ABSTRACT “A comparative study of ULIP plans VS MUTUAL FUNDS.” an analysis to be done be by K. V NARAYANA REDDY, student (MBA - IV Regular) GURUNANAK INSTITUTE OF P.G. STUDIES, HYDERABAD. Total Investment scenario is changing, in past people were not interested in investment because there were no good options available for investment. Now there are many options available for investment like life Insurance, Mutual fund, Equity market, Real asset, etc. Today people want more services and more return on their investment. So most of the insurance companies are providing more value – added services with the basic insurance operation. Another option for investment available is ULIPS are providing good returns. So while investing people tend more to words mutual fund as they are providing more returns than Insurance also, with a good investment portfolio. Mutual fund companies are providing more liquidity. The project was taken to know about, what are the main aspects in ULIP in insurance companies, and its USP (Unique Selling Preposition). After my study and analysis I came to know that most of the people go for ULIP insurance policies to cover the risk of life, and invest it in a good Portfolio but there is big portion of customers have taken the policies to save the taxes. And people are aware about the tax benefits they get for insurance policies. Therefore, while investing in any Investment option investor checks whether his money is safe or not, Mutual funds provides good returns but investments are directly exposed to risk. As in ULIP returns are related to stock market but they are having some insurance benefit and IRDA regulates the investment.Many people are getting the tax benefits in ULIP. In Mutual Fund they have to invest their money in tax saving funds to get the tax benefit. Now a day’s people want good returns without any efforts the plans like Automatic Investment plan are providing good Benefit & returns to investors.
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CONTENTS
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INTRODUCTION I. II. III. IV.
Objective of the project Scope & Need Of the study Research methodology Limitation of the project
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LITERATURE REVIEW I. About Insurance II. About Mutual Funds
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Industry Profile I. Insurance a. Definition b. History II. Mutual Funds a. Definition b. History
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Company Profile
5. ANALYSIS ON ULIPs V/S Mutual Funds 6
FINDINGS & SUGGESTIONS & CONCLUSION
Bibliography……………………………………………………
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INTRODUCTION
INTRODUCTION
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About Insurance India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. The Indian consumer should be ready now because the market is going to give them an array of products, different in price, features and benefits. How the customer is going to make his choice will determine the future of the industry. The industry presented a huge opportunity. Life insurance penetration, for instance, was at an abysmal 22% of the insurable population. However, private players have had to rise to many challenges. They were faced with attitudinal barriers towards the category and the perception that insurance was only a tax- saving tool. Insurance per se had lost it basic rationale: perception. It wasn’t surprising then that its potential lay frozen and unexploited. The challenge for private insurance players was to change the established category driver and get customers to evaluate life insurance as an investmentcum protection to About Mutual Funds
Mutual Funds operate as collective investment vehicles (CIV) that pools resources by issuing units to investors and collectively invests those resources in a diversified portfolio comprising of stocks, bonds or money market instruments in accordance with the objectives mentioned in the offer document issued for the purpose of pooling resources. The investors share the profit or losses in proportion to their investments in the fund. The first ever Mutual Fund in India, the Unit trust of India was set up in 1964. This was followed by entry of MFs supported by public sector banks and insurance companies in 1987. The industry was opened for the private players
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in 1993 providing Indian investors with a broader choice. Starting with an asset base of Rs. 25 crore in 1964, the industry has grown exponentially. The MF industry in India is governed by the SEBI, which lay norms for MF and its Asset Managing Companies (AMCs). A Mutual Fund is allowed to issue open-ended and closedended schemes under a common legal structure. Respective Asset Management Companies (AMC) manages mutual fund schemes. Different business groups/ financial institutions/ banks have sponsored these AMCs, either alone or in collaboration with reputed international firms. Several international funds like Alliance and Templeton are also operating independently in India. Many more international Mutual Fund giants are expected to come into Indian markets in the near future. Market survey plays a vital role in understanding the investment pattern of the customer and the level of satisfaction. It is very important for the company to perform such activities like market research and surveys at regular intervals and accordingly further plans and policies can be formulated. By studying the investment pattern of the customers, the company can plan the strategies to capture the more market share by providing the better services and customized plans. CONCEPT OF MUTUAL FUNDS A mutual fund is an investment vehicle which allows investors with similar (one could say mutual) investment objectives, to pool their resources and thereby achieve economies of scale and diversification in their investing. Economies of Scale mean lower costs on a per unit basis by doing things "in bulk" which spreads fixed costs over greater volume. A mutual fund achieves lower per unit costs for professional money management and for transaction charges, than small investors could achieve on their own. This can increase return to the investor. Diversification is just another way of saying "Don’t put all your eggs in one basket." A mutual fund allows its investors to a small percentage of many different investments. So in a welldiversified mutual fund no one particular investment dominates its performance. Poor results from some investments are likely to be offset by good results from other investments. Therefore, the unit value of a mutual fund will not fluctuate as sharply as the value of any one of its investments. This can reduce risk to the investor. 5
A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. Despite these advantages mutual funds do not guarantee do not return, nor do they eliminate risk to investors. The return and risk of a mutual fund depend primarily on the type of securities instruments in which it invests, and secondarily on how well it is managed by the company offering it. Typically a mutual fund scheme is initiated by a sponsor who recognizes and markets the fund. It pre specifies the investment objective of the fund and the risks associated with the costs involved in the process and broad rules for entry into and exit from the fund and other areas of operation. In India as in most nations the sponsors need approval from the regulator viz. SEBI. A sponsor then hires an asset management company to invest the funds according to the
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investment objective. It also hires another entity to the custodian of the assets of the funds and perhaps a third one to handle registry work. In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes. 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 appreciations realized are 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 small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an invest able surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.
The flow chart below describes broadly the working of a mutual fund.
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Mutual fund Investment Flow-chart
TYPES OF MUTUAL FUNDS Most mutual funds are open-ended funds. This means you can subscribe to one at any time of the year. Open-ended funds are not listed on stock exchanges. A converse set of rules apply to closed ended funds. Closed ended funds have a fixed number of shares, are open for subscription during a specified period and operate for a fixed period of time. For example, five years − and so, the number of buyers and sellers are exact − someone would have to sell for you to be able to buy. Closed ended funds are generally listed on stock exchanges. Mutual funds can also be broadly classified into four distinguishable types: Equity funds Debt or Income funds Balanced funds Money Market funds Debt or Income Funds
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The aim of debt or income funds is to make regular payments to its investors, although dividends can be reinvested to buy more units of the fund. To provide you with a steady income, these funds generally invest in fixed income securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. Opportunities for capital appreciation are limited and the downside is that as interest rates fluctuate, the net asset value or NAV of the fund could follow suit – if interest rates fall, the NAV is likely to increase and vice versa. There is also a risk that a company issuing a bond may default on its payment, if it is not financially healthy. However, if the fund invests in government securities there is little risk of the government defaulting on its payment. Equity Funds Equity funds (often described as growth funds) aims to provide capital growth by investing in the shares of individual companies. Depending on the fund’s objective, this could range from large blue-chip organizations to small and new businesses. Any dividends received by the fund can be reinvested by the fund manager to provide further growth or paid to investors. Both risk and returns are high but they could be a good investment if you have a long-term perspective and can stay invested for at least five years. Balanced funds - The best of both the worlds As the name suggests, these funds aim for balance, so they are made up of a mixture of equities and debt instruments. They match the goals of investors who seek to grow their capital and get regular income, while retaining
relatively
low risk.
The debt or bond element of the fund provides a level of income and acts as the safety net during dynamic periods in the market, while equities provide the potential for capital
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appreciation. Balanced funds could be suitable for investors who are looking for moderate capital appreciation. Money market funds Money market or liquid funds are an appealing alternative to bank deposits because they aim to provide stability, liquidity, capital preservation and slightly higher interest rates than bank accounts. When you invest in a money market fund, the fund manager invests in ‘cash’ assets such as treasury bills, certificates of deposit and commercial paper. Returns on these funds fluctuate much less compared to other funds, but they are not guaranteed. They are appropriate for corporate and individual investors who wish to park their surplus money in a fund for a short period.
CLASSIFICATION OF MUTUAL FUNDS There are varied ways in which funds can be classified. From the investors perspective funds are usually classified in terms: Collection entry Constitution
Structure
or exit charges from investors
Close – ended
Load funds
Open – ended
No-Load funds
Interval funds
No-Load funds
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Under each broad classification, there are several types of funds, depending on the basis of the nature of their portfolio. Every fund has unique risk-profiles that are determined by its portfolio. Open-ended Funds An open-end fund is one that has units available for sale and repurchase at all the times at a price based on the NAV per unit. Such funds are open for subscription the whole year. Capitalization/corpus is continuously changing. Fund size and the total investment amount goes up if more new subscription comes in from new investors than redemption by exiting investors, the fund shrinks when redemption of units exceeds fresh subscription. There’s no fixed maturity. Shares or units of such funds are normally not traded on the stock exchange but are repurchased by the fund at announced rates. They provide better liquidity even though not listed as investors can any time approach mutual funds for sale of such units. Dividend reinvestment option is also available in case of such funds. Since there is always a possibility of withdrawals, management of such funds becomes more tedious as managers have to work from crises to crises. Crises may be two fronts: Unexpected withdrawals require funds to maintain a high level of cash available every time implying thereby idle cash. By virtue of this situation such funds may fail to grab favorable opportunities. Further to match quick cash payments, funds cannot have matching realization from their portfolio due to intricacies of the stock market.
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Close-ended Funds Close end funds can be subscribed to, only during the initial public offer. Thereafter the units of such funds can be bought and sold on the stock exchange on which they are listed through a broker. Such funds have a stipulated maturity period. The duration of such funds is generally 2 to 15 years. The funds units may be traded at the discount or premium to NAV based on the investors’ perception about the funds future performance and other market factors affecting the demand for a supply of the funds units. An important point to note here is that the number of outstanding units of such fund doesn’t vary on account of trading in the funds units at the stock exchange. From management point of view, managing close ended schemes is comparatively easy since fund managers can evolve and adopt long term investment strategies depending on the life of the scheme. Interval Funds Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.
Load Funds Marketing of new mutual fund scheme involves initial expenses. Charges made to the investor to cover distribution/sales/marketing expenses are often called “loads”. These expenses may be recovered from the investors in different ways at different times.
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Typically entry and exit loads range from 1% to 2%. Three usual ways in which funds sales expenses may be recovered from the investor are: At the time of entry into the fund, by deducting a specific amount from his initial expenses. The load charges to the investor at the time of his entry into the scheme are called a “front-end or entry load”. By charging the fund/scheme with a fixed amount each year, during the stated number of years. The load amount charged to the scheme over a period of time is called “deferred load”. At the time of investors exit from the scheme, by deducting a specified amount from the redemption precedes payable to the investor. The load that the investors pay at the time of his exit is called a “back-end or exit load” Some funds may also charge different amounts of load to the investor depending upon how many years the investors has stayed with the fund, the longer the investor stays with the fund less the amount of exit load, he is charged. This is called as contingent deferred sales Charge. The schemes NAV would reflect the net amount after the deferred load. Loads are charged not only by an open-ended fund but even a close-ended fund can charge a load to cover the initial issue expense. No-Load Funds Funds that make no such charges or loads for sales expenses are called as “no load funds”. OPTIONS AVAILABLE TO INVESTORS Each plan of every mutual fund has three options – Growth, Dividend and dividend reinvestment. Separate NAV are calculated for each scheme.
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Dividend Option Under the dividend plan dividend are usually declared on quarterly or annual basis. Mutual fund reserves the right to change the frequency of dividend declared.
Dividend reinvestment option
Instead of remittances of units through payouts, Units holder may choose to invest the entire dividend in additional units of the scheme at NAV related prices of the next working day after the record date. No sales or entry load is levied on dividend reinvest.
Dividend Payout option
Dividend declared by the fund manager is remitted to the investors and NAV is reduced by that value. Growth Option
Under this plan returns accrue to the investor in the form of capital appreciation as reflected in the NAV. The scheme will not declare the dividend under the Growth plan and investors who opt for this plan will not receive any income from the scheme. Instead of income earned on their units will remain invested within the scheme and will be reflected in the NAV.
Calculation Of NAV
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PRODUCT PROFILE LIFE INSURANCE What is Life Insurance? Life insurance is an agreement between you (the insured) and an insurer. Under the terms of a life insurance contract, the insurer promises to pay a certain sum to someone (a beneficiary) when you die, in exchange for your premium payments. Insurance is the protection against financial loss arising in the happening of an unexpected event. Why Should You Take Insurance? Insurance is desired to safeguard oneself and one’s family against possible losses on account of risks and perils .It provides financial compensation for the losses suffered due the happening of the unforeseen events. life insurance proceeds is to pay off any debts you leave behind. For example, mortgages, car loans, medical bills, and credit card debts are often left unpaid when someone dies. These
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obligations must be paid from the assets left behind. This can deplete the resources that your family needs. Life insurance can be used to pay off these debts, leaving your other assets intact for your family to use. Life insurance provides liquidity to your estate. When you die, you may leave some liquid assets (such as cash, CDs, and savings bonds), and some illiquid assets (such as real estate, an automobile, and stocks). Your liquid assets may not be enough to pay all the debts that you leave behind, plus all the expenses that arise because of your death (such as funeral expenses and estate taxes). Your illiquid assets may have to be sold in order to meet these obligations when they come due. This may cause a financial loss if the assets must be sold cheaply in order to get the money on time. Life insurance can avert this situation, because the proceeds are available almost immediately upon your death. Life insurance creates an estate for your heirs. After your debts and expenses are paid, there may not be much left over for your family. Life insurance can automatically provide assets for them after your death. Life insurance is a great way to give to charity when you die. You may have always had a great philanthropic desire, but not the means to make it a reality. Life insurance can do that for you. Life insurance can be a critical component for specialized business applications, such as funding a buy-sell agreement. Under a buy-sell agreement, life insurance can be used to provide cash for the purchase of a deceased owner's interest in the business. Finally, life insurance can be an investment vehicle. Some types of life insurance policies may actually make money for you, as well as provide the benefits described above. This can help you with long-term financial goals.
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TYPES OF LIFE INSURANCE
1. Term Insurance Policy 2. Whole Life Policy 3. Endowment Policy 4. Money Back Policy 5. Annuities and Pension Most of the products offered by Indian life insurers are developed and structured around these "basic" policies and are usually an extension or a combination of these policies. So, what are these policies and how do they differ from each other is explained in detail.
Term Insurance Policy A term insurance policy is a pure risk cover for a specified period of time. What this means is that the sum assured is payable only if the policyholder dies within the policy term. For instance, if a person buys Rs 20 lakhs policy for 15-years, his family is entitled to the money if he dies within that 15-year period. If he survives the 15-year period, then he is not entitled to any payment; the insurance company keeps the entire premium paid during the 15-year period. So, there is no element of savings or investment in such a policy. It is a 100 per cent risk cover. It simply means that a person pays a certain premium to protect his family against his sudden death. He forfeits the amount if he outlives the period of the policy. This explains why the Term Insurance Policy comes at the lowest cost.
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Whole Life Policy As the name suggests, a Whole Life Policy is an insurance cover against death, irrespective of when it happens. Under this plan, the policyholder pays regular premiums until his death, following which the money is handed over to his family. This policy, however, fails to address the additional needs of the insured during his postretirement years. It doesn't take into account a person's increasing needs either. While the insured buys the policy at a young age, his requirements increase over time. By the time he dies, the value of the sum assured is too low to meet his family's needs. As a result of these drawbacks, insurance firms now offer either a modified Whole Life Policy or combine in with another type of policy.
Endowment Policy Combining risk cover with financial savings, endowment policies is the most popular policies in the world of life insurance. In an Endowment Policy, the sum assured is payable even if the insured survives the policy term. If the insured dies during the tenure of the policy, the insurance firm has to pay the sum assured just as any other pure risk cover. A pure endowment policy is also a form of financial saving, whereby if the person covered remains alive beyond the tenure of the policy, he gets back the sum assured with some other investment benefits. In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/ education endowment plans. The cost of such a policy is slightly higher but worth its value.
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Money Back Policy These policies are structured to provide sums required as anticipated expenses (marriage, education, etc) over a stipulated period of time. With inflation becoming a big issue, companies have realized that sometimes the money value of the policy is eroded. That is why with-profit policies are also being introduced to offset some of the losses incurred on account of inflation. A portion of the sum assured is payable at regular intervals. On survival the remainder of the sum assured is payable. In case of death, the full sum assured is payable to the insured. The premium is payable for a particular period of time. Annuities and Pension In an annuity, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against risk as well as provide money in the form of pension at regular intervals. Over the years, insurers have added various features to basic insurance policies in order to address specific needs of a cross section of people ULIP AS A PRODUCT WORKING OF ULIPs When you decide the amount of premium to be paid and the amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product. The rest of the premium is invested in the fund or mixture of funds chosen by you. Mortality charges and ULIP administration charges are thereafter deducted on a periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fund management charges are adjusted from NAV on a daily basis. Since the fund of your choice has an underlying investment – either in equity or debt or a combination of the two – your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity. The pie-chart below illustrates the split of your ULIP premium:
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A mutual fund is the 'safety of the principal', plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. Insurance is a provision against risk and it is a device with which man tries to protect himself from risk in life. The recent development in the financial innovation is Unit Link Insurance Policy (ULIP), which covers the concept of mutual fund and insurance. A Unit Link Insurance Policy (ULIP) is one in which the customer is provided with a life insurance cover and the premium paid is invested in either debt or equity products or a combination of the two. In other words, it enables the buyer to secure some protection for his family in the event of his untimely death and at the same time provides him an opportunity to earn a return on his premium paid. In the event of the insured person's untimely death, his nominees would normally receive an amount that is the higher of the sum assured or the value of the units (investments). To put it simply, ULIP attempts to fulfill investment needs of an investor with protection/insurance needs of an insurance seeker. It saves the investor/insuranceseeker the hassles of managing and tracking a portfolio or products.
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More importantly ULIPs offer investors the opportunity to select a product which matches their risk profile; for example an individual with a high risk appetite can shun traditional endowment plans (which invest about 85% of their funds in the debt instruments) in favour of a ULIP which invests its entire corpus in equities. In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component. ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same SERVICING A UNIT LINKED PLAN
Single Premium: The policy holder is required to pay the entire premium amount as a lump sum at the beginning of the policy term. Regular Premium Payment (annually, semi-annually or monthly): The policy holder has to pay the pre-determined premium amount periodically i.e. annually, semi annually or monthly, depending upon the premium payment term opted for. Number of Premium Paying Years: This depends on the term of the policy that you have chosen. In most cases, the policy term and the number of premium paying years (in case of regular premiums) are the same. However, some policies give the insured the option of choosing the number of premium paying years.
VERIFICATIONS BEFORE SIGNING THE PROPOSAL
One has to verify the approved sales brochure for all the charges deductible under the policy payment on premature surrender features and benefits limitations and exclusions lapsation and its consequences other disclosures 21
Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council.
COMPARISON BETWEEN UNIT LINKED PLANS AND CONVENTIAL PLANS
Unit Linked Insurance Plans Conventional plans Type Description
Key Features Flexibility of investment:
Transparency:
Maturity benefits payout:
Partial withdrawal:
Unit Linked Insurance Plans Conventional Plans are traditional offered by insurance insurance plans. They usually invest companies allow policy holdersin low risk return options and offer to direct part of their premiums guaranteed maturity proceeds along into different types of funds with declared bonuses. (equity, debt, money market, hybrid etc.) Here the risk of investment is borne by the policyholder. Unit Linked Plans give you These plans do not allow you to flexibility to invest as per your choose investment avenues. Your risk profile, financial funds are invested as per the commitments and convenience. strategy and discretion of the You can choose to invest either company. in equity, or in debt or in hybrid fund and even change your investment strategy. Most Unit Linked Plans allow Your premiums are invested in a you to track your portfolio. common 'with profits' fund and They also regularly intimate therefore you cannot track your regarding the percentage of the individual portfolio. premium that is invested along with the charges levied. You are also kept informed about the value and number of fund units that you hold. At the time of maturity you At the time of maturity you get the redeem the units collected at sum assured plus bonuses, if the then prevailing unit prices. applicable in the plan. Some plans also offer you loyalty or additional units annually or at the time of maturity. Unit Linked Plans allow you to Conventional plans do not allow make withdrawals from your you to withdraw part of your fund. fund, provided the fund does Instead, some policies offer you the not fall below the minimum facility to take a loan against your
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Switching options:
Charges structure: Single premium Top-up
Benefit Snapshot
fund value and subject to other investment. conditions. Available. You can change Not available since the the your investment fund decision investment decision is taken by the by switching between the funds insurance company. as being offered by the policy. Unit Linked Plans specify the These plans do not specify the charges. under various heads. charges involved. Available. The single premium The top-up facility is not available. top-up facility allows you to invest an extra amount over and above your regular premiums in your unit linked plan. Unit Linked Plans Conventional plans offer give you flexibility of fixed premiums linked to investment the sum assured. They allow you to track your portfolio. The maturity benefits for Unit Linked Plans these plans include the sum offer the benefit of a assured plus bonuses, if single premium top up applicable which allows you to invest ad hoc additional amounts Unit Linked Plans allow partial withdrawals, subject to conditions and switching between funds by paying some charges, if necessary.
Unit Linked Plans give you the option of a premium vacation.
COMPARISON BETWEEN UNIT LINKED PLANS AND MUTUAL FUNDS Unit Linked Insurance Plans Type Description
Mutual funds
Unit Linked Plans refer to Unit Linked A mutual fund pools the money from Insurance Plans offered by insurance investors and uses it to invest in companies. These plans allow investors various securities according to a preto direct part of their premiums into specified investment objective. different types of funds (equity, debt, money market, hybrid etc.)
Key Features
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Objective: Tax Benefit:
Unit Linked Plans are long term plans Mutual funds are ideal investment offering you a dual benefit of insurance tool for the short to medium term. and investment. All Unit Linked Plans offer tax benefits Only investments in tax saving funds under section 80C. are eligible for section 80C benefits.
Switching options:
Unit Linked Plans allow you to switch your investment between the funds linked to the plan. This enables you to change the riskreturn.
Additional Benefits:
Some of the Unit Linked Plans give you an additional benefit or loyalty benefit by issuing extra fund units. Unit Linked Plans have limited liquidity. One needs to stay invested for a minimum period of time as specified in the policy before redeeming the units. Charges in a unit linked plan include mortality charges for the life insurance provided. In addition, premium allocation charge, fund management charge and administration charges are applicable.
Liquidity:
Charges structure:
Benefit Snapshot:
Dual benefit of investment and insurance Suitable for the long term Option to switch between the funds is permitted.
No switching option is available. If you are not satisfied with the performance of the fund you can exit completely from the same by paying exit charges, if applicable. There are no additional benefits issued by mutual funds. You can easily sell mutual fund units (except for ELSS and funds that have a minimum lock-in period) Mutual fund charges include an entry load, the annual fund management charge and an exit load, if applicable.
Investment tool suitable for short to medium term. Easy exit possible. Tax benefit available only on tax saving funds
Offers tax benefits
CHARGES
Administration charges: A fee is charged for administration of your policy every month. Administration charges are deducted by cancelling units proportionately from each of the funds you have chosen.
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Fund management charges: These charges are towards meeting expenses related to managing the fund. This is charged as a percentage of the fund’s value and is deducted before arriving at the net asset value of the fund. Switch charges: You can switch between the funds available to suit your changing needs and goals. In a policy year, a fixed number of such switches are available free of cost. Subsequent to this, each switch would attract a certain charge. These charges are deducted by cancelling units proportionately from each of the funds you have chosen. Surrender charges: These charges are levied for premature encashment of units. They are charged as a percentage of the fund value and depend on the policy year in which the policy has been surrendered. Mortality Charges: Depending upon the age, and the amount of cover, these charges are levied towards providing a death cover to the insured. Premium Allocation Charge: This charge is deducted as a fixed percentage of the premium received, and is usually charged at a higher rate in the initial years of a policy. This charge varies depending upon whether the policy is a single premium or regular premium policy, the size of the premium, premium frequency and payment mode. Partial Withdrawal Charges: Lump sum withdrawals are allowed from the fund after the lapse of three years of the policy term and subject to prespecified conditions. However, such withdrawals attract charges, as mentioned in the respective policy brochures.
TYPES OF ULIPS
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One of the big advantages that a ULIP offers is that whatever be your specific financial objective, chances are that there is a ULIP which is just right for you. The figure below gives a general guide to the different goals that people have at various age-groups and thus, various life-stages. Depending on your specific life-stage and the corresponding goal, there is a ULIP which can help you plan for it. 1.
Premiums paid can be single, regular or variable. The payment period too can be regular or variable. The risk cover can be increased or decreased.
2. As in all insurance policies, the risk charge (mortality rate) varies with age. 3.
The maturity benefit is not typically a fixed amount and the maturity period can be advanced or extended.
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2. Investments can be made in gilt funds, balanced funds, money market funds, growth funds or bonds. 5. The policyholder can switch between schemes, for instance, balanced to debt or gilt to equity, etc. 6. The maturity benefit is the net asset value of the units. 7. The costs in ULIP are higher because there is a life insurance component in it as well, in addition to the investment component. 8. Insurance companies have the discretion to decide on their investment portfolios. 9. They are simple, clear, and easy to understand. 10. Being transparent the policyholder gets the entire episode on the performance of his fund. 11. Leads to an efficient utilisation of capital. 12. ULIP products are exempted from tax and they provide life insurance. 13. Provides capital appreciation. 14. Investor gets an option to choose among debt ,
balanced and equity funds
Charges and Expenses
ULIPs work very similar to a mutual fund with an added benefit of life cover and tax deduction. They have a mandate to invest the premiums in varying proportions in gsecs (government securities), bonds, the money markets (call money) and equities. The primary
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difference between conventional savings-based insurance plans like endowment and ULIPs is the investment mandate- while ULIPs can invest up to 100% of the premium in equities, the percentage is much lower (usually not more than 15%) in case of conventional insurance plans. ULIPs are also available in multiple options like ‘aggressive’ ULIPs (which can invest upto 100% in equities), ‘balanced’ ULIPs (which invest 40-60% in equities) and ‘debt’ ULIPs (which invest only in debt and money market instruments). Broadly speaking, ULIP expenses are classified into three major categories: 1) Mortality charges Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the age, sum assured and sum-at-risk for the individual. There is a direct relation between the mortality expenses and the above mentioned factors. In a ULIP, the sum-at-risk is an important reference point for the insurance company. The sum-atrisk is the difference between the sum assured and the investment value the individual’s corpus as on a specified date. Usually, the mortality charges are levied on the per thousand sum assured.
2) Sales and Fund Administration expenses Insurance companies incur these expenses for operational purposes on a regular basis. The expenses are recovered from the premiums that individuals pay towards their insurance policies. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a day-to-day basis are examples of such expenses. 3) Fund management charges (FMC) These charges are levied by the insurance company to meet the expenses incurred on managing the ULIP investments. A portion of ULIP premiums are invested in equities, bonds, g-secs and
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money market instruments. Managing these investments incurs a fund management charge, similar to what mutual funds incur on their investments. FMCs differ across investment options like aggressive, balanced and debt ULIPs; usually a higher equity option translates into higher FMC. Apart from the three expense categories mentioned above, individuals may also have to incur certain expenses, which are primarily ‘optional’ in nature- the expenses will be incurred if certain choices that are made available to individuals are exercised. a) Switching charges Individuals are allowed to switch their ULIP options. For example, an individual can switch his fund money from 100% equities to a balanced portfolio, which has say, 60% equities and 40% debt. However, the company may charge him a fee for ‘switching’. While most life insurance companies allow a certain number of free switches annually, a switch made over and above this number is charged. b) Top-up charges ULIPs allow individuals to invest a top-up amount. Top-up amount is paid in addition to the premium amount for a particular year. Insurance companies usually deduct a certain percentage from the top-up amount as charges. These charges are usually lower than the regular charges that are deducted from the annual premium. c) Cancellation charges Life insurance companies levy cancellation charges if individuals decide to surrender their policies before the mandated lock-in period which is usually three years. These charges are levied as a percentage of the fund value on a particular date. The Compounded Annual Growth Rate (CAGR) of the fund goes up over a period of time. This is because the ULIP expenses even out over a period of time. The ‘evening out’ occurs because although the expenses are high in the initial years, they fall thereafter. And as the years roll by, the expenses tend to ‘spread themselves’ more evenly over the tenure of the ULIP. 29
Another reason is also because the expenses are levied on the annual premium amount, which stays the same throughout the tenure. Therefore, the expenses do not have any impact on the returns generated by the corpus. Fund management charges also have an effect on the returns. FMC is levied on the corpus, which keeps fluctuating over the tenure. The returns also depend to a large extent on how well the insurance company manages the investment. Individuals therefore, need to bear in mind that expenses are an important variable while evaluating ULIPs across life insurance companies. They have the potential to make a considerable difference to the returns generated over a period of time.
Insurance Regulatory and Development Authority Act 1999 (IRDA): On the recommendation of Malhotra committee, and IRDA act passed by Indian parliament in1993. Its main aim is to activate an insurance regulatory apparatus essential for proper monitoring and control of the insurance industry. Due to this act several Indian private companies have joined with foreign partners. In this economic reform process the insurance company will boost the socio economic development process. The huge amount of funds that will be at disposal of insurance companies will be directed as desired avenues like housing, safe-drinking water, electricity, primary education and infrastructure. The growth of the debt market will also get a boost. Above all the policy holder will get better pricing of products from competitive insurance companies. Composition of Authority under IRDA Act 1999: As per the section 4 of IRDA act 1999 Insurance Regulatory Development Authority Act (IRDA), which was constituted by an act of parliament specify the composition of authority.
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The authority is ten-member team consisting of: a chairman five whole-time members four part time members With the opening of the Insurance industry, India stands to gain with the following major advantages:
Globalization will provide improved opportunities to the customer for better products, with more reasonable and affordable pricing.
The customer will get quicker and better servicing.
It will enhance the Savings Rate for smaller investors.
Long-term funds for infrastructure development will be available to the country.
It will secure for India larger inflows of foreign capital needed to sustain our GDP growth.
The Title The project is related to Investment strategy and comparative analysis between ULIP product and Mutual Funds
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Objectives of the study: 1.The project involves Study of different investments available in the market and simultaneously counseling the investors about the best funds and investment options available and to make them aware about the risk and return parameters of those investment instruments. 2. In this project, I have made efforts to give the comparative analysis between the ULIP products and Mutual Funds. This Project will highlight the difference between the Investments. 3. Last but not the least extensive research was done on coming up with investment guidelines to make it easier for potential clients to invest their money according to their own will. 4. And analyzing working of mutual fund and working of ULIP, with real time examples. SCOPE OF THE STUDY: The major products involved in financial planning and financial product distribution are MUTUAL FUNDS, ULIP, DEPOSITS, and INSURANCE. And the project mainly scoping to strictly two areas i.e. MUTUAL FUNDS & ULIPS. Under this study investments relating to Open-Ended EQUITY Growth Fund of Mutual Funds and GROWTH fund of ULIPs are taken into account. The theoretical part of the study include the following concepts: Characteristics of Mutual Funds & ULIP Advantages/ Disadvantages of Mutual Funds, ULIP Calculation ofNet Asset Value (NAV). Investment Process in MF VS ULIP Risk return grid of Mutual Funds & ULIP SEBI & IRDA guidelines.
METHODOLOGY OF THE STUDY All information related to the topic needs to be carefully scrutinized to avoid the risk of biased analysis. Having once identified which information is relevant and need to be collected, we will have to define how this will be done. The Method employed in the investigation depends on the purpose and scope of the study. 32
Research Design: Research design is some statement or specification of procedures for collecting and analyzing the information required for the solution of some specific problem. Here, the exploratory research is used as investigation and is mainly concerned with determining the trends and returns in Mutual Funds and Bank returns. Data Collection Methods: The key for creating useful system is selectivity in collection of data and linking that selectivity to the analysis and decision issue of the action to be taken. The accuracy of collected data is of great significance for drawing correct and valid conclusions from the research. Sources of Information: Data available in marketing research are either primary or secondary. Primary Data is not included in this study, only secondary data is taken in to account since, it is a comparative analysis. Secondary Data: Secondary data can be defined as - “data collected by some one else for purpose other than solving the problem being investigated”. Secondary data is collected from external sources which include information from published material of SEBI and some of the information is collected online. The data sources also include various books, magazines, newspapers, websites etc. The organization profile is collected from the Hyderabad Stock Exchange.
NEED OF THE STUDY: The basic purpose of the study is to give broad idea on Mutual Funds, ULIPS and analyze various schemes to highlight the diversified investment that Mutual Fund offers to its investors. Through this study one can understand how to invest in Mutual Funds and how to
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invest in ULIP turn the raw investment into ripen fruits by taking wise decisions, taking the risk factors into account.
Limitation of the study The study can be biased to the extent of personal perception, historical nature of data collection and of the time limit. Many customers are thinking that investment in share market is
very risky. As ULIP and Mutual fund both are related to share market.
LITERATURE REVIEW
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Sunayna khurana (2008) analyzed the customer preference in life insurance industry in India. She had analyzed the customer preference regarding plans and company, their purpose of buying insurance policies, satisfaction level and their future plans for the new insurance policy. Mr. K B S Kumar edited the book ‘Insurance customer service’ of ICFAI University press; it includes the chapters like ‘Tracking customer satisfaction’ by Mr Tom moormam. U Jawaharlal and Nikhil Pareek analyzed ‘the customer service in Life Insurance’ In Insurance Chronical (April 2004) he had analyzed the different services of Life Insurance players in India. Narayan Krishnamurthy in Outlook money (Sep 15, 2003) article analyzed the situational need of Insurance at different situations and steps of life in his article ‘AT every step of Life…’. Navasiyam et al. (2006) analyzed the socioeconomic factors that are responsible for taking life insurance policies and examined the preferences of the policyholders towards various types of policies of LIC. From the analysis, it was found that factors such as age, educational level and sex of the policyholders are insignificant. However, income level, occupation and family size are significant while deciding on an insurance policy. From the analysis, it is inferred that respondents belonging to the age group of 31 to 40 years are much interested in taking a life insurance policy. MFs have attracted a lot of attention and kindled the interest of both academic and practitioner communities. Compared to the developed markets, very few studies on MFs are done in India. This literature review reveals investor behavior studies. The researches on mutual funds has been extremely skewed in terms of geographical coverage, most focused to developed countries like Us. Tamal Datta chaudhuri, Jayanta Kumar seal, edited the book named ‘Mutual Funds Industry’ it includes empirical study made by Navdeep agrwal and Mohit Gupta titled ‘performance of mutual fund in India: an empirical study’. Mary Rowland written ‘The New Common sense Guide to mutual funds’ it includes the guidelines while investing in mutual fund. How should one invest in mutual fund and when what step should be taken in a situation by a investor.
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Gupta LC (1993) conducted a household investor survey with the objective to provide data on investor preferences on MFs and other financial asset. INVESTMENTS “INVESTMENT IS A SCIENCE AND NOT AN ART” Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. Investments, unlike works of art, cannot afford the luxury of experimenting. Investing is not guesswork. It takes more than just a 'tip', it needs training to plan, instinct to pick and sheer intellect to make it work for the investor. Human nature is fickle, his wants keep changing. An investment can be described as perfect if it satisfies all the needs of all investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment. Most investors and advisors spend a great deal of time understanding the merits of the thousands of investments available in India. Little time, however, is spent understanding the needs of the investor and ensuring that the most appropriate investments are selected for him.
The Investment Needs of an Investor
The investment needs of an investor are simply his lifestyle needs converted into financial terms. These include the normal living expenses, accommodation, food, as well as education,
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health, recreation, transport, special occasions like marriages, festivals etc. These needs are defined not only in current terms but also over the rest of the life. These needs tend to remain the same over the years. It is the current lifestyle and the lifestyle desired in future that determines the attitude of investor towards investments. By and large, most investors have eight common needs from their investments: 1. Security of Original Capital; 2. Wealth Accumulation; 3. Comfort Factor; 4. Tax Efficiency; 5. Life Cover; 6. Income; 7. Simplicity; 8. Ease of Withdrawal; 9. Communication.
Security of original capital: The chance of losing some capital has been a primary need. This is perhaps the strongest need among investors in India, who have suffered regularly due to failures of the financial system.
Wealth accumulation: This is largely a factor of investment performance, including both short-term performance of an investment and long-term performance of a portfolio. Wealth accumulation is the ultimate measure of the success of an investment decision.
Comfort factor: This refers to the peace of mind associated with an investment. Avoiding discomfort is probably a greater need than receiving comfort. Reputation plays an important part in delivering the comfort factor.
Tax efficiency: Legitimate reduction in the amount of tax payable is an important part of the Indian psyche. Every rupee saved in taxes goes towards wealth accumulation.
Life Cover: Many investors look for investments that offer good return with adequate life cover to manage the situations in case of any eventualities.
Income: This refers to money distributed at intervals by an investment, which are usually used by the investor for meeting regular expenses. Income needs tend to be fairly constant because they are related to lifestyle and are well understood by investors. 37
Simplicity: Investment instruments are complex, but investors need to understand what is being done with their money. A planner should also deliver simplicity to investors.
Ease of withdrawal: This refers to the ability to invest long term but withdraw funds when desired. This is strongly linked to a sense of ownership. It is normally triggered by a need to spend capital, change investments or cater to changes in other needs. Access to a long-term investment at short notice can only be had at a substantial cost.
Communication: This refers to informing and educating investors about the purpose and progress of their investments. The need to communicate increases when investments are threatened.
It is also pertinent to differentiate between needs and wants. Wants can be described as transient needs. Wants focus on the short-term, and often lead to long-term investment disappointment.
Security of original capital is more important when performance falls.
Performance is more important when investments are performing well.
Failures engender a desire for an increase in the comfort factor.
Perfect investment would have been achieved if all the above-mentioned needs had been met to satisfaction. But there is always a trade-off involved in making investments. As long as the investment strategy matches the needs of investor according to the priority assigned to them, he should be happy.
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The Ideal Investment strategy should be a customized one for each investor depending on his risk-return profile, his satisfaction level, his income, and his expectations. Accurate planning gives accurate results. And for that there must be an efficient and trustworthy roadmap to achieve the ultimate goal of wealth maximization. Investment Avenues in India Traditionally, Indian investors have been going for investment avenues ranging from low return-low risk Fixed Deposits to high risk-high-return Share Markets. Till nineties, investors were enjoying high interest rates in the range of 16-22 % on Fixed Deposits. With the outset of a liberalized era and opening of Indian economy interest rates softened and Fixed Deposits were no longer the preferred choices of many investors. They looked out beyond the traditional products. These risk savvy investors turned to the stock market which had been giving good returns on select scrips. Conventionally, Indian investors were investing in the following avenues: Fixed Deposits – They cover the fixed deposits of varied tenors offered by the commercial banks and other non-banking financial institutions. These are generally a low risk prepositions as the commercial banks are believed to return the amount due without default. By and large these FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease of investment above all parameters. Largely, these investments earn a marginal rate of return of 6-8% per annum.
Government Bonds – The Central and State Governments raise money from the market through a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits, Provident Funds, etc. These schemes are risk free as the government does not default in payments. But the interest rates offered by them are in the range of 7% - 9%.
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Money-back Insurance - Insurance in India is mostly sold and bought as investment products. They are preferred because of their add-on benefits like financial life-cover, tax-savings and satisfactory returns. Even if one does not manage to save money and invest regularly in financial instruments, with insurance, the policyholder has no choice. If he does not pay his premiums on time, his insurance cover will lapse. Money-back Insurance schemes are used as investment avenues as they offer partial cash-back at certain intervals. This money can be utilized for children’s education, marriage, etc. Endowment Insurance – These policies are term policies. Investors have to pay the premiums for a particular term, and at maturity the accrued bonus and other benefits are returned to the policyholder if he survives at maturity. Bullion Market – Precious metals like gold and silver had been a safe haven for Indian investors since ages. Besides jewellery these metals are used for investment purposes also. Since last 1 year, both Gold and Silver have highly appreciated in value both in the domestic as well as the international markets. In addition to its attributes as a store of value, the case for investing in gold revolves around the role it can play as a portfolio diversifier. According to the World Gold Council statistics, the trend in the price movements in the past five years has been unprecedented. Gold has appreciated by 95.6 % in the past five years. This means that the present value (as o March 31,2006 ) of an investment of Rs.12550 five years ago, is Rs.2454 “….Mutual funds are popular am ong all incom e levels. With a mutual fund, we get a diversified basket of stocks managed by a professional……” -
B a r b a r a S t a n n y, a u t h o r o f P r i n c e C h a r m i n g I s n ’ t C o m i n g & H o w Wom e n G e t S m a r t Ab o u t M o n e y
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“…A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings……..” -The U.S. Securities and Exchange Commission
COMPARATIVE ANALYSIS BETWEEN TRADITIONAL INVESTMENT PLANS & MODERN INVESTMENT PLAN Traditional methods 1. Fixed deposits –
Low risk
Less than 6%p.a returns
Taxable
2. Recurring deposits –
Low risk 41
Less than 6% p.a returns
Taxable
3. Savings
Low risk
3.5% returns
Taxable
4. Tax Saving Bonds –
Low risk
8% returns
Deductible from taxable income
5. Government bonds –
No risk
8% returns
Tax free
Modern methods 1. Investment in mutual funds –
High risk
Average returns depends on market fluctuations
Funds under ELSS Deductible from taxable income
2. Initial Public offers by corporate –
High risk
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High or low depends on market conditions
Returns after one year tax free
3. Investments in Pure Gold –
Low risk
Depends on the growth in the market
Taxable
INDUSTRY PROFILE INSURANCE Definition:
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Insurance may be defined as a contract between insurers and insured under which insurer indemnities the loss of the insured against identified perilous for the mutually agreed upon premium has been paid by the insured. History: The origin of insurance is very old. The time when we were not even born, man has sought some sort of protection from unpredictable calamities of the nature. The basic urge in man to secure himself against any form of risk and uncertainty led to the origin of insurance. The insurance came to India from U.K., with the establishment of Oriental Life Insurance Corporation in 1818. The life insurance company act 1912 was the first statutory body that started to regulate the life insurance business in India. By 1956 about 154 Indian, 16 foreign and 75 provident firms were been established in India. Then the central government took over these companies and as result the LIC has worked towards spreading life insurance and building a wide network across the length and the breadth of the country. After the liberalization the entrance of foreign players has added to the competition in the market. Insurance Market in India:
With the convergence of financial products, the lines between products, the lines between products, the lines between product categories often get blurred, leaving the customers bewildered about the purpose, structure and benefits of the product he or she has purchased. The key is to understand what financial goal one would like to fulfill and then purchase of product. Each of the financial products available- bank deposit, bonds, G-sectors, life insurance, mutual funds, stocks are structured along factors like term, risk and liquidity to meet different needs. Indian life insurance market size in 2005-2006 is estimated at rs. 35,000 crores for the first year premium. In financial year 2006-2007 it is expected to grow to around to rs. 45,000 to 50,000 crores of first year premiums. With competitive strategies all companies, including LIC,
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business have crossed market expectations and present insurance business The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance market, and growing at a rapid pace of 32-34 per cent annually, according to the Life Insurance Council. Life insurance companies have witnessed a 70 per cent jump in new premium collection during the first five months of the financial year. According to data released by the Insurance Regulatory and Development Authority (IRDA), insurance companies garnered US$ 11.73 billion in new business premium during April-August 2010, against US$ 6.90 billion in the corresponding period last year Life insurance is possibly the one product that has seen the greatest transformation. It has evolved from being a pure risk mitigation product to a vehicle for long term saving and wealth creation. The one aspect that makes life insurance an ideal long term savings vehicles is its guarantee that the customer will be able to meet the financial goal and can reap the maturity benefits of the policy. If not, the sum assured comes to play and the family receives the monies towards the goal. In India, insurance is generally considered as a tax- saving device instead of its other implied long term financial benefits. Indian people are prone to investing in proper fees and gold followed by bank deposits. They selectively invest in shares also but the percentage is very small i.e., 4-5%. Even to this day, LIC of India dominates Indian insurance sector with the entry of private sector players backed by foreign expertise, Indian insurance market has become more vibrant. Indian government considers insurance as one of major sources of funds for infrastructure development. The government has identified the following as major thrust areas: Timely and reliable statistical data and information about policies and markets to instill a degree of credibility; A code of good practices based on international best practices to raise the standard of Indian insurance sector; Strengthening of supervision and regulation; Market participation in decision making; High solvency standard and developing alternative channels.
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INDUSTRY PROFILE Definition: A mutual fund is an investment vehicle which allows investors with similar (one could say mutual) investment objectives, to pool their resources and thereby achieve economies of scale and diversification in their investing. History: The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and the Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases First Phase: 1964 – 1987 An Act of Parliament established Unit Trust of India (UTI) in 1963. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 Crores of assets under management. Second Phase: 1987 - 1993 (Entry of Public Sector Funds
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987
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followed by Canbank Mutual Fund (December 87), Punjab National Bank Mutual Fund (August 89), Indian Bank Mutual Fund (November 89), Bank of India (June 90), Bank of Baroda Mutual Fund (October 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 Crores. Third Phase: 1993 - 2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 Crores. The Unit Trust of India with Rs.44, 541 Crores of assets under management was way ahead of other mutual funds.
Fourth Phase: Since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the specified undertaking of the Unit Trust of India with assets under management of Rs.29, 835 Crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules
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framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 Crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of October 31, 2003, there were 31 funds, which manage assets of Rs.126726 Crores under 386 schemes.
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COMPANY PROFILE
COMPANY PROFILE
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COMPANY PROFILE
Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has been a listed company at Bombay Stock Exchange (BSE), Mumbai since 1995. A Member, at the National Stock Exchange of India (NSE) and Bombay Stock Exchange, Mumbai (BSE) on the Capital Market and Derivatives (Futures & Options) segment, NSBL has been traditionally servicing Institutional clients and in the recent past has forayed into retail broking, establishing branches across the country. Presence is being marked in the Middle East, Europe and the United States too, as part of our attempts to cater to global markets. We are a Depository participant at Central Depository Services India (CDSL) with plans to become one at National Securities Depository (NSDL) by the end of this quarter. We have our customers participating in the booming commodities markets with our membership at the Multi Commodity Exchange of India (MCX) and National Commodity & Derivatives Exchange (NCDEX), through Networth Stock.Com Ltd. With its strong support and business units of research, distribution & advisory, NSBL aims to become a one-stop solution to the broking and investment needs of its clients, globally. Strong team of professional’s experienced and qualified pool of human resources drawn from top financial service & broking houses form the backbone of our sizeable infrastructure. 50
Highly technology oriented, the company’s scalability of operations and the highest level of service standards has ensured rapid growth in the number of locations & the clients serviced in a very short span of time. ‘Networthians’, as each one of our 400 plus and ever growing team members are addressed, is a dedicated team motivated to continuously progress by imbibing the best of global practices, Indian sing such practices, and to constantly evolve a comprehensive suite of products & services trying to meet every financial / investment need of the clients. NSE CM and Derivatives Segment SEBI Regn. 1NB230638639 & 1NF230638639 BSE CM and Derivatives Segment SEBI Regn. 1NB010638634 & PMS SEBI Regn. 1NP000001371 CDSL DP SEBI Regn. IN-DP-CDSL 251-2004 Commodities Trading: MCX -10585 and NCDEX - 00011 (through Networth Stock.Com Ltd.) Hyderabad (Somajiguda) 401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad - 500 082 Andhra Pradesh. Phone Nos.: 040-55560708, 55562256, and 30994985 Mumbai (MF Division) 49, Au Chambers, 4th Floor, Tamarind Lane, Fort Mumbai - 400 001 Maharashtra. Phone Nos.: 022- 22650253
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Mumbai (Registered Office) 5, Church gate House, 2nd Floor, 32/ 34 Veer Narirnan Road, Fort Mumbai - 400 001 Maharashtra. Phone No. 022-22850428 The Networth connectivity with 107 branches and growing
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Products and services portfolio
Retail and institutional broking
Research for institutional and retail clients
Distribution of financial products
PMS
Corporate finance
Net trading
Depository services
Commodities Broking
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Infrastructure •
A corporate office and 3 divisional offices in CBD of Mumbai which houses state-ofthe-art dealing room, research wing & management and back offices.
•
All of 107 branches and franchisees are fully wired and connected to hub at Corporate office at Mumbai. Add on branches also will be wired and connected to central hub
•
Web enabled connectivity and software in place for net trading.
•
60 operative ID’s for dealing room
•
In house technology back up team to ensure un-interrupted connectivity.
1993: Networth Started with 300 Sq.ft. of office space & 10 employees
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2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107 branches & employee strength over 400 Market & research Focusing on your needs Every investor has different needs, different preferences, and different viewpoints. Whether investor prefer to make own investment decisions or desire more in-depth assistance, company committed to providing the advice and research to help you succeed. Networth providing following services to their customers, Daily Morning Notes Market Musing Company Reports Theme Based Reports Weekly Notes IPOs Sector Reports Stock Stance Pre-guarter/Updates Bullion Tracker F&O Tracker
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QUALITY POLICY To achieve and retain leadership, Networth shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Networth will strive to exceed Customer’s expectations. As per the quality policy, Networth will:
Build in house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services. Establish a partner relationship with in its investor service agents and vendors that will help in keeping up its commitments to the customers. Provide high quality of work life for all its employees and equip them with adequate knowledge & skill so as to respond to customer’s needs. Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics. Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients.
Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of it. Strive to keep all stake-holders (share holders, clients, investors, employees, suppliers and regulatory authorities) proud and satisfied.
Key Personnel:
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•
Mr. S P Jain – CMD Networth Stock Broking Ltd. A qualified Chartered Accountant with over 15 years of experience
in the capital
markets. •
Mr. Deepak Mehta – Head PMS Over 12 years of experience in the capital markets and has the prior work experience of serving on the Equity desk of Reliance.
•
Mr.Viral Doshi – Equity Strategist A qualified Chartered Accountant with experience of over a decade in technical analysis with respect to equity markets.
•
Mr. Vinesh Jain – Asst. Fund Manager A qualified MBA graduate specializing in finance and over two years of
experience
in the capital markets. •
Research and the Back office.
we have sought to provide premium financial services and information, so that the power of investment is vested with the client. We equip those who invest with us to make intelligent investment decisions, providing them with the flexibility to either tap into our extensive knowledge and expertise, or make their own decisions. We made our debut into the financial world by servicing Institutional clients, and proved its high scalability of operations by growing exponentially over a short period of time. Now, powered by a top-notch research team
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and a network of experts, we provide an array of financial products & services spanning entire India.Our strong support, technology-driven operations and business units of research, distribution, advisory, wide array of products & services coalesce to provide you with a onestop solution to cater to all your investment needs. Our single minded objective is to help you grow your Networth. OUR GROUP COMPANIES Networth Stock Broking Ltd. [NSBL] NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the Bombay Stock Exchange Ltd (BSE) in the Capital Market and Derivatives (Futures & Options) segment. NSBL has also acquired membership of the currency derivatives segment with NSE, BSE & MCX-SX. It is Depository participants with Central Depository Services India (CDSL) and National Securities Depository (India) Limited (NSDL). With a client base of over 1L loyal customers, NSBL is spread across the country though its over 230+ branches. NSBL is listed on the BSE since 1994.
Networth Wealth Solutions Ltd. [NWSL] NWSL is into the business of delivery of Financial Planning & Advice. It’s vision is to ‘Advice & Execute money related solutions to/for our customers in the most Convenient & Consolidated manner, while making sure that their experience with us is always pleasant & memorable resulting in positive advocacy’. The product & Services include Financial Planning, Life Insurance, On-line Trading Account, Mutual Funds, Debentures/Bonds, General Insurance, Loans and Depository Services.
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NetworthStock.ComLtd.[NSCL] NSCL is the commodities arm of NSBL. It is a member at the Multi Commodity Exchange of India (MCX) and National Commodity & Derivatives Exchange (NCDEX) and is backed by solid research & analytics in Commodities.
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Ravisha Financial Services Pvt. Ltd. [RFSL] RFSL is a RBI registered NBFC engaged in financing, primarily it provides loan against securities
Principles & Values At Net worth Stock Broking Ltd. success is built on teamwork, partnership and the diversity of the people. At the heart of our values lie diversity and inclusion. They are a fundamental part of our culture, and constitute a long-term priority in our aim to become the world's best international bank.
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Values
Responsive
Trustworthy
Creative
Courageous
Approach
Participation:- Focusing on attractive, growing markets where we can leverage our relationships and expertise
Competitive positioning:- Combining global capability, deep local knowledge and creativity to outperform our competitors
Management Discipline:- Continuously improving the way we work, balancing the pursuit of growth with firm control of costs and risks Commitment to stakeholders
Customers:- Passionate about our customers' success, delighting them with the quality of our service
Our People:- Helping our people to grow, enabling individuals to make a difference and teams to win
Communities:- Trusted and caring, dedicated to making a difference
Investors:- A distinctive investment delivering outstanding performance and superior returns
Regulators: - Exemplary governance and ethics wherever we are.
DATA ANALYSIS AND INTERPRETATION 60
Preparation of Reports After analysis, the next step is in the preparation of the report. The report has been prepared according to the report writing principles. The Objective, clarity in presentation of ideas and the uses of charts have been maintained throughout the report. Once the data has been collected, the researcher has to process, analyze and interpret the same. It was emphasized that the researcher should exercise good care to ensure that reliable data are not properly processed and analyzed. Sufficient attention is often not given to these aspects, with the result that the quality of the report suffers. Editing -The first task in data is editing. It is the process by which data are prepared for subsequent coding. As it is very subjective process, editing is the process of examining errors and omission in the collected data and making necessary in the same this is desirable when there is more inconsistency in the responses. Coding - coding is the procedure of classifying the answers to a question in meaningful categories the symbol used to indicate the categories are called codes. Coding is necessary to carry out the subsequent operation of tabulation and analyzing data. Coding involves two steps: The first is to specify the different categories or classes into which the responses are classified. The second step is to allocate individual answers to different categories. Tabulation - tabulation comprises of sorting of data into different categories and counting the number of cases that belongs to each categories. One is unvaried tabulation. This includes the numbers of responses to one question or to count. It’s very simplest way to tabulate where two or more variables are involved in tabulation. It is called bivariate or multivariate tabulation. In marketing research project, generally both type of tabulation is used.
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Analysis and interpretation: - analysis and interpretation are the central steps in the research process. The goal of analysis is to summaries the collected data in such a way that they provide answer to questions that triggered while research. Interpretation is the research for border, meaning of research finding. ULIP VS MUTUAL FUND: 1. INSURANCE 2. ENTRY LOAD 3. MATURITY 4. COMPULSION OF INVESTING 5. TAX SAVING 6. FLEXIBILITY OF TIME OF REDEMPTION INVESTOR
ELSS+TERM
ULIP
250000 S A
EX: In a ULIP, investor would pay 50,000 yearly on April 1st 2007 for this Entry load / allocation charge of 10%
= 5000.00
Administrative charge of 60 P.M
= 720.00
Insurance charges Rs.140 per lakh.
= 350.00
Fund management charge 1.5. %
= 750.00
Total charges paid by investor
6820.00
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Actual money invested in ULIP is 43180.00 Now, if investor decided to use ELSS for Investment and preferred a term plan insurance. Term plan costs @ 140 per lakh for 2.5 lakh 350.00 and here money left for investment is 49650.00. if investor puts this in as ELSS, he gets charged 2.5% of entry load. So, here money invested in ELSS is 48400.00. That means if an investor use the ULIP route, around 12% less of investor money invested than ELSS investment. For this above example if investor applies HDFC STANDARD LIFE ULIP and HDFC ELSS On 1st April 2007 NAV OF HDFC Maximizer fund is 50.50 and HDFC TAX SAVER NAV IS 131.30 Allotted units under HDFC ULIP IS 43180/50.50 is 855.04 UNITS Recorded NAV’s for every FY is April 2008 is 60.41 and April 2009 is 40.05 and highest NAV recorded in this two years on 18th February 2008 is 73.40. And recorded value on 31st march 2010 is 75.4718. Advantage in ULIP: After 1st financial year NAV recorded 60.41 with 20% returns in 1st year, here investor has the option to exit at that levels and can keep into safe custody. It means in ULIP a fund have more than one investment option like MAXIMIZER, EQUITY MANAGER, BALANCER, LIQUID 63
FUND. Here liquid fund doesn’t have equity exposure and able to generate 7.5% returns minimum per annum. If an investor exits total 855.04 units @ 60.41after 1st financial year he would able to receive 51650.00 and assume that the total amount diversified into liquid fund with a growth of 7.5% after completion of 2nd financial year with the appreciation of 3875. So the total amount is 55525.00. Here investor can go for MAXIMIZER fund on 1st April 2009 @ 40.05 this process called fund switching , this process doesn’t involve any extra charges. Fresh allotment units on 1st April 2009 is 55525/40.05 = 1386. 39 units. In this process investor’s units also increased When calculating with 1st April 2010 value is 75.4718 Total investment on that day which can with draw is 104633.00 The above facilities only available in ULIP, with insurance cover.
Calculation if investment invested in ELSS MUTUAL FUND: NAV as on 1st April 2007 is 131.30 and total units allotted in this for the investment of 48400 are 368.32 units. The recorded NAV’s after every financial year is 153.75 at 2008 and 99.95 at 2009 and 208.20 at 2010. But here in ELSS, fund investor have only one fund option and this option maximum scope to equity markets only in any market conditions and investor cannot utilize growth before completion of 3 years, because the investment has to be lock for minimum 3 years. Keeping this and calculate final growth after 3 years is 368.32* 208.20 is 76685.00 So, in volatility market conditions, if investor and fund manager active ULIP is better investment avenue than ELSS. This is the one reason investors keep showing interest on unit linked insurance plans. And there is one disadvantage in ULIP, let’s say if investor dies at the end of 3rd year how much his family get? In ULIP case, the limit is the higher of investment or the sum assured of 2.50000/In ULIP, investment is 104633.00 and insurance of 2.50000/- higher is 2.50000/- so, here investor’s family gets only 2.50000/-
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In ELSS+TERM PLAN case, ELSS covered full by family and term insurance 2.50000 also covered by the family so here total eligibility is 250000.00 + 76685.00 = 326685.00. So here ELSS is working than ULIP.
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FINDINGS
Interpretation First reason or preference that why an investor is interested in ULIP is Investment Purpose, and second is to its returns and after that they investing because they are getting the tax benefit. Then again there are some people who are investing for pension planning and security.
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Interpretation In future people will be more preferring to the security of their money means they want an secured option which should provide good returns. As ULIP are the option in which you can have the security also and good returns. The second choice of the investors is return of their money.
It is prudent to make equity-oriented investments based on an established track record of at least three years over different market cycles. ULIPs do not fulfill this criterion now.
In ULIP, only 1st year premium has to be locked for 3 years and 2 nd year investment 2years and 3rd year for 1year. But in ELSS every year’s investment locked for 3 years.
Insurance and savings are two different goals and it is better to address them separately rather than bundle them into a single product. A combination of a term plan and a mutual fund could give better results over the long term.
If investment returns are your priority, you should compare alternative investment products before locking in your money.
Tax advantages do work in favor of ULIPs for debt-oriented funds. For equity-oriented funds, equity-linked savings products, which enjoy tax advantages and provide marketlinked returns, are comparable.
Despite the IRDA regulations of no money backs to be offered by agents, it still prevails in the market. As observed, money back as high as 25% was seen is being provided by an agent. This is acting as one of the major bottlenecks for banks as no money backs are provided at bank level.
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HDFC bank even caters to the need of individuals who are not satisfied by its own ULIPS i.e. policies offered by HDFC Standard Life Insurance by offering them ULIP’s of Birla Sun life insurance.
ULIP’s are sold as investment plans rather than ‘RISK COVERING’ plans.
No awareness about ULIP’s despite LIC being the largest and the oldest player in the market having ULIP plans.
It was observed that salaried class is much easier to convince to go for ULIP’s than the business class. It was also observed that the business class doesn’t usually opt for monthly/ quarterly/ half yearly modes of payment because of unnecessary hassles and also more money at disposal.
Insurance and investment are treated in the same manner despite them being different.
Portfolio in MF changes every month, where as in ULIP’s changes on quarterly basis.
Recommendations
Insurance and investments must be treated differently
Consumer awareness must be created for ULIP’s
Should not be mis-sold as investment products but ‘risk cover’ products
Relationship building must be focused at, rather than pitching in the wrong product. This will create customer loyalty.
A person already having a ULIP, can lower costs and increase returns by the following:
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1. Try topups 2. Reduce life cover 3. Stay away from riders
CONCLUSION Change is very important and one whose goes which the changing environment always succeeds, that is what I have learnt from the study. The competition has grown too much in the market that the investors are confused in which he /she should invest. The competition is between the traditional methods and modern methods. This project gives the comparative analysis between ULIP products and Mutual Funds that is: Mutual Funds and the Unit Linked Insurance Plans are both professionally managed investment plans. ULIP provides life insurance and at the same time provides suitable investment avenues. The policy value is the sum assured plus the appreciation of the underlying assets. It is life insurance solution that provides for the benefits of protection and capital appreciation at the same time. The product is quite similar to a mutual fund in the sense that the investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV), and apart from the insurance benefit the structure and functioning of ULIP is exactly like a mutual fund.
The idea of having insurance and investment conveniently rolled into one-product looks alluring enough and saves the common investor the time and effort to consider different options. However, an investor may build a customized solution for himself separating insurance from his investment needs.
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In the case of ULIP, the insurance company deducts charges towards life insurance cover (mortality charges), administration charges and fund management charges from the premium paid by the investor. The balance amount left is used to invest in stocks or bonds or a combination of the two. All premiums paid are eligible for tax break under Sec 88 and come under a lock-in of three years. The administrative charges levied by the insurance company are quite high during the first few years of the policy. This acts as a dampener as the returns are affected due to lower levels of funds available for investment, and extra cautious approach by the insurance company towards investing doesn’t help either. Whereas, MF comparable administrative charges are very less and they invest their entire holdings in equities quite aggressively in favorable times, thus allowing the portfolio to appreciate rapidly. The higher administrative charges during the initial years erode the returns and make it less attractive when compared to a mutual fund investment for a similar period. ULIPs are not as liquid as mutual funds. The redemption process takes more time as compared to a mutual fund. If one intends to redeem after the lock-in period of three years, he would be at a loss because of higher initial administrative charges. Portfolio disclosure is another area where MF score over ULIPs and though leading insurance companies do disclose their portfolio on a regular basis, the competitive pressure in the mutual funds industry lead to higher disclosures and investors know exactly where there money is being invested. Although ULIPs offer certain benefits, which MFs are unable to provide for, for example certain ULIPs with a capital guarantee. This product 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. This is unlike investments in a mutual fund scheme where investors are partner to both profits as well as losses incurred by the scheme. Switch in/out from different asset classes is also allowed at no extra cost, and investor can conveniently transfer his investments from an equity scheme to a debt or balanced scheme. The investment
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amount that an investor pays can also be altered as per his wishes during anytime in between his maturity period. Thus it is better to keep insurance and investment needs separate. Investing in Mutual Funds can be done systematically. Systematic Investment Plan, Systematic Transfer Plan and Systematic Withdrawal Plan offer greater benefits than lump sum investment. People investing in MFs through SIPs may benefit through Rupee Cost Averaging. Here the average cost of buying units is kept low. It works out to be a disciplined investment practice that takes the guesswork out of timing the markets. It involves investing a fixed amount in the same investment plan at regular intervals–say every month or every quarter. The essence of this strategy is that more units are purchased automatically when prices are low and fewer units when prices are high. Over time, this results in the average cost per unit–the money investor pays–being lower than the average price per unit.
Unlike mutual fund SIPs, which are not long-term by nature, insurance plans cushion immediate market fluctuations as well as long-term market fluctuations varying over investment cycles. And as charges on ULIPs are front-loaded, the benefit on unit values over a 15-year period (or more) is pronounced. If well planned, insurance can work favorably as effective savings tools, especially if investor also factors in the tax benefits. Contributions in to insurance plans provides Section 80C benefits up to Rs 1 lakh invested and, at the time of maturity the proceeds are tax free under Section 10 (10D), making these preferred instruments for many. Hence it may be concluded that both Unit Linked Insurance Plans and the Mutual Funds are good in their respective domains. Investors should not club their insurance and investment needs. ULIPs offer a better preposition in terms of returns to investors over traditional insurance plans. They cover life and over and above that they help in growing in the money of investors. It is always good that investors start early and select the right insurance-cuminvestment plan for themselves and utilize their tax break limit fully.
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Mutual Funds are for a different class of investors. People who want to spread out their risk and still earn a handsome return; Mutual Funds would be the right investment avenue. Although no tax breaks are offered, Mutual Funds have a potential to give extraordinary returns that may even compensate for the tax part. But there is a note of caution for the investors that they should constantly monitor their portfolio and the Scheme in which they have invested. Careful monitoring and an intelligent approach could definitely help in earning fortunes. BIBILOGRAPHY
1. 2. 3. 4. 5. 6.
www.networthdirect.in www.google.com www.moneycontrol.com www.licindia.com Brochures of different Insurance Products IRDA books
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