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Industry Profile

History of Mutal Fund

INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business.Though

it is perhaps the smallest segment of the industry, it is also the most glamorous

in that it is a young industry where there are changes in the rules of the game

everyday, and there are constant shifts and upheavals.The mutual fund is

structured around a fairly simple concept, the mitigation of risk through the

spreading of investments across multiple entities, which is achieved by thepooling of a number of small investments into a large bucket. Yet it has been the

subject of perhaps the most elaborate and prolonged regulatory effort in the

history of the country.

A little history:

The mutual fund industry started in India in a small way with the UTI Act creating

what was effectively a small savings division within the RBI. Over a period of 25

years this grew fairly successfully and gave investors a good return, and

therefore in 1989, as the next logical step, public sector banks and financial

institutions were allowed to float mutual funds and their success emboldened the

government to allow the private sector to foray into this area. The initial years of

the industry also saw the emerging years of the Indian equity market, when a

number of mistakes were made and hence the mutual fund schemes, which

invested in lesser-known stocks and at very high levels, became loss leaders for

retail investors. From those days to today the retail investor, for whom the mutualfund is actually intended, has not yet returned to the industry in a big way. But to

be fair, the industry too has focused on brining in the large investor, so that it can

create a significant base corpus, which can make the retail investor feel more

secure.

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The Indian MF industry has Rs 5.67 lakh crore of assets under

management. As per data released by Association of Mutual Funds in India,

the asset base of all mutual fund combined has risen by 7.32% in April, the

first month of the current fiscal. As of now, there are 33 fund houses in

the country including 16 joint ventures and 3 whollyowned foreign asset

managers.

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

fund industry could grow to $350-440 billion by 2012, expanding 33%

annually. While the revenue and profit (PAT) pools of Indian AMCs are pegged

at $542 million and $220 million respectively, it is at par with fund houses

in developed economies. Operating profits for AMCs in India, as a percentageof average assets under management, were at 32 basis points in 2006-07,

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

in the same time frame.

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Major players in Indian mutual fund industry and their AU M

Mutual Fund Name

No. of Schemes*

As on CorpusABN AMRO M F 337 July 31, 2008 7803AIG GlobalM F 54 July 31, 2008 3513SBI Mutual Fund 177 July 31, 2008 29151.00Birla Mutual Fund 343 July 31, 2008 37497.00BOB Mutual Fund 22 July 31, 2008 56.00Canara Robeco Mutual Fund 54 July 31, 2008 4576.00DBS Chola Mutual Fund 80 July 31, 2008 1853.00Deutsche Mutual Fund 187 July 31, 2008 10792.00DSP Merrill Lynch Mutual Fund 211 Feb 29, 2008 19483.00Escorts Mutual Fund 26 Feb 29, 2008 177.00

Fidelity Mutual Fund 39 Mar 31, 2008 7464.00Franklin Templeton Investments 230 July 31, 2008 24441.00HDFC Mutual Fund 371 July 31, 2008 50,752.00HSBC Mutual Fund 221 July 31, 2008 16,385.00ICICI Prudential Mutual Fund 431 July 31, 2008 55,161.00ING Mutual Fund 262 July 31, 2008 7091.00

JPMorgan Mutual Fund 9 July 31, 2008 3054.00Kotak Mahindra Mutual Fund 185 July 31, 2008 18,782.00LIC Mutual Fund 112 July 31, 2008 17,499.00Lotus India Mutual Fund 216 July 31, 2008 7831.00Morgan Stanley Mutual Fund 3 July 31, 2008 2,814.00

PRINCIPAL Mutual Fund 151 July 31, 2008 11,359.00Quantum Mutual Fund 6 July 31, 2008 66.00Reliance Mutual Fund 345 July 31, 2008 84,564.00Sahara Mutual Fund 45 July 31, 2008 175.00Mirae asset mutual fund 255 July 31, 2008 2546.00Sundaram Mutual Fund 219 July 31, 2008 11,898.00Tata Mutual Fund 389 July 31, 2008 20,443.00Taurus Mutual Fund 14 July 31, 2008 289.00UTI Mutual Fund 315 July 31, 2008 46,120.00

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HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit Trust

of India, at the initiative of the Government of India and Reserve Bank. Thehistory of mutual funds in India can be broadly divided into four distinct phases: -

First Phase 1964-87

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

by the Reserve Bank of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-linked

from the RBI and the Industrial Development Bank of India (IDBI) took over theregulatory 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 publicsector banks and Life Insurance Corporation of India (LIC) and General

Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI

Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec

87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov

89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC

established its mutual fund in June 1989 while GIC had set up its mutual fund in

December 1990.

At the end of 1993, the mutual fund industry had assets under management of

Rs.47,004 crores.

Third Phase 1993-2003 (Entry of Private Sector Funds)6


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

mutual fund industry, giving the Indian investors a wider choice of fund families.

Also, 1993 was the year in which the first Mutual Fund Regulations came into

being, under which all mutual funds, except UTI were to be registered and

governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton)

was the first private sector mutual fund registered in July 1993.

Fourth Phase since February 2003

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

bifurcated into two separate entities. One is the Specified Undertaking of the Unit

Trust of India with assets under management of Rs.29,835 crores as at the end

of January 2003, representing broadly, the assets of US 64 scheme, assured

return and certain other schemes. The Specified Undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed by

Government of India and does not come under the purview of the Mutual Fund

Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It

is registered with SEBI and functions under the Mutual Fund Regulations. With

the bifurcation of the erstwhile UTI which had in March 2000 more than

Rs.76,000 crores of assets under management and with the setting up of a UTI

Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent

mergers taking place among different private sector funds, the mutual fund

industry has entered its current phase of consolidation and growth. As at the end

of September, 2004, there were 29 funds, which manage assets of Rs.153108

crores under 421 schemes.

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GROWTH IN ASSETS UNDER MANAGEMENT

ECONOMIC ENVIRONMENT

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

While the Indian mutual fund industry has grown in size by about 320% fromMarch, 1993 (Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms of

AUM, the AUM of the sector excluding UTI has grown over 8 times from Rs. 152

billion in March 1999 to $ 148 billion as at March 2008.

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Though India is a minor player in the global mutual fund industry, its AUM as a

proportion of the global AUM has steadily increased and has doubled over its

levels in 1999.

The growth rate of Indian mutual fund industry has been increasing for the lastfew years. It was approximately 0.12% in the year of 1999 and it is noticed 0.25%

in 2004 in terms of AUM as percentage of global AUM.

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMCs is in the queue to enter the Indian markets. Our saving rate is over 23%, highest in the world. Only channelizing these

savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US

having more than 800. There is a big scope for expansion.

Mutual fund can penetrate rurals like the Indian insurance industry with

simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

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

Introduction of Financial Planners who can provide need based advice.

Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive

expansion of the foreign owned mutual fund companies and the decline of

the companies floated by the nationalized banks and smaller private

sector players.

Many nationalized banks got into the mutual fund business in the early

nineties and got off to a start due to the stock market boom was

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prevailing. These banks did not really understand the mutual fund

business and they just viewed it as another kind of banking activity. Few

hired specialized staff and generally chose to transfer staff from the parent

organizations. The performance of most of the schemes floated by these

funds was not good. Some schemes had offered guaranteed returns and

their parent organizations had to bail out these AMCs by paying large

amounts of money as a difference between the guaranteed and actual

returns. The service levels were also very bad. Most of these AMCs have

not been able to retain staff, float new schemes etc.

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TECHNOLOGICAL ENVIRONMENT

IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out several innovations in their

products and is offering value added services to their investors. Some of the

value added services that are being offered are:

Electronic fund transfer facility.

Investment and re-purchase facility through internet. Added features like accident insurance cover, mediclaim etc.

Holding the investment in electronic form, doing away with the traditional

form of unit certificates.

Cheque writing facilities.

Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more

easily accessible to an ever increasing number of investors across the country.

For the first time in India the mutual fund start using the automated trading,

clearing and settlement system of stock exchanges for sale and repurchase ofopen-ended de-materialized mutual fund units.

Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were

options introduced which have come in very handy for the investor to maximize

their returns from their investments. SIP ensures that there is a regular

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investment that the investor makes on specified dates making his purchases to

spread out reducing the effect of the short term volatility of markets. SWP was

designed to ensure that investors who wanted a regular income or cash flow from

their investments were able to do so with a pre-defined automated form. Today

the SW facility has come in handy for the investors to reduce their taxes.

LEGAL AND POLITICAL ENVIRONMENT

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund

association in India was generated to function as a non-profit organization.

Association of Mutual Funds in India (AMFI) was incorporated on 22nd August

1995.

AMFI is an apex body of all Asset Management Companies (AMC), which has

been registered with SEBI. Till date all the AMCs are that have launched mutual

fund schemes are its members. It functions under the supervision and guidelinesof board of directors. AMFI has brought down the Indian Mutual Fund Industry to

a professional and healthy market with ethical lines enhancing and maintaining

standards. It follows the principle of both protecting and promoting the interest of

mutual funds as well as their unit holders.

It has been a forum where mutual funds have been able to present their views,

debate and participate in creating their own regulatory framework. The

association was created originally as a body that would lobby with the regulator

to ensure that the fund viewpoint was heard. Today, it is usually the body that is

consulted on matters long before regulations are framed, and it often initiates

many regulatory changes that prevent malpractices that emerge from time to

time.

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AMFI works through a number of committees, some of which are standing

committees to address areas where there is a need for constant vigil and

improvements and other which are adhoc committees constituted to address

specific issues. These committees consist of industry professionals from among

the member mutual funds. There is now some thought that AMFI should become

a self-regulatory organization since it has worked so effectively as an industry

body.

OBJECTIVES:

To define and maintain high professional and ethical standards in all areas of

operation of mutual fund industry

To recommend and promote best business practices and code of conduct to

be followed by members and others engaged in the activities of mutual fund and

asset management including agencies connected or involved in the field of

capital markets and financial services.

To interact with the Securities and Exchange Board of India (SEBI) and to

represent to SEBI on all matters concerning the mutual fund industry.

To represent to the Government, Reserve Bank of India and other bodies on

all matters relating to the Mutual Fund Industry.

To develop a cadre of well trained Agent distributors and to implement a

programme of training and certification for all intermediaries and other engaged

in the industry.

To undertake nation wide investor awareness programme so as to promote

proper understanding of the concept and working of mutual funds.

To disseminate information on Mutual Fund Industry and to undertake studies

and research directly and/or in association with other bodies.

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MEMBERS OF AMFI:

o Bank Sponsored

1. Joint Ventures - Predominantly Indian

1. Canara Robeco Asset Management Company Limited

2. SBI Funds Management Private Limited

2. Others

1. Baroda Pioneer Asset Management Company Limited

2. UTI Asset Management Company Ltd

o Institutions

1. LIC Mutual Fund Asset Management Company Limited

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o Private Sector

1. Indian

1. Benchmark Asset Management Company Pvt. Ltd.

2. DBS Cholamandalam Asset Management Ltd.3. Deutsche Asset Management (India) Pvt. Ltd.

4. Edelweiss Asset Management Limited

5. Escorts Asset Management Limited

6. IDFC Asset Management Company Private Limited

7. JM Financial Asset Management Private Limited

8. Kotak Mahindra Asset Management Company

Limited(KMAMCL)

9. Quantum Asset Management Co. Private Ltd.10. Reliance Capital Asset Management Ltd.

11. Sahara Asset Management Company Private Limited

12. Tata Asset Management Limited

13. Taurus Asset Management Company Limited

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2. Foreign

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

2. FIL Fund Management Private Limited

3. Franklin Templeton Asset Management (India) Private

Limited

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

Ltd.

3. Joint Ventures - Predominantly Indian

1. Birla Sun Life Asset Management Company Limited

2. DSP Merrill Lynch Fund Managers Limited

3. HDFC Asset Management Company Limited4. ICICI Prudential Asset Mgmt.Company Limited

5. Sundaram BNP Paribas Asset Management Company

Limited

4. Joint Ventures - Predominantly Foreign

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

2. Bharti AXA Investment Managers Private Limited

3. HSBC Asset Management (India) Private Ltd.

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

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5. JPMorgan Asset Management India Pvt. Ltd.

6. Lotus India Asset Management Co. Private Ltd.

7. Morgan Stanley Investment Management Pvt.Ltd.

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

REGULATORY MEASURES BY SEBI

Like Banking & Insurance up to the nineties of the last century, Mutual Fund

industry in India was set up and functioned exclusively in the state monopoly

represented by the Unit Trust of India. This monopoly was diluted in the eighties

by allowing nationalized banks and insurance companies (LIC & GIC) to set up

their institutions under the Indian Trusts Act to transact mutual fund business,

allowing the Indian investor the option to choose between different serviceproviders. Unit Trust was a statutory corporation governed by its own

incorporating act. There was no separate regulatory authority up to the time SEBI

was made a statutory authority in 1992. but it was only in the year 1993, when a

government took a policy decision to deregulate Indian Economy from

government control and to transform it market oriented, that the industry was

opened to competition from private and foreign players. By the year 2000 there

came to be established in the market 34 mutual funds offerings a variety of about

550 schemes.

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SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS)

REGULATIONS, 1996

The fast growing industry is regulated by Securities and Exchange Board of India

(SEBI) since inception of SEBI as a statutory body. SEBI initially formulatedSECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS)

REGULATIONS, 1993 providing detailed procedure for establishment,

registration, constitution, management of trustees, asset management company,

about schemes/products to be designed, about investment of funds collected,

general obligation of MFs, about inspection, audit etc. based on experience

gained and feedback received from the market SEBI revised the guidelines of

1993 and issued fresh guidelines in 1996 titled SECURITIES AND EXCHANGE

BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1996. The said

regulations as amended from time to time are in force even today.

The SEBI mutual fund regulations contain ten chapters and twelve schedules.

Chapters containing material subjects relating to regulation and conduct of

business by Mutual Funds.

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REGISTRATION OF MUTUAL FUND:

Application for registration

1. An application for registration of a mutual fund shall be made to the Board in

Form A by the sponsor.

Application fee to accompany the application

2. Every application for registration under regulation 3 shall be accompanied by

nonrefundable application fee as specified in the Second Schedule.

Application to conform to the requirements

3. An application which is not complete in all respects shall be liable to be

rejected:

Provided that, before rejecting any such application, the applicant shall be given

an opportunity to complete such formalities within such time as may be specified

by the Board.

Furnishing information

4. The Board may require the sponsor to furnish such further information or

clarification as may be required by it.

Eligibility criteria

5. For the purpose of grant of a certificate of registration, the applicant has to

fulfill the following, namely :

(a) the sponsor should have a sound track record and general reputation of

fairness and integrity in all his business transactions.

Explanation : For the purposes of this clause sound track record shall mean the

sponsor should,(i) be carrying on business in financial services for a period of not less than five

years; and

(ii) the networth is positive in all the immediately preceding five years; and

(iii) the networth in the immediately preceding year is more than the capital

contribution of the sponsor in the asset management company; and

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(iv) the sponsor has profits after providing for depreciation, interest and tax in

three out of the immediately preceding five years, including the fifth year;

(b) in the case of an existing mutual fund, such fund is in the form of a trust and

the trust deed has been approved by the Board;

(c) the sponsor has contributed or contributes at least 40% to the net worth of the

asset management company:

Provided that any person who holds 40% or more of the net worth of an asset

management company shall be deemed to be a sponsor and will be required to

fulfill the eligibility criteria specified in these regulations;

(d) the sponsor or any of its directors or the principal officer to be employed by

the mutual fund should not have been guilty of fraud or has not been convicted of

an offence involving moral turpitude or has not been found guilty of any economic

offence;

(e) appointment of trustees to act as trustees for the mutual fund in accordance

with the provisions of the regulations;

(f) appointment of asset management company to manage the mutual fund andoperate the scheme of such funds in accordance with the provisions of these

regulations;

(g) appointment of a custodian in order to keep custody of the securities 10 [or

gold and gold related instrumentsand carry out the custodian activities as may

be authorizedby the trustees.

Consideration of application

8. The Board, may on receipt of all information decide the application.

Grant of Certificate of Registration

9. The Board may register the mutual fund and grant a certificate in Form B on

the applicant paying the registration fee as specified in Second Schedule.

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Terms and conditions of registration

10. The registration granted to a mutual fund under regulation 9, shall be subject

to the following terms and conditions:

(a) the trustees, the sponsor, the asset management company and the custodian

shall comply with the provisions of these regulations;

(b) the mutual fund shall forthwith inform the Board, if any information or

particulars previously submitted to the Board was misleading or false in any

material respect;

(c) the mutual fund shall forthwith inform the Board, of any material change in the

information or particulars previously furnished, which have a bearing on the

registration granted by it;

(d) payment of fees as specified in the regulations and the Second Schedule.

Rejection of application

11. Where the sponsor does not satisfy the eligibility criteria mentioned in

regulation 7, the Board may reject the application and inform the applicant of the

same.

Payment of annual service fee:12. A mutual fund shall pay before the 15th April each year a service fee as

specified in the Second Schedule for every financial year from the year following

the year of registration:

Provided that the Board may, on being satisfied with the reasons for the delay

permit the mutual fund to pay the service fee at any time before the expiry of two

months from the commencement of the financial year to which such fee relates.

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Failure to pay annual service fee

13. The Board may not permit a mutual fund who has not paid service fee to

launch any scheme.

CONSTITUTION AND MANAGEMENT OF ASSET MANAGEMENT

COMPANY AND CUSTODIAN

Application by an asset management company

14. (1) The application for the approval of the asset management company shall

be made in Form D.(2) The provisions of regulations 5, 6 and 8 shall, so far as may be, apply to the

application made under sub-regulation (1) as they apply to the application for

registration of a mutual fund.

Appointment of an asset management company

15. (1) The sponsor or, if so authorised by the trust deed, the trustee, shall

appoint an asset management company, which has been approved by the Board

under sub-regulation(2) of regulation 21.

(2) The appointment of an asset management company can be terminated by

majority of the trustees or by seventy-five per cent of the unitholders of the

scheme.

(3) Any change in the appointment of the asset management company shall be

subject to prior approval of the Board and the unitholders.

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Eligibility criteria for appointment of asset management company

16. (1) For grant of approval of the asset management company the applicant

has to fulfill the following :

(a) in case the asset management company is an existing asset management

company it has a sound track record, general reputation and fairness in

transactions.

Explanation: For the purpose of this clause sound track record shall mean the

networth and the profitability of the asset management company;

(aa) the asset management company is a fit and proper person;

(b) the directors of the asset management company are persons having

adequate professional experience in finance and financial services related field

and not found guilty of moral turpitude or convicted of any economic offence or

violation of any securities laws;

(c) the key personnel of the asset management company 27[have not been

found guilty of moral turpitude or convicted of economic offence or violation of

securities laws or worked for any asset management company or mutual fund or

any intermediary 29[during the period when its] registration has been suspended

or cancelled at any time by the Board;

(d) the board of directors of such asset management company has at least fifty

per cent directors, who are not associate of, or associated in any manner with,the sponsor or any of its subsidiaries or the trustees;

(e) the Chairman of the asset management company is not a trustee of any

mutual fund;

(f) the asset management company has a networth of not less than rupees ten

crores :

Provided that an asset management company already granted approval under

the provisions of Securities and Exchange Board of India (Mutual Funds)

Regulations, 1993 shall within a period of twelve months from the date ofnotification of these regulations increase its networth to rupees ten crores :

Provided [further] that the period specified in the first proviso may be extended

in appropriate cases by the Board up to three years for reasons to be recorded in

writing :

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Provided further that no new schemes shall be allowed to be launched or

managed by such asset management company till the networth has been raised

to rupees ten crores.

Explanation : For the purposes of this clause, networth means the aggregate

of the paid up capital and free reserves of the asset management company after

deducting therefrom miscellaneous expenditure to the extent not written off or

adjusted or deferred revenue expenditure, intangible assets and accumulated

losses.

(2) The Board may, after considering an application with reference to the matters

specified in sub-regulation (1), grant approval to the asset management

company.

Terms and conditions to be complied with

17. The approval granted under sub-regulation (2) of regulation 21 shall be

subject to the

following conditions, namely:

(a) any director of the asset management company shall not hold the office of the

director in another asset management company unless such person is an

independent director referred to in clause (d) of sub-regulation (1) of regulation21 and approval of the Board of asset management company of which such

person is a director, has been obtained;

(b) the asset management company shall forthwith inform the Board of any

material change in the information or particulars previously furnished, which have

a bearing on the approval granted by it;

(c) no appointment of a director of an asset management company shall be

made without prior approval of the trustees;

(d) the asset management company undertakes to comply with theseregulations;

(e) no change in the controlling interest of the asset management company shall

be made unless,

(i) prior approval of the trustees and the Board is obtained;

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(ii) a written communication about the proposed change is sent to each

unitholder and an advertisement is given in one English daily newspaper having

nationwide circulation and in a newspaper published in the language of the

region where the Head Office of the mutual fund is situated; and

(iii) the unitholders are given an option to exit on the prevailing Net Asset Value

without any exit load;]

(f) the asset management company shall furnish such information and

documents to the trustees as and when required by the trustees.

Procedure where approval is not granted

18. Where an application made under regulation 19 for grant of approval does

not satisfy the eligibility criteria laid down in regulation 21, the Board may reject

the application.

Restrictions on business activities of the asset management company

19. The asset management company shall

(1) not act as a trustee of any mutual fund;

(2) not undertake any other business activities except activities in the nature of

portfolio management services,] management and advisory services to offshorefunds, pension funds, provident funds, venture capital funds, management of

insurance funds, financial consultancy and exchange of research on commercial

basis if any of such activities are not in conflict with the activities of the mutual

fund :

Provided that the asset management company may itself or through its

subsidiaries undertake such activities if it satisfies the Board that the key

personnel of the asset management company, the systems, back office, bankand securities accounts are segregated activity-wise and there exist systems to

prohibit access to inside information of various activities :

Provided furtherthat asset management company shall meet capital adequacy

requirements, if any, separately for each such activity and obtain separate

approval, if necessary under the relevant regulations.

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(3) The asset management company shall not invest in any of its schemes

unless full disclosure of its intention to invest has been made in the offer

documents 34[in case of schemes launched after the notification of these

regulations :

Provided that an asset management company shall not be entitled to charge any

fees on its investment in that scheme.

Asset management company and its obligations

20. (1) The asset management company shall take all reasonable steps and

exercise due diligence to ensure that the investment of funds pertaining to any

scheme is not contrary to the provisions of these regulations and the trust deed.

(2) The asset management company shall exercise due diligence and care in all

its investment decisions as would be exercised by other persons engaged in the

same business.

(3) The asset management company shall be responsible for the acts of

commission or omission by its employees or the persons whose services havebeen procured by the asset management company.

(4) The asset management company shall submit to the trustees quarterly

reports of each year on its activities and the compliance with these regulations.

(5) The trustees at the request of the asset management company may terminate

the assignment of the asset management company at any time:

Provided that such termination shall become effective only after the trusteeshave accepted the termination of assignment and communicated their decision in

writing to the asset management company.

(6) Notwithstanding anything contained in any contract or agreement or

termination, the asset management company or its directors or other officers

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shall not be absolved of liability to the mutual fund for their acts of commission or

omission, while holding such position or office.

(6A) The Chief Executive Officer (whatever his designation may be) of the asset

management company shall ensure that the mutual fund complies with all the

provisions of these regulations and the guidelines or circulars issued in relation

thereto from time to time and that the investments made by the fund managers

are in the interest of the unit holders and shall also be responsible for the overall

risk management function of the mutual fund.

Explanation.For the purpose of this sub-regulation, the words these

regulations shall mean and include the Securities and Exchange Board of India

(Mutual Funds) Regulations, 1996 as amended from time to time.

(6B) The fund managers (whatever the designation may be) shall ensure that the

funds of the schemes are invested to achieve the objectives of the scheme and

in the interest of the unit holders.

(7) (a) An asset management company shall not through any broker associated

with the sponsor, purchase or sell securities, which is average of 5 per cent or

more of the aggregate purchases and sale of securities made by the mutual fundin all its schemes :

Provided that for the purpose of this sub-regulation, the aggregate purchase and

sale of securities shall exclude sale and distribution of units issued by the mutual

fund :

Provided further that the aforesaid limit of 5 per cent shall apply for a block of

any three months.

(b) An asset management company shall not purchase or sell securities through

any broker [other than a broker referred to in clause (a) of sub-regulation (7)which is average of 5 per cent or more of the aggregate purchases and sale of

securities made by the mutual fund in all its schemes, unless the asset

management company has recorded in writing the justification for exceeding the

limit of 5 per cent and reports of all such investments are sent to the trustees on

a quarterly basis :

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Provided that the aforesaid limit shall apply for a block of three months.

(8) An asset management company shall not utilise the services of the sponsor

or any of its associates, employees or their relatives, for the purpose of any

securities transaction and distribution and sale of securities :

Provided that an asset management company may utilise such services if

disclosure to that effect is made to the unitholders and the brokerage or

commission paid is also disclosed in the half-yearly annual accounts of the

mutual fund :

Provided further that the mutual funds shall disclose at the time of declaring

halfyearly and yearly results :

(i) any underwriting obligations undertaken by the schemes of the mutual funds

with respect to issue of securities associate companies,

(ii) devolvement, if any,

(iii) subscription by the schemes in the issues lead managed by associate

companies,

(iv) subscription to any issue of equity or debt on private placement basis where

the sponsor or its associate companies have acted as arranger or manager.

(9) The asset management company shall file with the trustees the details oftransactions in securities by the key personnel of the asset management

company in their own name or on behalf of the asset management company and

shall also report to the Board, as and when required by the Board.

(10) In case the asset management company enters into any securities

transactions with any of its associates a report to that effect shall be sent to the

trustees at its next meeting.

(11) In case any company has invested more than 5 per cent of the net asset

value of a scheme, the investment made by that scheme or by any other scheme

of the same mutual fund in that company or its subsidiaries shall be brought to

the notice of the trustees by the asset management company and be disclosed in

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the half-yearly and annual accounts of the respective schemes with justification

for such investment 40[provided the latter

investment has been made within one year of the date of the former investment

calculated on either side.

(12) The asset management company shall file with the trustees and the Board

(a) detailed bio-data of all its directors along with their interest in other companies

within fifteen days of their appointment;

(b) any change in the interests of directors every six months; and

(c) a quarterly report to the trustees giving details and adequate justification

about the purchase and sale of the securities of the group companies of the

sponsor or the asset management company, as the case may be, by the mutual

fund during the said quarter.

(13) Each director of the asset management company shall file the details of his

transactions of dealing in securities with the trustees on a quarterly basis in

accordance with guidelines issued by the Board.

(14) The asset management company shall not appoint any person as key

personnel who has been found guilty of any economic offence or involved in

violation of securities laws.

(15) The asset management company shall appoint registrars and share transfer

agents who are registered with the Board:

Provided if the work relating to the transfer of units is processed in-house, the

charges at competitive market rates may be debited to the scheme and for rates

higher than the competitive market rates, prior approval of the trustees shall be

obtained and reasons for charging higher rates shall be disclosed in the annual

accounts.

(16) The asset management company shall abide by the Code of Conduct as

specified in the Fifth Schedule.

Appointment of custodian

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21. (1) The mutual fund shall appoint a Custodian to carry out the custodial

services for the schemes of the fund and sent intimation of the same to the Board

within fifteen days of the appointment of the Custodian:

Provided that in case of a gold exchange traded fund scheme, the assets of the

scheme being gold or gold related instruments may be kept in custody of a bank

which is registered as a custodian with the Board.

(2) No custodian in which the sponsor or its associates hold 50 per cent or more

of the voting rights of the share capital of the custodian or where 50 per cent or

more of the directors of the custodian represent the interest of the sponsor or its

associates shall act as custodian for a mutual fund constituted by the same

sponsor or any of its associates or subsidiary company.

Agreement with custodian

22. The mutual fund shall enter into a custodian agreement with the custodian,

which shall contain the clauses which are necessary for the efficient and orderly

conduct of the affairs of the custodian:Provided that the agreement, the service contract, terms and appointment of the

custodian shall be entered into with the prior approval of the trustees.

CHARACTERISTICS OF MUTUAL FUNDS

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

funds.

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

providers.

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

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

Net Asset Value (NAV) which changes everyday.

The investment portfolio is created according to the stated investment

objectives of the fund.

ADVANTAGES OF MUTUAL FUNDS

The advantages of mutual funds are given below: -

Portfolio Diversification

Mutual funds invest in a number of companies. This diversification reducesthe risk because it happens very rarely that all the stocks decline at the same

time and in the same proportion. So this is the main advantage of mutual funds.

Professional Management

Mutual funds provide the services of experienced and skilled professionals,

assisted by investment research team that analysis the performance and

prospects of companies and select the suitable investments to achieve theobjectives of the scheme.

Low Costs

Mutual funds are a relatively less expensive way to invest as compare to

directly investing in a capital markets because of less amount of brokerage and

other fees.

Liquidity

This is the main advantage of mutual fund, that is whenever an investor

needs money he can easily get redemption, which is not possible in most of other

options of investment. In open-ended schemes of mutual fund, the investor gets

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DISADVANTAGES OF MUTUAL FUNDS

Mutual funds have their following drawbacks:

No Guarantees

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

value of mutual fund shares will go down as well, no matter how balanced the

portfolio. Investors encounter fewer risks when they invest in mutual funds than

when they buy and sell stocks on their own. However, anyone who invests

through mutual fund runs the risk of losing the money.

Fees and Commissions

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

Some funds also charge sales commissions or loads to compensate brokers,

financial consultants, or financial planners. Even if you dont use a broker or

other financial advisor, you will pay a sales commission if you buy shares in a

Load Fund.

Taxes

During a typical year, most actively managed mutual funds sell anywhere

from 20 to 70 percent of the securities in their portfolios. If your fund makes a

profit on its sales, you will pay taxes on the income you receive, even you

reinvest the money you made.

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Management Risk

When you invest in mutual fund, you depend on fund manager to make the right

decisions regarding the funds portfolio. If the manager does not perform as wellas you had hoped, you might not make as much money on your investment as

you expected. Of course, if you invest in index funds, you forego management

risk because these funds do not employ managers.

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STRUCTURE OF MUTUAL FUND

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

of mutual funds: -

Structure of Mutual Funds

SEBI

The regulation of mutual funds operating in India falls under the preview of

authority of the Securities and Exchange Board of India (SEBI). Any person

proposing to set up a mutual fund in India is required under the SEBI (Mutual

Funds) Regulations, 1996 to be registered with the SEBI.

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Sponsor

The sponsor should contribute at least 40% to the net worth of the AMC.

However, if any person holds 40% or more of the net worth of an AMC shall bedeemed to be a sponsor and will be required to fulfill the eligibility criteria in the

Mutual Fund Regulations. The sponsor or any of its directors or the principal

officer employed by the mutual fund should not be guilty of fraud or guilty of any

economic offence.

Trustees

The mutual fund is required to have an independent Board of Trustees, i.e.

two third of the trustees should be independent persons who are not associated

with the sponsors in any manner. An AMC or any of its officers or employees are

not eligible to act as a trustee of any mutual fund. The trustees are responsible

for - inter alia ensuring that the AMC has all its systems in place, all key

personnel, auditors, registrar etc. have been appointed prior to the launch of any

scheme.

Asset Management Company

The sponsors or the trustees are required to appoint an AMC to manage the

assets of the mutual fund. Under the mutual fund regulations, the applicant must

satisfy certain eligibility criteria in order to qualify to register with SEBI as an

AMC.

1. The sponsor must have at least 40% stake in the AMC.

2. The chairman of the AMC is not a trustee of any mutual fund.

3. The AMC should have and must at all times maintain a minimum networth of Cr. 100 million.

4. The director of the AMC should be a person having adequate professional

experience.

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5. The board of directors of such AMC has at least 50% directors who are

not associate of or associated in any manner with the sponsor or any of its

subsidiaries or the trustees.

The Transfer Agents

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

maintaining the register of investors / unit holders and every day settlements of

purchases and redemption of units. The role of a transfer agent is to collect data

from distributors relating to daily purchases and redemption of units.

Custodian

The mutual fund is required, under the Mutual Fund Regulations, to appoint a

custodian to carry out the custodial services for the schemes of the fund. Only

institutions with substantial organizational strength, service capability in terms of

computerization and other infrastructure facilities are approved to act as

custodians. The custodian must be totally delinked from the AMC and must be

registered with SEBI.

Unit Holders

They are the parties to whom the mutual fund is sold. They are ultimate

beneficiary of the income earned by the mutual funds.

TYPES OF MUTUAL FUND SCHEMES

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

the trading of mutual funds. Wide varieties of Mutual Fund Schemes exist to

cater to the needs such as financial position, risk tolerance and return

expectations etc. Investment can be made either in the debt Securities or

equity .The table below gives an overview into the existing types of schemes in

the Industry.

TYPES OF MUTUAL FUND SCHEME

39

By structure By Investment

Objectives

Other Schemes

Open-endedSchemes

Interval Schemes

Sector specif

fund

Index Schem

Tax saving fu

Small cap

fund

EquitySchemes

DebtSchemes

Close Ended

Schemes

MM Mutual

fund

Other Debt

Schemes

FMP

Any Other

Equity Fund

Mid capFund

Large cap

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Generally two options are available for every scheme regarding dividend

payout and growth option. By opting for growth option an investor can have thebenefit of long-term growth in the stock market on the other side by opting for the

dividend option an investor can maintain his liquidity by receiving dividend time to

time. Some time people refer dividend option as dividend fund and growth fund.

Generally decisions regarding declaration of the dividend depend upon the

performance of stock market and performance of the fund.

OPTION REGARDING DIVIDEND

Systematic Investment Plan (SIP)

Systematic investment plan is like Recurring Deposit in which investor

invests in the particular scheme on regular intervals. In the case it is convenient for

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salaried class and middle-income group. In this case on regular interval units of

specified amount is created. An investor can make payment by regular payments

by issuing cheques, post dated cheques, ECS, standing Mandate etc. SIP can be

started in the any open-ended fund if there is provision of it. There are some entry

and exit load barriers for discontinuation and redemption of the fund before the

said period.

According to Structure

Open Ended Funds

An open ended fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy and sell

units at Net Asset Value (NAV) related prices. The key feature of open ended

schemes is liquidity.

Close Ended Funds

A close ended fund has a stipulated maturity period which generally ranging

from 3 to 15 years. The fund is open for subscription only during a specified

period. Investors can invest in the scheme at the same time of the initial public

issue and thereafter they can buy and sell the units of the scheme on the stock

exchanges where they are listed. In order to provide an exit route to the

investors, some close ended funds give an option of selling back the units to

the mutual fund through periodic repurchase at NAV related prices.

Interval Funds

Interval funds combine the features of open ended and close ended

schemes. They are open for sales or redemption during pre-determined intervals

at their NAV.

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According to Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the

medium to long term. Such schemes normally invest a majority of their

corpus in equities. It has been proven that returns from stocks are much

better than the other investments had over the long term. Growth

schemes are ideal for investors having a long term outlook seeking growth

over a period of time.

Income Funds

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

to investors. Such schemes generally invest in fixed income securities

such as bonds, corporate debentures and government securities. Income

funds are ideal for capital stability and regular income.

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Balanced Funds

The aim of balanced funds is to provide both growth and regular

income. Such schemes periodically distribute a part of their earning andinvest both in equities and fixed income securities in the proportion

indicated in their offer documents. In a rising stock market, the NAV of

these schemes may not normally keep pace or fall equally when the

market falls. These are ideal for investors looking for a combination of

income and moderate growth.

Money Market Funds

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

preservation of capital and moderate income. These schemes generally

invest in safe short term instruments such as treasury bills, certificates of

deposit, commercial paper and inter bank call money. Returns on these

schemes may fluctuate depending upon the interest rates prevailing in the

market. These are ideal for corporate and individual investors as a means

to park their surplus funds for short periods.

Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific

provisions of the Indian Income Tax laws as the government offers tax

incentives for investment in specified avenues. Investments made in

Equity Linked Saving Schemes (ELSS) and Pension Schemes areallowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also

provides opportunities to investors to save capital gains.

Special Schemes:

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Index Schemes

Index funds attempt to replicate the performance of a particular index

such as the BSE Sensex or the NSE 50.

Sector Specific Schemes

Sector funds are those which invest exclusively in a specified industry

or a group of industries or various segments such as A group shares or

initial public offerings.

Bond Schemes

It seeks investment in bonds, debentures and debt related instrumentto generate regular income flow.

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ULIPS

PLATFORMS OF LIFE INSURANCE- UNIT LINKED INSURANCE PLANS

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

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

about the basis on which these products are designed .With insurance market

opened up , Indian customer has suddenly found himself in a market place where

he is bombarded with a lot of jargon as well as marketing gimmicks with a very

little knowledge of what is happening . This module is aimed at clarifying these

underlying concepts and simplifying the different products available in the

market.

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

products are based on following basic platforms or structures viz.

Traditional Life

Universal Life or Unit Linked Policies

3.1 TRADITIONAL LIFE AN OVERVIEW

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

is based on the concept of sharing . Each of the policy holder contributes hiscontribution (premium) into the common large fund is managed by the company

on behalf of the policy holders.

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

the insurance company .It was the responsibility of the company to administer

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schemes for benefit of the policyholders. Policyholders played a very passive

roll . In the course of time , the same concept of sharing and a common fund was

extended to different areas like saving , investment etc.

3.1.1 FEATURES OF TL :

This is the simplest way of designing product as far as concerned. He has

no other responsibility but to pay the premium regularly.

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

policyholders funds.

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

Expenses incurred as well as claims paid are then taken out of this fund. Companies carry out the valuation of the fund periodically to ascertain the

position. It is also a practice to increase the minimum possible guarantee

under a policy every year in the form of declaring and attaching bonuses

to the sum assured on the basis of this valuation. Declaration of bonuses

is not mandatory .

Based on the end objective , companies may offer different plans like

saving plans, investment plans etc.(e.g. Endowment , SPWLIP)

It helps to maintain a smooth growth and protects against the vagaries of themarket. In other words it minimizes the risk of investments for an average

individual. He shares his risk with a group of like-minded individuals.

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

the decline in the popularity of traditional Insurance products & changing

Investor needs in terms of life protection, periodicity, returns & liquidity, it

was need of the hour to have an Instrument that offers all these features

bundled into one.

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 the46


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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/insurance-seeker the hassles of managing and tracking a portfolio or

products. More importantly ULIPs offer investors the opportunity to select a

product which matches their risk profile.

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

popular in Western Europe and Americas. In India The first unit linked Insurance

Plan , popularly known as ULIP Unit Linked Insurance Plan in India was

brought out by Unit Trust Of India in the year 1971 by entering into a group

insurance arrangement with LIC o provide for life cover to the investors , while

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

capital market and giving them a fair return .

Subsequently in the year 1989 , another Unit Linked Product was launched bythe LIC Mutual Fund called by the name of DHANARAKSHA which was more

or less on the line of ULIP of UTI . Thereafter LIC itself came out with a Unit

Linked Insurance Product known by name BIMA PLUS in the year 2001-02 .

Presently a number of private life insurance companies have launched Unit

Linked Insurance Products with a variety of new features.

TYPES OF ULIP

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

the key ones are pension, children, group and capital guarantee plans.

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The pension plans come with two variations with and without life cover and

are meant for people who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at taking care of their

educational and other needs..

Apart from unit-linked plans for individuals, group unit linked plans are also

available in the market. The Group linked plans are basically designed for

employers who want to offer certain benefits for their employees such as gratuity,

superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan

promises the policyholder that at least the premium paid will be returned at

maturity. But the guaranteed amount is payable only when the policy's maturity

value is below the total premium paid by the individual till maturity. However, the

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

the premium that is net of expenses (mortality, sales and marketing,

administration).

How ULIPs work

ULIPs work on the lines of mutual funds. The premium paid by the client (less

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

conservative) floated by the insurance companies. Units are bought according to

the plan chosen by the policyholder. On every additional premium, more units are

allotted to his fund. The policyholder can also switch among the funds as and

when he desires. While some companies allow any number of free switches to

the policyholder, some restrict the number to just three or four. If the number is

exceeded, a certain charge is levied.

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

time to increase the savings component in their plan. This facility is termed "top-

up". The money parked in a ULIP plan is returned either on the insured's death or

in the event of maturity of the policy. In case of the insured person's untimely

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death, the amount that the beneficiary is paid is the higher of the sum assured

(insurance cover) or the value of the units (investments). However, some

schemes pay the sum assured plus the prevailing value of the investments.

ULIP - KEY FEATURES

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.

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

The maturity benefit is not typically a fixed amount and the maturity periodcan be advanced or extended.

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

funds, growth funds or bonds.

The policyholder can switch between schemes, for instance, balanced to

debt or gilt to equity, etc.

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

The costs in ULIP are higher because there is a life insurance component

in it as well, in addition to the investment component.

Insurance companies have the discretion to decide on their investment

portfolios.

Being transparent the policyholder gets the entire episode on the

performance of his fund.

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

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Provides capital appreciation.

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

USP of ULIPS

Insurance cover plus savings

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

market-linked returns. To that extent, ULIPS can be termed as a two-in-one plan

in terms of giving an individual the twin benefits of life insurance plus savings.

Multiple investment options

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

multiple options at the individuals disposal. ULIPS generally come in three broad

variants:

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

balance in debt)

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

Conservative ULIPS (can typically invest upto 20% in equities)

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

debt/equity allocations may vary across insurance companies. Individuals can

opt for a variant based on their risk profile.

Flexibility

The flexibility with which individuals can switch between the ULIP variants tocapitalise on investment opportunities across the equity and debt markets is what

distinguishes it from other instruments. Some insurance companies allow a

certain number of free switches. Switching also helps individuals on another

front. They can shift from an Aggressive to a Balanced or a Conservative ULIP

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as they approach retirement. This is a reflection of the change in their risk

appetite as they grow older.

Works like an SIP

Rupee cost-averaging is another important benefit associated with ULIPS. Withan SIP, individuals invest their monies regularly over time intervals of a

month/quarter and dont have to worry about timing the stock markets.

HURDLES OF ULIP

NO STANDARDIZATION

All the costs are levied in ways that do not lend to standardisation. If onecompany calculates administration cost by a formula, another levies a flat rate. If

one company allows a range of the sum assured (SA), another allows only a

multiple of the premium. There was also the problem of a varying cost structure

with age

LACK OF FLEXIBILITY IN LIFE COVER

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

most counts, they are. However, some insurance companies do not allow the

individual to fix the life cover that he needs. These rely on a multiplier that is fixed

by the insurer

OVERSTATING THE YIELD

Insurance companies work on illustrations. They are allowed to show you howmuch your annual premium will be worth if it grew at 10 per cent per annum. But

there are costs, so each company also gives a post-cost return at the 10 per cent

illustration, calling it the yield. some companies were not including the mortality

cost while calculating the yield. This amounts to overstating the yield.

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INTERNALLY MADE SALES ILLUSTRATION

During the process of collecting information, it was found that the sales benefitillustration shown was not conforming to the Insurance Regulatory and

Development Authority (Irda) format. in many locations30 per cent return

illustrations are still rampant

NOT ALL SHOW THE BENCHMARK RETURN

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

customer. Though most companies use Sensex, BSE 100 or the Nifty as the

benchmark, or the measuring rod of performance, some companies are not using

any benchmark at all.

EARLY EXIT OPTIONS

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

the investor since he ends up redeeming a high-front-load product and is then

encouraged to move into another higher cost product at that stage. An early exitalso takes away the benefit of compounding from insured.

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This is in stark contrast to conventional insurance plans where the sum assured

is the starting point and premiums to be paid are determined thereafter.

ULIP investors also have the flexibility to alter the premium amounts during the

policy's tenure. For example an individual with access to surplus funds can

enhance the contribution thereby ensuring that his surplus funds are gainfully

invested; conversely an individual faced with a liquidity crunch has the option of

paying a lower amount (the difference being adjusted in the accumulated value of

his ULIP). The freedom to modify premium payments at one's convenience

clearly gives ULIP investors an edge over their mutual fund counterparts.

2. Expenses

In mutual fund investments, expenses charged for various activities like fund

management, sales and marketing, administration among others are subject to

pre-determined upper limits as prescribed by the Securities and Exchange Board

of India.

For example equity-oriented funds can charge their investors a maximum of

2.5% per annum on a recurring basis for all their expenses; any expense abovethe prescribed limit is borne by the fund house and not the investors.

Similarly funds also charge their investors entry and exit loads (in most cases,

either is applicable). Entry loads are charged at the timing of making an

investment while the exit load is charged at the time of sale.

Insurance companies have a free hand in levying expenses on their ULIP

products with no upper limits being prescribed by the regulator, i.e. the InsuranceRegulatory and Development Authority. This explains the complex and at times

'unwieldy' expense structures on ULIP offerings. The only restraint placed is that

insurers are required to notify the regulator of all the expenses that will be

charged on their ULIP offerings.

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Expenses can have far-reaching consequences on investors since higher

expenses translate into lower amounts being invested and a smaller corpus

being accumulated. ULIP-related expenses have been dealt with in detail in the

article "Understanding ULIP expenses".

3. Portfolio disclosure

Mutual fund houses are required to statutorily declare their portfolios on a

quarterly basis, albeit most fund houses do so on a monthly basis. Investors get

the opportunity to see where their monies are being invested and how they have

been managed by studying the portfolio.

There is lack of consensus on whether ULIPs are required to disclose their

portfolios. During our interactions with leading insurers we came across divergent

views on this issue.

While one school of thought believes that disclosing portfolios on a quarterly

basis is mandatory, the other believes that there is no legal obligation to do so

and that insurers are required to disclose their portfolios only on demand.

Some insurance companies do declare their portfolios on a monthly/quarterly

basis. However the lack of transparency in ULIP investments could be a cause

for concern considering that the amount invested in insurance policies is

essentially meant to provide for contingencies and for long-term needs like

retirement; regular portfolio disclosures on the other hand can enable investors to

make timely investment decisions.

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4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and ULIPs

segment are largely comparable. For example plans that invest their entire

corpus in equities (diversified equity funds), a 60:40 allotment in equity and debt

instruments (balanced funds) and those investing only in debt instruments (debt

funds) can be found in both ULIPs and mutual funds.

If a mutual fund investor in a diversified equity fund wishes to shift his corpus into

a debt from the same fund house, he could have to bear an exit load and/or entry

load.

On the other hand most insurance companies permit their ULIP inventors to shift

investments across various plans/asset classes either at a nominal or no cost

(usually, a couple of switches are allowed free of charge every year and a cost

has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset classes as

per his convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market when

the ULIP investor's equity component has appreciated, he can book profits by

simply transferring the requisite amount to a debt-oriented plan.

5. Tax benefits

ULIP investments qualify for deductions under Section 80C of the Income Tax

Act. This holds good, irrespective of the nature of the plan chosen by theinvestor. On the other hand in the mutual funds domain, only investments in tax-

saving funds (also referred to as equity-linked savings schemes) are eligible for

Section 80C benefits.

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Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for

example diversified equity funds, balanced funds), if the investments are held for

a period over 12 months, the gains are tax free; conversely investments sold

within a 12-month period attract short-term capital gains tax @ 10%.

Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while

a short-term capital gain is taxed at the investor's marginal tax rate.

Despite the seemingly similar structures evidently both mutual funds and ULIPs

have their unique set of advantages to offer. As always, it is vital for investors to

be aware of the nuances in both offerings and make informed decisions.

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59

Chapter 2

SBI Mutual Fund

Company Profile

Awards & Achievements

ProductsMajor Funds of SBI Mutual Fund


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STATE BANK OF INDIA MUTUAL FUND

Proven Skills in Wealth Generation

SBI Mutual Fund is Indias largest bank sponsored mutual fund and has an

enviable track record in judicious investments and consistent wealth creation.

The fund traces its lineage to SBI - Indias largest banking enterprise. The

institution has grown immensely since its inception and today it is India's largest

bank, patronised by over 80% of the top corporate houses of the country.

SBI Mutual Fund is a joint venture between the State Bank of India and

Socit Gnrale Asset Management, one of the worlds leading fund

management companies that manages over US$ 500 Billion worldwide.

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Exploiting expertise, compounding growth

In twenty years of operation, the fund has launched 38 schemes and successfully

redeemed fifteen of them. In the process it has rewarded its investorshandsomely with consistently high returns.

A total of over 5.4 million investors have reposed their faith in the wealth

generation expertise of the Mutual Fund.

Schemes of the Mutual fund have consistently outperformed benchmark indices

and have emerged as the preferred investment for millions of investors and

HNIs.

Today, the fund manages over Rs. 31,794 crores of assets and has a diverse

profile of investors actively parking their investments across 36 active schemes.

The fund serves this vast family of investors by reaching out to them through

network of over 130 points of acceptance, 28 investor service centers, 46

investor service desks and 56 district organisers.

SBI Mutual is the first bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund.

Growth through innovation and stable investment policies is the SBI MF

credo.

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PRODUCTS

EQUITY FUNDS:

The investments of these schemes will predominantly be in the stock markets

and endeavor will be to provide investors the opportunity to benefit from the

higher returns which stock markets can provide. However they are also exposed

to the volatility and attendant risks of stock markets and hence should be chosen

only by such investors who have high risk taking capacities and are willing tothink long term. Equity Funds include diversified Equity Funds, Sectoral Funds

and Index Funds. Diversified Equity Funds invest in various stocks across

different sectors while sectoral funds which are specialized Equity Funds restrict

their investments only to shares of a particular sector and hence, are riskier than

Diversified Equity Funds. Index Funds invest passively only in the stocks of a

particular index and the performance of such funds move with the movements of

the index

Magnum COMMA Fund

Magnum Equity Fund

Magnum Global Fund

Magnum Index Fund

Magnum MidCap Fund

Magnum Multicap Fund

Magnum Multiplier Plus 1993 Magnum Sector Funds Umbrella

MSFU - Emerging Businesses Fund

MSFU - IT Fund

MSFU - Pharma Fund

MSFU - Contra Fund

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MSFU - FMCG Fund

SBI Arbitrage Opportunities Fund

SBI Blue chip Fund

SBI Infrastructure Fund - Series I

SBI Magnum Taxgain Scheme 1993

SBI ONE India Fund

SBI TAX ADVANTAGE FUND - SERIES I

DEBT SCHEMES

Debt Funds invest only in debt instruments such as Corporate Bonds,

Government Securities and Money Market instruments either completelyavoiding any investments in the stock markets as in Income Funds or Gilt Funds

or having a small exposure to equities as in Monthly Income Plans or Children's

Plan. Hence they are safer than equity funds. At the same time the expected

returns from debt funds would be lower. Such investments are advisable for the

risk-averse investor and as a part of the investment portfolio for other investors.

Magnum Children`s Benefit Plan

Magnum Gilt Fund

Magnum Gilt Fund (Long Term)

Magnum Gilt Fund (Short Term)

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BALANCED SCHEMES

Magnum Balanced Fund invest in a mix of equity and debt investments. Hence

they are less risky than equity funds, but at the same time provide

commensurately lower returns. They provide a good investment opportunity to

investors who do not wish to be completely exposed to equity markets, but is

looking for higher returns than those provided by debt funds.

Magnum Balanced Fund

Magnum NRI Investment Fund - FlexiAsset Plan

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MAJOR FUNDS OF SBI MF

(EQUITY FUND)

Investment Objective

The objective of the scheme would be to generate opportunities for growth along

with possibility of consistent returns by investing predominantly in a

portfolio of stocks of companies engaged in the commodity business

within the following sectors - Oil& Gas, Metals, Materials & Agriculture andin debt & money market instruments

Asset Allocation

Instrument% of Portfolio of

Plan A & BRisk Profile

Equity and equity related instruments of

commodity based companieswithin 65% 100% High

Foreign Securities/ADRs/GDRs ofcommodity based companies

0% - 10% High

Fixed/Floating Rate Debt instruments

including derivatives0% - 30% Medium

Money Market instruments* 0% - 30% Low

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Scheme Highlights

1.An open-ended equity scheme investing in stocks of commodity based

companies.2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend

and Growth options available.Reinvestment and payout facility available.

3.Dividends will be completely tax-free. Long term capital gains to be

completely tax-free. STT would be at the rate of 0.20% at the time of

repurchase.

Minimum Application

Rs. 5000 and in multiples of Rs. 1000

1. An open-ended equity scheme investing in stocks of commodity based

companies

2.Minimum Investment Rs. 5000 and in multiples of Rs. 1000 Dividend and

Growth options available.Reinvestment and payout facility available.

3.Dividends will be completely tax-free. Long term capital gains to be

completely tax-free. STT would be at the rate of 0.20% at the time of

repurchase

Entry Load Exit Load

Investments below Rs.

5 crores-2.25%

Investments of Rs.5crores and above - NIL

Investments below Rs. 5 crore, exit within 6 months from

the date of allotment 1%, Investments below Rs. 5

crore, exit between 6 months & 12 months from the dateof allotment 0.5%, Investments below Rs. 5 crore, exit

after 12 months from the date of allotment Nil,

Investments of Rs. 5 crore and above Nil

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SIP

Rs.500/month - 12 months

Rs.1000/month - 6months,

Rs.1500/quarter - 12 months

A minimum of Rs. 500 can be withdrawn every month or quarter by

indicating in the application form or by issuing advance instructions

to the Registrars at any time.

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(DEBT FUND)

Investment Objective

The objective of the scheme is to provide the investors an opportunity to earn, in

accordance with their requirements, through capital gains or through regular

dividends, returns that would be higher than the returns offered by comparable

investment avenues through investment in debt & money market securities.

Asset Allocation

Instrument% of Portfolio of

Plan A & BRisk Profile

Corporate debentures &

Bonds/PSU/FI/Govt. Guaranteed Bonds /

Other including Securitised Debt

Upto 90% High

Securitized Debt Not more than 10%of in debt

Low

Government Securities Upto 90% HighCash & Call Money Upto 25% MediumMoney Market Instruments Upto 25% MediomUnits of other mutual funds Upto 5% Low

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Scheme Highlights

1.Open ended Debt Scheme 2. Following Plans are available to the investors :(A)

Growth Plan (B) Dividend Plan (C) Bonus Plan (D) Floating Rate PlanOptions available under Floating Rate Plan Short Term (Growth, Dividend

& Weekly Dividend)Long Term (Regular (Dividend & Growth) Long Term

(Institutional (Dividend & Growth)

2. The Plans will invest their entire corpus in high quality debt

(Corporate debentures, PSU/FI/Govt guaranteed bonds), Govt

securities and money market instruments (commercial paper,certificates of deposit, T-bills, bills rediscounting, repos, short-term

bank deposits, etc). There shall be no investment in equity.

3. The Growth Plan / Option will give returns through capital gains only. No

dividends shall be declared under this Plan.

mba fm mutual fund ale

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