Project report

COMPARATIVE ANALYSIS
OF MUTUAL FUND AND UNIT
LINKED INSURANCE PLANS
(ULIP)

By- Natasha Bodra

 Table of content

SL. PARTICULARS PAGE

No .NO
1 Introduction 6-1

1.1 Concept 6

1.2 Mutual Fund Industry in India 6-8

1.3 Concept of ULIP 8-9

1.4 History of ULIP 10

1.5 Literature Review 10-12

1.6 Rationale 13

1.7 Objectives 13

1.8 Methodology 13-15

1.9 Limitations 15

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2 Conceptual Framework 16-37

2.1 Asset under Management (AUM) 16

2.2 Growth under AUM 16-18

2.3 Economic environment affecting MF industry 18-19

2.4 Technological Environment 19

2.5 Legal and Regulatory Environment 20-21

2.6 Structure of Mutual fund and types of MF 21-27

2.7 Unit Linked Insurance Plans 27-37

2.7.1 Economic Environment influencing ULIP market 27-28

2.7.2 Legal and Regulatory framework 28-30

2.7.3 Platform of Life Insurance 29-31

2.7.4 Salient features of ULIP 31-32

2.7.5 Redemption procedure 32-33

2.7.6 Working Principle 33

2.7.7 Benefits of ULIPs 33-34

2.7.8 Types of ULIPs 34-37
3 Comparison of Mutual Fund with ULIP 38-49

3.1 Individual comparison 38-43

3.2 Comparative Analysis of MF and ULIP within themselves 43-46

3.3 Comparative Analysis of MF and ULIP considering the 46-49

recent changes in the plans of the government
4 Presentation of data and its analysis 50-57

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5 Conclusion and recommendation 58-60
5.1 Findings 58

5.2 Conclusions 58-59

5.3 Recommendations 59-60

6 Bibliography 61-62

7 Annexure 62-65

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 EXECUTIVE SUMMARY
The financial service sector has undergone a complete transformation during the
last decade, since the liberalization process began. In particular the most
dramatic change has occurred in the Mutual Fund industry and in the insurance
industry. There has been a distinctive change both in the quality and the range
of products being offered by the various Suppliers (such as Asset management
companies, AMCs) and insurance firms. Both the industries were a monopoly
for a long time.

However since the entry of new public as well as private players, the Indian
consumers are being offered the best and the choicest of products foreign
players have also changed the complete scenario of both of the industries
whether it is the Mutual fund or the Insurance. The bullish run of the stock
market has certainly helped the industry, but it is not the only factor behind the
industry’s success.

Today, Consumers (investors) have realized the opportunity cost of keeping

their fund idle. They are looking for better returns from their investments.
Mutual funds and ULIPs both provide a safe way for investing along with better
returns from their investments. Mutual fund presents a safe way of investing
along with other advantages such as liquidity, transparency of functioning and
professional management. At the moment, mutual funds have reached a level of
popularity where they are replacing traditional avenues such as bank, trust and
post office deposits. Though still at a nascent stage, Indian MF industry offers a
plethora of schemes and serves broadly all type of investors. The range of
products includes equity, debt, liquid and balanced funds.

On the other hand ULIPs have gained high acceptance due to attractive features
they offer like flexibility, fund optioning, transparency and liquidity. Till
recently, individuals seeking to provide protection to their family had no other
option except a life insurance term plan. The plan promised a stipulated amount
to the family of policyholder in the event of his death.

However, the insurance sector has evolved over the last few years and a number
of innovative products have hit the market and ULIP is one product category
that is increasingly catching the fancy of individuals. ULIP a combination of
insurance and investment, provide the policyholder with life cover and

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additionally offer the opportunity to earn a return on the premium paid. The idea
of having insurance and investment conveniently rolled into one product looks
alluring enough and saves the common investor the time and effort to consider
different options. However, an investor may build a customized solution for
himself separating insurance from his investment needs.

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 CHAPTER -1
INTRODUCTION
1.1Concept
A mutual fund is a professionally-managed investment scheme, usually run by
an asset management company that brings together a group of people and
invests their money in stocks, bonds and other securities. As an investor, one
can buy mutual fund 'units', which basically represent your share of holdings in
a particular scheme. These units can be purchased or redeemed as needed at the
fund's current net asset value (NAV). These NAVs keep fluctuating, according
to the fund's holdings. So, each investor participates proportionally in the gain
or loss of the fund. 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 a mutual fund:

Figure 1 Working of Mutual Fund

1.2 MUTUAL FUND INDUSTRY IN INDIA

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 of

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India. The history of mutual funds in India can be broadly divided into four
distinct phases

 First Phase - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. 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 Canbank Mutual Fund (Dec
87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund
(Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in
December 1990.At the end of 1993, the mutual fund industry had assets under
management of Rs. 47,004 crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund
families. Also, 1993 was the year in which the first Mutual Fund Regulations
came into being, under which all mutual funds, except UTI were to be
registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July
1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed

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several mergers and acquisitions. As at the end of January 2003, there were 33
mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India
with Rs. 44,541 crores of assets under management was way ahead of other
mutual funds.

 Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI
was bifurcated into two separate entities. One is the Specified Undertaking of
the Unit Trust of India with assets under management of Rs. 29,835 crores as at
the end of January 2003, representing broadly, the assets of US 64 scheme,
assured return and certain other schemes. The Specified Undertaking of Unit
Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund
Regulations.

The second is the UTI Mutual Fund, 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.

1.3. Concept of ULIP

A unit linked insurance plan (ULIP) is an investment product that provides for
insurance payout benefits. A unit linked insurance plan can be utilized for
various benefit payouts including life insurance, retirement, education and
more. A ULIP offers varying provisions to the investor as benefits. A ULIP is
typically opened by an investor seeking to provide coverage for beneficiaries. It
is paid into by the owner in the form of premiums, with the intention of the
plan’s worth to be paid out at a specified time frame for a specific purpose.
With a life insurance ULIP, the beneficiary would receive payments following
the owner’s death. Plans can include varying provisions for triggering
payments. A unit linked insurance plan’s investment options are structured
similar to a mutual fund. The assets in a ULIP are managed to a specified
objective. Different ULIPs offer different qualified investments. Investors can

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buy shares in a single strategy or diversify their investments across multiple
market-linked ULIP funds.

A Unit-Linked Insurance Plan is essentially a combination of insurance and an

investment vehicle. A portion of the premium paid by the policyholder is
utilized to provide insurance coverage to the policyholder and the remaining
portion is invested in equity and debt instruments. The aggregate premiums
collected by the insurance company providing such plans is pooled and invested
in varying proportions of debt and equity securities in a similar manner to
mutual funds. Each policyholder has the option to select a personalized
investment mix based on his/her investment needs and risk appetite. Like
mutual funds, each policyholder's Unit-Linked Insurance Plan holds a certain
number of fund units, each of which has a net asset value (NAV) that is
declared on a daily basis. The NAV is the value upon which net rates of return
on ULIPs are determined. The NAV varies from one ULIP to another based on
market conditions and fund performance. The working of ULIP is described
below through flowchart.

Figure 2 Working of ULIP

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1.4 History of ULIP
Insurance in its current form has its history dating back until 1818, when
Oriental Life Insurance Company was started by Anita Bhavsar in Kolkata to
cater to the needs of European community. The pre-independence era in India
saw discrimination between the lives of foreigners (English) and Indians with
higher premiums being charged for the latter. In 1870, Bombay Mutual Life
Assurance Society became the first Indian insurer. The Government of India
issued an Ordinance on 19 January 1956 nationalising the Life Insurance sector
and Life Insurance Corporation came into existence in the same year. The Life
Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as
also 75 provident societies—245 Indian and foreign insurers in all. In 1972 with
the General Insurance Business (Nationalisation) Act was passed by the Indian
Parliament, and consequently, General Insurance business was nationalized with
effect from 1 January 1973. At the dawn of the twentieth century, many
insurance companies were founded and hence many insurance plans came into
the market. Then, Unit Trust of India (UTI) launched the first ULIP in India in
1971. Second ULIP came from LIC Mutual Fund in 1989, i.e. after the MF
industry was opened for PSU entities. With the Government of India opening up
the insurance sector to foreign investors in 2001 and the subsequent issue of
major guidelines for ULIPs by the Insurance Regulatory and Development
Authority (IRDA), now Insurance Regulatory and Development Authority of
India (IRDAI), in 2005, several insurance companies forayed into the ULIP
business leading to an over abundance of ULIP schemes being launched to
serve the investment needs of those looking to invest in an investment cum
insurance product.

1.5 LITERATURE REVIEW

As far as comparative study of mutual funds and insurance products are
concerned, a number of researches have been carried out on its diverse facets by
the researchers, economists, academicians in the sub continent and overseas.
Different researchers have accomplished research on mutual funds and
insurance products & industry from different perspectives. An attempt to
incorporate literature review of empirical work on different aspects of mutual
funds, insurance products & industry has been made in this section.

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Athma & Kumar (2012) in an analysis of mutual funds from investors’
perspective concluded that there is no association between the satisfactions
level of the investors and the length of service of the MF Company.

Panda & Panda (2012) has studied a comparative study of factorial analysis of
Mutual Fund Investment and Insurance Fund Investment and found that for
stock option (mutual fund schemes), Risk and Expectation – Higher, whereas
Return , Knowledge level and rate of volatility are lower in each case. But in
case of insurance fund investment, the investors are self conscious, get right
information at right time along with the proper investment. They have also
suggested that before making any investment decision, evaluate how it affects
the current asset allocation plan. As time passes by, life stage changes with the
needs as well as income change. So one should need to monitor and review
investment periodically.

Shsnmuganathan & Muthian (2012) has done a comparative analysis on

standing of ULIPs in an individual investment portfolio and concluded that
Investment in ULIP with equity investment options is than that of traditional
investment. If investment horizon is long and equity should generate decent
returns in the long run. Simultaneously, if we can think ULIPs is the smart
choice for people who want to enjoy market returns and keep the controls in
their hands. Add to that it gives insurance cover with the flexibility to adapt
changing lifestyle needs. This is a viable option for those who want a
convenient, economical, one-stop solution.

Barathi et al., (2011) in their study examined the impact factor of reforms on the
world fastest growing insurance market. They found that due to private
participation entire industry has changed in all regards. The finding of the study
suggests that insurance companies may not only focus on developing and
improving the verity of products but explore new segments and develop
effective strategies to achieve profitable growth.

Chaudhry & Kiran (2011) analyzed that life insurance industry expanded
tremendously from 2000 onwards in terms of number of offices, number of
agents, new business policies, premium income etc. Further, many new products
(like ULIPs, pension plans etc.) and riders were provided by the life insurers to
suit the requirements of various customers. However, the new business of such
companies was more skewed in favour of selected states and union territories.
During the period of study, most of life insurance business was underwritten in
the last four months of the year. Private life insurers used the new business

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channels of marketing to a great extent when compared with LIC. Investment
pattern of LIC and private insurers also showed some differences. Solvency
ratio of private life insurers was much better than LIC in spite of big losses
suffered by them. Lapsation ratio of private insurers was higher than LIC and
servicing of death claims was better in case of LIC than the private life insurers.

Jaiswal & Nigam (2011) has studied that Mutual Fund’s are able to provide
better return than any return on risk free securities but unable to outperform the
benchmark portfolio in terms of average return. The correlation between fund
return and fund risk justify the fact that higher the returns, high the risk. There
is also positive association between fund return and market return. The sample
funds are not adequately diversified with a diversification of about 60.3%. Due
to inadequate diversification, a substantial part of the variation in fund return is
not explained by market and the fund is exposed to large diversification risk.

Das et al., (2008) has conducted a behavioural analysis of retail Fund vs. Life
Insurance. They have concluded that with some important findings that will be
valuable for both the investors and the companies having investment
opportunities in both Mutual Fund and Life Insurance.

Jagendra (2008) pointed out the development of Indian life insurance industry
during the globalization phase. He also mentioned about the reasons of high
awareness, low penetration, and untapped potential of the industry.

Alinvi & Babri (2007) are of view that customers’ preferences change on a
constant basis, and organizations adjust in order to meet these changes to
remain competitive and profitable. Kavitha (2007) analyzed the fund selection
behaviour of individual investors toward MF in Mumbai city during the period
July 2004-December 2004. It was found that there is a fair opportunity to
mutual investment in Future. Rao (2007) reported that insurance is a vital
economic activity and there is an excellent scope for its growth in emerging
markets. He also said that opening up of the insurance sector has raised high
hopes among people both in India and abroad.

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1.6 RATIONALE
In the commercial arena, the choice of an effective strategy is perhaps the most
important and the toughest decision to take. The decision to select among the
grand strategies and deciding upon which strategy will best meet the
enterprise’s objectives is rendered complex by multiple considerations. The
same is also true with the investors who are willing to invest in the market
where there options which are similar to each other such as mutual funds and
ULIPs.

The need of carrying out the study of comparative analysis of ULIPs and
Mutual Fund is to know the most desired investment avenue amongst these two
investment options and to understand the different factors and variable which
depicts preference of investors.

1.7 OBJECTIVES
 To identify the variables which are responsible for considering Mutual
Fund or ULIP as an investment option?
 To identify the investment pattern of the investors regarding investment
in ULIP or Mutual Funds.
 To know and understand for the popularity of different variable for
investment in Mutual Fund and ULIPs.

1.8 METHODOLOGY
 STEPS OF RESEARCH DESIGN
Define the information needed:-

This first step should be to know the information that is actually required.
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

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and information generated is only possible after defining the information
needed.

Design the research:-

A research design is a frame work 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.

Construct and pretest a questionnaire:-

A questionnaire is a formalized set of questions for obtaining information from

respondents. Whereas, pre-testing refers to the testing of the questionnaire on a
small sample of respondents in order to identify and eliminate potential
problems.

Sample Unit:-

Sample unit consists of investors and non-investors.

Sample Size:-

This study involves 30 respondents.

Sampling Technique:-

The sample size has been taken by non-random convenience sampling

technique.

 DATA COLLECTION
Data has been collected both from primary as well as secondary sources as
described below:

Primary sources-

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 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.

1.9 LIMITATIONS
No study is free from limitations. The limitations of this study can be:

 Sample size taken is small and may not be sufficient to predict the results
with 100% accuracy.
 The result is based on primary and secondary data that has its own
limitations.
 The study only covers the area of Ranchi that may not be applicable to
other areas.

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 CHAPTER 2
CONCEPTUAL FRAMEWORK

2.1 ASSET UNDER MANAGEMENT OR AUM

Assets under management (AUM) are the total market value of assets that an
investment company or financial institution manages on behalf of investors.
Assets under management definitions and formulas vary by company.

An asset under management describes how much of investors’ money an

investment company controls. Investments are held in various investment
vehicles including mutual funds, exchange-traded funds (ETFs) and hedge
funds. Products are managed by a venture capital company, brokerage
company or portfolio manager.

AUM can be segregated in many ways. It is used to indicate the size of a fund
and can refer to the total amount of assets managed for all clients or the total
assets managed for a specific client. It includes the funds the manager can use to
make transactions. For example, if an investor has Rs.50,000 invested in a
mutual fund, those funds become part of the total AUM and the fund
manager can buy and sell shares in accordance with the fund's investment
objective using all of the invested funds without obtaining any special
permissions

Fluctuating daily, AUM depends on the flow of investor money in and out of a
particular fund and asset performance. Increased investor flows, capital
appreciation and reinvested dividends will increase the AUM of a fund.

2.2 Growth under Asset under management

The mutual fund industry is witnessing an unprecedented pace of growth with
total assets under management increasing six fold to Rs.20 trillion in a matter of
10 years. Given the market scope, there is an exciting buzz in the industry about
the future. In a big surge, mutual funds have added over Rs.6 lakh crore to their
asset base in 2017, helped by a spirited promotion campaign by the industry and
post- demonetization resurgence of financial investment products.

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The industry looked at an increase of nearly 40 per cent to the total asset under
management (AUM) at the end of the year 2017, after attaining a record level of
Rs.23 lakh crore at November-end itself up from Rs.16.46 lakh crore at the end
of December 2016. The investor count is also estimated to have risen by over
1.7 crore during the year.

Moreover, the fund houses are expecting similar 'healthy' growth in AUM to
continue in the 2018 as the penetration levels of mutual funds are still very low
in the country and various reform measures initiated by the regulator SEBI
should help too.
In 2017, the total asset base of all 42 active fund houses put together has surged
by an impressive about 40 per cent. The growth was 24 per cent over the last
five years. This would be the fifth consecutive yearly rise in the industry AUM,
after a drop seen for the two preceding years.
Moreover, a sharp rise in systematic investment plans (SIPs) has promoted more
sustainable growth for the industry as more people moved away from the
concept of large lump sum investments.

Fund houses have garnered over Rs.53, 000 crore through SIPs -- a preferred
route for retail investors to invest in mutual funds as it helps them reduce
market timing risk.
The industry added over 9 lakh SIP accounts each month on an average in 2017
with SIP size increasing from Rs.3,973 crore .The industry added over 9 lakh
SIP accounts each month on an average in 2017 with SIP size increasing from
Rs.3,973 crore last year to Rs.5,893 crore in 2017.
The increased participation of investors from the country's smaller towns (B-15)
compared to top 15 cities was another major development for the industry.

Another highlight of 2017 was an impressive surge in the number of investor

accounts and equity folios contributed tremendously to this growth.
Overall, investor folios climbed by 1.7 crore to 6.5 crore while retail investor
accounts defined by folios in equity, ELSS and balanced categories -- alone
grew by 1.4 crore to 5.3 crore.

Equity and equity-linked saving schemes (ELSS) attracted an impressive inflow

of around Rs.1.4 lakh crore. SIPs have been a key driver for these flows, while
EPFO has been another major contributor to such flows through passive funds.

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The year passing-by continued to see a trend wherein net investments by
domestic institutions have been more than that of foreign investors. Mutual
funds have made a net investment of Rs.1.15 lakh crore into stock markets,
much higher than Rs 53,000 crores pumped in by foreign portfolio investors
(FPIs).

2.3 ECONOMIC ENVIRONMENT AFFECTING MF INDUSTRIES

The Indian mutual fund (MF) industry witnessed an addition of around 2.2
million new investors during 2014-15. The total number of investors stood at
4.17 crore at the end of the 12-month period in March 2015 as compared to 3.95
crore at the end of March 2014 registering a growth of 5.54 per cent. The
growth in the number of investors in the INR12 trillion (US$ 187.17 billion)
sector is largely concentrated around the top five asset management companies
(AMCs) – HDFC Mutual Fund, ICICI Prudential, Birla Sun Life, Reliance MF
and UTI MF.

With close to a total of 44 fund houses in the country, the top five companies
account for close to 80 per cent of the sector's assets under management
(AUM). ICICI Prudential registered the fastest growth of 25 per cent with the
total investor base at 33.59 lakh followed by Birla Sun Life with growth of 20
per cent to 24.26 lakh from 20.19 lakh investors. HDFC MF, the country's
largest fund house with an AUM of INR1.61 trillion (US$ 2.5 billion), saw
growth of 15 per cent in its customer base to 52.1 lakh, adding a little more than
7 lakh new investors.

According to another recent report, Reliance MF led the growth of retail equity
AUM at 119 per cent during the previous fiscal, followed by ICICI Prudential at
76 per cent and Birla Sun Life at 72 per cent. HDFC MF grew its retail equity
AUM by 45 per cent and UTI by 39 per cent during the period.

The large growth witnessed during the previous fiscal signal towards the upbeat
domestic investor sentiment in the country. On the other hand, with the large
investor base concentrating with the top five companies, it is evident that Indian
consumers are only willing to take market risks with companies that have a
strong brand equity and a positive past track record.

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The asset base of the mutual fund industry in the country is expected to grow
faster at 18.6 percent per annum to cross INR 20 trillion(US$ 325 billion) by
2018 with an investor base of 10 crore accounts. With the total investor base
still at a low level of 2 per cent out of the total domestic population, there are
ample growth opportunities available in the domestic mutual fund industry.

Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were
options introduced which have come in very handy for the investor to maximize
their returns from their investments. SIP ensures that there is a regular
investment that the investor makes on specified dates making his purchases to
spread out reducing the effect of the short term volatility of markets. SWP was
designed to ensure that investors who wanted a regular income or cash flow
from their investments were able to do so with a pre-defined automated form.
Today the SW facility has come in handy for the investors to reduce their taxes.

2.4 TECHNOLOGICAL ENVIRONMENT AFFECTING MF

INDUSTRY.
Technological advances are transforming India’s mutual fund industry.
Technologies such as mobile, social media, big data and analytics, cloud and
artificial intelligence are transforming the mutual fund industry and continue to
be a key growth enabler by facilitating seamless customer acquisition and real-
time efficient processes. Technology has become a crucial element across
mutual fund operations spanning from transaction processing and fund
management to distribution and customer service. Asset managers are not only
using technology to drive efficiencies and cost reduction in the back-office, but
also developing their front-office digital capabilities. Fund houses offer a range
of mobile and online apps for tracking and transacting portfolios, as well as for
effective distribution and customer service. AMCs are using social media to
reach out to customers, especially new-age customers, and employing big data
and analytics in data-driven models for improving offerings and customer
engagement while using cloud technologies to drive process efficiencies and
rationalize costs. The advent of artificial intelligence is also causing significant
disruptions in the asset management sector, with robots-advisors threatening the
traditional advisor model. Additionally, the launch of differentiated banks i.e.
Payment Banks that will be allowed to sell third-party mutual funds will help
increase the market reach of the fund industry.

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2.5 LEGAL AND REGULATORY ENVIRONMENT
 ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund
association in India was generated to function as a non-profit organization.
Association of Mutual Funds in India (AMFI) was incorporated on 22nd
August1995. AMFI is an apex body of all Asset Management Companies
(AMC), which has been registered with SEBI. Till date all the AMCs are that
have launched mutual fund schemes are its members. It functions under the
supervision and guidelines of board of directors. AMFI has brought down the
Indian Mutual Fund Industry to a professional and healthy market with ethical
lines enhancing and maintaining standards. It follows the principle of both
protecting and promoting the interest of mutual funds as well as their unit
holders.

It has been a forum where mutual funds have been able to present their views,
debate and participate in creating their own regulatory framework. The
association was created originally as a body that would lobby with the regulator
to ensure that the fund viewpoint was heard. Today, it is usually the body that is
consulted on matters long before regulations are framed, and it often initiates
many regulatory changes that prevent malpractices that emerge from time to
time AMFI works through a number of committees, some of which are standing
committees to address areas where there is a need for constant vigil and
improvements and other which are ad-hoc committees constituted to address
specific issues. These committees consist of industry professionals from among
the member mutual funds. There is now some thought that AMFI should
become a self-regulatory organization since it has worked so effectively as an
industry body.

 OBJECTIVES:
 To define and maintain high professional and ethical standards in all
areas of operation of mutual fund industry
 To recommend and promote best business practices and code of
conduct to be followed by members and others engaged in the activities
of mutual fund and asset management including agencies connected or
involved in the field of capital markets and financial services.
 To interact with the Securities and Exchange Board of India (SEBI) and
to represent to SEBI on all matters concerning the mutual fund industry.

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  To represent to the Government, Reserve Bank of India and other bodies
on all matters relating to the Mutual Fund Industry.
 To develop a cadre of well-trained Agent distributors and to implement
a programme for training and certification for all intermediaries and
other engaged in the industry.
 To undertake nationwide investor awareness programme so as to promote
proper understanding of the concept and working of mutual funds.
 To disseminate information on Mutual Fund Industry and to undertake
Studies and research directly and/or in association with other bodies.

AMFI interacts with SEBI and works according SEBIs guidelines.

 SEBI REGULATIONS
Securities and Exchange Board of India (SEBI) is the apex regulator of Indian
capital markets. Issuance and trading of capital market instruments and
regulation of capital market the intermediaries is under the purview of SEBI.
SEBI is the primary regulator of mutual funds in India. SEBI has enacted the
SEBI (Mutual Funds) Regulations, 1996, which provides the scope of the
regulation of mutual funds in India. It is mandatory that mutual funds should be
registered with SEBI. The structure and the formation of mutual funds,
appointment of key functionaries and investors, investment restrictions,
compliance and penalties are all defined under SEBI Regulations, Mutual funds
have to send a seven-year compliance reports to SEBI. SEBI is also empowered
to periodically inspect mutual fund organizations to ensure compliance with
SEBI regulations. SEBI also regulates other fund constituents such as AMCs,
Trustees, Custodians, etc.

2.6 Structure of Mutual Fund

 Board of Directors
A management investment company (mutual fund company) has a CEO,
a team of officers and a board of directors. Each one of these entities is
responsible for serving the interests of the shareholders. The primary
responsibility of the officers and the board of directors is to handle the
investment company's administrative matters.

21
 Sponsor
The principal underwriter of a mutual fund is called a distributor, or more
commonly, the sponsor. The sponsor has a written contract with the
investment company that allows it to purchase fund shares at the current
net asset value and resell the shares to the public at the full public
offering price, either through outside dealers or through its own sales
force. The contract with the mutual fund company is subject to annual
renewal, but as long as the sponsor is distributing and marketing the
shares in a satisfactory manner, there is no reason why the sponsor's
contract should be discontinued.
 Custodians
The he custodian is responsible for the possession of the securities
purchased by the investment company for its portfolio. The custodian
also handles most of the investment company's clerical functions. Once
securities are transferred to the custodian for safekeeping, the custodian
must keep the assets physically segregated at all times, restrict access to
the account to officers and employees of the investment company, and
allow withdrawal only according to SEC rules.
 Investment advisor
The board of directors hires an investment advisor to invest the cash and
securities held in the fund's portfolio, implement the objectives outlined
by the board, manage day-to-day trading of the portfolio, and handle other
tasks that involve the tax implications of the share. For these services, the
investment advisor is acting as a fund advisor or fund manager, and earns
a management fee paid from the fund's net assets. Usually, the fund
manager earns an annual percentage of the fund's value, adds an incentive
bonus if he or she exceeds certain performance goals.
 Transfer Agent
The mutual fund contracts with a transfer agent to issue, redeem and
cancel fund shares, handle the distribution of dividend and capital gains to
shareholders, and send out trade confirmations. In certain instances, the
custodian will act as transfer agent. The fund company usually pays the
transfer agent a fee for services rendered.
 Board of Directors
A management investment company (mutual fund company) has a CEO, a
team of officers and a board of directors. Each one of these entities is
responsible for serving the interests of the shareholders. The primary

22
 responsibility of the officers and the board of directors are to handle the
investment company's administrative matters.
The board of directors is elected by the investment company's
shareholders. The board defines the type of funds that will be offered to
the public. For example, it will suggest offering a selection of funds -
growth funds, international funds, income funds and so on - to meet the
investment needs of many individuals. It will also define each fund's
objectives. The board will also approve and hire the investment advisor,
transfer agent and custodian (defined below) for each fund.
 Dealers
As mentioned before, the sponsor usually distributes shares of the mutual
fund through dealers. The dealers purchase shares from the sponsor at a
discount to the public offering price and fill their customers' orders. It is
important to note that dealers cannot buy shares for their own inventory to
sell at a later date. They may purchase shares to fill customer orders or for
their own investment, but any purchase that occurs for a dealer's own
investment must be redeemed when sold, it cannot be sold to an investor.

Figure 3 Structure of Mutual Fund industry

23
 Restrictions on Mutual Fund Operations
The SEC prohibits a mutual fund from engaging in the following activities
unless it meets strict financial and disclosure requirements:
 Selling securities short

 Buying securities on margin

 Participating in joint investment or trading accounts

 Distributing its own securities, except through a sponsor

 Otherwise, the fund must disclose these activities and the extent to which
it plans to participate in these activities in its prospectus.

Affiliated and Interested Parties

The 1940 act and its amendments identify two types of people, defined as
affiliated and interested parties, who may influence the investment
company's management and operations and whose actions must be
regulated and restricted by the SEC. They may not borrow money from
the investment company or sell any security or property to the investment
company or companies the management company controls.

 An affiliated party is someone who controls an investment company's

operations in any way.

 An interested person includes those individuals who have a relationship

with an affiliated person that the SEC deems influential in matters of fund
operation. These people would include immediate family members of
affiliated parties, legal counselors, broker-dealers, and so on.

Furthermore, the board of directors must have 40% outside representation: that
is, at least 40% of the board must be made up of individuals who do not have a
position with, or affiliation to, the fund. This restriction includes anyone
associated with the underwriter, investment advisor, custodian or transfer agent.

Types of Mutual Funds

1) Based on structure

24
 Open-Ended Funds: These are funds in which units are open for
purchase or redemption through the year. All purchases/redemption of
these fund units are done at prevailing NAVs. Basically these funds will
allow investors to keep invest as long as they want. There are no limits on
how much can be invested in the fund. They also tend to be actively
managed which means that there is a fund manager who picks the places
where investments will be made. These funds also charge a fee which can
be higher than passively managed funds because of the active
management. They are an ideal investment for those who want
investment along with liquidity because they are not bound to any
specific maturity periods. This means that investors can withdraw their
funds at any time they want thus giving them the liquidity they need.
 Close-Ended Funds: These are funds in which units can be purchased
only during the initial offer period. Units can be redeemed at a specified
maturity date. To provide for liquidity, these schemes are often listed for
trade on a stock exchange. Unlike open ended mutual funds, once the
units or stocks are bought, they cannot be sold back to the mutual fund,
instead they need to be sold through the stock market at the prevailing
price of the shares.
 Interval Funds: These are funds that have the features of open-ended and
close-ended funds in that they are opened for repurchase of shares at
different intervals during the fund tenure. The fund management
company offers to repurchase units from existing unit holders during
these intervals. If unit holders wish to they can offload shares in favor of
the fund.

2) Based on asset class

 Equity Funds: These are funds that invest in equity stocks/shares of
companies. These are considered high-risk funds but also tend to provide
high returns. Equity funds can include specialty funds like infrastructure,
fast moving consumer goods and banking to name a few.
 Debt Funds: These are funds that invest in debt instruments e.g.
company debentures, government bonds and other fixed income assets.
They are considered safe investments and provide fixed returns. These
funds do not deduct tax at source so if the earning from the investment is

25
 more than Rs.10, 000 then the investor is liable to pay the tax on it
himself.
 Money Market Funds: These are funds that invest in liquid instruments
e.g. T-Bills, CPs etc. They are considered safe investments for those
looking to park surplus funds for immediate but moderate returns. Money
markets are also referred to as cash markets and come with risks in terms
of interest risk, reinvestment risk and credit risks.
 Balanced or Hybrid Funds: These are funds that invest in a mix of asset
classes. In some cases, the proportion of equity is higher than debt while
in others it is the other way round. Risk and returns are balanced out this
way. An example of a hybrid fund would be Franklin India Balanced
Fund-DP (G) because in this fund, 65% to 80% of the investment is made
in equities and the remaining 20% to 35% is invested in the debt market.
This is so because the debt markets offer a lower risk than the equity
market.

3) Based on investment objective

 Growth funds: Under these schemes, money is invested primarily in
equity stocks with the purpose of providing capital appreciation. They are
considered to be risky funds ideal for investors with a long-term
investment timeline. Since they are risky funds they are also ideal for
those who are looking for higher returns on their investments.
 Income funds: Under these schemes, money is invested primarily in
fixed-income instruments e.g. bonds, debentures etc. with the purpose of
providing capital protection and regular income to investors
 Liquid funds: Under these schemes, money is invested primarily in short-
term or very short-term instruments e.g. T-Bills, CPs etc. with the
purpose of providing liquidity. They are considered to be low on risk with
moderate returns and are ideal for investors with short-term investment
timelines.
 Tax-Saving Funds (ELSS): These are funds that invest primarily in
equity shares. Investments made in these funds qualify for deductions
under the Income Tax Act. They are considered high on risk but also
offer high returns if the fund performance.

4) Based on specialty

 Sector Funds: These are funds that invest in a particular sector of the
market e.g. Infrastructure funds invest only in those instruments or

26
 companies that relate to the infrastructure sector. Returns are tied to the
performance of the chosen sector. The risk involved in these schemes
depends on the nature of the sector.
 Index Funds: These are funds that invest in instruments that represent a
particular index on an exchange so as to mirror the movement and returns
of the index e.g. buying shares representative of the BSE Sensex.
 Fund of funds: These are funds that invest in other mutual funds and
returns depend on the performance of the target fund. These funds can
also be referred to as multi manager funds. These investments can be
considered relatively safe because the funds that investors invest in
actually hold other funds under them thereby adjusting for risk from any
one fund.

2.7 Overview of ULIP

2.7.1 Economic Environment affecting insurance (ULIP) market
The Indian insurance industry seems to be in a state of flux while there has been
a perceptible change in the market dynamics since liberalization and economic
reforms, a considerable amount needs to be done for future growth and
development of the market in an orderly and sustained manner. Notwithstanding
the strong improvement in penetration and density in the last 10 years, India
largely remains an under-penetrated market. The market today is primarily
dependent on push, tax incentives and mandatory buying for sales. There is very
little customer pull, which will come from increased financial awareness along
with increasing savings and disposable income. Till then the stakeholders will
have to strive for the product simplification, increasing transparency of cost and
pricing, effective distribution and improving customer servicing to drive sales.
In the long run the insurance industry is still poised for a strong growth as the
domestic economy is expected to grow steadily, leading to rise in per capita and
disposable income, while savings are expected to be stable.

There is a perceptible shift in the life insurance market as the sales of Unit
Linked Insurance Plans (ULIP) products witnessed a drop in sales and customer

27
move toward traditional products. The business model for insurers has been
changing continuously for the past couple of years on account of regulatory
changes. While the regulatory changes were aimed at customer protection and
increasing transparency in pricing and operations, it gave the industry very little
time to adjust, leading to a lot of uncertainty in the market environment. In
addition to challenges in growth, pricing and profitability life insurers are also
faced with significant challenges on distribution front with a reducing agency
force and uncertainties in alternate channels such as Banc assurance. The cap on
commission and expense ratios further imposes restriction on the competiveness
of insurers and limits the expansion of distribution channels.

There is a requirement today for long-term assets, benefits, health policies to

serve the people till the time insurance in India is considered as a household
requirement than just a temporary risk-mitigating tool. Furthermore the pace of
reforms needs to be increased especially in the areas of pricing and reinsurance.

The industry is at an inflexion point and despite the signs of stress there is a
silver lining. Most players will now look to reassess the entire business model
from product, pricing, risk management, acquiring rural customers, distribution,
claims and fraud management and a realistic pace of growth. The industry is
also likely to witness consolidation as and when the regulator finalizes the
guideline for mergers and acquisitions. The stakeholders should work toward
maintaining favourable environment for stable growth, increasing the
penetration of insurance to rural and underpenetrated areas and increasing the
contribution to the economy.

2.7.2 LEGAL AND REGULATORY FRAMEWORK

Insurance Regulatory and Development Authority of India
1. Insurance Regulatory and Development Authority of India (IRDAI), is a
statutory body formed under an Act of Parliament, i.e., Insurance Regulatory
and Development Authority Act, 1999 (IRDAI Act 1999) for overall
supervision and development of the Insurance sector in India.

2. The powers and functions of the Authority are laid down in the IRDAI Act,
1999 and Insurance Act, 1938. The key objectives of the IRDAI include
promotion of competition so as to enhance customer satisfaction through

28
increased consumer choice and fair premiums, while ensuring the financial
security of the Insurance market.

3. The Insurance Act, 1938 is the principal Act governing the Insurance sector
in India. It provides the powers to IRDAI to frame regulations which lay down
the regulatory framework for supervision of the entities operating in the sector.
Further, there are certain other Acts which govern specific lines of Insurance
business and functions such as Marine Insurance Act, 1963 and Public Liability
Insurance Act, 1991.

4. IRDAI adopted a Mission for itself which is as follows:

 To protect the interest of and secure fair treatment to policyholders;

 To bring about speedy and orderly growth of the Insurance industry

(including annuity and superannuation payments), for the benefit of the
common man, and to provide long term funds for accelerating growth of
the economy;

 To set, promote, monitor and enforce high standards of integrity,

financial soundness, fair dealing and competence of those it regulates;

 To ensure speedy settlement of genuine claims, to prevent Insurance

frauds and other malpractices and put in place effective grievance
redressed machinery;

 To promote fairness, transparency and orderly conduct in financial

markets dealing with Insurance and build a reliable management To take
action where such standards are inadequate or ineffectively enforced;

 To bring about optimum amount of self-regulation in day-to-day working

of the industry consistent with the requirements of prudential regulation.

5. Entities regulated by IRDAI:

a. Life Insurance Companies -Both public and private sector Companies

b .General Insurance Companies - Both public and private sector Companies.

Among them, there are some standalone Health Insurance Companies which
offer health Insurance policies.

c. Re-insurance Companies

29
d. Agency Channel

e. Intermediaries which include the following:

 Corporate Agents

 Brokers

 Third Party Administrator

 Survivors

2.7.3 PLATFORMS OF LIFE INSURANCE

UNIT LINKED INSURANCE PLANS

World over, insurance come in different forms and shapes Although, the generic
names may find similar, the difference in product features makes one wonder
about the basis on which these products are designed .With insurance market
opened up, Indian customer has suddenly found himself in a market place where
he has a lot of jargon as well as marketing gimmicks with a very little
knowledge of what is happening around. This module is aimed at clarifying
these underlying concepts and simplifying the different products available in the
market. We have many products like endowment, whole life, etc. All these
products are based on following basic platforms or structures viz.

 Traditional Life
 Universal Life or Unit Linked Policies

TRADITIONAL LIFE – AN OVERVIEW

The basic and widely used form of design is known as Traditional Life
Platform. It is based on the concept of sharing. Each of the policy
holder contributes his contribution (premium) into the common large fund is
managed by the company on behalf of the policy holders. It was the
responsibility of the company to administer schemes for benefit of the policy
holders and a common fund was extended to different areas like saving ,
investment etc.

30
 FEATURES OF TRADITIONAL LIFE:
 This is the simplest way of designing product as far as
concerned. He has no other responsibility but to pay the premium
regularly.
 Company is responsible for the protection as well as
maximization of the policyholder’s funds.
 Expenses incurred as well as claims paid are then taken out of this fund.
 Companies carry out the valuation of the fund periodically to ascertain
the position. It is also a practice to increase the minimum possible
guarantee under a policy every year in the form of declaring and attaching
bonuses to the sum assured on the basis of this valuation. Declaration of
bonuses is not mandatory.

Based on the end objective, companies may offer different plans like
saving plans, investment plans e.g. Endowment, SPWLIP). It helps to maintain
a smooth growth and protects against the vagaries of the market. In other
words it minimizes the risk of investments for an average individual. He
shares his risk with a group of like-minded individuals.

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

to the insurance company .It was the responsibility of the company to
administer schemes for benefit of the policyholders. Policyholders played a very
passive roll. In the course of time, the same concept of sharing and a common
fund was extended to different areas like saving, investment etc.

2.8.4 Salient features of ULIP

Unit linked Insurance Plans or ULIP are popular for its triple benefits of life
cover, capital appreciation and income tax benefits. ULIP investment proportion
is structured like a mutual fund. The prime objective of this product is insurance
and capital appreciation. Accordingly, a part of the premium paid to the
company is allocated towards life insurance cover, administrative charges and
management fees. The rest is invested in market-linked instruments like stocks,
corporate bonds and government securities, depending on the asset allocation
plan. Most ULIP offer policy holders a choice of plans, namely equity oriented,
debt oriented and balanced too.

31
Policy holders will get units for the amount invested and not on the full
premium amount paid. Investor can switch from one plan to another as per the
specified number of times. ULIP policy holders can make use of features such
as top-up facilities, switching between various funds during the tenure of the
policy, reduce or increase the level of protection, options to surrender,
additional riders to enhance coverage and returns as well as tax benefits.

Tenure
ULIPs have a minimum tenure of 5 years and the maximum term depends on
the age of the investor. These are also subject to a lock-in period of three years
before which an investor has no access to the investment amount. Lock-in
period is minimum time had to remain invested. One can discontinue plan and
stop paying premium but cannot withdraw money. In case of surrender benefits
will be paid after 5years as per the plan.

2.8.5 Redemption procedure

In the case of ULIP the policy holder can redeem units under any of the
following situations: End of the period on the maturity date of the ULIP.

Surrender: If the investor surrenders policy, the surrender value as stated in the
policy after the lock-in period of three years will be received by him.

Death: In the event of unfortunate demise of the investor, his nominee receives
the sum assured or the value of the units, whichever is higher.

Partial Withdrawals: Some funds allow partial withdrawal at periodic time

intervals. Units will stand reduced to that extent for the holder. The Sum
Assured and/or value of the fund units is normally payable to the beneficiaries
in the event of risk to the life assured during the term as per the policy
conditions.

One can invest additional contribution over and above the regular premiums as
per their choice subject to the feature being available in the product. This
facility is known as “TOP UP” facility.

32
 SWITCH option provides for shifting the investments in a
policy from one fund to another provided the feature is
available in the product. While a specified number of switches
are generally effected free of cost, a fee is charged for switches
made beyond the specified number
The Risk- The risk involved here is that due to the fluctuations
in the market, the policy fund value at the end of the plan term
might be less than the sum of the premiums paid throughout
the policy. Since ULIP returns are directly linked to market
performance and the investment risk in investment portfolio is
borne entirely by the policyholder, one need to thoroughly
understand the risks involved and one’s own risk absorption
capacity before deciding to investing in ULIPs. In unit linked
products/policies, the investment risk in investment portfolio is
borne by the policy holder.

2.8.6 Working Principle

A ULIP is basically a combination of insurance and investment product where
the investor gets to avail the benefits of insurance as well as investment. A part
of the premium paid is utilized to provide insurance cover to the policy holder
while the remaining portion is invested in various equity and debt schemes. The
money collected by the insurance provider is utilized to form a pool of fund that
is used to invest in various market instruments (debt and equity) in varying
proportions just the way it is done for mutual funds. Policy holders have the
option of selecting the type of funds (debt or equity) or a mix of both based on
their investment need and appetite. Just the way it is for mutual funds, ULIP
policy holders are also allotted units and each unit has a net asset value (NAV)
that is declared on a daily basis. The NAV is the value based on which the net
rate of returns on ULIPs are determined. The NAV varies from one ULIP to
another based on market conditions and the fund’s performance.

33
2.8.7 Benefits of ULIPs
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 for specified number of switches. 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.

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 on a daily basis.

Liquidity: To cope with unforeseen circumstances, ULIPs offer the

benefit of partial withdrawal; wherein after 5 years you can withdraw
funds from our Unit Linked account, retaining only the stipulated
minimum amount.

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.

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.

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.

34
2.8.8 Types of ULIP
1) Pension ULIPs - Pension plans are designed to provide annuity amounts in
the future with regular payment of premiums in the present. Premiums paid
under pension plans are invested in ULIPs. These are also called pension
ULIPs. Pension ULIPs are very similar in nature and operation to regular life
insurance ULIP plans. In a pension ULIP plan, premiums paid are invested in
units. After the completion of the stipulated time period of the pension plan,
unlike insurance where the amount is paid in lump sum, annuity is paid to the
policy holder either in lump sum, annually, half yearly or monthly for life time.
Various pension ULIP plan in India include:

 HDFC Unit Linked Pension

 ICICI Life Time Super Pension
 Birla Sun Life Flexi Secure Life Retirement Plan
 Max New York Life Insurance SMART Invest Pension Plan
 Bajaj Allianz Life Insurance New Unit Gain Easy Pension Plan

2) Child ULIPs - In order that the investment will increase its value, one must
invest in child ULIP insurance. ULIP or Unit linked Insurance Policies are
increasing their popularity in the recent times. These are regarded as high risk
high return investments that are spread over long periods of time. Each of these
policies differs in their growth rate. So, one must consider all aspects before
investing in various child ULIP plans. There is a significant amount of
flexibility in child ULIP policies. A parent can invest in lump sum or can invest
annually, half-yearly or monthly depending upon his/her financial status and
permeability. Child ULIP comparison is a must for parents who want to invest
for their children. This is because various insurance companies offer different
child ULIP plans which differ in premiums, premium waive rand guaranteed
amount after the maturity. In such condition, child ULIP comparison can derive
the best child ULIPs plan. Some of the best child ULIPs plans in India include:

 Smart Steps Plan from Max New York Life Insurance

 Reliance Secure Child Plan from Reliance Life Insurance Plan
 Smart Kid New Unit Linked Regular Premium from ICICI Prudential
Life Insurance

35
3) ULIPS For Long Term Wealth Creation - ULIPs are the right insurance
solutions for you if you are looking for a strong wealth creation proposition
allied to a core insurance benefit. Such plans are ideal for people who are in
their late 20s and early30s and by investing in such a plan get the flexibility of
using it to fund any of their long-term financial goals such as purchase of a
house for their children’s education. The added element of life cover serves to
make these plans a wholesome financial investment option. Wealth Creation
ULIPs can be primarily classified as:

 Single premium -Regular premium plan: Depending upon you needs &
premium paying capacity you can either opt for a single premium plan
where you need to pay premium only once during the term of entire
policy or regular premium plans where you can premium at a frequency
chosen by you depending upon your convenience.
 Life Stage based –Non life Stage based: Life Stage based ULIPs factor in
the fact that your priorities differ at different life stages & hence
distribute your money across equity & debt. Here the initial allocation is
decided as per your age since age is a significant indicator of risk
appetite. Such a strategy ensures that the asset allocation at all times is in
sync with your age and changing financial needs.

Wealth creation ULIPS which also offer guaranteed benefit. These plans are
ideal insurance-cum-investment option for customers who want to enjoy the
potentially higher returns (over the long term)of a market linked instrument, but
without taking any market risk. On the other hand non guarantee plans comes
with an in -built range of fund options to choose from –ranging from aggressive
funds (Primarily invested in equities with the general aim of capital
appreciation) to conservative funds (invested in cash, bank deposits and money
market instruments with aim of capital preservation) so that you can decide to
invest your money in line with your market outlook, time horizon and your
investment preferences and needs.

4) ULIPS for Heath Solution- Health ULIP is a recent innovation from the
health insurance industry. In a health ULIP part of your premiums are allocated
for investment designed specifically to build a health fund to meet future health
related expenses. It aims to create a health savings kitty by investing in a long
term flexible savings plan with multiple fund options. The health fund thus
created allows you to claim for health related expenses of any kind and also

36
fund your future health insurance charges. You can also avail of tax benefit on
premium paid u/s 80D.

Unit Fund The allocated (invested) portions 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.
Most insurers offer a wide range of funds to suit one’s investment objectives,
risk profile and time horizons. Different funds have different risk profiles. The
potential for returns also varies from fund to fund. The following are some of
the common types of funds available along with an indication of their risk
characteristics.

General Nature of investments Risk Category

Description

Equity Funds Primarily invested in company Medium to high

stocks with the general aim of
capital appreciation.
Income, Fixed Invested in corporate bonds, Medium
Interest and Bond government securities and other
Funds fixed income instruments.
Cash Funds Sometimes known as Money Low
Market Funds – invested in
cash, bank deposits and money
market instruments.
Balanced Funds Combining equity investment Medium
with fixed interest instruments.

37
 CHAPTER 3
COMPARISION OF MUTUAL FUNDS WITH ULIP

3.1 Individual Comparisons

 Advantages of Mutual Funds
If mutual funds are emerging as the favourite investment vehicle, it is because
of the many advantages they have over other forms and the avenues of
investing, particularly for the investor who has limited resources available in
terms of capital and the ability to carry out detailed research and market
monitoring. The following are the major advantages offered by mutual funds to
all investors:

1. Portfolio Diversification:

Each investor in the fund is a part owner of all the fund’s assets, thus enabling
him to hold a diversified investment portfolio even with a small amount of
investment that would otherwise require big capital.

2. Professional Management:

Even if an investor has a big amount of capital available to him, he benefits

from the professional management skills brought in by the fund in the
management of the investor’s portfolio. The investment management skills,
along with the needed research into available investment options, ensure a much
better return than what an investor can manage on his own. Few investors have
the skill and resources of their own to succeed in today’s fast moving, global
and sophisticated markets.

3. Reduction/Diversification of Risk:

When an investor invests directly, all the risk of potential loss is his own,
whether he places a deposit with a company or a bank, or he buys a share or
debenture on his own or in any other from. While investing in the pool of funds
with investors, the potential losses are also shared with other investors. The risk
reduction is one of the most important benefits of a collective investment
vehicle like the mutual fund.

38
4. Reduction of Transaction Costs:

What is true for risk is also true for the transaction cost. The investor bears all
the costs of investing such as brokerage or custody of securities. When going
through a fund, he has the benefit of economies of scale; the funds pay lesser
costs because of larger volumes, a benefit passed on to its investors.

5. Liquidity:

Often, investors hold shares or bonds they cannot directly, easily and quickly
sell. When they invest in the units of a fund, they can generally cash their
investments any time, by selling their units to the fund if open-ended, or selling
them in the market if the fund is close-end. Liquidity of investment is clearly a
big benefit.

6. Convenience and Flexibility:

Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holding from one
scheme to the other; get updated market information and so on.

7. Tax Benefits:

Any income distributed after March 31, 2002 will be subject to tax in the
assessment of all unit holders. However, as a measure of concession to Unit
holders of open-ended equity- oriented funds, income distributions for the year
ending March 31, 2003, will be taxed at a concessional rate of 10.5%.In case of
Individuals and Hindu Undivided Families a deduction up to Rs. 9,000 from the
Total Income will be admissible in respect of income from investments
specified in Section 80L, including income from Units of the Mutual Fund.
Units of the schemes are not subject to Wealth-Tax and Gift-Tax.

8. Choice of Schemes:

Mutual Funds offer a family of schemes to suit your varying needs over a
lifetime.

9. Well Regulated:

All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.

39
10. Transparency:

You get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and
outlook.

 DISADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS

1. No Control over Costs:

An investor in a mutual fund has no control of the overall costs of investing.

The investor pays investment management fees as long as he remains with the
fund, albeit in return for the professional management and research. Fees are
payable even if the value of his investments is declining. A mutual fund investor
also pays fund distribution costs, which he would not incur in direct investing.
However, this shortcoming only means that there is a cost to obtain the mutual
fund services.

2. No Tailor-Made Portfolio:

Investors who invest on their own can build their own portfolios of shares and
bonds and other securities. Investing through fund means he delegates this
decision to the fund managers. The very high net-worth individuals or large
corporate investors may find this to be a constraint in achieving their objectives.
However, most mutual fund managers help investors overcome this constraint
by offering families of funds- a large number of different schemes- within their
own management company. An investor can choose from different investment
plans and constructs a portfolio to his choice.

3. Managing a Portfolio of Funds:

Availability of a large number of funds can actually mean too much choice for
the investor. He may again need advice on how to select a fund to achieve his
objectives, quite similar to the situation when he has individual shares or bonds
to select.

4. The Wisdom of Professional Management:

The average mutual fund manager is no better at picking stocks than the average
nonprofessional, but charges fees.

40
5. No Control:

Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car.

6. Dilution:

Mutual funds generally have such small holdings of so many different stocks
that even a great performance by a fund's top holdings still doesn't make much
of a difference in a mutual fund's total performance.

7. Buried Costs:

Many mutual funds specialize in burying their costs and in hiring salesmen who
do not make those costs clear to their clients.

 ADVANTAGES OF ULIP
1. Insurance cover plus saving

ULIPs serve the purpose of providing life insurance combined with savings at
market-linked returns. To that extent, ULIPS can be termed as a two-in-one plan
in terms of giving an individual the twin benefits of life insurance plus savings.

2. Multiple investment options

ULIPS offer a lot more variety than traditional life insurance plans. So, there are
multiple options at the individual’s disposal. ULIPS generally come in three
broad variants:

 Aggressive ULIPs (which can typically invest 80%-100% in equities,

balance in debt)

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

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

Although this is how the ULIP options are generally designed, the exact
debt/equity allocations may vary across insurance companies. Individuals can
opt for a variant based on their risk profile.

41
3. Flexibility

The flexibility with which individuals can switch between the ULIP variants to
capitalize on investment opportunities across the equity and debt markets is
what distinguishes it from other instruments. Some insurance companies allow a
certain number of ‘free’ switches. Switching also helps individuals on another
front. They can shift from an Aggressive to a Balanced or a Conservative ULIP
as they approach retirement. This is a reflection of the change in their risk
appetite as they grow older.

4. Works like an SIP

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

an SIP, individuals invest their monies regularly over time intervals of a
month/quarter and don’t have to worry about the timing of the stock markets.

 Disadvantages of Unit Linked Insurance Plans

1. No Standardization

All the costs are levied in ways that do not lend to standardization. If one
company calculates administration cost by a formula, another levies a flat rate.
If one company allows a range of the sum assured (SA), another allows only a
multiple of the premium. There was also the problem of a varying cost structure
with age

2. Lack of flexibility in life cover

ULIP is known to be more flexible in nature than the traditional plans and on
most counts, they are. However, some insurance companies do not allow the
individual to fix the life cover that he needs. These rely on a multiplier that is
fixed by the insurer.

3. Overstatement of the yield

Insurance companies work on illustrations. They are allowed to show you how
much your annual premium will be worth if it grew at 10 per cent per annum.
But there are costs, so each company also gives a post-cost return at the 10per
cent illustration, calling it the yield. Some companies were not including the
mortality cost while calculating the yield. This amounts to overstating the yield.

4. Internally Made Sale Illustration

42
During the process of collecting information, it was found that the sales benefit
illustration shown was not conforming to the Insurance Regulatory and
Development Authority (IRDA) format. In many locations 30 per cent return
illustrations are still rampant.

5. No Benchmark Return

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

customer. Though most companies use Sensex, BSE or the Nifty as the
benchmark or the measuring rod of performance, some companies are not using
any benchmark at all.

6. Early Exit Option

The ULIP product works over the long term. The earlier the exit, the worse
off is the investor since he ends up redeeming a high-front-load product and is
then encouraged to move into another higher cost product at that stage. An early
exit also takes away the benefit of compounding from insured.

4.2 Comparative Analysis of Mutual Funds and ULIPs within

themselves
Structure
MF- A MF collects money from the public and invests in equity, debt or a
combination of both, as per a pre specified investment objective. Investors are
offered units depending on the value of their investment, on a pro rata basis.
Equity funds invest pre dominantly in the stock market to generate growth by
way of capital appreciation for investors, whereas debt funds invest in fixed
income securities such as bonds, debentures, government securities, reverse
repos, etc. A balanced fund invests partly in both equity and debt. A mutual
fund scheme can be open-ended (no defined time period) or close-ended (three
years or five years).

ULIP- Although the investment proportion of a ULIP is structured like a mutual

fund, the prime objective of this product is insurance and capital appreciation.
Accordingly, a part of the premium paid to the company is allocated towards
life insurance cover, administrative charges and management fees. The rest is
invested in market-linked instruments like stocks, corporate bonds and
government securities, depending on the asset allocation plan. Most ULIPs offer

43
policy holders a choice of plans, namely equity oriented, debt oriented and
balanced, too. You will get units only for the amount invested and not on the
full premium amount paid. You can switch from one plan to another, a specified
number of times. The value of units of both ULIPs and MFs are calculated and
declared on a daily basis at their market worth and called the Net Asset Value
(NAV) of the investment fund. Investors can gauge whether their investment
has appreciated or depreciated according to NAV movement.

Tenure:
MF- There is no minimum holding period for most mutual fund schemes,
except in the case of tax saving schemes (ELSS), which have a three-year lock-
in period. Close ended funds, which have a lock-in period, are either listed on
the stock exchange or provide liquidity by accepting redemptions at periodic
time intervals (e.g. every three months or six months)

ULIP- These usually have a minimum tenure of 5 years and the maximum term
depends on the age of the investor. These are also subject to a lock-in period of
three years before which an investor has no access to the investment amount.

Expenses:
MF- Expenses such as fund management, sales and marketing, administration,
etc., are charged subject to predetermined 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 cent per annum on a recurring
basis. Any expense above the prescribed limit is borne by the fund house and
not passed on to the investors. Mutual funds also charge their investors entry
and/or exit loads. Entry loads are charged at the time of making an investment
while the exit load is charged at the time of sale.

ULIP- There is no maximum limits prescribed by the Insurance Regulatory and

Development Authority, as regards levy of expenses on ULIP products.
However, the insurance company is required to get the expense limit pre-
approved from the Insurance Regulator. The expenses have to be explicitly
stated by the insurance company. The expenses charged by ULIPs are rather
high and could range between 5 to 65 per cent for the first year and then fall to 3
to 20 per cent in subsequent years.

44
 Returns:
MF- Mutual funds usually give better returns on investment than ULIPs, since a
larger portion of your contribution is invested in securities. The returns vary
with the investment pattern. For example debt schemes are presently offering,
on an average basis, annualized returns of 3 to 8 per cent, whereas equity
oriented schemes are presently offering returns in the range of 30 to 60 per cent
per annum.

ULIP- ULIPs charge higher expenses as a percentage of your investment than

MFs, the amount available for investment reduces to that extent. Life insurance
cover charges and other expenses are factored into the ULIP premium. Since the
base for investment is lower, the returns offered by ULIP will mostly be lower
than those on mutual fund schemes.

Options for receiving returns:

MF - Returns are available to investors in the form of dividends if the dividend
option is chosen by the investor. In the case of the growth option, these are in
the form of capital appreciation.

ULIP- The return is in the form of capital appreciation and insurance cover in
case of premature death.

Redemption procedure:
MF- The redemption amount is calculated by multiplying the NAV (minus exit
load, if any) on the date of redemption with the number of units redeemed.
Mutual fund investments are highly liquid (the redemption amount is received
within 1 to 3 working days based on scheme type).

ULIP- In the case of ULIPs, you can redeem units under any of the following
situations:

 Maturity: This is on the expiry/maturity date of the ULIP

 Surrender: If you surrender your policy, you receive the surrender value
as stated in the policy, only after the lock-in period of three years.

 Death: In the event of unfortunate demise of the investor, his nominee

receives the sum assured or the value of the units, whichever is higher.
Partial Withdrawals: Some funds allow partial withdrawal at periodic
time intervals. Your units will stand reduced to that extent.

45
Suitability:
A mutual fund offers certain advantages in terms of cost, various types and sub-
types of plans and liquidity. ULIPs on the other hand, give you the flexibility to
shift between various plans within the insurance company, without high load
cost and capital gains implications. Further, if you plan to invest for the long
term (more than 10 years), you could consider ULIPs as this vehicle would
ensure that your insurance needs are taken care of and you enjoy capital
appreciation as well.

Tax-savings:
ULIPs allow you tax deductions, as per Section 80C of the Income Tax Act.
Whatever money you invest in a ULIP is deducted from your total taxable
income. This then reduces the money you owe to the government as income tax.
Mutual funds, on the other hand, do not always help you reduce taxes. Only
ELSS or Equity-Linked Saving Schemes give you such tax deductions.

3.3 Comparative Analysis of mutual fund and ULIP considering the

recent changes in the plans of government.
The budget this year saw the introduction of a 10% Dividend Distribution Tax
(DDT) in the case of equity instruments, such as equity Mutual Funds. In his
Budget 2018 speech, Finance Minister Arun Jaitley proposed among other
things, the introduction of a 10% Dividend Distribution Tax (DDT) in the
case of equity instruments, such as equity mutual funds.

Even before the Budget proposed to tax long-term gains from stocks and
mutual funds, ULIP had an edge over equity mutual funds. If balanced schemes
or equity mutual funds were held for less than one year, the short-term capital
gains were taxed at 15%. But since ULIPs are insurance products, the short-
term gains were tax free under Section 10(10d) of Income Tax Act.

That advantage will become even bigger after the new LTCG tax comes in from
1st April, 2018. As many insurers have been quick to point out, while gains

46
from balanced and equity funds will be taxed at 10%, income from ULIPs will
be completely tax free.

The tax-free advantage of ULIPs extends beyond equity funds to the fixed
income space. ULIPs not only offer equity funds but also debt and liquid fund
options to investors. In this space, income from fixed deposits is taxed at the
marginal rate while LTCG from debt funds are taxed at 20% after indexation.
However, gains from ULIPs are tax free.

In the light of the proposed introduction, we can see the comparisons as follows:

o Where Unit-Linked Insurance Plans (ULIPs) score over mutual

funds?
1. The maturity amount in ULIPs is exempt from tax. In case of mutual
funds, the long-term capital gains resulting from sale of equity mutual
funds units is taxed at 10%.

2. Even if a investor hold his entire money in a debt ULIP fund, the maturity
proceeds are still tax free.

Whereas, in case of a debt mutual fund, he will have to pay long term
capital gains tax at 20% (after allowing for indexation).

3. If an investor wants to switch to another fund within the same ULIP,

it does not give rise to any tax liability towards him. For instance, he
can shift from Aggressive Growth (equity) fund to a conservative fund
(debt) or vice-versa within the ULIP. There will not be any tax liability.

However, in case of mutual fund, if switch from one fund to another, it is

equivalent to redemption from one fund and purchase in another fund.
And redemption gives rise to both exit load and capital gains tax
implications.

4. Therefore, if an investor want to rebalance his portfolio, it is much

easier to do in case of a ULIP. Or rather, the cost of such rebalancing
will be much lower in ULIPs.

47
 o Where Unit-Linked Insurance Plans (ULIPs) struggle against
mutual funds?
1. The performance of ULIP funds may be misleading
Mortality charges and policy administration charges are deducted by
cancellation of units. In case of mutual funds, the performance that one sees is
net of all the charges (expenses) and the taxes has to be paid.

This is not the case with ULIPs. The performance that one sees on brochures and
Morning Star is before applying mortality charges and policy administration
charges. For instance, a person may have 1,000 units of Fund A with him. During
the year, some of these may be cancelled/redeemed to finance mortality charges.
So, at the end of the year, he may be left with only 980 units. It is possible that
your Fund A returned 15% next year. However, the net return to you will be only
12.7%.

15% is what will be shown in the brochures. 12.7% is what he will get.
Mutual funds do not show results in such convoluted manner. The mutual
fund NAV is net of all the expenses. What you see is what you get.

2. An investor cannot exit an underperformer in ULIP

If one of the MF investments were under-performing; an investor would probably

exit the investment and invest the proceeds elsewhere.

How it is done in the case of ULIP?

You have a choice of 4-5 ULIP funds from the same insurance company.
However, those are different types of funds. For instance, Mr. A invested in a
ULIP from HDFC Life and invested the bulk of his money in the multi-cap fund.
If the fund underperforms, he can perhaps switch to a balanced fund from the
same list of 4-5 funds. However, he cannot switch to a fund from say ICICI
Prudential.

And this takes away his flexibility. He can always exit the ULIP from HDFC
Standard Life and purchase another from ICICI Prudential. However, there are
restrictions on when you can exit. Moreover, when an investor invests in a new
ULIP, the lock-in period starts again.

48
Whereas, in case of mutual funds, an investor could have simply sold his
investments and shifted to say a fund from ICICI AMC and hence, exercise his
flexibility.

3. The Fund Management Charges (FMC) may not be as low

One of the prominent arguments used by life insurance industry in favor of ULIPs
is that ULIPs have very low charges.

FMC in ULIPs is capped at 1.35% p.a. There is also a cap of difference between
gross yield and net yield.
At the same time, expense ratio in mutual funds can be as high as 2.5%-3% p.a.
for an equity fund. However, it is to be noted that it is not that the expense ratio
is as high for all the funds. In case of debt funds, one can expect the expense ratio
to be lower. The expense ratio is further lower for direct plans (in both equity and
debt funds).
If we see, 1.35% p.a. may look like a good number for an equity fund. However,
if the same FMC were to be charged for say a liquid or a short-term bond fund, it
is quite high. Moreover, these are not the only charges that you incur (as we have
seen above).

Hence, we can see ULIPs as well as Mutual funds; both have their pros and cons.

49
 CHAPTER 4
PRESENTATION OF DATA, ANALYSIS AND FINDINGS
The analysis is done on the basis of primary data that is questionnaire.

From the responses of the respondents my analysis is as follows:-

1) Do you invest in mutual funds/ULIPs?

No
6%

Yes
94%

Figure4 Investments in Mutual Funds/ULIPs

Interpretation: In this pie -chart we have demonstrated the segmentation of the

sample size according to the investment criteria. It is visible here that 96% of
the respondents invest in either of mutual fund or ULIP or in both, whereas, the
6% do not invest in either of the two.

2) If not, then what other option(s) do you prefer to invest?

Others

Recurring Deposits 3
2
Post Office Schemes 1
0
Fixed deposits

0 1 2 3 4

Figure 5 Investment in other options

50
Interpretation- It can be clearly seen that only 3 respondent invest in Fixed
deposits.

3) What percentage of your income do you invest?

25%
31%
0-5%
6-10%
11-15%

44%

Figure 6 Percentage of income invested

Interpretation – 44% of the investors, invest 6-10% of their income while the
31% of the investors, invest 11-15% and the rest invest 0-5% of their income.

4) At what rate do you want your investment to grow?

Steadily At an average rate Fast

38% 38%

24%

Figure 7 Growth rate

51
Interpretation- In this pie- chart, it is visible that 38% i.e. the equal number of
the investors wants to grow their investment at an average and fast rate, while
the 24% wants it to grow at a steady rate.

5) How long do you plan to invest your money?

Under 2 years 2-5 years 6-10 years 11-15 years Over 15 years

0%

12% 13%

31%

44%

Figure 8 Time period of investment preferred by investors

Interpretation- 44% of the total investors plan to invest for a period of 6-10
years and not more than that, whereas 31% of the investors plan to invest for not
more than 2-5 years. 12% of the investors plan to invest for time period of 11-
15 years and the remaining plan to invest for 0-2 years. It can be clearly seen
that no investor want to invest for the longest time period i.e. beyond 15 years.

52
6) Imagine that the stock market drops immediately after you invest in it, then
what will you do?

6%

38%
Withdraw your money
Wait and watch
Invest more in it
56%

Figure 9 Reactions when stock market drops

Interpretation- 56% of the investors will wait and watch when the stock market
drops just after they had invested in it, while 38% will invest more in it and the
6% will withdraw the money invested.

7) Which form of investment do you prefer the most?

ULIP
6% 6%
13% Mutual Fund

Equity Trading

25% 50% Fixed Deposit &Post Office

Schemes
Bank Savings

Figure 10 Preferences of investments

Interpretation- 50% of the investors prefer the mutual fund, 25% prefer Equity
Trading where as 13% of the investors prefer Fixed Deposit and Post Office.

53
Only 6 % of the investors prefer ULIP and bank savings as a form of
investment.

8) Under Mutual Fund schemes, rank the following according to your

preference. (1- Most preferred, 5- Least preferred)

4 Most Preferred
Preferred
3
Neutral
Less Preferred
2
Least Preferred

0
Debt Funds Equity Funds Balanced Funds ELSS

Figure 11 Rank of various schemes under Mutual Funds according to preference

Interpretation- Investors have a neutral preference towards Debt Funds. On the

other hand they prefer Equity Linked Saving Schemes the most out of all.

54
9) Do you view following factor/sources of information important while
investing in Mutual Funds?

6
5
4
3
Extremely Important
2
Important
1
Neutral
0
Unimportant
Highly Unimportant

Figure 12 Factors according to their importance, affecting the investment in Mutual

Funds

Interpretation - Safety, Liquidity, Return Earned are the most important factors
while investing in Mutual Funds.

10) How long do you plan to stay invested in ULIP?

42% 41% 3-5 years

5-7 years
10-20 years

17%

Figure 13 Time period for the investment

55
Interpretation- 42% of the investors plan to stay in ULIP for more than 10-20
years.

11) Why have you invested in ULIPs?

Insurance Investment

8%

92%

Figure 14 Reason for investment in ULIP

Interpretation- 92% of the investors have invested in ULIPs for the insurance it
provides.

12) Do you view following factor/sources of information important while

investing in ULIP?

56
 6

3
Extremely Important
2
Important
1 Neutral
0 Unimportant
Highly unimportant

Figure 15 Factors according to their importance, affecting the investment in ULIPs

Interpretation- While investing ULIPs, safety and liquidity are the most
important factor
13) After imposition of tax on Long Term Capital Gains (LTCG) as proposed in
Union Budget 2018, which investment would you prefer?

Mutual Fund ULIPs

50% 50%

Figure 16 Preference between MF and ULIP after the imposition of LTCG tax.

Interpretation- Half of the percentage of investors i.e. 50% will prefer mutual
fund while the half will prefer to invest in ULIPs.

57
 CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
5.1 Findings
Following are the findings after the primary analysis of the data-

1. More percentage of the investors want to invest for a longer time period that
is for around 6-10 years and most of the investors want their investment to grow
at a fast or at an average rate.

2. The investors are likely to not take any risk when the stock market drops just
after they have invested money in it.

3. There is more number of investors who prefer mutual funds over other forms
of investment.

4. Safety and liquidity are considered to be most important factors while

investing.

5. Equity Linked Saving Schemes (ELSS) are most preferred funds.

6.50% of the investors will still prefer Mutual Fund as an investment, even after
the imposition of LTCG tax ( 1st April, 2018 onwards).

5.2 Conclusions
A mutual fund is an ideal investment vehicle for present scenario. Today each
and every investor (potential) is fully aware of every kind of investment
proposals as well as every investor (as seen in the primary analysis) wants to
invest money, which is entitled to low risk, higher and faster rate of return and
easy redemption. Hence, before investing in mutual funds, one should be fully
aware of the risk involved and other aspects attached to plan.

At the same time, ULIP as an investment avenue is better for the investors who
have interest in staying for a longer period of time, that is around 5 years and
above. The ULIP investors have the flexibility to alter the premium amounts
during the policy tenure. ULIP as an investment avenue is the closet to the
mutual fund investors as in ULIP, units are allotted by the insurance company

58
and the Net Asset Value (NAV) is declared for the same on a daily basis. ULIP
investors have many options of investing across various schemes and therefore,
ULIP are sometimes, termed as a mutual fund scheme with an insurance
component.

Mutual fund investors have the option of either making a lump sum investment
or investing through systematic investment plan which entails commitments
over a longer time horizon. The minimum investment amounts are laid out by
fund houses. This is a stark contrast to conventional insurance plans where the
sum assured is the starting point and premiums which are to be paid are
determined thereafter. Under mutual fund investments, expenses charged for
various activities such as fund management, sales and marketing, administration
expenses among other are subject to predetermined upper limits as prescribed
by SEBI. Similarly funds also charge their investors entry and exit loads. Entry
loads are charged at the time of making an investment while exit load is charged
at the time of sale.

5.3 Recommendations
Mutual Fund Companies
The performance of the mutual fund depends on the previous year’s Net Asset
Value of the fund. All schemes are doing well. Since the future is uncertain, so
the AMC (Asset under Management Companies) should take the following
steps: -

1. The people do not want to take risk. The AMC should launch more
diversified funds so that the risk becomes minimum. This will lure more and
more people to invest in mutual funds.

2. The expectation of the people from the mutual funds is high. So, the portfolio
of the fund should be prepared taking into consideration the expectations of the
people.

3. Try to reduce fund charges, administration charges and other charges which
help to invest more funds in the security market and earn good returns.

4. Different campaigns should be launched to educate people regarding mutual

funds.

59
5. Mutual funds should concentrate on differentiating the portfolio of their MF.

6. Companies should give handsome brokerage to brokers so that they get

attracted towards distribution of the funds.

ULIPs Companies
Even though ULIP is better known as double advantage option i.e. insurance
plus investment, it still does not get its share of acceptance and popularity. So,
AMC which are managing ULIPs so take steps in following directions:

1. There should be more training and awareness camps by SEBI/IRDA to guide

the investors how to invest in ULIP and what are the various formalities that
must comply with. This will encourage fairness and discourage resistant to
adopt it.

2. Try to reduce fund charges, administration charges and other charges which
help to invest more funds in the security market and earn good returns.

3. Different campaigns should be launched to educate people regarding ULIPs.

4. There should more print and media advertisement to ensure word of mouth in
its favor.

60
BIBLIOGRAPHY
1. Bhalla, V.K., (2004). Investment Management, 6th edition, S. Chand & Co.
Ltd, pp 2-3

2. Bodla, B. S., Bishnoi, S. (2008). “Emerging trends of mutual funds in India:

A study across category and type of schemes”, The Journal of Indian
Management & Strategy, Vol. 13(1).

3. Das, B., Mohanty, S., Shil Chandra N. (2008). “Mutual fund vs. life
insurance: Behavioral analysis of retail investors”, International Journal of
Business and Management, Vol. 3( 10).

4. Dutta, G. (2013). “Profitability Picture Improves for some Large and Small
AMCs in FY12-13”, Nov, http://www. morningstar.in/posts/20261/profitability-
picture-improves-for-some-large-and-small-amcs-in-fy12-13.aspx

5. Anirudh Lasker(2010) “Budget signals higher returns on ULIPs”,[ available

at” http://www.livemint.com/2010/02/28233434/Budget-signals-higher-
returns.html]
6. Anonymous,(2005) “ULIPs vs Mutual Funds: Who's better?”,[available at”
http://www.rediff.com/money/2005/oct/15perfin.htm]

7. Getmeinsure, ( 2008 ) “Ulip Comparison Vs Mutual Fund and Term

Insurance”, [available at” http://www.getmeinsure.com/india-insurance/articles-
news-insurance/ulip-comparison-mutual-fund-term-insurance]

8. George D. Lambert (2010),“ Using Mutual Funds To Profit From Market

Dips”,[available at”
http://www.investopedia.com/articles/mutualfund/07/against_the_market.aspJ
Hari

9. Narayan(2008)“IRDA’s new efforts to differentiate ULIP from Mutual

Fund”,[available at” http://gconnect.in/gc/money-matters/irdas-new-efforts-to-
differentiate-ulip-from-mutual-funds.html]

10. Loth,R.(2007) “5 Ways To Measure Mutual Fund Risk”, [available at”

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61
11. Roudra Bhattacharya (2009), “Unit-linked insurance policies may sell less
after cap on charges”,[available at”
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m]
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November 2015; “SEBI using technology to push for growth of Mutual Fund

industry”, IndiaInfoline website, 28 October 2015

13. www.irdaonline.org in

14. https://www.amfiindia.com/

62
ANNEXURE
Questionnaire
1. Do you invest in mutual funds/ ULIPs?

 Yes
 No

2. If not, then what other option(s) do you prefer to invest?

 Fixed Deposits
 Post Office Schemes
 Recurring Deposits
 Others

3. What percentage of your income do you invest?

 0-5%
 6-10%
 11-15%

4. At what rate do you want your investment to grow?

 Steadily
 At an average rate
 Fast

5. How long do you plan to invest your money?

 Under 2 years
 2-5 years
 6-10 years
 11-15 years
 Over 15 years

6. Imagine that the stock market drops immediately after you invest in it, then
what will you do?

 Withdraw your money

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  Wait and watch
 Invest more in it

7. Which form of investment do you prefer the most?

 ULIP
 Mutual Fund
 Equity Trading
 Fixed Deposits & Post Office schemes
 Bank Savings

8. Under Mutual Fund schemes, rank the following according to your

preference.( 1- Most preferred , 5- Least preferred )

 Debt Fund
 Equity Fund
 Balanced Fund
 Equity Linked Saving Schemes

9. Do you view following factor/sources of information important while

investing in Mutual Funds?

 Safety
 Liquidity
 Return earned
 Tax Savings
 Performance of past schemes
 Rating of MF by Agencies
 Advertisements
 Recommendations of friends and relatives

10. How long do you plan to stay invested in ULIP?

 3-5 years
 5-7 years
 10-20 years

11. Why have you invested in ULIPs?

 Investment
 Insurance

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12. Do you view following factors/sources of information important while
investing in ULIP?

 Safety
 Liquidity
 Return earned
 Tax Savings
 Performance of past schemes
 Rating of ULIPS by Agencies
 Advertisements
 Recommendations of friends and relatives

13. After imposition of tax on Long Term Capital Gains (LTCG) as proposed in
Union Budget 2018, which investment would you prefer?

 Mutual Funds
 ULIPs

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.

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