the hour to have an Instrument

thatoffers all these features bundled into one.


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Meaning:

A Unit Link Insurance Policy (ULIP) is one in which the customer is provided with a

lifeinsurance cover and the premium paid is invested in either debt or equity products or acombination of the two. In other words, it enables the buyer to secure some protection for his

family in the event of his untimely death and at the same time provides him an opportunity to

earn a return on his premium paid. In the event of the insured person's untimely death, his

nominees would normally receive an amount that is the higher of the sum assured or the

value ofthe units (investments).

To put it simply, ULIP attempts to fulfill investment needs of investor with

protection/insuranceneeds of an insurance seeker. It saves the investor/insurance-seeker the

hassles of managing andtracking a portfolio or products. More importantly ULIPs offer

investors the opportunity to selecta product which matches their risk profile.

Unit Linked Insurance Plans came into play in the 1960s and became very popular in

WesternEurope and Americas. In India The first unit linked Insurance Plan , popularly known

as ULIPUnit Linked Insurance Plan in India was brought out by Unit Trust Of India in the

year 1971 byentering into a group insurance arrangement with LIC o provide for life cover to

the investors,while UTI , as a mutual was taking care of investing the unit holders money in

the capital marketand giving them a fair return .

Subsequently in the year 1989, another Unit Linked Product was launched by the LIC

MutualFund called by the name of DHANARAKSHA which was more or less on the line

of ULIP ofUTI. Thereafter LIC itself came out with a Unit Linked Insurance Product known

by nameBIMA PLUS in the year2001-02.

Presently a number of private life insurance companies have launched Unit Linked

InsuranceProducts with a variety of new features.


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ULIP - Key Features:

Premiums paid can be single, regular or variable. The payment period too can be

regularor variable. The risk cover can be increased or decreased.

As in all insurance policies, the risk charge (mortality rate) varies with age.

The maturity benefit is not typically a fixed amount and the maturity period can

beadvanced or extended.

Investments can be made in gilt funds, balanced funds, money market funds,

growthfunds or bonds.

The policyholder can switch between schemes, for instance, balanced to debt or gilt

toequity, etc.

The maturity benefit is the net asset value of the units.

The costs in ULIP are higher because there is a life insurance component in it as well,

inaddition to the investment component.

Insurance companies have the discretion to decide on their investment portfolios.

Being transparent the policyholder gets the entire episode on the performance of his

fund.

ULIP products are exempted from tax and they provide life insurance. Provides capital appreciation.

Investor gets an option to choose among debt, balanced and equity funds

Functions of ULIP:

ULIPs work on the lines of Mutual Funds. The premium paid by the client (less any

charge)is used to buy units in various funds (aggressive, balanced or conservative)

floated by theinsurance companies.

Units are bought according to the plan chosen by the policyholder. On every

additionalpremium, more units are allotted to his fund.

The policyholder can also switch among the funds as and when he desires. While

somecompanies allow any number of free switches to the policyholder, some restrict

the numberto just three or four. If the number is exceeded, a certain charge is levied.

Individuals can also make additional investments (besides premium) from time to

time toincrease the savings component in their plan. This facility is termed "top-up".


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The money parked in a ULIP plan is returned either on the insureds death or in the

event ofmaturity of the policy.

In case of the insured persons untimely death, the amount that the beneficiary is paid

is thehigher of the sum assured (insurance cover) or the value of the units(investments).However,some schemes pay the sum assured plus the prevailing value

of the investments.

Types of Funds do ULIP Offers:

Most insurers offer a wide range of funds to suit ones investment objectives, risk

profile andtime horizons. Different funds have different risk profiles. The potential for returns

also variesfrom fund to fund.

The following are some of the common types of funds available along with an

indication of theirrisk characteristics.

There are various unit linked insurance plans available in the market. However, the key ones

arepension, children, group and capital guarantee plans.

The Pension Planscome with two variationswith and without life coverand are

meantfor people who want to generate returns for their sunset years.


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The Chil dren Plans, on the other hand, are aimed at taking care of their educational and

otherneeds.

Apart from unit-linked plans for individuals, Group Unit L inked Plansare also available in

themarket. The Group linked plans are basically designed for employers who want to offer

certainbenefits for their employees such as gratuity, superannuation and leave encashment.

The other important category of ULIPs is Capital Guarantee Plans. The plan promises the

policyholder that at least the premium paid will be returned at maturity. But the

guaranteedamount is payable only when the policys maturity value is below the total

premium paid by theindividual till maturity.

However, the guarantee is not provided on the actual premium paid but only on that portion

ofthe premium that is net of expenses (mortality, sales and marketing, administration).

USP of ULIPS:

Insurance cover plus savings:

ULIPs serve the purpose of providing life insurance combined with savings at market-

linkedreturns. To that extent, ULIPS can be termed as a two-in-one plan in terms of giving

anindividual the twin benefits of life insurance plus savings.

Multiple investment options:

ULIPS offer a lot more variety than traditional life insurance plans. So there are

multipleoptions at the individuals disposal. ULIPS generally come in three broad

variants.

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

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

Conservative ULIPS (can typically invest up to 20% in equities)

Although this is how the ULIP options are generally designed, the exact

debt/equityallocations may vary across insurance companies. Individuals can opt for a

variant based ontheir risk profile.


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Flexibility:

The flexibility with which individuals can switch between the ULIP variants to

capitalize oninvestment opportunities across the equity and debt markets is what

distinguishes it from otherinstruments. Some insurance companies allow a certain number of

free switches. Switchingalso helps individuals on another front. They can shift from an

Aggressive to a Balanced or aConservative ULIP as they approach retirement. This is a

reflection of the change in their riskappetite as they grow older.

Works like an SIP:

Rupee cost-averaging is another important benefit associated with ULIPs. With an

SIP,individuals invest their monies regularly over time intervals of a month/quarter and dont

have toworry about timing the stock markets.

Hurdles of ULIP:

No Standardization:

All the costs are levied in ways that do not lend to standardization. If one company

calculatesadministration cost by a formula, another levies a flat rate. If one company allows a

range of thesum assured (SA), another allows only a multiple of the premium. There was also

the problem ofa varying cost structure with age

Lack of Flexibility in Life Cover:

ULIP is known to be more flexible in nature than the traditional plans and, on most

counts, theyare. However, some insurance companies do not allow the individual to fix the

life cover that heneeds. These rely on a multiplier that is fixed by the insurer

Overstating the Yield:


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Insurance companies work on illustrations. They are allowed to show you how much

your annualpremium will be worth if it grew at 10 per cent per annum. But there are costs, so

each companyalso gives a post-cost return at the 10per cent illustration, calling it the yield.

Some companieswere not including the mortality cost while calculating the yield. This

amounts to overstating theyield.

Internally Made Sales Illustration:

During the process of collecting information, it was found that the sales benefit

illustrationshown was not conforming to the Insurance Regulatory and Development

Authority (IRDA)format. In many locations30 per cent return illustrations are still rampant

Not All Show the Benchmark Return:

To talk about returns without pegging them to a benchmark is misleading the

customer. Thoughmost companies use Sensex, BSE 100 or the Nifty as the benchmark, or the

measuring rod ofperformance, some companies are not using any benchmark at all.

Early Exit Options:

The ULIP product works over the long term. The earlier the exit, the worse off is the

investorsince he ends up redeeming a high-front-load product and is then encouraged to move

intoanother higher cost product at that stage. An early exit also takes away the benefit

ofcompounding from insured.

Creeping Costs:

Since the investors are now more aware than before and have begun to ask for costs,

somecompanies have found a way to answer that without disclosing too much. People are

now askinghow much of the premium will go to work. There are plans that are able to say 92

per cent willbe invested, that is, will have a front load of just 8 per cent. What they do not say

is the muchhigher policy administration cost that is tucked away inside (adjusted from the

fund value).Whilemost insurance companies charge an annual fee of about Rs 600 as


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administration costs, that stayfixed over time, there are plans that charge this amount, but it

grows by as much as 5 per cent ayear over time. There are others that charge a multiple of

this amount and that too grows.

Are I nvestment Returns Guaranteed in a ULIP?

Investment returns from ULIP may not be guaranteed. In unit linked

products/policies, theinvestment risk in investment portfolio is borne by the policy holder.

Depending upon theperformance of the unit linked fund(s) chosen; the policy holder may

achieve gains or losses onhis/her investments. It should also be noted that the past returns of a

fund are not necessarilyindicative of the future performance of the fund.

Charges, fees and deductions in a ULIP:

ULIPs offered by different insurers have varying charge structures. Broadly, the

different typesof fees and charges are given below. However it may be noted that insurers

have the right torevise fees and charges over a period of time.

Premium Allocation Charge:

This is a percentage of the premium appropriated towards charges before allocating

the unitsunder the policy. This charge normally includes initial and renewal expenses apart

fromcommission expenses.

Mortality Charges:

These are charges to provide for the cost of insurance coverage under the plan.

Mortalitycharges 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 theNet Asset Value (NAV).


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Policy/ Admin istration Charges:

These are the fees for administration of the plan and levied by cancellation of units. This

couldbe flat throughout the policy term or vary at a per-determined rate.

Surrender Charges:

A surrender charge may be deducted for premature partial or full encashment of units

whereverapplicable, 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

thepremium.

Can one seek refund of premiums if not satisfied with the policy, after purchasing it?

The policyholder can seek refund of premiums if he disagrees with the terms and

conditions ofthe policy, within 15 days of receipt of the policy document (Free Look

period). Thepolicyholder shall be refunded the fund value including charges levied through

cancellation ofunits subject to deduction of expenses towards medical examination, stamp

duty andproportionate risk premium for the period of cover.

What should one verify before signing the proposal?

One has to verify the approved sales brochure for

oAll the charges deductible under the policy

oPayment on premature surrender

oFeatures and benefits

oLimitations and exclusions

oLapsation and its consequences

oOther disclosures

oIllustration projecting benefits payable in two scenarios of 6% and 10% returns as

prescribed by the life insurance council.


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What happens if payment of premiums is discontinued?

a) Discontinuance within three years of commencement

If all the premiums have not been paid for at least three consecutive years from

inception, theinsurance cover shall cease immediately. Insurers may give an opportunity for

revival within theperiod allowed; if the policy is not revived within that period, surrender

value shall be paid at theend of third policy anniversary or at the end of the period allowed

for revival, whichever is later.

b) Discontinuance after three years of commencement

At the end of the period allowed for revival, the contract shall be terminated by

paying thesurrender value. The insurer may offer to continue the insurance cover, if so opted

for by thepolicy holder, levying appropriate charges until the fund value is not less than one

full yearspremium. When the fund value reaches an amount equivalent to one full years

premium, thecontract shall be terminated by paying the fund value.


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ULIPs vs. Mutual Funds


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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 onesfound in the Mutual Funds domain, i.e. diversified equity funds, balanced funds

and debt fundsto name a few. Generally speaking, ULIPs can be termed as Mutual Fund

schemes with aninsurance component.

However it should not be construed that barring the insurance element there is nothingdifferentiating Mutual Funds from ULIPs.

Points of difference between the two:

1. Mode of investment/ investment amounts

Mutual Fund investors have the option of either making lump sum investments or investing

usingthe 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

therebyensuring that his surplus funds are gainfully invested; conversely an individual faced

with aliquidity crunch has the option of paying a lower amount (the difference being


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djustedin theaccumulated value of his ULIP). The freedom to modify premium payments at

onesconvenience clearly gives ULIP investors an edge over theirMutual Fund counterparts.

2. Expenses

In Mutual Fund investments, expenses charged for various activities like fund management,

salesand marketing, administration among others are subject to per-determined upper limits

asprescribed by the Securities and Exchange Board of India.

For example equity-oriented funds can charge their investors a maximum of2.5% per annum

on arecurring basis for all their expenses; any expense above the prescribed limit is borne by

the fundhouse and not the investors. Similarly funds also charge their investors entry and exit

loads (inmost cases, either is applicable). Entry loads are charged at the timing of making an

investmentwhile 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

upperlimits being prescribed by the regulator, i.e. the Insurance Regulatory and

DevelopmentAuthority. This explains the complex and at times 'unwieldy' expense structures

on ULIPofferings. The only restraint placed is that insurers are required to notify the

regulator of all theexpenses that will be charged on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher expenses translate

intolower amounts being invested and a smaller corpus being accumulated. ULIP-related

expenseshave 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,

albeitmost fund houses do so on a monthly basis. Investors get the opportunity to see where

theirmonies 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

ourinteractions with leading insurers we came across divergent views on this issue.


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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 todisclose 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

consideringthat the amount invested in insurance policies is essentially meant to provide for

contingenciesand for long-term needs like retirement; regular portfolio disclosures on the

other hand canenable investors to make timely investment decisions.

4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the Mutual Funds segment and ULIPs segment are

largelycomparable. For example plans that invest their entire corpus in equities (diversified

equityfunds), a 60:40 allotment in equity and debt instruments (balanced funds) and those

investingonly 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

fromthe 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

areallowed 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

holdswell, irrespective of the nature of the plan chosen by the investor. On the other hand in


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theMutual Funds domain, only investments I-Tax-saving funds (also referred to as equity-

linkedsavings 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%.

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

structuresevidently 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.

Facts to Be Considered Before Investing In ULIPS:

The high returns (above 20 per cent) are definitely not sustainable over along term, as they

have been generated during the biggest Bull Run in recent stock market history.

The free hand given to ULIPs might prove risky if the timing of exit happens to coincide with

abearish market phase, because of the inherently high equity component of these schemes.

While a debt-oriented ULIP scheme might be superior to a debt option in a conventional

MutualFund due to tax concessions that insurance companies enjoy, such tax incentives may

not last.

Look beyond NAVs:

The appreciations in the net asset value (NAV) of ULIPs barely indicate the actual returns

earnedon your investment. The various charges on your policy are deducted either directly

frompremiums before investing in units or collected on a monthly basis by knocking off

units.

Either way, the charges do not affect the NAV; but the number of units in your account

suffers.You might have access to daily NAVs but your real returns may be substantially


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lower. A roughcalculation shows that if our investments earn a 12 per cent annualized return

over a 20-yearperiod in a growth fund, when measured by the change in NAV, the real pre-

tax returns mightbe only 9 per cent. The shorter the term, the lower the real returns.

How charges dent returns:

An initial allocation charge is deducted from our premiums for selling, marketing and broker

commissions. These charges could be as high as 65per cent of the first year premiums.

Premiumallocation charges are usually very high (5-65 per cent) in the first couple of years,

but taper offlater. The high initial charges mainly go towards funding agent commissions,

which could be ashigh as 40 per cent of the initial premium as per IRDA

(InsuranceRegulatory and DevelopmentAuthority) regulations.

The charges are higher for a linked plan than a non-linked plan, as the former require lot

moreservicing than the latter, such as regular disclosure of investments, switches, re-direction

ofpremiums, withdrawals, and so on.

Insurance companies have the discretion to structure their expenses structure whereas a

MutualFund does not have that luxury. The expense ratios in their case cannot exceed 2.5 per

cent for anequity plan and 2.25 per cent for a dept plan respectively. The lack of regulation

on the expensefront works to the detriment of investors in ULIPs.

The front-loading of charges does have an impact on overall returns as we lose out on the

compounding benefit. Insurance companies explain that charges get evened out over a long

term.Thus we are forced to stay with the plan for a longer tenure to even out the effect of

initialcharges as the shorter the tenure, the lower our real returns. If we want to withdraw

from theplan, you lose out, as you will have to pay withdrawal charges up to a certain number

of years.

In effect, when we lock in our money in a ULIP, despite the promise of flexibility and

liquidity,we are stuck with one fund management style. This is all the more reason to look for

anestablished track record before committing our hard-earned money.

Evaluate alternative options:


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As an investor we have to evaluate alternative options that give superior returns before

considering ULIPs. Insurance companies argue that comparing ULIPs with Mutual Funds is

likecomparing oranges with apples, as the objectives are different for both the products.

Most ULIPs give us the choice of a minimum investment cover so that we can direct

maximumpremiums towards investments.

Both ULIPs and Mutual Funds target the same customers. If risk cover is your primary

objective, pure insurance plans are less expensive. When we choose a Mutual Fund, we look

foran established track record of three to five years of consistent returns across various

marketcycles to judge a fund's performance.

It is early days for insurance companies on this score; investing substantially in linked plans

might not be advisable at this juncture.

Try top-ups

Insurance companies allow us to make lump-sum investments in excess of the regular

premiums.These top-ups are charged at a much lower rateusually one to two per cent. The

expensesincurred on a top-up including agent commissions are much lower than regular

premiums.

Some companies also give a credit on top-ups. For instance, if you pay in Rs100 as a top up,

the actual allocation to units will be Rs 101. If you keep the regular premiums tothe minimum

and increase your top ups, you can save up on charges, enhancing returns in the

long run.

Reduce life cover:

The price of the life cover attached to a ULIP is higher than a normal term plan. Risk charges

arecharged on a daily or monthly basis depending on the daily amount at risk. Rates are not

lockedand are charged on a one-year renewal basis.

Our life cover charges would depend on the accumulation in your investment account. As


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accumulation increases, the amount at risk for the insurance company decreases. However,

withincreasing age, the cost per Rs 1,000sum assured increases, effectively increasing your

overallinsurance costs. A lower life cover could yield better returns.

Stay away from riders;

Any riders, such as accident rider or critical illness rider, are also charged on a one-year

renewalbasis. Opting for these riders with a plain insurance cover could provide better value

for money. ULIP's as an investment is a very good vehicle for wealth creation, but wayUnit

Linked Insurance schemes are sold by insurance company representatives and insurance

advisers is not correct.

ULIP's usually have following charges built into it:

a) Up-front Charges

b) Mortality Charges (Charges for providing the risk cover for life)

c) Administrative Charges

d) Fund Management Charges

Mutual Funds have the following charges:

a) Up-front charges (Marketing, Advertising, distributors fee etc.)

b) Fund Management Charges (expenses for managing your fund)

A few aspects of investing in ULIPs versus Mutual Funds.

Liquidity;

ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory

andDevelopment Authority (IRDA), ULIPs have a minimum term of five years and a

minimum lockin of three years. You can make partial withdrawals after three years. The

surrender value of aULIP is low in the initial years, since the insurer deducts a large part of

your premium asmarketing and distribution costs. ULIPs are essentially long-term products

that make sense onlyif your time horizon is 10 to 20 years.


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Mutual Fund investments, on the other hand, can be redeemed at any time, barring ELSS

(equitylinkedsavings schemes). Exit loads, if applicable, are generally for six months to a

year in equityfunds. So Mutual Funds score substantially higher on liquidity.

Tax efficiency

ULIPs are often pitched as tax-efficient, because your investment is eligible for exemption

underSection 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). But investments in

ELSSschemes of Mutual Funds are also eligible for exemption under the same section

.Besides thepremium, the maturity amount in ULIPs is also tax-free, irrespective of whether

the investmentwas in a balanced or debt plan. So they do have an edge on Mutual Funds, as

debt funds aretaxed at 10% without indexation benefits, and20% with indexation benefits.

The point, though, isthat if you invest in a debt plan through a ULIP, despite its tax -

efficiency your post-tax returnswill below, because of high front-end costs. Debt

MutualFunds dont charge such costs.

Expenses

Insurance agents get high commissions for ULIPs, and they get them in the initial years, not

staggered over the term. So the insurer recovers most charges from you in the initial years, as

itrisks a loss if the policy lapses. Typically, insurers levy enormous selling charges,

averagingmore than 20%of the first years premium, and dropping to 10% and 7.5% in

subsequent years.(And this is after investors balked when charges were as high as 65 %)

Compare this with Mutual Funds fees of 2.25% on entry, uniform for all schemes. Different

ULIPs have varying charges, often not made clear to investors.

For instance, an agent who sells you a ULIP may get 25% of your first years premium, 10%

inthe second year, 7.5% in the third and fourth year and 5%thereafter. If your annual

premium isRs 10,000 and the agents commission in the first year is 25%, it means only Rs

7,500 of yourmoney are invested in the first year. So even if the NAV of the fund rises, say

20%, that year,your portfolio would be worth only Rs 9,000much lower than the Rs 10,000

you paid. On theother hand, if you invest Rs 10,000 in an equity scheme with a2.25% entry

load, Rs 225 isdeducted, and the rest is invested. If the schemes NAV rises 20%, your

portfolio is worth Rs11,730.


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This shows howULIPs work out expensive for investors. Deduct the cost of a term policy

from the Mutual Fundreturns, and youre still left with a sizable difference.


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Mutual Fund Vs ULIP in a Nut shell


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Review of the Literature:

In Orissa apart from Bajaj capital there is four more third Party broker Companies

are there. Looking at the market share the LIC is the pioneer but in last few yearsthe private

players have performed very well despite that the Performance of BajajCapital though

satisfactory, but it is not the best. Because the other players aregiving a cut throatcompetition

& grabbing a high chunk of the market share.

In order to decipher the reason behind this cause. At first I inquired myrespondents

regarding its product line but no where they reflected it as a matter ofworry. As per their

opinion Bajaj capital have a sound product line tackle thisproblem. Then I focused on thequality of service provided by Bajaj Capital,Similarly the ICs marked it to be satisfactory,

when I asked for their feedback inthe questionnaire & through personal interview, many of

them said that the peopleof Orissa have less knowledge regarding the products & service

quality offered byBajaj Capital. In their view the problem might be lying with the

promotionalstrategy of Field Force. So I decided to carry on a study to decipher

thecompetitiveness of Promotional Strategy of Field Force of Bajaj Capital in Orissa.

Then I tried to gain as much as knowledge regarding the promotional strategybeing a

vital tool for a companys success for this I searched for as much asinformation as I can & I

went through many journals, books , Internet sources.The knowledge I have acquire & the

problem with Bajaj Orissa in Orissa , inspiredto me carry on my survey to study the

competitiveness of promotional strategy offield force of Bajaj Capital in Orissa.

The hypothesis taken behind this study is that the promotional strategy of field

force of Bajaj Capital in Orissa is not Profound.


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Chapter-02

Company Profile

Bajaj Capital's Mission Statement

The focus of our organization is to be the most useful, reliable and efficient provider of

Financial Services. It is our continuous endeavor to be a trustworthy adviser to our clients,

helping them achieve BCIBL financial goals.


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Bajaj Capital Ltd.

The Bajaj Capital Group is one of Indias premier Investment Advisory and

FinancialPlanning companies. It is also SEBI- approved Category Merchant Bankers.

Bajaj Capital is among the pioneers of the investment advisory and financial planning

industry inIndia. For over four decades, the Company has been serving Indian investors, and

giving shapeto the vision of its founder-chairman, Mr. K.K. Bajaj.

It offers personalized Investment Advisory and Financial Planning services to

individualinvestors, corporate houses, institutional investors, Non-Resident Indians (NRIs)

and High Networth Clients, among others.

As one of Indias largest distributors of financial products, we offer a wide range of

investmentproducts such as Mutual Funds, life and general insurance, bonds, post office

schemes, etc.offered by reputed public and private and government organizations.

Company Profile:

Bajaj Capital is one of Indias leading Financial Services companies offering Free

Advice onInvestments, Insurance, Tax Saving, Retirement Planning, Financial Planning,

Childrens FuturePlanning and other services. It also has a wide range of products and

services for Corporate,High Net worth Individuals, and NRIs all under one roof.

At Bajaj Capital, it believes in dreaming big. Dreams inspire us to excel. They ignite

hope andkindle in us the passion to stretch there limits. It also believes that nothing can or

should stop usfrom realizing our dreams and financial constraints should be the last thing to

stop anyone.

Four decades of excellence:

Forover four decades, we have been helping people realize BCIBL aspirations by helping

themmake their wealth grow, and plan their financial lives. Today, Bajaj Capital is a one of

thelargest financial planning and investment advisory companies in India, with a strong

presence all over the country. It takes pride in serving our customers both individual and


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institutional, and is known for our strong professionalism and work ethics.

Wide range of services:

We offer a comprehensive range of services including financial planning and investment

advice,and the entire gamut of financial instruments and investment products of almost all

majorcompanies, both public and private. In addition, we also provide investment assistance

byhelping you complete all the formalities, and help you keep regular track of your

investments.

These services and products are delivered through our network of 134 Bajaj Capital

InvestmentCenters located all over the country.

Bajaj Capital is also a SEBI- approved Category Merchant Banker. They raise resources for

over1,000 top institutions and corporate houses every year, and offer specialized services to

Non-Resident Indian (NRIs) and High Net worth Clients.

Key Personnel

Mr. K.K. Bajaj

Chairman

Mr. Rajiv Deep Bajaj

Vice Chairman & Managing Director

Mr. Sanjiv Bajaj

Joint Managing Director

Mr. Anil Chopra

CEO & Director


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Introducing Bajaj Capital Insurance Broking Ltd (BCIBL)

By your side whenever you need us

Risks are unavoidable in personal life and in business, but can be managed by proper

planning.

As a true partner, BCIBL promises to use their knowledge for customer benefit. Be it advice

onthe right insurance products or looking after your rights and interests in case of a claim,

with amission-well be by your side... whenever you need us.

That's exactly where they at Bajaj Capital Insurance Broking Ltd. step in. At BCIBL, an

IRDA licensed "Composite Insurance Broker" bearing license number CB 042/02, they

callit Risk Management. They help customers to identify the potential risks and pass some of

themon to insurance companies.

They are customers partners, who help them to identify and understand various risks,

prioritizethem and eventually manage them.

As a broker, BCIBL do not offer customers just a single option but multiple options

available,and help you select the most appropriate one.

Products:

They offer a wide range ofLife and General Insuranceproducts offered by the insurance

companies that cover almost the entire spectrum of risks that individuals or your business

mayface.

BCIBL offers a wide range of insurance packages including:

Personal Lines

o Auto

o Home

o Travel

o Accident & Health


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Property Insurance

o Fire and Special Peril

o Marine

o Machinery Breakdown

o Electronic Equipment Insurance

o Loss of Profits etc.

Liability Insurance

o Commercial

o General Liability

o Product Liability

Workman's Compensation/ Employer's Liability

Contingency Risks

Event Cancellation

Wedding Insurance

All Risk for Mobiles, Computers and Laptops etc.

Industrial All Risk and Project Insurance

Specialty Products

Professional Indemnity/Errors & Omissions (E&O)

Directors and Officers Liability (D&O)

Fidelity Guarantee

Commercial Cyber Crime Insurance

Credit Insurance

Mutual Fund & Asset Protection


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Why consult BCIBL?

As IRDA licensed Insurance Brokers, BCIBL are your representatives unlike

anagent who represents an insurance company.

At BCIBL, BCIBL consider it your right to receive independent, unbiasedandprofessional advice.

BCIBL enjoy the 'Preferred Insurance Broker' status with many of the

Insurancecompanies. This, in essence, translates into a greater benefit for

customers.

In fact, BCIBL enjoy a transactional relationship with almost all the

Insurancecompanies present in India.

We are therefore proud to say that many companies have come up with

insuranceproducts based on our feedback.

We have a strong operational and servicing team, and an all-India reach.

We also have the support of a strong IT infrastructure and responsive call

centers.

As such, we are easily accessible.

Milestones:

Bajaj Capital has contributed to the growth of the Indian Capital Market at every step.

In 1965, BCIBL were the first to innovate the Companies Fixed Deposit. Today, BCIBL is

playing an active role in the growth of the Indian Mutual Fund industry.

BCIBL is also working closely with private insurance companies to deepen India's insurance

market.

Here is a briefgist of BCIBLs journey through the years.

1964

Bajaj Capital sets up its first Investment Centre in New Delhi to guide individual investors on

where, when and how to invest.


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India's first Mutual Fund, Unit Trust of India (UTI) is incorporated in the same year.

1965

Bajaj Capital is incorporated as a Company. In the same year, the company introduces an

innovative financial instrument the Company Fixed Deposit. EIL Ltd. (Oberoi Hotels, then

known as Associated Hotels of India Ltd.) becomes the first company to raise resources

throughCompany Fixed Deposits.

1966

Bajaj Capital expands its product range to include all UTI schemes and Government saving

schemes in addition to Company Fixed Deposits.

1969

Bajaj Capital manages its first Equity issue (through an associate company) of Grauer&

WellsIndia Ltd.; right from drafting the prospectus to marketing the issue.

1975

Bajaj Capital starts offering 'need-based' investment advice to investors, which would later be

known as 'Financial Planning' in the investment world.

1981

SAIL becomes the first government company to accept deposits, followed by IOC, BHEL,

BPCL, HPCL and others; thus opening the floodgates for growth of retail investment market

inIndia.

Bajaj Capital plays an active role in all the schemes as 'Principal Brokers.

1986

Public Sector Undertakings (PSUs) begin making public issues of bonds MTNL, NHPC,

IRFCoffer a series of Bond Issues. Bajaj Capital is among the top ranks of resource

mobilizes.


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1987

SBI leads the launch of Public Sector Mutual Funds in India. Bajaj Capital plays a

significantrole in fund mobilization for all these players.

1991

SBI issues India Development Bonds for NRIs. Bajaj Capital becomes the top mobiliser with

collections of over US $20 million.

1993

The first private sector Mutual Fund Kothari Pioneer is launched, followed by Birla and

Alliancein the following years. Bajaj Capital plays an active role and is ranked among the top

mobilisersfor all these schemes.

1995

IDBI and ICICI begin issuing their series of Bonds for retail investors. Bajaj Capital is the

co-managerin all these offerings and consistently ranks among the top five mobilisers on an

all-India basis.

1997

Private sector players lead the revival of Mutual Funds in India through Open-ended

Debtschemes. Bajaj Capital consolidates its position as India's largest retail distributor of

Mutual

Funds

1999

Bajaj Capital begins marketing Life and General Insurance products of LIC and GIC

(throughassociate firms) in anticipation of opening up of the Insurance Sector. Bajaj Capital

achieves themilestone of becoming the top 'Pension Scheme' seller in India and launches

marketing of GIC'sHealth Insurance schemes.

2000


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Bajaj Capital implements its vision of being a 'One-stop Financial Supermarket.' The

Companyoffers all kinds of financial products, including the entire range of investment and

insuranceproducts through its Investment Centers. Bajaj Capital offers 'full-service merchant

banking'including structuring, management and marketing of Capital issues. Bajaj Capital

reinvents'Financial Planning' in its international sense and upgrades its entire team of

Investment Expertsinto Financial Planners.

2002

The Company focuses on creating investor awareness for Financial Planning and need-

basedinvesting. To achieve this goal, the company introduced the International College of

FinancialPlanning. The graduates of this institute become Certified Financial Pl

Market Capitalisation of Mutual Funds

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