MBA Project Report(Parts)

7/31/2019 MBA Project Report(Parts)

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CONCLUSION

There is ever ending comparison between ULIP and mutual fund. certainly mutual

fund are better option as compare to ULLIP for comparatively shorter term., sayupto 10-15 years apart from better liquidity and other benefits mutual fund is the

ideal investment vehicle for todays complex and modern financial scenario.

Markets for equity shares, bonds and other fixes income instruments, real estate,

derivatives and other assests have become mature and information driven.Today,

everybody wants to invest money, which entitled of low risk, high returns and easy

redemption. Mutual fund have higher rate of return than ULIP in span of 4-5 years.

At the same time ULIP as an investment avenue is good for a person who has

interest in staying for a longer period of time, that is around 15 years and above. It

is good for people who were investing in ULIP policies of insurance companies as

their investments earn them a better return than the other policies. But the darker

aspect of ULIP in upfront charges in the initial years and greater opportunity of

mis-celling.in my opinion before investing in ULIP one should be fully aware of

each and everything. I think if one wants benefits of both of them he/she should

prefer term insurance for life cover along with mutual fund investment for wealth

creation which fulfills both the needs. He/she will get more then what he is

expecting.


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RECOMMENDATIONS

The performance of the mutual fund depends on the previous year net assets value

of the fund. All schemes are doing well. But the future is uncertain &on the other

hand ULIP has to be very important to be recommended. So the AMC and

insurance companies should take the following steps:

People are more familiar to mutual fund in large cities but in rural areas theyare still not aware.So, SEBI should take a step to advice people in rural

areas.

The people do not want to take risk so that they choose the fund based on thefund objective and to see the performance of the fund.

The Insurance Regulatory and Development Authority (IRDA) should haveworking hard on making ULIPS attractive for policyholder.

IRDA should try to reduce fund charges, administration charges and othercharges which help to invest more funds in the security market and earn

good return and also try to reduce the agents commission.

Different campaigns should be launched to educate people regarding mutualfund.

Insurance companies should appoint financial advisor rather than broker. AMFI should launched distributer education programmed other than

certification so that they get attracted towards distribution of the fund.

The expectation of the people from the mutual fund is high.So; the portfolioof the fund should be prepared taking into consideration the expectation of

the people.


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ULIP vs. MUTUAL FUND:

BASIC DIMENSION ULIP MUTUAL FUND

Investment amounts Determined by the

investor and can be

modified as well.

Minimum investment

amounts are determine by

the fund house.

Expenses No upper limits, exp.

determine by the

insurance company

Upper limits expenses

chargeable to investors

have been set by the

regulator

Portfolio disclosure Not mandatory Quarterly disclosures are

mandatory

Modifying asset

allocation

Generally permitted for

free or at a nominal cost

Entry/exit loads have to

be borne by the investors.

Tax benefits Section 80c benefits are

available on all ULIP

investments

Section 80c benefits are

available only on

investments in tax saving

funds.


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Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to

mutual funds in terms of their structure and functioning. As is the case with mutual

funds, investors in ULIPs are allotted units by the insurance company and a net

asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes

similar to the ones found in the mutual funds domain, i.e. diversified equity funds,

balanced funds and debt funds to name a few. Generally speaking, ULIPs can be

termed as mutual fund schemes with an insurance component.

However it should not be construed that barring the insurance element there is

nothing differentiating mutual funds from ULIPs.

How ULIPs can make you RICH!

Despite the seemingly comparable structures there are various factors wherein the

two differ.

In this article we evaluate the two avenues on certain common parameters and find

out how they measure up.

1. Mode of investment/ investment amounts

Mutual fund investors have the option of either making lump sum investments or

investing using the systematic investment plan (SIP) route which entails

commitments over longer time horizons. The minimum investment amounts are

laid out by the fund house.

ULIP investors also have the choice of investing in a lump sum (single premium)

or using the conventional route, i.e. making premium payments on an annual, half-
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yearly, quarterly or monthly basis. In ULIPs, determining the premium paid is

often the starting point for the investment activity.

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

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

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

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

enhance the contribution thereby ensuring that his surplus funds are gainfully

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

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

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

gives ULIP investors an edge over their mutual fund counterparts.

2. Expenses

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

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

determined upper limits as prescribed by the Securities and Exchange Board of

India [Images].

For example equity-oriented funds can charge their investors a maximum of 2.5%

per annum on a recurring basis for all their expenses; any expense above the

prescribed limit is borne by the fund house and not the investors.

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

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

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

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

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

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

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

on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher expenses

translate into lower amounts being invested and a smaller corpus being

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

"Understanding ULIP expenses".

3. Portfolio disclosure

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

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

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

managed by studying the portfolio.

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

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

views on this issue.

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


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portfolio disclosures on the other hand can enable investors to make timely

investment decisions.

ULIPs vs Mutual Funds

ULIPs Mutual Funds

Investment

amounts

Determined by

the investor

and can be

modified as

well

Minimum

investment

amounts are

determined by

the fund house

Expenses

No upper

limits,

expenses

determined by

the insurance

company

Upper limits for

expenses

chargeable to

investors have

been set by the

regulator

Portfolio

disclosure

Not

mandatory*

Quarterly

disclosures are

mandatory

Modifying

asset allocation

Generally

permitted for

free or at a

nominal cost

Entry/exit loads

have to be borne

by the investor


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Tax benefits

Section 80C

benefits are

available on all

ULIP

investments

Section 80C

benefits are

available only

on investments

in tax-saving

funds

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

portfolios. While some insurers claim that disclosing portfolios on a quarterly basis

is mandatory, others state that there is no legal obligation to do so.

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.


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

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

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

5. Tax benefits

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

Act. This holds good, irrespective of the nature of the plan chosen by the investor.

On the other hand in the mutual funds domain, only investments in tax-saving

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

80C benefits.

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

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

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

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

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

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

Despite the seemingly similar structures evidently both mutual funds and ULIPs

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

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

Insurance industry introducedUnit Linked Insurance Plan (ULIP) some years back

when the stock market was rising and people wanted to take advantage of capital

appreciation. ULIP, even though an insurance product, exposed investors to market

risk to a large extent because of its market linked portfolio. ULIP was an instant hit

and it did give good returns to investors. In fact, ULIP started being used as a
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speculative product where people can make easy money. This was far from the

truth. The trouble started when market started its downward journey.

Higher fee, in addition to a declining market, was a double whammy for investors.

There was much noise from investors' community which forced insurance

companies to restructure the product. The new ULIP is a much better product from

safety point of view but it also gives you less return than what it provided earlier.

In comparison, mutual funds are a pure investment product. There are different

types of mutual funds based on the risk exposure.Equity oriented mutual

fundsinvest major part of the fund in equities.Hybrid funds or balanced

fundsinvest in both equities and debt. Debt funds invest in bonds and fixed income

securities. Lets look at some aspects of investing and understand how these two

popular products fair against each other.

Risk exposure - ULIPs are a relatively less risky product because they are

insurance products. Even though ULIPs have great variety of products available

investing in equities and bonds, they have to be more careful in investment because

of the nature of insurance products. Mutual funds are of various types as explained

above. Equity oriented mutual funds are more risky than the hybrid ones and

hybrid mutual funds are more risky than the debt funds.

Potential of Returns - Since ULIPs invest in relatively low risk products, the

potential of returns is also low. The reason is that they have to promise sum

assured irrespective of whether the plan makes money. Mutual funds are of

different varieties. Equity oriented mutual funds give higher returns than the hybrid

ones. Hybrid mutual funds offer better returns than debt funds.

Lock-in period - Since ULIP is an insurance product, insurance companies define

a lock-in period for investment. Hence if an investor buys ULIP, he or she cannot
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sell before the lock-in period of 3 to 5 years depending on individual ULIP

products and the structure. Most of the mutual funds typically do not have any

lock-in period. You can buy and sell mutual funds anytime. There is a certain type

of mutual funds, known as closed fund, which have lock-in period of 3 years.

Liquidity - Liquidity is defined as the ease with which investors can redeem their

investment. It is also about time it takes to receive your investment back after

redemption. Needless to say, mutual funds are more liquid since it is more widely

traded in the market.

Charges - The advantage of mutual fund is its low charges and professional

management. The management fee of mutual funds is typically 1% to 2%. ULIP

charges are higher.

Important Points to keep in mind

Investors should understand the difference between

investment and insurance. Never mix these two important

aspects of your financial life. The purpose of insurance is

to protect your family in case of any exigencies. The

purpose of investment is to build wealth overtime.

Mutual funds are great product to earn higher returns and build wealth overtime.

Investors should stay with mutual funds for longer time to earn higher returns. At

the same time, when investors buy ULIP, it is good to continue with it till the

maturity.

One major advantage mutual funds have over ULIP is their history. Mutual funds

are in the market for quite a number of years and hence investors can look at the

history of returns. The data point available in the market to help investors to select

right mutual fund is vast. The same is not available for ULIP.


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ULIPs and Mutual funds offer a variety of products based on risk profile. Investors

should understand their risk profile and investment period and then decide

accordingly. If an investor has low risk profile and an investment horizon of 3

years, investing in ULIPs or mutual funds with major portion in equity is not a

good idea. Similarly an investor with longer investment horizon and high risk

appetite should go for equity oriented mutual fund or ULIPs with bigger exposure

to equities.

Finally, even when investors have bought ULIP as insurance, they must take term

insurance to have sufficient protection. The sum assured in term insurance is very

high compared to ULIP or any other insurance plan. Term insurance products are

pure insurance plan where a large sum is paid to your family members in case of

any eventuality. If nothing happens to the insured, there is no disbursement of

money.

Documents

MBA Project Report(Parts)