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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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http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM047http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM037http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM024http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM047http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM037http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM024http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM022http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM048http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM0468/4/2019 MBA FM Mutual Fund ale
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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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ReinvestedPayout
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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.