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WEB UNIV Model Town, Delhi Learning Centre Code: 00883


A project report submitted in partial fulfillment of the requirements for the degree of Master of Business Administration of Sikkim Manipal University, India

Aamir Hussain

Rajni Singh Enrolment No. 0510920093

Sikkim Manipal University of Health, Medical and Technological Sciences Distance Education Wing Syndicate House, Manipal 576104

I hereby declare that the project report entitled


Submitted in partial fulfillment of the requirement for the degree of Masters of business Administration to Sikkim Manipal University, India, is my original work and not submitted for the award of any other degree, diploma, fellowship, or any other similar title or prizes.

Place: Date:

Rajni Singh (0510920093)


Examiners Certification The project report of


is approved and is acceptable in quality and from

Internal Examiner Mr. Aamir Hussain M.Com, MBA(Marketing/Finance) MBA (Marketing/HR) Senior Faculty, Web Univ

External Examiners


University Study Center Certificate

This is to certify that the project report entitled


Submitted in partial fulfillment of the requirements for the degree of Masters of Business Administration of Sikkim Manipal University of Health, Medical and Technological Sciences.

Ms. Rajni Singh

Has worked under my supervision and guidance and that no part of this report has been submitted for the award of any other degree, Diploma, fellowship or other similar titles or prizes and that the work has not been published in any journal or Magazine.





A large number of people are involved in the success of completion of this project; and this success would not have been accomplished without their help. I pay my greatest sense of gratitude to Mr. Aamir Hussain for his inspiring, continuous encouragement, valuable suggestions and constructive criticism.

Rajni Singh

There are no lists or escalators in the world of success. There are only stairs lading from one level to the next. There is no shortcut to success. Neither can success come solely through luck or good fortune. Pluck more than luck is essential than success, since fortune favor the brave and not the fickle minded. In the nut shell, there is only one way to achieve success and that is hard work performed as per a well conceived and imaginative plan. Master of business administration is a professional course, which provides the student with the intelligence, and the power they need to conquer the business world of this era. As a part of this curriculum, the students are required to undergo a practical training in a reputed business organization for a stipulated period of 6 to 8weeks. This training gives a first hand knowledge and experience to students and helps them to know about the real business world. I have been really fortunate regarding my summer training because I got an opportunity to work in professionally managed organization like Star wire. During the short span of 8weeks I learned a lot.


SR NO CHAPTER-1 Project Title Insurance history Objectives Research Methodology CHAPTER-2: Founder About Reliance Vision And Mission Products Insurance Plans SWOT Analysis CHAPTER 3: Basics About Mutual Funds About Ulips CHAPTER-4: Comparison And Other Facts Principles of Investing Comparison Between Ulip N Mutual Funds Facts regarding Mutual Funds Future of Mutual Funds CHAPTER-5: CHAPTER-6 : ANALYSIS OF DATA US-CRISIS An article

CONTENT Introduction

Company Profile





Introduction to insurance industry in India

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. Year Event 1818 The advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. 1834 Oriental Life Insurance Failure

1850 The advent of General Insurance in India with the establishment of Triton Insurance Company Ltd in Calcutta 1870 The enactment of the British Insurance Act 1907 In 1907, the Indian Mercantile Insurance Ltd was set up 1912 The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. 1928 The Indian Insurance Companies Act was enacted. 1956 Nationalization of Life Insurance Sector and Life Insurance Corporation came into existence in 1956.The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies. 1971 The General Insurance Corporation of India was incorporated as a company 1973 General insurance business was nationalized with effect from 1st January 1973.

107 insurers were amalgamated and grouped into four companies namely 1)National Insurance Company Ltd., 2).The New India Assurance Company Ltd., 3). The Oriental Insurance Company Ltd 4).The United India Insurance Company Ltd. 1993 The Government set up a committee under the chairmanship of RN Malhotra former Governor of RBI to propose recommendations for reforms in the insurance sector. 2000 The IRDA was incorporated as a statutory body in April 2000. Foreign companies were allowed ownership of up to 26%. 2000Insurance Industry had 16 new entrants, 10 in Life and 6 in General Insurance 2001Insurance Industry had 5 new entrants, 2 in Life and 3 in General. 2003Insurance Industry had 1new entrant, Sahara India Insurance Company Ltd. In Life Insurance category 2004-2005

Insurance Industry had 1new entrant, Shri Ram Insurance company Ltd. In Life Insurance category 2005Bharti Axa Life insurance company was granted Certification of Registration in July, 2006 2006Bharti Axa Life insurance company commenced its operations the newest player in the insurance sector. Exhibit 1-INDIAN INSURANCE SECTOR ORIGIN AND

DEVELOPMENTS Till date there are 16 Life Insurance companies, 15 General Insurance players

1. To get the knowledge About the Ulips and Mutual Funds. 2. To make a comparison Betweem Ulips and Mutual Funds. 3. To make an analysis between these two.

1) Identification of the problem: the project relates to an in depth study of Mutual Funds and ULIPS 2) Planning the research design: a suitable research design has to be planned for any research. It is the plan specifying the procedure for collecting and analyzing the needed information. As per the objectives of the study, mainly there are four types of research designs viz. experimental, diagnostic, descriptive and exploratory. Here exploratory research design is proposed with focus on discovering of ideas and insight about the particular problem. Probably exploratory research design will be suitable for the purpose because here the job is to find out the working capital requirement. 3) Data collection: Relevant data for the proposed research project will be secondary data has also been collected by using the following methods/technique. Annual report of the company Internet Various books Company magazines, broachers and reports

Concerned trade association reports


1. The time frame for the research project was very little. This could not provide me the ample opportunity to study ever detail of management in the company. 2. As some data have not been disclosed by the company on the account of confidential report.



Founder Reliance
Reliance Mutual fund General Insurance Mutual Fund Reliance Reliance Life Insurance Money Reliance Consumer Finance

Few men in history have made as dramatic a contribution to their countrys economic fortunes as did the founder of Reliance, Shri. Dhirubhai H Ambani. Fewer still have left behind a legacy that is more enduring and timeless. As with all great pioneers, there is more than one unique way of describing the true genius of Dhirubhai: The corporate visionary, the unmatched strategist, the proud patriot, the leader of men, the architect of Indias capital markets, and the champion of shareholder interest. But the role Dhirubhai cherished most was perhaps that of Indias greatest wealth creator. In one lifetime, he built, starting from the proverbial scratch, Indias largest private sector enterprise. When Dhirubhai embarked on his first business venture, he had a seed capital of barely US$ 300 (around Rs 15,000). Over the next three and a


half decades, he converted this fledgling enterprise into a Rs 60,000 crore colossusan achievement which earned Reliance a place on the global Fortune 500 list, the first ever Indian private company to do so. Dhirubhai is widely regarded as the father of Indias capital markets. In 1977, when Reliance Textile Industries Limited first went public, the Indian stock market was a place patronised by a small club of elite investors which dabbled in a handful of stocks. Under Dhirubhais extraordinary vision and leadership, Reliance scripted one of the greatest growth stories in corporate history anywhere in the world, and went on to become Indias largest private sector enterprise. Through out this amazing journey, Dhirubhai always kept the interests of the ordinary shareholder uppermost in mind, in the process making millionaires out of many of the initial investors in the Reliance stock, and creating one of the worlds largest shareholder families.


Reliance Life Insurance Company Limited is a part of Reliance Capital Ltd. Of the Reliance - Anil Dhirubhai Ambani Group. Reliance Capital is one of India's leading private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, stock broking, life and general insurance, proprietary investments, private equity and other activities in financial services. Reliance Capital Limited (RCL) is a Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India

under section 45-IA of the Reserve Bank of India Act, 1934. Reliance Capital sees immense potential in the rapidly

growing financial services sector in India and aims to become a dominant player in this industry and offer fully integrated financial services. Reliance Life Insurance is another step forward for Reliance Capital Limited to offer need based Life Insurance solutions to individuals and Corporates.


Anil Ambani
Achievement: Chairman of Anil Dhirubhai Ambani Group; Chosen as the 'CEO of the Year 2004' in the Platts Global Energy Awards and Anil Ambani is one of the foremost entrepreneurs of Independent India. He is the Chairman of Anil Dhirubhai Ambani Group. Earlier, before the split in the Reliance Group, Anil Ambani held the post of Vice Chairman and Managing Director in Reliance Industries Limited (RIL). Born on June 4, 1959, Anil Ambani did his Bachelors in Science from the University of Bombay and then Masters in Business Administration Anil Ambani joined Reliance in 1983 as Co-Chief Executive Officer. He pioneered India Inc's forays into overseas capital markets with international public offerings of global depository receipts, convertibles and bonds. After the split in Reliance Group, Anil Ambani founded Anil Dhirubhai Ambani Group. He is the Chairman of all listed Group companies, which include: Reliance Communications, Reliance Capital, Reliance Energy and Reliance Natural Resources Limited.



Mr. P Nandagopal joined Reliance Life Insurance Company Limited as CEO on October 4th, 2005 - the day the share holding of AMP Sanmar was transferred to Reliance Capital Group. Prior to this, he was with Birla Sun Life Insurance as one of its founding members. Working as Senior Vice-President, he was responsible for driving the Alternate Channels, Group Insurance and Pensions businesses.

Reliance Life Insurance

Reliance Life Insurance Company Limited is a part of Reliance Capital Ltd. of the Reliance - Anil Dhirubhai Ambani Group. The company acquired 100 per cent shareholding in AMP Sanmar Life Insurance Company in August 2005. Taking over AMP Sanmar Life provided Reliance Life Insurance a readymade infrastructure and a portfolio. AMP Sanmar Life Insurance was a joint venture between AMP, Australia and the Sanmar Group. Headquartered in Chennai, AMP Sanmar had over 90 offices across the country, 9,000 agents, and more than 900 advisors.


Reliance Life Insurance offers you products that fulfill your savings and protection needs. Our aim is to emerge as a transnational Life Insurer of global scale and standard. Reliance Life Insurance is an associate company of Reliance Capital Ltd., a part of Reliance - Anil Dhirubhai Ambani Group. Reliance Capital is one of Indias leading private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, stock broking, life and general insurance, proprietary investments, private equity and other activities in financial services. Reliance - Anil Dhirubhai Ambani Group also has presence in Communications, Energy, Natural Resources, Media, Entertainment, Healthcare and Infrastructure.

Contact Address :
Reliance Life Insurance Company Limited, Regd. Office: 9 Cathedral Road, Chennai 600 086, India. Ph: 2811 8400 Fax: 2811 7669. Email : service@rcl.co.in

Vision & Mission: Vision

To be a globally respected wealth creator, with an emphasis on customer care and a culture of good corporate governance. Empowering everyone live their dreams.

Create unmatched value for everyone through dependable, effective, transparent and profitable life insurance and pension plans. It is our aim to become one of the top private life insurance companies in India and to become a cornerstone of RLI integrated financial services business in India. "To set the standard in helping our customers manage their financial future".

Our Goal
Reliance Life Insurance would strive hard to achieve the 3 goals mentioned below:

Emerge as transnational Life Insurer of global scale and standard


Create best value for Customers, Shareholders and all Stake holders

Achieve impeccable reputation and credentials through best business practices


RLIC has been one of the fast gainers in market share in new business premium amongst the private players with an incremental market share of 4.1% in the Financial Year 2007-08 from 3.9% in April 07 to 8% in Feb 08. ( Source: IRDA)

Also continues to be amongst the fast growing Private Life Insurance Companies with a YOY growth of 195% in new business premium as of Mar08.

A Company that has crossed 1.7 Million policies in just 2 years of operation, post take over of AMP Sanmar business.

Initiated Express Life an Unique Over the Counter sales process for Unit Linked Insurance Policies in the Industry.

Accomplished a large distribution ramp-up in the Industry in a short span of time by opening 600 branches in 10 months taking the overall branch network above 740.


RLIC continues to be one of the two Life Insurance companies in India to be certified ISO 9001:2000 for all the processes.

Products of Life Insurance

Life Insurance products are usually referred to as plans of insurance. These plans have two basic elements; one is the Death Cover providing for the benefits being paid on the death of the insured person within a specified period. The other is the Survival Benefit providing for the benefit being paid on survival of a specified period. Plans of insurance that provide only death cover are called Term Assurance Plans. Plans of insurance that provide only survival benefits are called Pure Endowment Plans.

Term Life Insurance

Term Life Insurance provides protection for a specified period of time. A death benefit is paid to the beneficiary if the insured dies within a specified period of time while the policy is still in force.

Whole Life Insurance

Whole Life insurance is a permanent life insurance and provides protection for life. As long as premiums are paid, a death benefit is paid to the beneficiary.


A ULIP is a life insurance which provides a combination of Life Insurance protection and investment. Money can be invested in the following fund:- Equity Fund, Debt Fund, Money Market Fund (Liquid Fund) and Balance Fund.

Annuities are practically the same as pension. Pension provides periodical payments to the employees, who have retired. They are paid as long as the recipient is alive. Annuities are called the reverse of Life Insurance.

INSURANCE PLANS: Protection Plans

Protect your family even when youre not around by investing in Reliance Protection Plans. Choose a limited period plan or a lifetime protection plan depending on your needs. The latest Protection Plans are as below 1. Reliance Term plan 2. Reliance Simple Term plan 3. Reliance Special Term plan 4. Reliance Credit Guardian plan


5. Reliance Special Credit Guardian plan 6. Reliance Endowment plan

7. Reliance Special Endowment plan

8. Reliance Connect 2 Life plan 9. Reliance Whole Life plan 10.Reliance Wealth + Health plan 11.Reliance Cash Flow plan

Savings & Investment Plans

Reliance Savings & Investment Plans help you to set aside some money to achieve specific goals in life, which means that you can enjoy life and provide for your familys daily needs. The savings and investment Plans are as below 1. Reliance Total Investment Plan Series I - Insurance 2. Reliance Wealth + Health plan 3. Reliance Automatic Investment plan 4. Reliance Money Guarantee plan 5. Reliance Cash Flow plan 6. Reliance Market Return plan 7. Reliance Endowment plan 8. Reliance Special Endowment plan 9. Reliance Whole Life plan

10.Reliance Golden Years Plan 11.Reliance Golden Years Plan Value 12.Reliance Golden Years Plan Plus 13.Reliance Connect 2 Life plan

Retirement Plans
Invest today in Reliance Retirement Plans and save money to enjoy life even after retirement. You will never have to depend on another person or make any compromises to maintain your current lifestyle. The latest Retirement Plans are as below 1. Reliance Total Investment Plan Series II Pension 2. Reliance Golden Years Plan 3. Reliance Golden Years Plan Value 4. Reliance Golden Years Plan Plus 5. Reliance Wealth + Health plan 6. Reliance Automatic Investment Plan 7. Reliance Money Guarantee Plan

Child Plans
Save systematically and secure your childs future needs by investing in Reliance Child Plans. You can always be there for your child when he or she needs you. The Childs plans are as below 1. Reliance Child plan

2. Reliance Secure Child plan 3. Reliance Wealth + Health plan


Brand strategy: as opposed to some of its competitors, Reliance operates a multi-brand strategy. The company operates under numerous well-known brand names, which allows the company to appeal to many different segments of the market. Distribution channel strategy: Reliance is continuously improving the distribution of its products. Its online and Internet-based access offers a combination of excellent growth prospects and its retail direct business also saw growth of 27% in 2002 and 15% in 2003. Various sources of income: Reliance has many sources of income throughout the group, and this diversity within the group makes the company more flexible and resistant to economic and environmental changes. Large pool of installed capacities. Experienced managers for large number of Generics. Large pool of skilled and knowledgeable manpower. Increasing liberalization of government policies.


Emerging markets: since there is more investment demand in the United States, Japan and the rest of Asia, Reliance should concentrate on these markets, especially in view of low global interest rates.

Potential markets: The Indian rural market has great potential. All the major market leaders consider the segments and real markets for their products. A senior official in a one of the leading company says foray into rural India already started and there has been realization that the rural market is both price and quantity conscious. Entry of MNCs: Due to multinationals are entering into market job opportunities are increasing day by day. Also India Mutual Fund majors are tie up with other financial institutions.

Increased Competition: With intense competition by so many local players causing headache to the current marketers. In addition to this though multinational brands are not yet established but still they will soon hit the mark. Almost 60 to 70% of the revenue is spending on the management and services



About Mutual Funds

The Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

Short history The government of India set up Unit Trust of India in 1963 by an act on parliament. UTI functioned under the regulatory and administrative control of the Reserve Bank of India till 1978. The Industrial Development Bank of India took over the regulatory and administrative control that year. The first scheme launched by UTI was Unit Scheme 1964 or the infamous Unit 64. The second phase of the mutual fund industry began with the public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India setting up their own mutual funds in 1987. Finally, in 1993 Kothari Pioneer (now merged with Franklin Templeton) became the first private sector mutual fund to start operations in the country. A host of private sector as well as foreign funds set up shop after that. In 1996, a comprehensive and revised Mutual Fund regulation was put in place. The industry now functions under Sebi (Mutual Fund) regulations, 1996.

The industry faced its toughest challenge when the US 64 fiasco shattered the confidence of investors. However, in 2003, the government bifurcated the erstwhile UTI. One entity manages the assets of US 64 and some assured return schemes. The other is a regular mutual fund working under the Sebi regulations. Thanks to the boom in the stock market, UTI managed to clean up its act and continue to enjoy the confidence of several investors. The whole industry also came out of the controversy without any major setbacks. Working of mutual funds A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money. All mutual funds except UTI functions under Sebi (Mutual Fund) regulations 1996.

The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value


or NAV of the unit. NAV 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. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit load. We can make money from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a
distribution. 3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares. Mutual Funds: Different Types Of Funds


No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means there are more mutual funds than stocks. It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential returns, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to
diversify away all risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds: Equity funds (stocks) Fixed-income funds (bonds) Money market funds All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.


Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.

Money Market Funds The money market consists of short-term debt instruments, mostly
Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).

Bond/Income Funds Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees. Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest.


For example, a fund specializing in high-yield junk bonds is much more

risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.

Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.

Equity Funds Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the


universe of equity funds is to use a style box, an example of which is


The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-to-book

ratios and high dividend yields. The opposite of value is growth, which refers to
companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks nor are classified as being somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are
in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth).

Global/International Funds


An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of
a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.

Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as

financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This
may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and 32

expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession.

Socially Responsible funds (or ethical funds) invest only in companies that
meet the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience.

Index Funds The last but certainly not the least important are index funds. This type
of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees.

Why invest through a Mutual Fund Affordability: Mutual funds allow you to start with small investments. For example, if you want to buy a portfolio of blue chips of modest size, you should at least have a few lakhs of rupees. A mutual fund gives you the same portfolio for meagre investment of Rs 1,000-5,000. A mutual fund can do that because it collects money from many people and it has a large corpus.


Professional management: The major advantage of investing in a mutual fund is that you get a professional money manager for a small fee. You can leave the investment decisions to him and only have to monitor the performance of the fund at regular intervals. Diversification: Considered the essential tool in risk management, mutual funds makes it possible for even small investors to diversify their portfolio. A mutual fund can effectively diversify its portfolio because of the large corpus. However, a small investor cannot have a well-diversified portfolio because it calls for large investment. For example, a modest portfolio of 10 blue-chip stocks calls for a few a few thousands. Convenience: Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors. Investors also do not have to worry about the investment decisions or they do not have to deal with their brokerage or depository, etc. for buying or selling of securities. Mutual funds also offer specialized schemes like retirement plan, childrens plan, industry specific schemes, etc. to suit personal preference of investors. These schemes also help small investors with asset allocation of their corpus. It also saves a lot of paper work.


Cost effectiveness: A small investor will find that a mutual fund route is a cost effective method. AMC fee is normally 2.5% and they also save a lot of transaction costs as they get concession from brokerages. Also, they get the service of a financial professional for a very small fee. If they were to seek a financial advisor's help directly, they may end up pay more. Also, the size of the corpus should be large to get the service of investment experts, who offer portfolio management. Liquidity: You can liquidate your investments anytime you want. Most mutual funds dispatch checks for redemption proceeds within two or three working days. You also do not have to pay any penal interest in most cases. However, some schemes charge an exit load. Tax breaks: You do not have to pay any taxes on dividends issued by mutual funds. You also have the advantage of capital gains taxation. Tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. Investments up to Rs 10,000 in them qualify for tax rebate. Transparency: Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio,


performance of schemes against various benchmarks, etc. They are also well regulated and Sebi monitors their actions closely. Conception and performance in India The industry has steadily grown over the decade. For example, before the public sector mutual funds entry, UTI was managing around Rs 6,700 crore on its own. Public sector mutual funds also helped accelerate the growth of assets under management. UTI and its public sector counterparts were managing around Rs 47,000 crore when Kothari Pioneer, the first private sector mutual fund, set up shop in 1993. Before the US 64 fiasco, there were 33 mutual funds with total assets of Rs 1,21,805 crore as on January 2003. The UTI was way ahead of other mutual funds with Rs 44,541 crore assets under management. The industry overall has performed well over the years. Of course, there were a few funds houses, which disappointed investors. However, overall performance has been good. However, lack of awareness still impedes the growth of the mutual fund industry. Unlike developed countries, most of the household savings still go to bank deposits in India.


Advantages of Mutual Funds:

Professional Management - The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money. Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.


Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis. Disadvantages of Mutual Funds: Professional Management- Did you notice how we qualified the advantage of professional management with the word

"theoretically"? Many investors debate over whether or not the socalled professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut. We'll talk about this in detail in a later section. Costs - Mutual funds don't exist solely to make your life easier--all funds are in it for a profit. The mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this tutorial we have devoted an entire section to the subject.


Dilution - It's possible to have too much diversification (this is explained in our article entitled "Are You Over-Diversified?"). Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money. Taxes - When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, which allows for cost-effective diversification. Investors may also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options, although there is dispute over whether professional fund

managers can, on average, outperform simple index funds that mimic public indexes. Whether actively managed or passively indexed, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.

What Ulips are all About

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment.The dynamics of the capital market have a direct bearing on the performance ofthe ULIPs. REMEMBER THAT IN A UNIT LINKED POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR. What are the 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 pre-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.

Fund 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. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units What Types of Funds do ULIP Offer? Most insurers offer a wide range of funds to suit ones investment objectives, riskprofile 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 Description Nature of Investments Risk Category Equity Funds

Primarily invested in company stocks with the general aim of capital appreciation Medium to High Income, Fixed Interest and Bond Funds Invested in corporate bonds, government securities and other fixed income instruments Medium Cash Funds Sometimes known as Money Market Funds invested in cash, bank deposits and money market instruments


Low Balanced Funds Combining equity investment with fixed interest instruments Medium Unit Linked Insurance Plans (ULIP) A policy, which provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). ULIP came into play in the 1960s and became very popular in Western Europe and Americas. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers. As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In todays times, ULIP


provides solutions for insurance planning, financial needs, financial planning for childrens future and retirement planning. ULIP distinguishes itself through the multiple benefits that it provides to the consumer. The plan is a one-stop solution providing:

Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against Death due to accident Disability Critical Illness Surgeries Liquidity Tax planning


This is just a general definition of an ULIP. But there are so many more parameters, which contributes to a decision about choosing the BEST ULIP in the market. When we say ULIP or any Insurance related products, there will be IRDA guidelines for minimum locking period of 3 years. I dont know much about comparative analysys of various ULIP products from different players in the s This ULIP has yielded 34% annualized profit returns in last 22 months. Fund Manager is Franklin Templeton, which is one of the MAJOR deciding factor when you think of MFs or ULIPs. As compared to shares( where you need to keep track ups and downs of share value on a daily basis) MFs and ULIPs are considered to be the safer ones as our funds will be managed by someone who is knowledgeable(e.g Franklin Templeton, Fidelity..etc)... You need to also look at the administrative charges which ULIP gets tagged with. Its just 20% for the 1st year an3% flat for rest of the tenure.


Advantage About ULIP :

1. Medium Term to Long Term Investments 2. Fund Management Expenses will be High. 3. Insurance Maturity Amouts are Tax Free in the hands of the investor (In india) 4. Not much of varieties are available 5. In General ULIP Products has min of 3 years lock in period 6. Value based investment 7. Need to explain the benefits of the investor and make them understand about hidden charges and benefits involved 8. Investor who would like to protect his life / health and also make some money, can invest in ULIP s

Disadvantages of ULIPs, I would like to enumerate a few:

1. Insurnace is not an investment: Keep your insurance and investments separate in life.

2. High charges: They are loaded with very high charges - a definite disadvantage.


3. Not enough investment trackrecord: While most insurance companies have come into india post 2000, how well can they handle money while investing in markets is something to be seen over a long term period. Not to undermine their potential, but it would be difficult to convince myself to give my money to somebody who is new to me rather than someone(Mutual fund companies), who has been in this business for 10-20 yrs in india and has demonstrated the capability to give consistent returns.


The Basic Principles of Investing

Investing means, making more money on your hard earned money towards increasing your wealth. An investment is anything you purchase for future income or benefit. In other words, anything not consumed today and saved for future use can be considered an investment. Income earned from your investments and any appreciation in the value of your investments increases your wealth. Before we take a look at the different financial products, it is important to know the basic principles of investing! Investment refers to a placement of funds in some assets that will be held over some period of time with the expectation that the funds will grow. Each one of us has assets of some kind, ranging from physical assets to financial assets. For our purposes, investment will mean a measurable asset retained in order to increase ones personal wealth. The prime motive behind investing is that we want to improve our future welfare. Sources of funds may be from assets already owned, savings or foregone consumption or borrowed money. By foregoing consumption today and investing the savings, we expect to enhance our future consumption possibilities. Anticipated future consumption may be by other family members, such as education funds for children or by


ourselves, possibly in retirement when we are less able to work and produce for our daily needs. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors. The sooner one starts investing the better. Your investments get more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. Three rules of investment: Invest early Invest regularly Invest for long term and not short term Invest Early : The sooner you start the better. Start investing in small amounts, continuously for a long time, money grows due to the power of compounding. If you start investing when you are single you will be able to save maximum. The best policy is to start saving from the moment you begin earning. Invest Regularly: Develop the habit of adding to your recurring deposit / systematic investment plan of mutual fund / deferred annuity


account on a regular basis, perhaps monthly or quarterly. By investing regularly with SIP of mutual funds you take advantage of a strategy called rupee-cost averaging. Regular investing, however, does not ensure a profit or protect against loss in declining market scenario. Invest for Long Term and Not Short Term : If you decide that your money can work for you over a long period of time, then better compounding works. Consider this: Rs 1,000 invested at 8% earns Rs. 80. Left to compound, the original Rs.1,000, plus accumulated interest, will earn Rs.160 in the 10th year, Rs.507 in the 25th year, and Rs.1,609 in the 40th year returns of 16%, 51%, and 161%, respectively, on the initial Rs.1,000. The proper choice of investment instrument can actually make it almost simple to realize your goals. In other words, right choice of investment will improve your present life and let you look ahead to the future too. It allows you to understand how todays financial decision affects other areas of your finances. For example, buying a particular investment product might help you pay off your housing loan faster or it helps to support your retirement significantly. One must view each financial decision as part of a whole and also consider its short and long-term effects on your financial objectives.


Surprisingly, many of us do not have any type of formalized investment plan in place.



ULIPs vs Mutual Funds: Who's better?

In this 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-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. 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 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.










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. ULIPs vs Mutual Funds Mutual Funds Minimum investment Determined by the amounts are investor and can be determined by the fund Investment amounts modified as well house No upper limits, Upper limits for expenses expenses chargeable determined by the to investors have been Expenses insurance company set by the regulator Quarterly disclosures Portfolio disclosure Not mandatory* are mandatory Generally permitted Entry/exit loads have to Modifying asset for free or at a be borne by the allocation nominal cost investor ULIPs

From the investors point of view, the biggest difference between

the two categories pertains to how much of his money is actually used for his insurance and his savings and how much is taken away to pay

commissions to agents and towards the insurance companys expenses. The second big difference is in the quality of the information he is given about his investments. Mutual funds deduct less than 2.5% as the agents commission. And as per current norms, there is no deduction if investors dont use an agent and go directly to a fund company. In Ulips, on the other hand, the agents commission varies, but in the first year, it could be as high as 25% and more. Next is the issue of transparency. There is a vast difference between the meaning of net asset value (NAV) of Ulips and mutual funds. In a mutual fund, the NAV announced is net of all expenses and charges the fund company deducts. If your investments were worth Rs 1 lakh when a funds NAV was Rs 22, then it will be worth Rs 2 lakh when the funds NAV is Rs 44. Thats it. The arithmetic of insurance companies is different. NAVs of Ulips are effectively pre-deductions. The NAV may double, but your investments wont double because the insurance company will reduce the number of units you hold to pay for expenses and commissions etc. This means the


announced NAV has no clear and transparent relation to what the unit holders are actually earning. However, Ulips have been the more successful of the two. News reports say that last year, a total of Rs 55,000 crore was invested (if invested is the right word) in Ulips. In the same period, around Rs 16,000 crore was invested in mutual funds. We are often told by the insurance industry that this is because Ulips are a superior product. Thats complete rubbish. Ulips are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising, all from the unit holders money. The net result of highpressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office deposits and many other asset types is ending up in Ulips, where a good proportion is diverted to pay commissions. The direction Indias insurance industry has taken in the last few years amounts to regulatory failure. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to Indias under-insured masses. Instead, it


has ended up focusing its energies (and capital) on selling expensive and opaque mutual funds dressed up as insurance. Its tragic that there is no move to even recognise that this problem exists. Indeed, even higher foreign ownership is on its way, supposedly because more capital is needed to Ulip the under-Uliped masses. But, even the mutual funds dont seem to be very interested in highlighting these issues, perhaps because many of them are part of financial conglomerates with flourishing insurance businesses. It is therefore left to the investor to understand the issues and do what he thinks is in his best interest.

Some facts for the growth of mutual funds in India

100% growth in the last 6 years. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.


We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices.


Future of Mutual Funds in India

By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.



An investors primary dilemma is why and how much insurance he needs and what should be his investment? Here comes in handy the services of professional investment advisors (popularly known as Agents), who with prior knowledge of various products and experience, help/guide an investor to a large extent to overcome this dilemma. An investors need/investment objectives can be broadly grouped as follows: 1. Large investment in house/real estate property. 2. Childrens Higher Education Expenses. 3. Childrens Marriage Expenses. 4. Health Expenses. 5. Old Age Comfort Living. 6. General Financial/Life Protection, etc.


Based on these needs/objectives and the guidance he receives, an investor decides his priorities.

Consumer Need for Investment Findings: It was very surprising for us to find that almost 58% of Investor were NOT sure of the specific end benefit that they wanted to derive from owning the mutual funds or ULIP.Amongst the ones who were specific in their requirement, Pension security emerged as the most sought after benefit, closely followed by economic security to Children and finally Tax-saving. INVESTING IN ULIPS:
The chart below shows how one product can meet multiple needs at different life stages.


Starting a job,Single individual

Recently married, no kids


Kids going Higher studies for

Children independe

with kids to

school,coll child,marria nt, nearing ege ge the golden years

Your Need

Low protection, high asset

Reasonable Higher protection,



Safe accumulatio n for the golden

protection, Protection, money for high on asset creation but steadier options, education, marriage.

still high on still high on asset creation but steadier options, increase savings for child

creation and asset accumulatio creation n

Facility to stop yrs.Consider premium for 2-3 yrs for these extra ably lower life insurance as the dependancie s have decreased

liquidity for expenses education expenses

Flexibil Choose low Increase ity death benefit, choose death

Increase death

Withdrawal Withdrawal from the from the

Decrease the death benefitreduce it to

benefit,choo benefit, se choose

account for account for the education higher

growth/bala growth/bala balanced

education/mar the riage minimum possible.Cho ose the income investment

nced option nced option option for expenses for asset creation for asset creation asset creation. Choose riders for enhanced protection. Use top-

of the child expenses of the child. Premium holiday-to

stop premium option.Topfor a period without ups form the


ups to increase your accumulati on

lapsing the policy

accumulatio n (with reduced expenses) for the golden yrs cash accumulatio n

multiple needs of investors showing throw life cycles The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest innovation in the field of life insurance in the past several decades. In a swoop, it has addressed and overcome several concerns that customers had about life insurance -- liquidity, flexibility and transparency and the lack thereof. These benefits are possible because ULIPs are differently structured products and leave many choices to the policyholder. Hence, as a customer, you must carefully consider whether you can make such a product work well for you. Broadly speaking, I believe that ULIPs are best suited for those who have a conceptual understanding of financial markets and are genuinely looking for a flexible, long-term savings-cuminsurance solution.

Put simply, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one's specific needs. Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match one's lifestyle, inexplicable returns and an expensive, complicated exit. ULIPs, by separating the two parts within the same product, and managing them independently, offer insurance buyers what no traditional policy had -- continuous information about how their policy is working for them. Often, people wonder whether it's better to purchase separate financial products for their protection and savings needs. Certainly, this is a viable option for those who have the time and skill to manage several products separately. To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, let us take the example of a 35-year-old man with 2 young children. With a premium of, say, Rs 30,000 p.a. he could begin with a sum assured of Rs 5 lakh, for which the life insurer would set aside a nominal

amount of the premium to cover this risk. The balance could be invested in a fund of his choice, possibly a balanced or growth option. As the children grow, he might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up. The key to good financial planning is to understand one's current and future financial goals, risk appetite and portfolio mix. This done, the next step is to allocate assets across different categories and systematically adhere to an investment pattern, so that they work in tandem to meet one's requirements over the next month, year or decade. Because of their flexibility to adjust to different lifestage needs, ULIPs fit in very well with financial planning efforts. Moreover, as a systematic investment plan, ULIPs greatly diminish the hazards of investing in a volatile market, and using the concept of 'Rupee Cost Averaging', allow the policyholder to earn real returns over the long term. When you're buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you.


When you're buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you. Take the following into consideration. Charges: Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative charges, the fund management charges, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. It might seem confusing at first, but a company provided benefit illustration should help make this clearer. Some companies levy a spread between the buy and sell rates of the units, which can significantly reduce the value of the investment over the long-term. Close examination and questioning of such aspects will reveal the growing power of your investment. Fund Options and Management: Understand the various fund options available to you and the fund management philosophy and objectives of each of them.


Examine the track record of the funds thus far and how they are performing in comparison to benchmarks. Who manages the funds and what experience do they have? Are there adequate controls? Importantly, look at how easily you can access information about your fund's performance when you need it. Features: Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. Carefully understand the conditions and charges associated with each of these. For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must you go through medical underwriting if you want to increase the sum assured? Company: Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements. Having bought a ULIP, its important that you monitor it on a regular basis, though not as frequently as you would a stock or mutual fund. Your ULIP is a long-term investment and daily fluctuations in the NAV should not impact you.


Check once a quarter to see how your fund is performing, and consider a switch if there is a change in the level of risk you are willing to take or in your personal market view. Monitor your fund; value it in the few weeks or months before a planned withdrawal or top-up, or a change in your life stage or lifestyle. For those who are still finding their feet with their ULIP and its multitude of options, the best thing to do is to consult your advisor. Possible investment options range from bank deposits and government small saving schemes to mutual funds, stocks and property. All financial products have a certain amount of risk and charges, be it a mutual fund, property, or even a bank deposit. It would be unrealistic to assume that the features and benefits of a ULIP come at no cost, though the charges are considerably lower than that of a traditional product. In fact, the very reason the product is transparent is because the customer knows the charges and risks. Further, unlike other financial products, all life insurance plans come with a 15-day free look, which allows you to return the policy if you believe it does not meet your needs or expectations. There is absolutely no doubt that both these avenues are one of the best methods of creating wealth in the long run but it is important to

make the best choice before starting to invest in it and to take the right doses of each product depending on ones risk appetite and investment horizon. If the requirement is say children education then may be a with a premium waiver benefit can be considered because in this case even in case of death the child ill receive the desired amount at the age he/she requires which will solve the purpose. Similarly if the goal is a short term say money is needed in 3-5 years then mutual funds can be good option because the costs in s are heavier in the initial years which will eat into the corpus. HOW TO SELECT A MUTUAL FUND SCHEME TO INVEST IN: Each of these portals have there own logic for rating funds. For instance Money Control's ratings historically gave more relevance to short/mid term performance. Value research gives more importance to consistency and long term performance. I am not going to debate which method is the best as the experts behind each of these portals have there own logic/reasons for there ratings. There is no harm in selecting star rated funds based on any of these portals as each of these ratings have there own relevance.


For a more informed investor who has the time to research, I would recommend selecting mutual fund schemes to invest in based on the following criteria. 1. Longterm Performance , consistency in Returns 2. Short Term Performance (though a fund has performed well in the past, is there a let down in short to mid term performance) 3. Performance across market cycles, like during bullish and bearish phases (how well did the fund perform during the bearish phases) 4. Fund Corpus (When selecting midcap funds, the corpus size is very important) 5. Fund Managers performance with the scheme(If a fund just got a new fund manager, I would observe the performance under this new manager before I select the fund) 6. For equity mutual funds, one will also need to evaluate risk. (Exposure to midcaps, Standard Deviation of the fund) 7. For debt mutual funds, apart from risk one also need to examine entry/exit loads and expense ratio are very important. ARE ULIPS RIGHT FOR YOU: ULIPS are best suited for those who seek insurance cover. If a person is not interested in "Insurance" and is mainly interested in "Investing", then he is better of investing in "Mutual Funds". This will help him avoid

unnecessarily paying the "Mortality Charges" associated with ULIPs. You might run across insurance agents who might project ULIPS as a very good avenue for investment based on the last two to three year returns. But before you fall into the trap of an insurance agent, always ask yourself "Do you need Insurance Cover". Invest in ULIPS only if the answer to the above question is "YES". ULIPS are a good avenue for investment ONLY for those who also seek "Insurance Cover". Risk Management: Allocation of funds to equity and debt I am sure many of you might have wondered how much exposure to equity is safe at any point of time. I am suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy. Fund Allocation Based on Nifty/Sensex PE Ratio In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio of Nifty or Sensex at bseindia.com or nseindia.com. The reasoning behind this approach is we have lesser exposure to equity when we think the market is expensive. We have more exposure to equity


when the market is cheap. The following is the asset allocation I would suggest based on PE Ratios. PE Ratio Below 13 13 - 16 16 - 20 20 - 24 Above 24 Equity Exposure % 90 - 100 70 - 90 50 - 70 20 - 50 0 - 20 Debt Exposure % 0 - 10 10 - 30 30 - 50 50 - 80 80 - 100

Table PE ratio & equity and debt exposure Fund Allocation based on the Term to Maturity This approach is applicable to goal based investing, example planning for children's marriage. In this approach we decide asset allocation ratios based on the term remaining till goal or maturity. The longer the term to maturity in years, the higher the exposure to equity. The idea behind this approach is that we take higher risk when we have more time on our side. We take less risk if the by when we need to funds is less. Term Left from Goal Equity Exposure % Debt Exposure % Less than 3 years 3 - 6 Years 6 - 10 Years More than 10 years 0 - 20 20 - 50 50 - 80 80 - 100 80 - 100 50 - 80 20 - 50 0 - 20

TableTerm period and equity & debt exposure Which Charges Have The Biggest Impact On Returns

I have been trying to measure the impact of the following charges on overall returns

Loading Charges Admin Charges Fund Management Charges

I have used the following three plans in my comparision.

Bajaj Allianz Unit Gain Plus HDFC UnitLinked Endowment Plus ICICI Lifetime Plus

Loading Charges HDFC - 60% first year Bajaj- 24% first year ICICI- 25% first year Admin Charges HDFC - Rs.240 per annum Bajaj- Rs.240 per annum

ICICI- Rs.720 per annum Fund Management Charge HDFC - 0.80% BAJAJ- 1.75% ICICI- 1.50% For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like Investment Time Frame - 5 Years Best Returns - BAJAJ (7% more than ICICI) Second Best - HDFC (2% more than ICICI) Last ICICI Investment Time Frame - 10 Years Best Returns - HDFC (5% more than ICICI) Second Best - BAJAJ (3% more than ICICI) Last ICICI Investment Time Frame - 15 Years


Best Returns - HDFC (8% more than ICICI) Second Best - BAJAJ (1% more than ICICI)Last ICICI Investment Time Frame - 20 Years Best Returns - HDFC (12% more than BAJAJ) Second Best - ICICI (0.5% more than BAJAJ) Last BAJAJ Investment Time Frame - 25 Years Best Returns - HDFC (16% more than BAJAJ) Second Best - ICICI (2% more than BAJAJ) Last BAJAJ For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns. Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which


offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run. CONCLUSION: Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns. ULIP ARE A LONG TERM INVESTMENT : Below is an illustration of returns from Unit Linked Endowment Plus based on term of the plan. These illustrations are for a 34 year male. Assuming returns of 10% per annum the following is what the figures look like.

Term 3 Years 10 Years 15 Years 20 Years 25 Years

Premium Sum Assured Fund Balance Net Returns 25,000 25,000 25,000 25,000 25,000 1,25,000 1,25,000 1,25,000 1,25,000 1,25,000 68,796 3,17,657 7,37,790 13,01,447 21,74,310 LOSS 7.17% 8.07% 8.43% 8.62%

TableNet Return According to Term in ULIP Clearly, if you look at the net returns, investment in ULIPs only work if you plan to stay invested for long term. If someone is selling you a ULIP for a time frame of 3 to 5 years, it will not work. All he is doing is misselling

Why it is important to examine all products offered by an insurance company before buying: In todays market, you have different products offered by the same company. Some of these products are designed with the investor in mind and to provide maximum benefit to the Investor whereas some of products are designed to rob the Investor for the benefit of the insurance agent and the insurance company. To explain the relevance of my earlier statement, I would like to compare two different ULIPS offered by Bajaj Allianz.

Policy Admin Policy Name Charge New Unit Gain New Unit Gain Rs.240 per annum Plus Rs.600 per annum

Initial Loading Charge 71.5% first year 24% first year

TablePolicy Return and Loading Charges Clearly, the charges in "New Unit Gain" are significantly higher than "New Unit Gain Plus". I checked to see if New Unit Gain offers any additional benefits to justify the higher charges. You will be suprised that "New Unit Gain" does not offer any additional benefit to justify these additional charges over "New Unit Gain Plus".


Very recently my co-worker was asked to take "New Unit Gain" policy by his insurance agent. He was not even told about "New Unit Gain Plus". The incentive for the agent to sell "New Unit Gain" is because he gets higher commission. It is sad when insurance companies resort to such tactics to exploit the ignorance of their customers for their own benefit. They should be more proactive in "stopping sale off" older products (like LIC) once they have launched newer/better products. WHAT SHOULD YOU GO FOR ULIP OF MF? ULIP VS MF (%) RETURNS HIGH RISK MEDIUM RISK LOW RISK ULIP 6 months 7.2-28.9 4.8-13.7 0.6-6.4 ULIP 12 months 16.4-65 5.1-27.5 0.8-7.2 MF 6 months 11-53 (0.03)-29 (0.3)-7 MF 12 months 42-121 8-74 2-15

Table 6.06-Return and Risk of ULIP and MF UNIT linked insurance policies (ULIPs) offer insurance plus investment objective to those who want a higher amount of insurance cover at a marginally higher cost. However, unlike mutual funds, which may be a short-term investment play, ULIPs per se, should be looked at as meeting long-term investment objectives. The insurance regulator, Insurance


Regulatory Authority of India (IRDA), had earlier raised concerns over the early exit options provided by insurance companies under a few ULIP policies. Essentially, ULIPs must be treated as long-term (15 plus years) investment vehicles. Also, one must keep in mind the expenses under MF and ULIP schemes. In the initial years, expenses on ULIPs are on the higher side. Thus, encashing your ULIP schemes would hardly be of any benefit in the initial few years. That said, lets take a look at the performance of the ULIP schemes compared to similar purpose MF schemes. By purpose, we mean the investment pattern as defined by the individual MF and ULIP schemes. Unfortunately, a longerterm horizon is not available, as ULIPs have become popular during the current boom time. So, we are forced to compare the two over a 12-month period. To broaden the base, we compare it over a six-month period. Over a 12month period, 102 ULIP schemes are compared whereas over a sixmonth period, 134 ULIP schemes are compared. Returns are varied across the risk class. One can categorise risks into three classes for both MF and ULIP schemes High, medium and low risks. High-risk policies have a higher exposure to equities and low risk policies might have low or no exposure to equities. For MFs, high-risk comparable products are diversified equity funds, medium risks balanced funds and low risks are debt instruments. For ULIP schemes, returns for high-risk ULIP schemes (those with higher equity exposure) are in the range of 16-65% over a 1283

month period (7-29% over 6 months), for medium risk ULIP schemes returns are 5-28% (5-14% over 6 months) and for low risk ULIP schemes, returns are in the range of 1-7% (1-6% over a 6-month period). As far as MF schemes are concerned, average 12-month returns from diversified MF schemes were 42-121% (11-53% over 6-months), 8-74% for balanced MF schemes (0-29% over 6-months). Debt schemes delivered around 2-15% returns (0.3 to 7% over 6-months). As can be seen, the returns, across risk class, are clearly much lower for ULIP schemes. To top that, not the entire portion of your ULIP premiums are invested. Part of it goes in covering your life and paying commission to agents. The balance is invested into market products. Since ULIP schemes are front loaded, in the initial years, very little is invested in market products. Thus, your overall average returns will be substantially less than the above-mentioned returns from ULIP schemes. For ULIP schemes, agent commissions are as high as 25-30% in the first year with almost a 5% trailing commission. On the other hand, for MF schemes, initial commission is around 2%, with a 0.5-1% trailing commission. Real returns from ULIP schemes are much lower. It makes more sense to insure yourself without market linked instruments and invest the premium difference between market linked and pure life insurance schemes through the MF route to get better bang for your buck.



US Crisis: A lesson for India

Looking back at the heydays of the Indian stock exchange, it's not news to the quintessential investor that derivatives were being seen as the next big thing after shares. However, since the recession in January, practically everything has fallen down, leaving little choice to any investor. The recent US debacle has also had its impact on stock exchanges around the world. However, while the former is of prime concern to us, we can also learn a lot from the latter. India's chief economist, Arvind Virmani, is of the opinion that India should take heed from the US situation and encourages investors to only invest in derivatives that are exchange traded. In his own words, You have to be cautious. Say, for example, when derivatives are mentioned, the implication to me is that you should try and first open up derivatives which are exchange- traded because those are much more transparent. For those of you who don't know, there are basically two groups of derivative contracts in India, Over the Counter (OTC) and exchange traded. OTC refers to a situation when contracts are traded between two


parties directly with/without the use of an intermediary and without going through an exchange, while exchange-traded derivatives, as the name suggests, are traded on an exchange. He further added that even if some people do lose out on certain derivatives, it could at least solve the purpose of others getting educated about staying away from the same. Relating this situation to the US situation is not a hard task. Even in the States, the structure of deals was a very complex one, with the common public clueless about what is happening. Analysts point out that the sub-prime crisis in the US went on to such a magnanimous scale primarily because lenders as well as subprime housing borrowers sold their portfolio through complex derivatives to other players, hence making it unclear as to what would be the size of losses to individual firms in case of a financial crisis. According to an article in the Economic Times, the RBI and SEBI have recently permitted exchange traded currency futures, initially in a rupeedollar pare, and are expected to allow exchange-traded interest rate futures by December-January. Further, there are certain OTC derivatives also in the interest rate and currency futures categories. I firmly believe that it is high time now that the government steps in with some regulatory measures to monitor derivatives, since we, as a country, can surely not afford another economic crisis at this stage.

Is India investing in insurance or are fixed deposits the rage of the season?
Are Indians investing in insurance, FDs or MFs? A survey of 3000 male respondents across Indias metros carried out by India Net finds a clear tilt towards insurance for investment. 75% say it would be their first option. And yet, 33 % of these respondents are not insured. In other words, they continue to view insurance as an investment rather than protection tool. In the second investment option fixed deposits and mutual funds score high with 75% and 72 % respectively of respondents wanting to opt for these products. Interestingly, direct equity investing is a favoured way of investing accounts only for 3.5% of the respondents that could perhaps largely be triggered due to the volatility in the markets, with investors preferring to hand over their money to professional fund managers



ULIPs only work if we plan to stay invested for long term. If someone is selling a ULIP for a time frame of 3 to 5 years, it will not work. UNIT linked insurance policies (ULIPs) offer insurance plus investment objective to those who want a higher amount of insurance cover at a marginally higher cost. However, unlike mutual funds, which may be a short-term investment play.



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