PREFACE

MBA is a stepping-stone to the management carrier and to develop good manager it is necessary that the theoretical must be supplemented with exposure to the real environment. Theoretical knowledge just provides the base and its not sufficient to produce a good manager thats why practical knowledge is needed. Therefore the research product is an essential requirement for the student of MBA. This research project not only helps the student to utilize his skills properly learn field realities but also provides a chance to the organization to find out talent among the budding managers in the very beginning. In accordance with the requirement of MBA course I have summer training project on the topic Market Capitalization of Mutual Funds and ULIPS. The main objective of the research project was to study the two instruments and make a detailed

comparison of the two.

For conducting the research project sample size of 50 customers of Bajaj Capital was selected. The information regarding the project research was collected through the questionnaire formed by me which was filled by the customers there.

In the growing global competition, business has taken a new shape in the world. Todays Manager has to understand the uncertainty of business environment to cope with the situation. Dissertation for each and every student of PGPM is an essential part of completion at the end of 1st year of the course. The prime objective of this summer training to familiar with real life business environment and apply the theoretical concept of business into reality and know how much theory is applicable in day to day business activity. It also sharpens their knowledge, hones their analytical and other business acumen and develops better appreciation of the practical problems of business, especially from the management point of view.

Moreover the experience acquired by student helps to decide the future professional career. As per the module is concern I underwent in a project entitled Market Capitalization of Mutual Fund & ULIP.

1

ACKNOWLEDGEMENTS

A Successful project is fruitful culmination of efforts of many people, some directly involved, and others who have quietly encouraged and extended their support, while being in the background. I take this opportunity to

extend my deep sense of gratitude and heartfelt thanks to all those who have helped us directly or indirectly during the course of my project.

My colleagues and associates at ASIAN SCHOOL OF BUSINESS MANAGEMENT continue to have important impact on my thinking. I am in debt to my corporate guide Mr. Sambit Mohanty (Branch Head) & Shibashis Pattanaik(Financial Planning Executive) of Bajaj Capital Bhubaneswar. Who have taught me a great deal as we worked together to adopt marketing management thinking to the problems of different situations. This dissertation could not have been written without Prof.Kalpana Sahoo who not only served as my supervisor but also encouraged and challenged me throughout my academic program who patiently guided me through the dissertation process, never accepting less than my best efforts. I am also appreciative of all that I have learned from working with industry executives who have generously shared their insight and experiences.

I would like to give thanks to all the staff of Bajaj capital. Bhubaneswar (Orissa) for their valuable and sincere cooperation and plying all the database of Bajaj capital, Bhubaneswar (Orissa). I am thankful to my parents, & my entire family who are always my source of brainchild & unplumbed exertion towards the journey of my life.

At last but not the least I am grateful to Omnipotent God for his manifold blessing in this endeavor of mine.

Deviprasad Dandapat

28th June 2010

2

EXECUTIVE SUMMARY

3EXECUTIVE SUMMARYIn todays corporate and competitive world, I find that insurance 7 Mutual Fund sector has the maximum growth and potential as compared to the other sectors. Insurance has the maximum growth rate of 70-80% while as FMCG sector has maximum 12-15% of growth rate. This growth potential attracts me to enter in this sector and Bajaj Capital has given me the opportunity to work

and get experience in highly competitive and enhancing sector.

My project was to understand the different marketing strategies adopted by the company, namely, Bajaj Capital to increase their market share and also to achieve its own target in order to attain the zenith of its respective sector.

My SIP has helped me in learning a lot of things about the corporate world. As a project trainee I was required to understand the behavior of the consumer in order to manipulate the market and gain an advantage in the competitive scenario.

I also learned to develop the agency channel and how to create business opportunities. This helped me to know the issues of the competitive market and also helped me enhance my communication and convincing skills.

Understanding the ground reality of marketing is like stars in the eyes of every Management Professional, & this experience becomes more profound when the inception is with a pioneer like Bajaj Capital. During the two months Summer Project with Bajaj Capital had a very nice Corporate World Exposure, which I think will serve as a stepping stone for me in my corporate journey.

In todays corporate and competitive world, I find that insurance 7 Mutual Fund sector has the maximum growth and potential as compared to the other sectors. Insurance has the maximum growth rate of 70-80% while as FMCG sector has

4

maximum 12-15% of growth rate. This growth potential attracts me to enter in this sector and Bajaj Capital has given me the opportunity to work and get experience in highly competitive and enhancing sector.

Unit Links Insurance Plan (ULIP) and Mutual Fund (MF) are the two most preferred options for a part time investor to invest into equity. But how do we decide which one should we go for. Though it is very easy to decide, people tend to confuse themselves most of the time. This Report talks about some points that you need to consider while deciding which option we want to take. Mutual Fund is pure investments. ULIP are combination of Insurance and Investment.

5Market Capitalization of Mutual Fund and ULIPs

Chapter-01

Mutual Fund

6

INTRODUCTION

A Mutual Fund is a collective investment vehicle formed with the specific objective of raising money from a large number of Individuals and investing it according to a pre specified objective. The word Mutual in a Mutual Fund signifies a vehicle wherein the benefits of Investment accrued pro rata to all the investors in proportion to there Investments. Over the past decades Mutual Funds have grown intensely in popularity and have experienced a considerable growth rate. Mutual Funds are popular because they make it easy for small investors to invest their money in a diversified pool of securities. As the Mutual Fund industry

has evolved over the years

MEANING:

Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anyone with an invisible surplus of as little as few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy.

The fund manager in different types of securities then invests the money thus collected. These could range from shares to debentures to money market instruments, depending on the schemes stated objectives. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion of the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportune investing a diversified, professionally managed basket of securities at a relatively low cost.

A Mutual Fund is the ideal investment vehicle for todays complex modern world. It appoints professionally qualified and experienced staff that manages each of these functions on full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the Mutual Fund vehicle exploits economies of scale in all three areas

research, investing and transaction processing.

While the concept of individuals coming together to invest money collectively is not new, the Mutual Fund in its present form is a 20th century phenomenon. In fact, Mutual Funds gained popularity only after the Second World War. Globally, there are thousand of firms offerings tens of thousand of Mutual Funds with different investment objectives. Today Mutual Funds collectively manage almost as much money as banks.

7Along with the success of Mutual Funds, inevitably there arose a need to regulate the industry. Thus regulation and regulatory bodies came into being so that small investors were not misled or put to loss by some unscrupulous people representing themselves as Mutual Funds.

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.

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 reduces the 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 the objectives 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, which is whenever 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 the money back at net asset value and on the other hand in close-ended schemes the units can be sold in a stock exchange at a prevailing market price.

8Transparency

In Mutual Fund, investors get full information of the value of their investment, the proportion of money invested in each class of assets and the fund managers investment strategy

Flexibility

Flexibility is also the main advantage of Mutual Fund. Through this investors can systematically invest or withdraw funds according to their needs and convenience like regular investment plans, regular withdrawal plans, and dividend reinvestment plans etc.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps investors to avoid many problems like bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save time and make investing easy.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A Mutual Fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

Well Regulated

All Mutual Funds are registered with SEBI and they function with in the provisions of strict regulations designed to protect the interest of investors. The operations of Mutual Funds are regularly monitored by SEBI.

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 profit on its sales, you will pay taxes on the income you receive; even you reinvest the money you made.

9Management 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 well as 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.

Types of Mutual Fund Schemes:

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.

MUTUAL FUND SCHEME

By structure

Open-ended

Schemes

Close EndedSchemes

Interval

Schemes

10

By Investment

Objectives

Debt

Equity

Schemes

Schemes

MM Mutual

Large cap

Fund

Fund

FMP

Mid cap

Fund

Other Debt

Small cap

Schemes

Fund

Any Other

Equity Fund

Other

Schemes

Tax saving fund

Sector specific fund

Index

SchemesGenerally two options are available for every scheme regarding dividend payout and growth option. By opting for growth option an investor can have the benefit 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

Dividend

Growth

Payout

Reinvested

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 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

11the 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.

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.

Balanced Funds:

The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest 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.

12Other 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 inequity Linked Saving Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains.

Special Schemes:

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 instrument to generate regular income flow.

13

Industrial

Profile

14Industry 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 the pooling 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 Mutual Fund 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.

The Indian Mutual Fund industry has Rs 5.67 lakh crores of Assets Under Management (AUM). 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 wholly owned 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 percentage of 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.

15

Major Players in Indian Mutual Fund Industry and Their AUM

Mutual Fund NameNo. ofAs onCrores

Scheme

s

ABN AMRO MF337July 31, 200878037803AIG Global MF54July 31, 20083513SBI Mutual Fund177July 31, 200829151.00Birla Mutual Fund343July 31, 200837497.00BOB Mutual Fund22July 31, 200856.00Canara Robeco Mutual Fund54July 31, 20084576.00DBS Chola Mutual Fund80July 31, 20081853.00Deutsche Mutual Fund187July 31, 200810792.00DSP Merrill Lynch Mutual Fund211Feb 29, 200819483.00Escorts Mutual Fund26Feb 29, 2008177.00Fidelity Mutual Fund39Mar 31, 20087464.00Franklin Templeton230July 31, 200824441.00Investments

HDFC Mutual Fund371July 31, 200850,752.00HSBC Mutual Fund221July 31, 200816,385.00ICICI Prudential Mutual Fund431July 31, 200855,161.00ING Mutual Fund262July 31, 20087091.00JPMorgan Mutual Fund9July 31, 20083054.00Kotak Mahindra Mutual Fund185July 31, 200818,782.00LIC Mutual Fund112July 31, 200817,499.00Lotus India Mutual Fund216July 31, 20087831.00Morgan Stanley Mutual Fund3July 31, 20082,814.00PRINCIPAL Mutual Fund151July 31, 200811,359.00Quantum Mutual Fund6July 31, 200866.00Reliance Mutual Fund345July 31, 200884,564.00Sahara Mutual Fund45July 31, 2008175.00Mirae asset Mutual Fund255July 31, 20082546.00Sundaram Mutual Fund219July 31, 200811,898.00Tata Mutual Fund389July 31, 200820,443.00Taurus Mutual Fund14July 31, 2008289.00UTI Mutual Fund315July 31, 200846,120.00

Source: www.mutualundsindia.com/amc_snapshot.asp?amc_name=AM008

16History of Mutual Fund:

The Mutual Fund industry in India started in 1963 with the formation of Unit Trust of India (UTI), at the initiative of the Government of India and Reserve Bank. The history 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 setup by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was delinked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI hadRs.6, 700 crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector Mutual Funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 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)

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 1963UTIwas bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management ofRs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64scheme, 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 March2000 more thanRs.76,000 crores of assets under management and with

17the 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 29funds, which manage assets of Rs.153108 crores under 421 schemes.

Analysis:

First Phase 1964-87(UTI was the Only Player)

Second Phase 1987-1993 (Entry of Public Sector Funds):

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

Fourth Phase Since February 2003.

18

Overview of Mutual Fund Industry:

Over the past decades Mutual Funds have grown intensely in popularity and have experienced a considerable growth rate. The graph indicates the growth of assets over the years.

Growth in Assets under Management:

19Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the

Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

This is how a Mutual Fund going on. it is also called as the life cycle of Mutual Fund.

This is the way how Mutual Fund works. Its starts from investor and it also end with investor. So investor plays a vital role in Mutual Fund. Its all about Mutual Fund. Now we are going to discuss about the Reliance Mutual Fund (RMF) in detail.

Economic Environment:

While the Indian Mutual Fund industry has grown in size by about 320% from March, 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.

Though India is a minor player in the global Mutual Fund industry, its AUM as 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 last few 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.

20Some 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 are much less than US having more than 800. There is a big scope for expansion.

Mutual Fund can penetrate rural 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 were 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.

21Members of AMFI:

Bank Sponsored

Joint Ventures - Predominantly Indian

Canara Robeco Asset Management Company Limited

SBI Funds Management Private Limited

Others

Baroda Pioneer Asset Management Company Limited

UTI Asset Management Company Ltd

Institutions

1. LIC Mutual Fund Asset Management Company Limited

Private Sector

Indian

Benchmark Asset Management Company Pvt. Ltd.

DBS Cholamandalam Asset Management Ltd.

Deutsche Asset Management (India) Pvt. Ltd.

Edelweiss Asset Management Limited

Escorts Asset Management Limited

IDFC Asset Management Company Private Limited

JM Financial Asset Management Private Limited

Kotak Mahindra Asset Management Company Limited (KMAMCL)

Quantum Asset Management Co. Private Ltd.

Reliance Capital Asset Management Ltd.

Sahara Asset Management Company Private Limited

Tata Asset Management Limited

Taurus Asset Management Company Limited

Foreign

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

FIL Fund Management Private Limited

Franklin Templeton Asset Management (India) Private Limited

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

Joint Ventures - Predominantly Indian

Birla Sun Life Asset Management Company Limited

22DSP Merrill Lynch Fund Managers Limited

HDFC Asset Management Company Limited

ICICI Prudential Asset Management Company Limited

Sundaram BNP Paribas Asset Management Company Limited

Joint Ventures - Predominantly Foreign

ABN AMRO Asset Management (India) Pvt. Ltd.

Bharti AXA Investment Managers Pvt. Ltd

HSBC Asset Management (India) Private Ltd.

ING Investment Management (India) Pvt. Ltd.

JPMorgan Asset Management India Pvt. Ltd.

Lotus India Asset Management Co. Pvt. Ltd.

Morgan Stanley Investment Management Pvt. Ltd.

Principal PNB Asset Management Co. Pvt. Ltd.

23Frequently Used Terms:

Advisor - Is employed by a Mutual Fund organization to give professional advice on the funds investments and to supervise the management of its asset.

Diversification The policy of spreading investments among range of different securities to reduce the risk.

Net Asset Value (NAV) - Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sales Price - Is the price you pay when you invest in a scheme. Also called Offer price. It may include a sales load.

Repurchase Price - Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price - Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load - Is a charge collected by a scheme when it sells the units. Also called Front-end load. Schemes that do not charge a load are called No Load schemes.\

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders.

Dividend Policy:

Dividend will be distributed from the available distributable surplus after the deduction of the divided distribution surplus after the deduction of the dividend distribution tax and the applicable surcharge, if any. The Mutual Fund is not guaranteeing or assuring any dividend.

24Chapter-02

ULIP (UNIT LINKED INSURANCE Policy)

25

Introduction: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 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.

Current Market Share of Private Insurance Companies in India:

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 Insurance

Universal Life or Unit Linked Insurance Policy.

26Traditional 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 his contribution (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 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.

Features of Traditional Life:

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 claim 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 the market. In other words it minimizes the risk of investments for an average individual. He shares his risk with a group of like-minded individuals.

Universal Life or Unit Linked Insurance Policy:

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.

27

Meaning:

A Unit Link Insurance Policy (ULIP) is one in which the customer is provided with a life insurance cover and the premium paid is invested in either debt or equity products or a combination of the two. In other words, it enables the buyer to secure some protection for his family in the event of his untimely death and at the same time provides him an opportunity to earn a return on his premium paid. In the event of the insured person's untimely death, his nominees would normally receive an amount that is the higher of the sum assured or the value of the units (investments).

To put it simply, ULIP attempts to fulfill investment needs of 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 by the 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 year2001-02.

Presently a number of private life insurance companies have launched Unit Linked Insurance Products with a variety of new features.

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 period can be advanced or extended.

Investments can be made in gilt funds, balanced funds, money market funds, growth funds or bonds.

28

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.

Provides capital appreciation.

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

Functions of ULIP:

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 insureds death or in the event of maturity of the policy.

In case of the insured persons untimely 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.

29Types of Funds do ULIP Offers:

Most insurers offer a wide range of funds to suit ones investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund.The following are some of the common types of funds available along with an indication of their risk characteristics.

General DescriptionNature of investmentRisk

Category

Equity FundsPrimarily invested in company stocks with theMedium to

general aim of capital appreciationHigh

Income, FixedInvested in corporate bonds, governmentMediumInterest and Bondsecurities and other fixed income instruments

Funds

Cash FundsSometimes known as Money Market Funds Low

invested in cash, bank deposits and money

market instruments

Balanced FundsCombining equity investment with fixed interestMedium

instruments

There are various unit linked insurance plans available in the market. However, the key ones are pension, children, group and capital guarantee plans.

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

30amount is payable only when the policys 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).

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 up to 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. Individuals can opt for a variant based on their risk profile.

Flexibility:The flexibility with which individuals can switch between the ULIP variants to capitalize 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 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. With an SIP, individuals invest their monies regularly over time intervals of a month/quarter and dont have to worry about timing the stock markets.

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Hurdles of ULIP:

No Standardization:

All the costs are levied in ways that do not lend to standardization. If one company 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 how much 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 10per cent illustration, calling it the yield. Some companies were not including the mortality cost while calculating the yield. This amounts to overstating the yield.

Internally Made Sales Illustration:

During the process of collecting information, it was found that the sales benefit illustration 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 exit also takes away the benefit of compounding from insured.

Creeping Costs:

Since the investors are now more aware than before and have begun to ask for costs, some companies have found a way to answer that without disclosing too much. People are now asking how much of the premium will go to work. There are plans that are able to say 92 per cent will

32be invested, that is, will have a front load of just 8 per cent. What they do not say is the much higher policy administration cost that is tucked away inside (adjusted from the fund value).While most insurance companies charge an annual fee of about Rs 600 as administration costs, that stay fixed over time, there are plans that charge this amount, but it grows by as much as 5 per cent a year over time. There are others that charge a multiple of this amount and that too grows.

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

Charges, fees and deductions in a ULIP:

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

Premium Allocation Charge:

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

Mortality Charges:

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

Fund Management Fees:

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

Policy/ Administration Charges:

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

Surrender Charges:

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

33Fund Switching Charge:

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

Service Tax Deductions:

Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

Can one seek refund of premiums if not satisfied with the policy, after purchasing it?

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

What should one verify before signing the proposal?

One has to verify the approved sales brochure for

All the charges deductible under the policy

Payment on premature surrender

Features and benefits

Limitations and exclusions

Lapsation and its consequences

Other disclosures

Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council.

What happens if payment of premiums is discontinued?a) Discontinuance within three years of commencement

If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later.

b) Discontinuance after three years of commencement

At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full years premium. When the fund value reaches an amount equivalent to one full years premium, the contract shall be terminated by paying the fund value.

34Chapter-03

ULIPs vs. Mutual Funds

35

Comparison between ULIPS and Mutual Funds:

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to Mutual Funds in terms of their structure and functioning. As is the cases 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.

Points of difference between the two:

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-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 ones 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 per-determined upper limits as prescribed by the Securities and Exchange Board of India.

36For example equity-oriented funds can charge their investors a maximum of2.5% 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 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 portfolio disclosures on the other hand can enable investors to make timely investment decisions.

4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the Mutual Funds segment and ULIPs segment are largely comparable. For example plans that invest their entire corpus in equities (diversified equity funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing only in debt instruments (debt funds) can be found in both ULIPs and Mutual Funds.

37If 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 well, irrespective of the nature of the plan chosen by the investor. On the other hand in the Mutual Funds domain, only investments I-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.

Facts to Be Considered Before Investing In ULIPS:

The high returns (above 20 per cent) are definitely not sustainable over along term, as they have been generated during the biggest Bull Run in recent stock market history.

The free hand given to ULIPs might prove risky if the timing of exit happens to coincide with a bearish market phase, because of the inherently high equity component of these schemes.

While a debt-oriented ULIP scheme might be superior to a debt option in a conventional Mutual Fund due to tax concessions that insurance companies enjoy, such tax incentives may not last.

38

Look beyond NAVs:

The appreciations in the net asset value (NAV) of ULIPs barely indicate the actual returns earned on your investment. The various charges on your policy are deducted either directly from premiums before investing in units or collected on a monthly basis by knocking off units.

Either way, the charges do not affect the NAV; but the number of units in your account suffers. You might have access to daily NAVs but your real returns may be substantially lower. A rough calculation shows that if our investments earn a 12 per cent annualized return over a 20-year period in a growth fund, when measured by the change in NAV, the real pre- tax returns might be only 9 per cent. The shorter the term, the lower the real returns.

How charges dent returns:

An initial allocation charge is deducted from our premiums for selling, marketing and broker commissions. These charges could be as high as 65per cent of the first year premiums. Premium allocation charges are usually very high (5-65 per cent) in the first couple of years, but taper off later. The high initial charges mainly go towards funding agent commissions, which could be as high as 40 per cent of the initial premium as per IRDA (Insurance Regulatory and Development Authority) regulations.

The charges are higher for a linked plan than a non-linked plan, as the former require lot more servicing than the latter, such as regular disclosure of investments, switches, re-direction of premiums, withdrawals, and so on.

Insurance companies have the discretion to structure their expenses structure whereas a Mutual Fund does not have that luxury. The expense ratios in their case cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for a dept plan respectively. The lack of regulation on the expense front works to the detriment of investors in ULIPs.

The front-loading of charges does have an impact on overall returns as we lose out on the compounding benefit. Insurance companies explain that charges get evened out over a long term. Thus we are forced to stay with the plan for a longer tenure to even out the effect of initial charges as the shorter the tenure, the lower our real returns. If we want to withdraw from the plan, you lose out, as you will have to pay withdrawal charges up to a certain number of years.

In effect, when we lock in our money in a ULIP, despite the promise of flexibility and liquidity, we are stuck with one fund management style. This is all the more reason to look for an established track record before committing our hard-earned money.

39

Evaluate alternative options:

As an investor we have to evaluate alternative options that give superior returns before considering ULIPs. Insurance companies argue that comparing ULIPs with Mutual Funds is like comparing oranges with apples, as the objectives are different for both the products.

Most ULIPs give us the choice of a minimum investment cover so that we can direct maximum premiums towards investments.

Both ULIPs and Mutual Funds target the same customers. If risk cover is your primary objective, pure insurance plans are less expensive. When we choose a Mutual Fund, we look for an established track record of three to five years of consistent returns across various market cycles to judge a fund's performance.

It is early days for insurance companies on this score; investing substantially in linked plans might not be advisable at this juncture.

Try top-ups

Insurance companies allow us to make lump-sum investments in excess of the regular premiums. These top-ups are charged at a much lower rate usually one to two per cent. The expenses incurred on a top-up including agent commissions are much lower than regular premiums.

Some companies also give a credit on top-ups. For instance, if you pay in Rs

100 as a top up, the actual allocation to units will be Rs 101. If you keep the regular premiums to the minimum and increase your top ups, you can save up on charges, enhancing returns in the long run.

Reduce life cover:

The price of the life cover attached to a ULIP is higher than a normal term plan. Risk charges are charged on a daily or monthly basis depending on the daily amount at risk. Rates are not locked and are charged on a one-year renewal basis.

Our life cover charges would depend on the accumulation in your investment account. As accumulation increases, the amount at risk for the insurance company decreases. However, with increasing age, the cost per Rs 1,000sum assured increases, effectively increasing your overall insurance costs. A lower life cover could yield better returns.

Stay away from riders;

Any riders, such as accident rider or critical illness rider, are also charged on a one-year renewal basis. Opting for these riders with a plain insurance cover could provide better value for money.

40

ULIP's as an investment is a very good vehicle for wealth creation, but way

Unit Linked Insurance schemes are sold by insurance company representatives and insurance advisers is not correct.

ULIP's usually have following charges built into it:

Up-front Charges

Mortality Charges (Charges for providing the risk cover for life)

Administrative Charges

Fund Management Charges

Mutual Funds have the following charges:

Up-front charges (Marketing, Advertising, distributors fee etc.)

Fund Management Charges (expenses for managing your fund)

A few aspects of investing in ULIPs versus Mutual Funds.

Liquidity;

ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum lock in of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years.

Mutual Fund investments, on the other hand, can be redeemed at any time, barring ELSS (equity-linked savings schemes). Exit loads, if applicable, are generally for six months to a year in equity funds. So Mutual Funds score substantially higher on liquidity.

Tax efficiency

ULIPs are often pitched as tax-efficient, because your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). But investments in ELSS schemes of Mutual Funds are also eligible for exemption under the same section .Besides the premium, the maturity amount in ULIPs is also tax-free, irrespective of whether the investment was in a balanced or debt plan. So they do have an edge on Mutual Funds, as debt funds are taxed at 10% without indexation benefits, and20% with indexation benefits. The point, though, is that if you invest in a debt plan through a ULIP, despite its tax-efficiency your post-tax returns will below, because of high front-end costs. Debt Mutual Funds dont charge such costs.

Expenses

Insurance agents get high commissions for ULIPs, and they get them in the initial years, not staggered over the term. So the insurer recovers most charges from you in the initial years, as it risks a loss if the policy lapses. Typically, insurers levy enormous selling charges, averaging

41more than 20%of the first years premium, and dropping to 10% and 7.5% in subsequent years. (And this is after investors balked when charges were as high as 65 %)

Compare this with Mutual Funds fees of 2.25% on entry, uniform for all schemes. Different ULIPs have varying charges, often not made clear to investors.

For instance, an agent who sells you a ULIP may get 25% of your first years premium, 10% in the second year, 7.5% in the third and fourth year and 5%thereafter. If your annual premium is Rs 10,000 and the agents commission in the first year is 25%, it means only Rs 7,500 of your money are invested in the first year. So even if the NAV of the fund rises, say 20%, that year, your portfolio would be worth only Rs 9,000much lower than the Rs 10,000 you paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a2.25% entry load, Rs 225 is deducted, and the rest is invested. If the schemes NAV rises 20%, your portfolio is worth Rs 11,730. This shows how

ULIPs work out expensive for investors. Deduct the cost of a term policy from the Mutual Fund returns, and youre still left with a sizable difference.

42Mutual Fund Vs ULIP in a Nut shell

43

Review of the Literature:

In Orissa apart from Bajaj capital there is four more third Party broker Companies are there. Looking at the market share the LIC is the pioneer but in last few years the private players have performed very well despite that the Performance of Bajaj Capital though satisfactory, but it is not the best. Because the other players are giving a cut throat competition & grabbing a high chunk of the market share.

In order to decipher the reason behind this cause. At first I inquired my respondents regarding its product line but no where they reflected it as a matter of worry. As per their opinion Bajaj capital have a sound product line tackle this problem. Then I focused on the quality of service provided by Bajaj Capital, Similarly the ICs marked it to be satisfactory, when I asked for their feedback in the questionnaire & through personal interview, many of them said that the people of Orissa have less knowledge regarding the products & service quality offered by Bajaj Capital. In their view the problem might be lying with the promotional strategy of Field Force. So I decided to carry on a study to decipher the competitiveness of Promotional Strategy of Field Force of Bajaj Capital in Orissa.

Then I tried to gain as much as knowledge regarding the promotional strategy being a vital tool for a companys success for this I searched for as much as information as I can & I went through many journals, books , Internet sources. The knowledge I have acquire & the problem with Bajaj Orissa in Orissa , inspired to me carry on my survey to study the competitiveness of promotional strategy of field force of Bajaj Capital in Orissa.

The hypothesis taken behind this study is that the promotional strategy of field force of Bajaj Capital in Orissa is not Profound.

44

Chapter-04

Company Profile

Bajaj Capital's Mission Statement

The focus of our organization is to be the most useful, reliable and efficient provider of Financial Services. It is our continuous endeavor to be a trustworthy adviser to our clients, helping them achieve BCIBL financial goals.

45Bajaj Capital Ltd.

The Bajaj Capital Group is one of Indias premier Investment Advisory and Financial Planning companies. It is also SEBI- approved Category Merchant Bankers.

Bajaj Capital is among the pioneers of the investment advisory and financial planning industry in India. For over four decades, the Company has been serving Indian investors, and giving shape to the vision of its founder-chairman, Mr. K.K. Bajaj.

It offers personalized Investment Advisory and Financial Planning services to individual investors, corporate houses, institutional investors, Non-Resident Indians (NRIs) and High Net worth Clients, among others.

As one of Indias largest distributors of financial products, we offer a wide range of investment products such as Mutual Funds, life and general insurance, bonds, post office schemes, etc. offered by reputed public and private and government organizations.

Company Profile:

Bajaj Capital is one of Indias leading Financial Services companies offering Free Advice on Investments, Insurance, Tax Saving, Retirement Planning, Financial Planning, Childrens Future Planning and other services. It also has a wide range of products and services for Corporate, High Net worth Individuals, and NRIs all under one roof.

At Bajaj Capital, it believes in dreaming big. Dreams inspire us to excel. They ignite hope and kindle in us the passion to stretch there limits. It also believes that nothing can or should stop us from realizing our dreams and financial constraints should be the last thing to stop anyone.

Four decades of excellence:

For over four decades, we have been helping people realize BCIBL aspirations by helping them make their wealth grow, and plan their financial lives. Today, Bajaj Capital is a one of the largest financial planning and investment advisory companies in India, with a strong presence all over the country. It takes pride in serving our customers both individual and institutional, and is known for our strong professionalism and work ethics.

Wide range of services:

We offer a comprehensive range of services including financial planning and investment advice, and the entire gamut of financial instruments and investment products of almost all major

46companies, both public and private. In addition, we also provide investment assistance by helping you complete all the formalities, and help you keep regular track of your investments.

These services and products are delivered through our network of 134 Bajaj Capital Investment Centers located all over the country.

Bajaj Capital is also a SEBI- approved Category Merchant Banker. They raise resources for over 1,000 top institutions and corporate houses every year, and offer specialized services to Non-Resident Indian (NRIs) and High Net worth Clients.

Key Personnel

Mr. K.K. Bajaj

Chairman

Mr. Rajiv Deep Bajaj

Vice Chairman & Managing Director

Mr. Sanjiv Bajaj

Joint Managing Director

Mr. Anil Chopra

CEO & Director

47

Introducing Bajaj Capital Insurance Broking Ltd (BCIBL)

By your side whenever you need us

Risks are unavoidable in personal life and in business, but can be managed by proper planning.

As a true partner, BCIBL promises to use their knowledge for customer benefit. Be it advice on the right insurance products or looking after your rights and interests in case of a claim, with a mission-well be by your side... whenever you need us.

That's exactly where they at Bajaj Capital Insurance Broking Ltd. step in. At BCIBL, an IRDA licensed "Composite Insurance Broker" bearing license number CB 042/02, they call it Risk Management. They help customers to identify the potential risks and pass some of them on to insurance companies.

They are customers partners, who help them to identify and understand various risks, prioritize them and eventually manage them.

As a broker, BCIBL do not offer customers just a single option but multiple options available, and help you select the most appropriate one.

Products:

They offer a wide range of Life and General Insurance products offered by the insurance companies that cover almost the entire spectrum of risks that individuals or your business may face.

BCIBL offers a wide range of insurance packages including:

Personal Lines

Auto

Home

Travel

Accident & Health

Property Insurance

Fire and Special Peril

Marine

Machinery Breakdown

Electronic Equipment Insurance

48

Loss of Profits etc.

Liability Insurance

Commercial

General Liability

Product Liability

Workman's Compensation/ Employer's Liability

Contingency Risks

Event Cancellation

Wedding Insurance

All Risk for Mobiles, Computers and Laptops etc.

Industrial All Risk and Project Insurance

Specialty Products

Professional Indemnity/Errors & Omissions (E&O)

Directors and Officers Liability (D&O)

Fidelity Guarantee

Commercial Cyber Crime Insurance

Credit Insurance

Mutual Fund & Asset Protection

49Why consult BCIBL?

As IRDA licensed Insurance Brokers, BCIBL are your representatives unlike an agent who represents an insurance company.

At BCIBL, BCIBL consider it your right to receive independent, unbiased and professional advice.

BCIBL enjoy the 'Preferred Insurance Broker' status with many of the Insurance companies. This, in essence, translates into a greater benefit for customers.

In fact, BCIBL enjoy a transactional relationship with almost all the Insurance companies present in India.

We are therefore proud to say that many companies have come up with insurance products based on our feedback.

We have a strong operational and servicing team, and an all-India reach.

We also have the support of a strong IT infrastructure and responsive call centers. As such, we are easily accessible.

Milestones:

Bajaj Capital has contributed to the growth of the Indian Capital Market at every step.

In 1965, BCIBL were the first to innovate the Companies Fixed Deposit. Today, BCIBL is playing an active role in the growth of the Indian Mutual Fund industry.

BCIBL is also working closely with private insurance companies to deepen India's insurance market.

Here is a brief gist of BCIBLs journey through the years.

1964Bajaj Capital sets up its first Investment Centre in New Delhi to guide individual investors on where, when and how to invest.

India's first Mutual Fund, Unit Trust of India (UTI) is incorporated in the same year.

1965Bajaj Capital is incorporated as a Company. In the same year, the company introduces an innovative financial instrument the Company Fixed Deposit. EIL Ltd. (Oberoi Hotels, then known as Associated Hotels of India Ltd.) becomes the first company to raise resources through Company Fixed Deposits.

501966

Bajaj Capital expands its product range to include all UTI schemes and Government saving schemes in addition to Company Fixed Deposits.

1969

Bajaj Capital manages its first Equity issue (through an associate company) of Grauer & Wells India Ltd.; right from drafting the prospectus to marketing the issue.

1975

Bajaj Capital starts offering 'need-based' investment advice to investors, which would later be known as 'Financial Planning' in the investment world.

1981

SAIL becomes the first government company to accept deposits, followed by IOC, BHEL, BPCL, HPCL and others; thus opening the floodgates for growth of retail investment market in India.

Bajaj Capital plays an active role in all the schemes as 'Principal Brokers.

1986Public Sector Undertakings (PSUs) begin making public issues of bonds MTNL, NHPC, IRFC offer a series of Bond Issues. Bajaj Capital is among the top ranks of resource mobilizes.

1987SBI leads the launch of Public Sector Mutual Funds in India. Bajaj Capital plays a significant role in fund mobilization for all these players.

1991SBI issues India Development Bonds for NRIs. Bajaj Capital becomes the top mobiliser with collections of over US $20 million.

1993The first private sector Mutual Fund Kothari Pioneer is launched, followed by Birla and Alliance in the following years. Bajaj Capital plays an active role and is ranked among the top mobilisers for all these schemes.

1995IDBI and ICICI begin issuing their series of Bonds for retail investors. Bajaj Capital is the co-manager in all these offerings and consistently ranks among the top five mobilisers on an all-India basis.

1997Private sector players lead the revival of Mutual Funds in India through Open-ended Debt schemes. Bajaj Capital consolidates its position as India's largest retail distributor of Mutual Funds

511999

Bajaj Capital begins marketing Life and General Insurance products of LIC and GIC (through associate firms) in anticipation of opening up of the Insurance Sector. Bajaj Capital achieves the milestone of becoming the top 'Pension Scheme' seller in India and launches marketing of GIC's Health Insurance schemes.

2000

Bajaj Capital implements its vision of being a 'One-stop Financial Supermarket.' The Company offers all kinds of financial products, including the entire range of investment and insurance products through its Investment Centers. Bajaj Capital offers 'full-service merchant banking' including structuring, management and marketing of Capital issues. Bajaj Capital reinvents 'Financial Planning' in its international sense and upgrades its entire team of Investment Experts into Financial Planners.

2002

The Company focuses on creating investor awareness for Financial Planning and need-based investing. To achieve this goal, the company introduced the International College of Financial Planning. The graduates of this institute become Certified Financial Planners (CFPs), a coveted professional qualification.

2004Bajaj Capital obtains the All India Insurance Broking License. Simultaneously, a series of wealth creation seminars are launched all over the country, making Bajaj Capital a household name.

2005Bajaj Capital launches 360 Financial Planning, a software-based program aimed at encouraging scientific and holistic investing.

2007Bajaj Capital launches Stock Broking and Depository (Demat) Services.

2008Bajaj Capital launches Just Trade, an online Platform for investing in Equities, Mutual Funds, IPO's

52Objectives of Bajaj Capital:

To serve their clients with utmost dedication and integrity so that they exceed their expectations and build enduring relationships.

To offer unparalleled quality of service through complete knowledge of products, constant innovation in services and use of the latest technology.

To always give honest and unbiased financial advice and earn their clients' everlasting trust.

To serve the community by educating individuals on the merits of Financial Planning and in turn help shape a financially strong society.

To create value for all stake holders by ensuring profitable growth.

To build an amicable environment that accords respect to every individual and permits their personal growth.

To utilize the power of teamwork to function as a family and build a seamless organization.

The Significance of the Logo of Bajaj capital:

The logo depicts Lord Ganesha who is the source of all our values and ethics in business.

The large ears of Lord Ganesha remind Bajaj Capital to hear more. They listen carefully to our clients to understand their needs.

The weight of the trunk on the mouth symbolizes silence. Bajaj Capital works silently, without blowing their own trumpet.

The long trunk symbolizes continuous exploration. Bajaj Capital explores all avenues to provide the best investment opportunities for our clients.

The heavy posture of Ganesha symbolizes stability. Bajaj Capital helps our clients to attain financial stability through wise investments.

53

Lord Ganesha is known as the remover of obstacles and bestower of prosperity. Bajaj Capital emulates His example and tries their best to help our clients attain prosperity by proper financial planning.

The logo has a yellow background. Yellow is the color of gold, which symbolizes wealth. According to Vedic lore, it is also the color associated with Brihaspati, the guru and counselor of the Gods. We offer our clients sage counsel to make their wealth grow.

The letters are in red. Red is the color rajas symbolizing power and incessant activity. It symbolizes our aggressive quest for your well-being and happiness.

The white streak represents the trunk of Lord Ganesha. White is the color of satvaguna, and implies our selfless commitment to your life-long happiness.

Strengths of Bajaj Capital:

Wide range of products and services

41 years experience as Investment Advisors and Financial Planners

More than eight lakh satisfied clients all over India

Countrywide network of 134 branches

Over 12,000 NRI clients across the globe

Personalized wealth management advice

24 x 7 online accessibility through www.bajajcapital.com

Strong team of qualified and experienced professionals including CAs, MBAs, MBEs, CFPs, CSs, Insurance experts, Legal experts and others

SEBI-Approved Category I Merchant Bankers

Group Co BCIBL is an IRDA-licensed Direct Insurance Broker

54Chapter-05

Research

Research Methodology

55

Research Methodology:

Objective of the Research:

To study about the Mutual Funds industry.

To study the approach of investors towards Mutual Funds and ULIPs.

To study the behavior of the investors whether they prefer Mutual Funds or ULIPS?

Scope of the research:

Subject matter is related to the investors approach towards Mutual Funds and ULIPs.

People of age between 20 to 65.

Area limited to Cuttack & Bhubaneswar.

Demographics include names, age, qualification, occupation, marital status and annual income.

Achievements:

My On The Job Training has given me a good experience in learning how to sell a product, how to deal with the customers, how to generate leads, how to maintain relation with the existing customers, how to get the references from the existing customers, how maintain a good relationship with co-employees. I have learn the convincing and persuasive skills in my OJT. Initially I have faced some hurdles in the beginning of the project to get the leads, but later on I could coup with the problems and I could perform my task successfully.

Steps of Research Design:

Define the information needed:

This first step states that what the information that is actually required is. Information in this case we require is that what is the approach of investors while investing their money in Mutual Funds and ULIPs. E.g. what do they consider while deciding as to invest in which of the two i.e. Mutual Funds or ULIPs. Also, it studies the extent to which the investors are aware of the various costs that one bears while making any investment. So, the information sought and information generated is only possible after defining the information needed.

Design the research:

A research design is a framework or blueprint for conducting the research project. It details the procedures necessary for obtaining the information needed to solve research problems. In this project, the research design is explorative in nature.

56Specify the scaling procedures:

Scaling involves creating a continuum on which measured objects are located. Both nominal and interval scales have been used for this purpose.

Construct and pretest a questionnaire:

A questionnaire is a formalized set of questions for obtaining information from respondents. Where as pretesting refers to the testing of the questionnaire on a small sample of problems.

Population:

The general public who are investing money in Mutual Funds and ULIPs, both.

Sample Unit:

Investors and non-investors.

Sample Size:

This study involves 50 respondents.

Sampling Technique:

The sample size has been taken by non-random convenience sampling technique

Data Collection:

Data has been collected both from primary as well as secondary sources as described below:

Primary sources:

Primary data was obtained through questionnaires filled by people and through direct communication with respondents in the form of Interview.

Secondary sources:

The secondary sources of data were taken from the various websites, books, journals reports, articles etc. This mainly provided information about the Mutual Fund and ULIPs industry in India.

Plan for data analysis:

Analysis of data is planned with the help of mean, chi-square technique and analysis of variance.

57

Analysis & Interpretation

58Market Capitalization of Mutual Funds and ULIPs:What do investors prefer?

1) Do you invest in Mutual Funds?

ResponseFrequencyPercentage

Yes1938%

No3162%

total50100

Interpretation: 62% of the people invest in mutual funds.

592) If not, then what other option(s) do you prefer to invest?

Optionsfrequencypercentages

Fixed deposits1242.10

Post office schemes831.57

Recurring deposits415.78

Others710.52

Total31100

3)What is the mode of information that you use for insurance companies?

60OptionsFrequencypercentage

Advertisements2142%Agents1122%Seminar612%Workshop816%Others48%total50100

FrequencyObserved-(observed-(observed-Options

expectedexpected)2expected) /e

Advertisements211112112.1Agents11110.1Seminar6-4161.6Workshop8-240.4Others4-6363.6Total50

17817.8

Expected Frequency=50/5=10

Chi square= observed-expected = 17.8Expected

At 4 degree of freedom, df (4) =7.815, thus the calculated value is greater than the table value. Hence, H0 is rejected

Interpretation: It means that all the modes of information are not the same. Advertisement is more popular

614) In which sector do