CHAPTER-1 INTRODUCTION

INTRODUCTION TO MUTUAL FUND:

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objective of a mutual fund scheme generally forms the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors. For example: If the market value of the assets of a fund is Rs. 100,000 The total number of units issued to the investors is equal to 10,000. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00 Now if an investor 'X' owns 5 units of this scheme Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the scheme)

TYPES OF MUTUAL FUNDS General Classification of Mutual Funds Open-end Funds / Closed-end Funds Open-end Funds: Funds that can sell and purchase units at any point in time are classified as Openend Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day. Closed-end Funds: Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions: Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday).

Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed.

Load Funds/no-load funds Load Funds: Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund managers salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors: Entry Load Also known as Front-end load, it refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investors contribution amount to the fund. Exit Load Also known as Back-end load, these charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor. Deferred Load Deferred load is charged to the scheme over a period of time. Contingent Deferred Sales Charge (CDSS) In some schemes, the percentage of exit load reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.

No-Load Fund: All those funds that do not charge any of the above mentioned loads are known as No-load Funds. Tax-exempt Funds/ Non-Tax-exempt Funds Tax-exempt Funds: Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free. Non-Tax-exempt Funds: Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.

BROAD MUTUAL FUND TYPES

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

(1)Aggressive Growth Funds: In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. Growth Funds: Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. Specialty Funds: Specialty Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier than diversified funds. There are following types of specialty funds: Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve 8

international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500crores but more than Rs. 500crores) and Small-Cap companies have market capitalization of less than Rs. 500crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. Diversified Equity Funds: Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock9

in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. Equity Index Funds: Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are Less risky than equity index funds that follow narrow sect oral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky. 2. Debt/Income Funds: Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds: 10

Diversified Debt Funds: Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

Focused Debt Funds: Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.

Assured Return Funds: Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have 11

adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible. Fixed Term Plan Series: Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to Gratify investors by generating some expected returns in a short period. 1.Open-end 2.Closed-end 3.GiltFunds Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities 12

are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction. 4. Money Market/Liquid Funds: Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). 5. Hybrid Funds: As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India: Balanced Funds The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. Growth-and-Income Funds Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in 13

companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds. 6. Commodity Funds: Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. Precious Metals Fund and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds. 7. Real Estate Funds: Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. Exchange Traded Funds (ETF): Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a

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single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad. 9. Fund of Funds: Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes. Risk Hierarchy of Different Mutual Funds: Thus, different mutual fund schemes are exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation hereunder provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:

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MUTUAL FUND STRUCTURE As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds. In fact, too many people, investing means buying mutual funds. After all, its common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand.

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Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits your business. In this tutorial, we'll explain the basics of mutual funds and hopefully clear up some of the myths around them. You can then decide whether or not they are right for you.

1.1 Introduction to Life Insurance

Life insurance has traditionally been looked upon pre-dominantly as an avenue that offers tax benefits while also doubling up as a saving instrument. The purpose of life insurance is to indemnify the nominees in case of an eventuality to the insured. In other words, life insurance is intended to secure the financial future of the nominees in the absence of the person insured. The purpose of buying a life insurance is to protect your dependants from any financial difficulties in your absence. It helps individuals in providing them with the twin benefits of insuring themselves while at the same time acting as a compulsory savings instrument to take care of their future needs. Life insurance can aid your family on a rainy day, at a time when help from every quarter is welcome and of course, since some plans also double up as a savings instrument, they assist you in planning for such future needs like

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childrens marriage, purchase of various household items, gold purchases or as seed capital for starting a business. Traditionally, buying life insurance has always formed an integral part of an individuals annual tax planning exercise. While it is important for individuals to have life cover, it is equally important that they buy insurance keeping both their long-term financial goals and their tax planning in mind. This note explains the role of life insurance in an individuals tax planning exercise while also evaluating the various options available at ones disposal. Life is full of dangers, but with insurance, you can at least ensure that you and your dependents dont suffer. Its easier to walk the tightrope if you know there is a safety net. You should try and take cover for all insurable risks. If you are aware of the major risks and buy the right products, you can cover quite a few bases. The major insurable risks are as follows: Life Health Income Professional Hazards Assets Outliving Wealth Debt Repayment

1.2 Types of Insurance Policies:

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A) Term Plans A term plan is the most basic type of life insurance plan. It is the most costeffective life insurance product. Unlike other plans that come with an investment or savings component, term plans are products that cover only your life. This means your dependents or nominees get the sum assured on your death. A term plan offers life cover at a very nominal cost. This is due to the fact that term plan premiums include only mortality charges and sales and administration expenses. There is no savings element. B) Money Back Plan A money back plan aims to give you a certain sum of money at regular intervals; simultaneously it also provides you with life cover. Money back plans are especially useful in case you need money at regular intervals for your childs education, marriage, etc. C) Unit Linked Insurance Plans (ULIPs) ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities (gsecs). The basic difference between ULIPs and traditional insurance plans is that while traditional plans invest mostly in bonds and gsecs, ULIPs mandate is to invest a major portion of their corpus in stocks. However, investments in ULIP should be in tune with the individuals risk appetite. ULIPs offer flexibility to the policy holder the policy holder can shift his money between equity and debt in varying proportions. D) Pension / Retirement Plans Planning for retirement is an important exercise for any individual. A retirement plan from a life insurance company helps an individual insure his life for a specific sum

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assured. At the same time, it helps him in accumulating a corpus, which he receives at the time of retirement. E) Endowment Plans Individuals with a low risk appetite, who want an insurance cover, which will also give them returns on maturity could consider buying traditional endowment plans. Such plans invest most of their money in specified debt instruments like corporate bonds, government securities (Gsecs) and the money market. The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest innovation in the field of life insurance in the past several decades.In a swoop, it has addressed and overcome several concerns that customers had about life insurance -- liquidity, flexibility and transparency and the lack thereof. These benefits are possible because ULIPs are differently structured products and leave many choices to the policyholder. Hence, as a customer, you must carefully consider whether you can make such a product work well for you. Broadly speaking, I believe that ULIPs are best suited for those who have a conceptual understanding of financial markets and are genuinely looking for a flexible, long-term savings-cum-insurance solution.Put simply, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one's specific needs. Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match one's lifestyle, inexplicable returns and an expensive, complicated exit.

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ULIPs, by separating the two parts within the same product, and managing them independently, offer insurance buyers what no traditional policy had -- continuous information about how their policy is working for them. Often, people wonder whether it's better to purchase separate financial products for their protection and savings needs. Certainly, this is a viable option for those who have the time and skill to manage several products separately. However, for those who want a convenient, economical, one-stop solution, ULIPs are the best bet. To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, let us take the example of a 35-year-old man with 2 young children. With a premium of, say, Rs 30,000 p.a. he could begin with a sum assured of Rs 5lakh, for which the life insurer would set aside a nominal amount of the premium to cover this risk. The balance could be invested in a fund of his choice, possibly a balanced or growth option. As the children grow, he might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up. The chart below shows how one product can meet multiple needs at different life stag

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Integrated Financial Planning

Starting job, individual a Recently married, no kids Married, with kids Kids going to school, college Higher studies for marriage child, Children independent, nearing the golden years

Single

Your Need

Low protection, high creation asset and

Reasonable protection, still high on asset creation

Higher protection, still high on asset creation but steadier options, increase savings child for

Higher Protection, high on asset creation steadier options, liquidity education expenses Withdrawal from account for expenses the child the for of for but

Lumpsum money education, marriage. Facility to stop premium for 23 yrs for these extra expenses for

Safe accumulation for the golden yrs.Considerab ly lower life insurance the dependencies have low as

accumulation

Flexibili ty

Choose choose

low

Increase death benefit, choose growth/balan ced for creation option asset

Increase death benefit; choose balanced option asset creation. Choose riders for enhanced protection. Use to your accumulation top-ups increase

Withdrawal from account higher education/marri age expenses of the Premium holiday-to stop premium for a period without lapsing policy the child. the for

Decrease

the

death benefit, growth/balan ced option for asset creation

death benefitreduce it to the minimum possible. Choose income investment option. Topups form the accumulation (with reduced expenses) cash accumulation for the golden yrs the

the education

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The key to good financial planning is to understand one's current and future financial goals, risk appetite and portfolio mix. This done, the next step is to allocate assets across different categories and systematically adhere to an investment pattern, so that they work in tandem to meet one's requirements over the next month, year or decade. Because of their flexibility to adjust to different life stage needs, ULIPs fit in very well with financial planning efforts. Moreover, as a systematic investment plan, ULIPs greatly diminish the hazards of investing in a volatile market, and using the concept of 'Rupee Cost Averaging', allow the policyholder to earn real returns over the long term. When you're buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you. Take the following into consideration. Charges: Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative charges, the fund management charges, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. It might seem confusing at first, but a company provided benefit illustration should help make this clearer. Some companies levy a spread between the buy and sell rates of the units, which can significantly reduce the value of the investment over the long-term. Close examination and questioning of such aspects will reveal the growing power of your investment.

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Fund Options and Management: Understand the various fund options available to you and the fund management philosophy and objectives of each of them. Examine the track record of the funds thus far and how they are performing in comparison to benchmarks. Who manages the funds and what experience do they have? Are there adequate controls? Importantly, look at how easily you can access information about your fund's performance when you need it -- are their daily NAVs? Is the portfolio disclosed regularly? Features: Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. Carefully understand the conditions and charges associated with each of these. For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must you go through medical underwriting if you want to increase the sum assured? Company: Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements. Having bought a ULIP, its important that you monitor it on a regular basis, though not as frequently as you would a stock or mutual fund. Your ULIP is a long-term investment and daily fluctuations in the NAV should not impact you. Check once a quarter to see how your fund is performing, and consider a switch if there is a change in the level of risk you are willing to take or in your personal market view.

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Monitor your fund; value it in the few weeks or months before a planned withdrawal or top-up, or a change in your life stage or lifestyle. For those who are still finding their feet with their ULIP and its multitude of options, the best thing to do is to consult your advisor. Life insurance as a form of protection is the single-most important financial product any earning member of a family must have. Having said this, a well-diversified portfolio is one of the first rules of financial planning, and as such one should consider different instruments as the ability to save increases. Certainly ULIPs successfully combine the first and most important need of protection, with savings, and hence are an excellent addition to your portfolio. These can be combined with various other products, after taking into account your risk appetite, financial goals and need for portfolio diversification. Possible investment options range from bank deposits and government small saving schemes to mutual funds, stocks and property. Buying a ULIP is quite different from buying a traditional insurance product; and sometimes there are cases of people who believe they have been mis-sold a ULIP, the complaint most often being that they were not aware of the risks or the charges. All financial products have a certain amount of risk and charges, be it a mutual fund, property, or even a bank deposit. It would be unrealistic to assume that the features and benefits of a ULIP come at no cost, though the charges are considerably lower than that of a traditional product.

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In fact, the very reason the product is transparent is because the customer knows the charges and risks. Further, unlike other financial products, all life insurance plans come with a 15-day free look, which allows you to return the policy if you believe it does not meet your needs or expectations. My advice to those who are looking to buy not just a ULIP, but any financial product: It is your right and responsibility to ask for a company printed benefit illustration and brochure, and take some time to read, understand and question it. After all, you are committing your hard-earned money for years to come!

1.3 OBJECTIVES
To study some of the Unit Linked Insurance plans and policies of HDFC and some of the Mutual Fund scheme of HDFC AMC. To investigate which investment option (Ulips/Mutual funds) would bring out maximum returns for an investor. To determine which investment option would yield maximum returns in the long run. To find and suggest whether there is any uncertainty involved in this schemes.

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1.4 NEED OF THE STUDY ULIPs have been selling like proverbial `hot cakes' in the recent past and they are likely to continue to outsell their going ahead. So what is it that makes ULIPs so attractive to the individual? Here are some reasons, which have made ULIPs so irresistible. To begin with, 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. This is unlike comparable instruments like a mutual fund for instance, which does not offer a life cover. 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.

1.5 SCOPE OF THE STUDY 27

The scope of the study is limited to different mutual fund schemes and different life insurance schemes of HDFC.THE present study has taken to observe the returns of ULIPs and Mutual Funds for a period of 10years, 15years, and 20years. This enables me to study long run returns. 1.6 IMPORTANCE OF THE STUDY One may well ask how ULIPs are any different from mutual funds. After all, mutual funds also offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile. The difference lies in the flexibility that ULIPs afford the individual. Individuals can switch between the ULIP variants outlined above to capitalize on investment opportunities across the equity and debt markets. Some insurance companies allow a certain number of `free' switches. This is an important feature that allows the informed individual/investor to benefit from the vagaries of stock/debt markets. Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have probably already heard of the Systematic Investment Plan (SIP) which is increasingly being advocated by the mutual fund industry. With an SIP, individuals invest their monies regularly over time intervals of a month/quarter and don't have to worry about `timing' the stock markets. These are not benefits peculiar to mutual funds. Not many realize that ULIPs also tend to do the same, albeit on a quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP works on the rupee cost-averaging principle. An added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP either to benefit from opportunities in the stock markets or if they have an investible surplus in a particular year that they wish to put aside for the future.

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Keeping in mind the rapid growth of the Life Insurance industry as well as the Mutual Funds industry and the above mentioned factors, it was felt that it was important to understand the features that distinguished ULIPS from Mutual Funds.

2.0 Research Design:

The research design used to undertake the project is of exploratory research. 2.1.0 Data sources The data sources used for the study are : 2.1.1 Primary data: The data is collected by interaction with executives of HDFC standard life insurance. 2.1.2 Secondary data: The secondary data is obtained from sources like Study reference books Internet Current NAVs of HDFC mutual fund AMC and HDFC Life insurance. 2.1.3 Data analysis: Fact Sheets

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The data about different schemes in HDFC standard life insurance is obtained and the analysis is performed and compared with the schemes of other insurance company and different Mutual Fund schemes of HDFC.

2.2 Limitations of the Study Comparison of funds with ULIPS is difficult as each of them come with different objectives. Moreover the past performance of various funds may or may not be sustained in the future. There is limited availability of data for comparison Since this project was undertaken for a less period meticulous study could not be carried out. Much of the data is collected from secondary sources. The calculations so made with the help of above data may not be accurate.

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CHAPTER-2 REVIEW OF LITERATURE

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CHAPTER-3 COMPANY PROFILE

Company Profile
HDFC Bank Limited
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The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an in principle approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBIs liberalization of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of HDFC Bank Limited, with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. Promoter HDFC is Indias premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment. Business focus HDFC Banks mission is to be a World-Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the banks risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, and corporate governance and regulatory. Compliance. HDFC Banks business philosophy is 34

based on four core values - Operational Excellence, Customer Focus, Product Leadership and People Capital Structure The authorized capital of HDFC Bank is Rs.450crore (Rs.4.5 billion). The paid-up capital is Rs.309.9crore (Rs.3.09 billion). The HDFC Group holds 22.2% of the banks equity and about 19.5% of the equity is held by the ADS Depository (in respect of the banks American Depository Shares (ADS) Issue). Roughly 31.7% of the equity is held by Foreign Institutional Investors (FIIs) and the bank has about 190,000 shareholders. The shares are listed on the Stock Exchange, Mumbai and the National Stock Exchange. The banks American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol HDB. Times Bank Amalgamation In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co. /Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. The acquisition added significant value to HDFC Bank in terms of increased branch network, expanded geographic reach, enhanced customer base, skilled manpower and the opportunity to cross-sell and leverage alternative delivery channels.

Distribution Network

35

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over 495 branches spread over 218 cities across India. All branches are linked on an online real-time basis. Customers in over 120 locations are also serviced through Telephone Banking. The Banks expansion plans take into account the need to have a presence in all major industrial and commercial centers where its corporate customers are located as well as the need to build a strong retail customer base for both deposits and loan products. Being a clearing/settlement bank to various leading stock exchanges, the Bank has branches in the centers where the NSE/BSE has a strong and active member base. The Bank also has a network of about over 1054-networked ATMs across these cities. Moreover, HDFC Banks ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.

Management
Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia. The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in public policy, administration, industry and commercial banking. Senior executives representing HDFC are also on the Board. Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and 36

retaining the best talent in the industry, the bank believes that its people are a significant competitive strength. Technology HDFC Bank operates in a highly automated environment in terms of information technology and communication systems. All the banks branches have online connectivity, which enables the bank to offer speedy funds transfer facilities to its customers. Multibranch access is also provided to retail customers through the branch network and Automated Teller Machines (ATMs). The Bank has made substantial efforts and investments in acquiring the best technology available internationally, to build the infrastructure for a world class bank. In terms of software, the Corporate Banking business is supported by Flexcube, while the Retail Banking business by Finware, both from i-flex Solutions Ltd. The systems are open, scaleable and web-enabled. The Bank has prioritized its engagement in technology and the Internet as one of its key goals and has already made significant progress in web-enabling its core businesses. In each of its businesses, the Bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share.

Business Profile

37

HDFC Bank caters to a wide range of banking services covering commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. The bank has three key business segments: a) Wholesale Banking Services The Banks target market is primarily large, blue chip manufacturing companies in the Indian corporate sector and to a lesser extent, small & mid-sized corporate and agribased businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading Indian corporate including multinationals, companies from the domestic business houses and prime public sector companies. It is recognized as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. b) Retail Banking Services The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to the customers through the growing branch network, as well as through

38

alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the MasterCard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2005, the bank had a total card base (debit and credit cards) of 4.2 million cards. The Bank is also one of the leading players in the merchant acquiring business with over 42,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc. c) Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the liberalization of the financial markets in India, corporate need more sophisticated risk management information, advice and product structures. These and fine pricing on various treasury products are provided through the banks Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in

39

government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.

RATINGS/AWARDS
Credit Rating HDFC Bank has its deposit programmes rated by two rating agencies - Credit Analysis & Research Limited. (CARE) and Fitch Ratings India Private Limited. The Banks Fixed Deposit programmed has been rated CARE AAA (FD) [Triple A] by CARE, which represents instruments considered to be of the best quality, carrying negligible investment risk. CARE has also rated the Banks Certificate of Deposit (CD) programmed PR 1+ which represents superior capacity for repayment of short term promissory obligations. Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the AAA (ind) rating to the Banks deposit programmed, with the outlook on the rating as stable. This rating indicates highest credit quality where protection factors are very high. HDFC Bank also has its long term unsecured, subordinated (Tier II) Bonds of Rs.4 billion rated by CARE and Fitch Ratings India Private Limited. CARE has assigned the rating of CARE AAA for the Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating AAA(ind) with the outlook on the rating as stable. In each of the cases referred to above, the ratings awarded were the highest assigned by the rating agency for those instruments? Corporate Governance Rating The bank was one of the first four companies, which subjected itself to a Corporate Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating Information Services of India Limited (CRISIL). The rating provides an independent assessment of an entitys current performance and an expectation on its 40

balanced value creation and corporate governance practices in future. The bank has been assigned a CRISIL GVC Level 1 rating which indicates that the banks capability with respect to wealth creation for all its stakeholders while adopting sound corporate governance practices is the highest. Awards and Accolades Over the years, HDFC Bank has received recognition and awards from various leading organizations and publications, both domestic and international. Awards and achievements-Bank services In June 2005, HDFC Bank won Asia money magazines Best Domestic Commercial Bank Award 2005 for India. The Bank was awarded The Asian Bankers, Excellence in Retail

Banking Risk Management Award for 2004, and pan-Asia recognition of the banks risk management abilities. The Asset (Triple a Country Awards) rated HDFC Bank as the Best

Domestic Bank in India 2004 and Best Domestic Bank in India 2003. Forbes Global again named the Bank in its listing of Best under a Billion,

100 Best Smaller Size Enterprises in Asia/Pacific and Europe, in its November 2004 issue. The Bank was rated as the Best Overall Local/Domestic Bank India

in the Corporate Cash Management Poll conducted by the Hong Kong based Asia money magazine. The said magazine also awarded the Bank with the titles of Overall Most

Improved Company for Best Management Practices in India in the Best Managed Companies poll 2004, Best Local Cash Management Bank, Best Overall Domestic 41

Trade Finance Services Award, and also awarded the Managing Director, Mr. Aditya Puri as the Best Chief Executive Officer in India. In May 2004, the Bank also won the Operational Excellence in Retail Financial Services India award as part of the Asian Banker Excellence in Retail Financial Services Program 2003. HDFC Bank was selected by Finance Asia as the Best Local Bank

India 2003, Best Local Bank in India 2002, Best Domestic Commercial Bank India 2001, Best Domestic Commercial Bank India 2000 and Best Domestic Commercial Bank India 1999.

Euro money rated HDFC Bank as Best Bank in India 2002, Best Bank

India 2001, Best Domestic Bank India 2000 and Best Bank India 1999. For its use of information technology the bank has been recognized as a

Computer world Honors Laureate and awarded the 21st Century Achievement Award in 2002 for Finance, Insurance & Real Estate category by Computer world, Inc., USA. Closer home, HDFC Bank was selected as the Best Bank in India for

the second consecutive year in 2004 by Business Today. The Bank was selected by Business World as "one of India's Most

Respected Companies" as part of The Business World Most Respected Company Awards 2004.

Theoretical base to the study

Ulips 42

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. It is to be REMEMBERED THAT IN A UNIT LINKED POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR. 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. Unit It is a component of the Fund in a Unit Linked Policy. Types of ULIP Offers Most insurers offer a wide range of funds to suit ones 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.

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General Description Equity Funds Income, Funds Cash Funds

Nature of Investments

Risk Category

Primarily invested in company stocks with the Medium to general aim of capital appreciation High Fixed Invested in corporate bonds, government Medium

Interest and Bond securities and other fixed income instruments Sometimes known as Money Market Funds Low invested in cash, bank deposits and money market instruments Balanced Funds Combining equity interest instruments investment with fixed Medium

Investment Guarantee in a ULIP

Investment returns from ULIP may not be guaranteed. In unit linked products/policies, the investment risk in investment portfolio is borne by the policy holder. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.

Charges, fees and deductions in a ULIP

44

ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time.

1. Premium Allocation Charge

This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.

2. Mortality Charges
These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc.

3. Fund Management Fees

These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV).

4. Policy/ Administration Charges

These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.

5. Surrender Charges

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A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.

6. Fund Switching Charge

Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.

7. Service Tax Deductions

Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units Amount of the premium that is used to purchase units The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units.

Refund of premiums if one is not satisfied with the policy, after purchasing it
46

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.

Net Asset Value (NAV)

NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers. The benefit payable in the event of risk occurring during the term of the policy 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 condition

The benefit payable on the maturity of the policy The value of the fund units with bonuses, if any is payable on maturity of the policy. Possibility to invest additional contribution above the regular premium 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.

Mutual Fund

47

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of mutual funds. .

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because all stocks

48

may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The investors in proportion to their investments share the profits or losses. The

mutual funds normally come out with a number of schemes with different investment objectives that are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public. Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields adjustment of tax on various instruments while taking investment decisions. after

Mutual fund structure:

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Sponsor:
Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

Trust:
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908 Trustee: Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner Asset Management Company:

50

The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 cores at all times. History of Mutual Funds in India and role of SEBI in mutual funds industry. Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the securities market. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. 51

By structure Open-Ended schemes Close-ended schemes Interval schemes

By Investment objective Growth schemes Income schemes Balanced schemes Money market schemes

Other schemes Tax saving schemes Special saving schemes Index schemes Sector specific schemes

NET ASSET VALUE: A unit is a basic measure of investment in a mutual fund. Each scheme or plan will have different market values depending on the market value of the underlying asset it has invested in. This value is called net asset value. Similarly market value of underlying asset changes every day, net asset value also varies on day-to-day basis.

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NAV is computed using a formula: (Total assets liabilities) / No. Of assets

ULIPs vs. Mutual Funds Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component. However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs. Despite the seemingly comparable structures there are various factors wherein the two differ. In this article we evaluate the two avenues on certain common parameters and find out how they measure up. 1. Mode of investment/ investment amounts Mutual fund investors have the option of either making lump sum investments or investing using the systematic investment plan (SIP) route which entails commitments

53

over longer time horizons. The minimum investment amounts are laid out by the fund house. ULIP investors also have the choice of investing in a lump sum (single premium) or using the conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly basis. In ULIPs, determining the premium paid is often the starting point for the investment activity. This is in stark contrast to conventional insurance plans where the sum assured is the starting point and premiums to be paid are determined thereafter. ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure. For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). The freedom to modify premium payments at one's convenience clearly gives ULIP investors an edge over their mutual fund counterparts. 2. Expenses In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to 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 annum on a recurring basis for all their expenses; any expense above the prescribed limit is borne by the fund house and not the investors.

54

Similarly funds also charge their investors entry and exit loads (in most cases, either is applicable). Entry loads are charged at the timing of making an investment while the exit load is charged at the time of sale. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP offerings. The only restraint placed is that insurers are required to notify the regulator of all the expenses that will be charged on their ULIP offerings. Expenses can have far-reaching consequences on investors since higher expenses translate into lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses have been dealt with in detail in the article "Understanding ULIP expenses". 3. Portfolio disclosure Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio. There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our interactions with leading insurers we came across divergent views on this issue.

55

While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory, the other believes that there is no legal obligation to do so and that insurers are required to disclose their portfolios only on demand. Some insurance companies do declare their portfolios on a monthly/quarterly basis. However the lack of transparency in ULIP investments could be a cause for concern considering that the amount invested in insurance policies is essentially meant to provide for contingencies and for long-term needs like retirement; regular portfolio disclosures on the other hand can enable investors to make timely investment decisions. 4. Flexibility in altering the asset allocation As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely comparable. For example plans that invest their entire corpus in equities (diversified equity funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing only in debt instruments (debt funds) can be found in both ULIPs and mutual funds. If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from the same fund house, he could have to bear an exit load and/or entry load. On the other hand most insurance companies permit their ULIP inventors to shift investments across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are allowed free of charge every year and a cost has to be borne for additional switches). Effectively the ULIP investor is given the option to invest across asset classes as per his convenience in a cost-effective manner.

56

This can prove to be very useful for investors, for example in a bull market when the ULIP investor's equity component has appreciated, he can book profits by simply transferring the requisite amount to a debt-oriented plan. 5. Tax benefits ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds good, irrespective of the nature of the plan chosen by the investor. On the other hand in the mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked savings schemes) are eligible for Section 80C benefits. Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example diversified equity funds, balanced funds), if the investments are held for a period over 12 months, the gains are tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @ 10%. Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term capital gain is taxed at the investor's marginal tax rate.Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both offerings and make informed decisions.

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Major difference between ULIPS and MUTUAL FUNDS Unit Linked Investment Plans (ULIP) What it is? Protection + Investments. Duration for Long Term only good returns Flexibility Limited. Correcting mistakes and Moving funds from one ULIP to another ULIP of a different fund management is very expensive. ULIPs can be used for achieving only long term objectives and for those who seek Insurance cover. Provide Tax Benefits under section 80C. Mutual Funds Investments Medium term, Long Term. Risky for Short Term investors. Very flexible. You can correct your mistakes if you made any wrong investment decisions. You can easily rearrange your portfolio in MFs. MF's can be used as your vehicle for investments to achieve mid-long term objectives. Investments in ELSS schemes qualify for 80C. Returns on equity MF's are exempt from long term capital gains tax. Very liquid. You can sell your MF units any time (except ELSS). Reliance mutual funds even have introduced redemptions at ATMs. Only Investment. Better returns than ULIPs and Lower charges than ULIPs.

Investment Objective Tax Implications Liquidity

Limited liquidity. Should stay invested for a minimum number of years before you can redeem. Protection + Investments.

Protection

Certain ULIPs provide capital guarantee. This protects individuals from a potential market slide. In case of a market slide, the insurance company purports to at least return the premium paid by the individual.

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CHAPTER-4 DATA ANALYSIS

Charges for ULEP & ULYS 59

Initial Charges for 1 & 2 Yr Initial Charges 3rd Yr onwards FMC Policy Fee

30% - 5% 1% 0.80% 240

Comparison of ULIP, ULYS and Mutual Funds

Premium for 3 yrs Premium for Rest of period Rate of Return Regular Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 100000 100000 10

Unit Linked

Initial Policy Inevitable Net Premium Charges Fee Amount Growth FMC Growth 100,000 30,000 240 69,760 76,736 614 76,122 100,000 30,000 240 69,760 160,470 1,284 159,187 100,000 1,000 240 98,760 283,741 2,270 281,471 100,000 1,000 240 98,760 418,254 3,346 414,908 100,000 1,000 240 98,760 565,035 4,520 560,515 100,000 1,000 240 98,760 725,202 5,802 719,401 100,000 1,000 240 98,760 899,977 7,200 892,777 100,000 1,000 240 98,760 1,090,691 8,726 1,081,965 100,000 1,000 240 98,760 1,298,798 10,390 1,288,407 100,000 1,000 240 98,760 1,525,884 12,207 1,513,677 100,000 1,000 240 98,760 1,773,681 14,189 1,759,491 100,000 1,000 240 98,760 2,044,076 16,353 2,027,724 100,000 1,000 240 98,760 2,339,132 18,713 2,320,419 100,000 1,000 240 98,760 2,661,097 21,289 2,639,808 100,000 1,000 240 98,760 3,012,425 24,099 2,988,326 100,000 1,000 240 98,760 3,395,794 27,166 3,368,628 100,000 1,000 240 98,760 3,814,127 30,513 3,783,614 100,000 1,000 240 98,760 4,270,611 34,165 4,236,446 100,000 1,000 240 98,760 4,768,727 38,150 4,730,577 100,000 1,000 240 98,760 5,312,271 42,498 5,269,773 Interpretation: It shows that the Fund allocation of on 100000 policy with premium 10000. The above policy shoes that the maturity period is 20 years.After maturity of the policy the investor get 5,269,773 and after deducting FMC. Charges for MF 60

Entry Load 2.25 FMC 2.25% Premium for 3 yrs 100000 Premium for Rest of period 100000 Rate of Return 10

Comparison of ULEP, ULYS and Mutual Funds

Regular Amount 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Mutual Fund Initial Charges 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 Inevitable Amount 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 Growth 107,525 223,141 347,458 481,129 624,859 779,404 945,580 1,124,259 1,316,385 1,522,968 1,745,096 1,983,940 2,240,756 2,516,898 2,813,820 3,133,085 3,476,374 3,845,496 4,242,395 4,669,160 FMC 2,419 5,021 7,818 10,825 14,059 17,537 21,276 25,296 29,619 34,267 39,265 44,639 50,417 56,630 63,311 70,494 78,218 86,524 95,454 105,056 Net Growth 105,106 218,121 339,640 470,303 610,799 761,868 924,304 1,098,964 1,286,766 1,488,701 1,705,832 1,939,301 2,190,339 2,460,268 2,750,509 3,062,590 3,398,156 3,758,973 4,146,941 4,564,104 Difference (28,984) (58,934) (58,169) (55,395) (50,285) (42,467) (31,527) (16,998) 1,641 24,976 53,660 88,423 130,080 179,540 237,817 306,038 385,458 477,473 583,636 705,668

Returns of ULEP, ULYS and Mutual Funds UL Vs MF Total Investment Return in Unit Linked Return in MF Difference 10 yrs 1,000,000 1,513,677 1,488,701 24,976 15 yrs 1,500,000 2,988,326 2,750,509 237,817 20 yrs 2,000,000 5,269,773 4,564,104 705,668

61

Comparison of ULPP and Mutual Funds

Charges for ULPP Initial Charges for 1 & 2 Yr 25% - 5% Initial Charges 3rd Yr onwards 1% FMC 0.80% Policy Fee 240 Premium for 3 yrs 100000 Premium for Rest of period 100000 Rate of Return 10 Unit Linked Regular Year Policy Investable Premium Initial Charges Fee Amount 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 25,000 25,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 74,760 74,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760

Growth 82,236 171,972 296,292 431,950 579,979 741,509 917,771 1,110,108 1,319,986 1,549,004 1,798,910 2,071,606 2,369,173 2,693,877 3,048,195 3,434,826 3,856,718 4,317,087 4,819,441 5,367,610

FMC 658 1,376 2,370 3,456 4,640 5,932 7,342 8,881 10,560 12,392 14,391 16,573 18,953 21,551 24,386 27,479 30,854 34,537 38,556 42,941

Net Growth 81,578 170,596 293,921 428,494 575,340 735,577 910,429 1,101,227 1,309,426 1,536,612 1,784,518 2,055,033 2,350,219 2,672,326 3,023,809 3,407,348 3,825,865 4,282,550 4,780,886 5,324,670

Comparison of ULPP and Mutual Funds

62

Premium for 3 yrs 100000 Premium for Rest of period 100000 Rate of Return 10 Charges for MF Entry Load 2.25 FMC 2.25%

Regular Amount 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

Mutual Fund Initial Charges 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 Inevitable Amount 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 Growth 107,525 223,141 347,458 481,129 624,859 779,404 945,580 1,124,259 1,316,385 1,522,968 1,745,096 1,983,940 2,240,756 2,516,898 2,813,820 3,133,085 3,476,374 3,845,496 4,242,395 4,669,160 FMC 2,419 5,021 7,818 10,825 14,059 17,537 21,276 25,296 29,619 34,267 39,265 44,639 50,417 56,630 63,311 70,494 78,218 86,524 95,454 105,056 Net Growth 105,106 218,121 339,640 470,303 610,799 761,868 924,304 1,098,964 1,286,766 1,488,701 1,705,832 1,939,301 2,190,339 2,460,268 2,750,509 3,062,590 3,398,156 3,758,973 4,146,941 4,564,104 Difference (23,528) (47,524) (45,718) (41,809) (35,460) (26,290) (13,875) 2,263 22,660 47,911 78,687 115,732 159,880 212,058 273,300 344,757 427,709 523,578 633,945 760,565

Returns of ULPP and Mutual Funds

UL Vs MF Total Investment 10 yrs 1,000,000 15 yrs 1,500,000 20 yrs 2,000,000 63

Return in Unit Linked Return in MF Difference

1,536,612 1,488,701 47,911

3,023,809 2,750,509 273,300

5,324,670 4,564,104 760,565

Comparison of ULEP+, ULYS+ and Mutual Funds

Charges for ULEP+ , ULYS+ Initial Charges for 1 Yr 60% - 10% Initial Charges 2nd Yr onward 1% FMC 1% Policy Fee 240.00 Premium for 1st yr 100000 Premium from 2nd & 3rd yr 100000 Premium for Rest period 100000 Rate of Return 10

Unit Linked Year 1 2 3 4 5 6 7 8 9 10 11 12 Regular Premium 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Initial Charges 60,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Policy Fee 240 240 240 240 240 240 240 240 240 240 240 240 Investable Amount 39,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 Growth 43,736 156,409 279,481 413,913 560,754 721,147 896,345 1,087,714 1,296,746 1,525,071 1,774,472 2,046,891 FMC 350 1,251 2,236 3,311 4,486 5,769 7,171 8,702 10,374 12,201 14,196 16,375 Net Growth 43,430 155,314 277,525 411,016 556,828 716,099 890,071 1,080,100 1,287,669 1,514,396 1,762,050 2,032,563 64

13 14 15 16 17 18 19 20

100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

240 240 240 240 240 240 240 240

98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760

2,344,455 2,669,485 3,024,514 3,412,313 3,835,905 4,298,595 4,803,991 5,356,036

18,756 21,356 24,196 27,299 30,687 34,389 38,432 42,848

2,328,044 2,650,798 3,003,342 3,388,426 3,809,054 4,268,505 4,770,364 5,318,544

Comparison of ULEP+, ULYS+ and Mutual Funds

Premium for 1st yr Premium from 2nd & 3rd yr Premium for Rest period Rate of Return Charges for MF Entry Load 2.25 FMC 2.25% 100000 100000 100000 10

Mutual Fund Regular Initial Amount Charges 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 Investable Amount 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 Growth 107,525 223,141 347,458 481,129 624,859 779,404 945,580 1,124,259 1,316,385 FMC 2,419 5,021 7,818 10,825 14,059 17,537 21,276 25,296 29,619 Net Growth 105,106 218,121 339,640 470,303 610,799 761,868 924,304 1,098,964 1,286,766 Difference (61,676) (62,807) (62,115) (59,287) (53,971) (45,769) (34,233) (18,864) 902 65

100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250

97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750

1,522,968 1,745,096 1,983,940 2,240,756 2,516,898 2,813,820 3,133,085 3,476,374 3,845,496 4,242,395 4,669,160

34,267 39,265 44,639 50,417 56,630 63,311 70,494 78,218 86,524 95,454 105,056

1,488,701 1,705,832 1,939,301 2,190,339 2,460,268 2,750,509 3,062,590 3,398,156 3,758,973 4,146,941 4,564,104

25,695 56,219 93,262 137,705 190,530 252,834 325,836 410,898 509,532 623,422 754,439

Returns of ULEP+, ULYS+ and Mutual Funds

UL Vs MF Total Investment Return in Unit Linked Return in MF Difference 10 yrs 1,000,000 1,514,396 1,488,701 25,695 15 yrs 1,500,000 3,003,342 2,750,509 252,834 20 yrs 2,000,000 5,318,544 4,564,104 754,439

Comparison of HDFC (ULEP, ULYS) and Other Insurance Companies

Charges for HDFC ULEP & ULYS Initial Charges for 1 & 2 Yr 30% - 5% Initial Charges 3rd Yr onwards 1% FMC 1% Policy Fee 240.00 Premium for 3 yrs 100000 Premium for Rest of period 10000 Rate of Return 10 Premium for 3 yrs 100000 66

Premium for Rest of period 10000 Rate of Return 10 HDFC ULYS / ULEP Regular Year Policy Investable Premium Initial Growth Charges Fee Amount 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 100,000 100,000 100,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 30,000 30,000 1,000 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 69,760 69,760 98,760 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 9,660 76,736 160,470 283,741 320,244 360,077 403,542 450,971 502,725 559,200 620,825 688,070 761,448 841,518 928,891 1,024,231 1,128,267 1,241,791 1,365,669 1,500,844 1,648,346

FMC 614 1,284 2,270 2,562 2,881 3,228 3,608 4,022 4,474 4,967 5,505 6,092 6,732 7,431 8,194 9,026 9,934 10,925 12,007 13,187

Net Growth 76,122 159,187 281,471 317,682 357,196 400,313 447,363 498,703 554,726 615,858 682,565 755,356 834,786 921,459 1,016,037 1,119,241 1,231,857 1,354,743 1,488,837 1,635,160

Comparison of HDFC (ULEP, ULYS) and Other Insurance Companies

Other Insurance Company Initial Charges for 1 yr 18 Initial Charges for 2 yr 7.5 Initial Charges for 3 to 10 yrs 4 Initial Charges 11 yr onwards 4 FMC 2.25% Policy Fee 720 Premium for 3 yrs 100000 Premium for Rest of period 10000 Rate of Return 10 67

Regular Amount 100,000 100,000 100,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000

Other Insurance Company Initial Charges 18,000 18,000 18,000 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 Policy Fee 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 Investable Amount 82,000 82,000 82,000 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 Growth 90,200 187,188 291,473 322,427 355,709 391,497 429,977 471,352 515,842 563,679 615,116 670,423 729,892 793,837 862,593 936,523 1,016,016 1,101,492 1,193,399 1,292,222 FMC 2,030 4,212 6,558 7,255 8,003 8,809 9,674 10,605 11,606 12,683 13,840 15,085 16,423 17,861 19,408 21,072 22,860 24,784 26,851 29,075 Net Growth 88,171 182,976 284,915 315,172 347,706 382,688 420,302 460,747 504,235 550,996 601,275 655,339 713,470 775,975 843,185 915,451 993,156 1,076,708 1,166,547 1,263,147 Difference (12,048) (23,789) (3,444) 2,510 9,490 17,626 27,061 37,956 50,491 64,862 81,290 100,018 121,316 145,484 172,853 203,790 238,701 278,035 322,289 372,012

Returns of HDFC (ULEP, ULYS) and Other Insurance Companies HDFC Vs Other Company Total Investment Return in HDFC Return in Other Insurance Co Difference 10 yrs 370,000 615,858 550,996 64,862 15 yrs 420,000 1,016,037 843,185 172,853 20 yrs 470,000 1,635,160 1,263,147 372,012

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Comparison of ULEP +, ULYS + and Other Insurance Companies Charges for ULEP + & ULYS + Initial Charges for 1 Yr 60% - 10% Initial Charges 2nd Yr onwards 1% FMC 0.80% Policy Fee 240 Premium for 3 yrs 100000 Premium for Rest of period 10000 Rate of Return 10 Year Regular Unit Linked Initial Policy Investable Premium Charges Fee Amount 1 100000 60000 240 39760 2 100000 1000 240 98760 3 100000 1000 240 98760 4 10000 100 240 9660 5 10000 100 240 9660 6 10000 100 240 9660 7 10000 100 240 9660 8 10000 100 240 9660 9 10000 100 240 9660 10 10000 100 240 9660 11 10000 100 240 9660 12 10000 100 240 9660 13 10000 100 240 9660 14 10000 100 240 9660 15 10000 100 240 9660 16 10000 100 240 9660 17 10000 100 240 9660 18 10000 100 240 9660 19 10000 100 240 9660 20 10000 100 240 9660

Growth 43736 156408 279480 315899 355680 399132 446594 498437 555064 616918 684480 758277 838886 926934 1023107 1128157 1242902 1368237 1505139 1654676

FMC 350 1251 2236 2527 2845 3193 3573 3987 4441 4935 5476 6066 6711 7415 8185 9025 9943 10946 12041 13237

Net Growth 43429 155312 277521 313685 353187 396335 443465 494944 551174 612595 679683 752963 833007 920438 1015937 1120251 1234192 1358648 1494591 1643080 69

Comparison of ULEP +, ULYS + and Other Insurance Companies

Other Insurance Company Initial Charges for 1 yr 18 Initial Charges for 2 yr 7.5 Initial Charges for 3 to 10 yrs 4 Initial Charges 11 yr onwards 4 FMC 2.25% Policy Fee 720 Premium for 3 yrs 100000 Premium for Rest of period 10000 Rate of Return 10 Other Insurance Company Regular Policy Investable Amount Initial Growth Charges Fee Amount 100,000 100,000 100,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 18,000 18,000 18,000 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 720 82,000 82,000 82,000 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 8,200 90,200 187,188 291,473 322,427 355,709 391,497 429,977 471,352 515,842 563,679 615,116 670,423 729,892 793,837 862,593 936,523 1,016,016 1,101,492 1,193,399 1,292,222

FMC 2,030 4,212 6,558 7,255 8,003 8,809 9,674 10,605 11,606 12,683 13,840 15,085 16,423 17,861 19,408 21,072 22,860 24,784 26,851 29,075

Net Growth 88,171 182,976 284,915 315,172 347,706 382,688 420,302 460,747 504,235 550,996 601,275 655,339 713,470 775,975 843,185 915,451 993,156 1,076,708 1,166,547 1,263,147

Difference (44,741) (27,663) (7,394) (1,487) 5,481 13,647 23,162 34,197 46,939 61,599 78,408 97,625 119,537 144,462 172,753 204,800 241,036 281,940 328,044 379,933

Returns of ULEP +, ULYS + and Other Insurance Companies

HDFC Vs Other Company 10 yrs 15 yrs 20 yrs 70

Total Investment Return in HDFC Return in Other Insurance Co Difference

370,000 612,595 550,996 61,599

420,000 1,015,937 843,185 172,753

470,000 1,643,080 1,263,147 379,933

Comparison of ULPP+ and Mutual Funds

Charges for ULPP+ Initial Charges for 1 Yr Initial Charges 2nd Yr onwards FMC Policy Fee Premium for 1st yr Premium from 2nd & 3rd yr Premium for Rest period Rate of Return Regular Premium 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 60% - 10% 1% 0.80% 240 100000 100000 100000 10

Unit Linked Year Initial Charges 50,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Policy Fee 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 240 Investable Amount 49,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 Growth 54,736 168,424 292,606 428,249 576,413 738,251 915,028 1,108,121 1,319,037 1,549,420 1,801,067 2,075,942 2,376,187 2,704,145 3,062,374 3,453,667 FMC 438 1,347 2,341 3,426 4,611 5,906 7,320 8,865 10,552 12,395 14,409 16,608 19,009 21,633 24,499 27,629 Net Growth 54,353 167,245 290,557 425,251 572,378 733,084 908,623 1,100,364 1,309,803 1,538,574 1,788,460 2,061,410 2,359,554 2,685,216 3,040,937 3,429,491 71

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

17 18 19

100,000 100,000 100,000

1,000 1,000 1,000

240 240 240

98,760 98,760 98,760 98,760

3,881,077 4,347,936 4,857,886 5,414,905

31,049 34,783 38,863 43,319

3,853,909 4,317,500 4,823,881 5,377,001

20 100,000 1,000 240 Comparison of ULPP+ and Mutual Funds Premium for 1st yr Premium from 2nd & 3rd yr Premium for Rest period Rate of Return Charges for MF Entry Load 2.25 FMC 2.25% 100000 100000 100000 10

Regular Amount 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

Mutual Fund Initial Charges 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 Investable Amount 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 97,750 Growth 107,525 223,141 347,458 481,129 624,859 779,404 945,580 1,124,259 1,316,385 1,522,968 1,745,096 1,983,940 2,240,756 2,516,898 FMC 2,419 5,021 7,818 10,825 14,059 17,537 21,276 25,296 29,619 34,267 39,265 44,639 50,417 56,630 Net Growth 105,106 218,121 339,640 470,303 610,799 761,868 924,304 1,098,964 1,286,766 1,488,701 1,705,832 1,939,301 2,190,339 2,460,268 Difference (50,753) (50,875) (49,082) (45,052) (38,422) (28,784) (15,681) 1,401 23,037 49,873 82,628 122,109 169,215 224,948 72

100,000 100,000 100,000 100,000 100,000 100,000

2,250 2,250 2,250 2,250 2,250 2,250

97,750 97,750 97,750 97,750 97,750 97,750

2,813,820 3,133,085 3,476,374 3,845,496 4,242,395 4,669,160

63,311 70,494 78,218 86,524 95,454 105,056

2,750,509 3,062,590 3,398,156 3,758,973 4,146,941 4,564,104

290,429 366,901 455,753 558,528 676,940 812,897

Returns of ULPP+ and Mutual Funds UL Vs MF Total Investment Return in Unit Linked Return in MF Difference 10 yrs 1,000,000 1,538,574 1,488,701 49,873 15 yrs 1,500,000 3,040,937 2,750,509 290,429 20 yrs 2,000,000 5,377,001 4,564,104 812,897

CHAPTER-5
FINDINGS & SUGGESTIONS
73

Findings of the study

From the analysis, it is observed that the schemes like unit linked endowment plan (ULEP) and unit linked youngster plan (ULYS) in HDFC standard life insurance are performing better from 5th year on words. The reason is that the initial charges in the first and second year are very less in other insurance companies, whereas HDFC standard life insurance company is an initial charge of 60% to 10% in the first year itself. Though the initial charges are more in HDFC standard life insurance, yet it is able to get more returns or appreciate the capital of the investor due to less Fund Manager 74

cost (0.80%). Also the policy fee in HDFC standard life insurance is 1/3 of the policy fee in other insurance company. When schemes like ULEP and ULYS of HDFC standard life insurance are compared with HDFC mutual funds (ELSS), it is noticed that up to 8th year, equity linked saving schemes of HDFC mutual funds is performing better. There after HDFC standard life insurance schemes are giving better returns. The strong reason behind is that fund manager cost is more for mutual funds (2.25%) It is also observed that in the long run, insurance scheme is giving more return than mutual funds. Around Rs 7, 05,668 is difference in the amount observed between the above said schemes in a time span of 20 years. The difference of Rs 7, 60,565 is observed when Unit Linked pension plan (ULPP) is compared with ELSS. As far as ULEP and ULYS are compared with ELSS of HDFC Mutual Funds, it is observed that there is a difference of nearly 10% increase in the returns in the span of 5years. When ULPP is compared with ELSS schemes of other AMCs it is observed that ULPP is generating a net growth of Rs 45, 64,104 thereby creating a difference of Rs 8, 12,897.

Suggestions and conclusions:

From the analysis it was learned that investors objective behind the investment is growth of capital 75

The investors who are risk seekers are ready to face high risk in order to rape higher returns. It is to be noted that the youngster plan (ULYs) is associated with more risk, but at the same time it is generating maximum returns.

Though the charges are less in insurance schemes, every company must highlight to its investors the fact that the expenses involved in investing in Mutual Funds are far less as compared to investment made in ULIPS.

Since there are tax benefits associated with the investment made into ULIPs the AMC must highlight the tax benefits associated with ELSS and must bring about more of such advantages/benefits to counter the stiff competition from ULIPs.

It is also to be noted that there would be more capital appreciation in Mutual Funds if the period of investment is short. If it is for long term period. It would be better to invest in ULIPs for more capital appreciation.

The people who are interested for long term in Mutual Fund should be given the benefits of reducing the expense related to the Fund Manager cost , so that they can rape more returns similar to ULIPS

76

BIBLIOGRAPHY:
Reference Books Title Mutual Fund Mutual Fund in Indian perspective Tools &techniques of life insurance planning Robert j.jr Author Name Sadhak Nalini prava tripathy leimberg, Stephan R, Doyle,

Websites
77

www.indiainfoline.com www.mininova.org www.bambooweb.com www.google.com www.wikipedia.com www.getpedia.com www.value research.com http://www.hdfcfund.com/ http://www.hdfcinsurance.com/

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