A PROJECT REPORT ON

A COMPARATIVE STUDY OF

ULIPS VS MUTUAL FUNDS

AT

SBI MUTUAL FUNDS

In partial fulfillment of the requirements for the award of the degree in

MASTER OF BUSINESS ADMINISTRATION

Submitted by

P.REDDY RAJA REDDY

H.T.No. 13691E0083

Under the guidance of

Miss. G.ARUNA REDDY

Asst. Professor

MALLA REDDY INSTITUTE OF MANAGEMENT

(Affiliated to Osmania University)

MAISAMMAGUDA, DHULAPALLY,

SECUNDERABAD – 500014.

2007-2009

1

ACKNOWLEDGEMENT

It is my bounded duty to place on record my the gratitude to Shri V. Crist general manager, SBI

MUTUAL FUNDS, Hyderabad for permitting me to undertake this project work.

I would like to extend my gratitude and sincere thanks to Shri S. Mallikarjun, Agency Manager

for the guidance offered and personal involvement in completing this project work.

I also confer my sincere thanks to Ms. Aruna asst Prof of Mallareddy Institute of Management

secbad.

I’m greatly indebted to my beloved parents for their invaluable encouragement, support, guidance,

and for building self-confidence in me at every step in my career.

P.REDDY RAJA REDDY

2

DECLARATION

I here by declare that this project work entitled “A COMPARATIVE STUDYOF ULIPS VS

MUTUAL FUNDS” in SBI MUTUAL FUNDS, is strictly an original one and has been carried out by

me and submitted in partial fulfillment for the award of the Degree of Master of business

Administration (MBA). In the department of commerce, Osmania university for the academic year

2008-2009.

Place: SECBAD (P.REDDY RAJA REDDY)

Date:

HALL TICKET NO:

3

ABSTRACT OF THE STUDY

The present project work “A COMPARATIVE STUDY OF ULIPS VS MUTUAL FUNDS” is

carried out in “SBI MUTUAL FUNDS”.

Chapter1: Deals with Introduction of the topic, Objectives, Needs, Scope & Importance of the

study, .Methodology and Limitations.

Chapter2: Deals with the Introduction & Briefing about “A COMPARATIVE STUDY OF ULIPS

VS MUTUAL FUNDS”.

Chapter3: Deals with the Industry profile and Company profile.

Chapter4: Deals with Data analysis & Interpretation.

Chapter5: Deals with Findings.

Chapter6: Deals with Suggestions.

Chapter7: Deals with Conclusions.

CONTENT

4

Chapter no Content Page no

1 Introduction 1-3

  Objectives 4

  Need, scope & importance 5-6

  Methodology 7

  Limitations 8

2 Review of literature 9-37

3 Industry profile & Company profile 38-67

4 Data analysis and interpretation 68-82

5 Findings 83

6 Suggestions 84

7 Conclusions 85

ANNEXURE Bibliography

5

CHAPTER-I

INTRODUCTION

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INTRODUCTION TO LIFE INSURANCE

OVER VIEW OF INSURANCE

Life insurance has traditionally been looked upon predominantly as an avenue that offers tax

benefits while also doubling up as a saving instrument. The purpose of life insurance is to identify the

nominees in case of an eventuality to the insured. In other words, life insurance is intended to secure

the financial future of the nominees in the absence of the person insured.

The purpose of buying a life insurance is to protect your dependents from any financial difficulties

in your absence. It helps individuals in providing them with the twin benefits of insuring themselves

while at the same time acting as a compulsory savings instrument to take care of their future needs. Life

insurance can aid your family on a rainy day, at a time when help from every quarter is welcome and of

course, since some plans also double up as a savings instrument, they assist you in planning for such

future needs like children’s marriage, purchase of various house hold items, gold purchases or as seed

capital for starting a business.

Traditionally, buying life insurance has always formed an integral part of an individual’s annual tax

planning exercise. While it is important for individuals to have life cover, it is equally important that

they buy insurance keeping both their long-term financial goals and their tax planning in mind. This

note explains the role of life insurance in an individual’s tax planning exercise while also evaluating the

various options available at one’s disposal.

Life is full of dangers, but with insurance, you can at least ensure that you and your dependents

don’t suffer. It’s easier to walk the tightrope if you know there is a safety net. You should try and take

cover for all insurable risks. If you are aware of the major risks and buy the right products, you can

cover quite a few bases. The major insurable risks are as follows:

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Life

Health

Income

Professional Hazards

Assets

Outliving Wealth

Debt Repayment

INTRODUCTION TO ULIPS

ULIPs are basically work like a mutual fund with a life cover thrown in. They invest the premium

in market-linked instruments like stocks, corporate bonds and government securities (gsecs). The basic

difference between ULIPs and traditional insurance plans is that while traditional plans invest mostly in

bonds and gsecs, ULIPs’ mandate is to invest a major portion of their corpus in stocks. However,

investments in ULIP should be in tune with the individual’s risk appetite. ULIPs offer flexibility to the

policy holder-the policy holder can shift his money between equity and debt in varying proportions.

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INTRODUCTION TO MUTUAL FUNDS

As you probably know, mutual funds have become extremely popular over the last 20 years. What

was once just another obscure financial instrument is now a part of our daily lives. More than 20

million people, or one half of the households in America, invest in mutual funds. That means that, in

the United States al one, trillions of dollars are invested in mutual funds.

In fact, too many people, investing means buying mutual funds. After all, its common knowledge

that investing in mutual funds is (or at least should be) better than simply letting your cash waste away

in a savings account, but, for most people, that’s where the understanding of funds ends. It doesn’t help

that mutual fund sale people speak a strange language that is interspersed with jargon that many

investors don’t understand.

Originally, mutual funds were heralded as a way for the little guy to get a piece of the market.

Instead of spending all your free time buried in the financial pages of the wall street journal, all you had

to do was buy a mutual fund and you’d be set on your way to financial freedom. As you might have

guessed, it’s not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven’t

always delivered. Not all mutual funds are created equal, and investing in mutual’s isn’t as easy as

throwing your money at the first salesperson who solicits your business.

Types of Mutual Funds

There are wide varieties of Mutual Fund schemes that cater to investor needs, whatever the age,

financial position, risk tolerance and return expectations. The mutual fund schemes can be classified

according to both their investment objective (like income, growth, tax saving) as well as the number of

units (if these are unlimited then the fund is an open-ended one while if there are limited units then the

fund is close-ended.

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OBJECTIVES OF THE STUDY

1. To study about the concept of unit linked insurance policies (ULIPS) and mutual funds.

2. To study and compare the returns of SBI ULIPS with SBI MUTUAL FUND.

3. To study and compare the returns of SBI ULIPS with HDFC ULIPS.

4. To observe which investment option (Ulips/Mutual Funds) is beneficial to investors.

NEED OF THE STUDY

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ULIPS have been selling like proverbial ‘hot cakes’ in the recent past and they are likely to

continue to outsell their going ahead. So what is it that makes ULIPs so attractive to the individual?

Here are some reasons, which made ULIPs so irresistible.

To begin with, 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. This is unlike comparable instruments like a

mutual fund for instance, which does not offer a life cover.

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

there are options at the individual’s 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.

\

SCOPE OF THE STUDY

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The scope of the study is limited to different mutual fund schemes and different life insurance

schemes of SBI. The present study has taken to observe the returns of ULIPs and Mutual funds for a

period of 5years, 10 years, 15 years, and 20 years .this enables me to study short term and long term

returns.

IMPORTANCE OF THE STUDY

One may well ask how ULIPs are any different from mutual funds. After all, mutual funds also

offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile. The

difference lies in the flexibility that ULIPs afford the individual. Individuals can switch between the

ULIP variants outlined above to capitalize on investment opportunities across the equity and debt

market. Some insurance companies allow a certain number of ‘free’ switches. This is an important

feature that allows the informed individual/investor to benefit from the vagaries of stock/debt markets.

Rupee cost-averaging is another benefit associated with ULIPs. Individuals have probably already

heard of the systematic investment plan (SIP) which is increasingly being advocated by the mutual fund

industry. With an SIP, individuals invest their monies regularly over time intervals of a month/quarter

and don’t have to worry about ‘timing’ the stock markets. These are not benefits peculiar to mutual

funds. Not many realize that ULIPs also tend to do the same, albeit on a quarterly/half-yearly basis. As

a matter of fact, even the annual premium in a ULIP works on the rupee cost-average principle. An

added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP either from

opportunities in the stock markets or if they have an investible surplus in a particular year that they

wish to put aside for the future.

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Keeping in mind the rapid growth of the life insurance industry as well as the mutual funds industry

and the above mentioned factors, it was important to understand the features that distinguished ULIPS

from Mutual Funds.

METHODOLOGY

The research design used to undertake the project is of exploratory research.

Data Sources

The data sources used for the study are

1. Primary data:

The data is collected by interaction with executives of SBI MUTUAL FUNDS and HDFC standard

life insurance.

2. .Secondary data:

The secondary data is obtained from sources like

Study reference books

Internet

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Current NAVs of SBI MUTUAL FUNDS and HDFC standard life insurance

Fact sheets

Data analysis:

The data about different schemes in SBI is obtained and the analysis is performed and compared

with the schemes of other insurance company and different mutual fund schemes of SBI.

LIMITATIONS

Comparison of funds with ULIPS is difficult as each of them come with different

objectives. Moreover the past performance of various funds may or may not be sustained in the future.

There is limited availability of data comparison.

Since this project was undertaken for a less period meticulous study could not be carried

out.

Much of the data is collected from secondary sources. The calculations so made with the

help of above data may not be accurate

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CHAPTER-II

LITERATURE SURVEY

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INTRODUCTION & BREAFING ABOUT TOPIC

ULIPS

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 of the ULIPs. It is to be REMEMBERED THAT IN AUNIT LINKED

POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.

Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked life

insurance products are those where the benefits are expressed in terms of number of units and unit

price. They can be viewed as a combination of insurance and mutual funds. The number of units, which

the customer would get, would depend on the unit price when he pays his premium. The daily unit price

is based on the market value of the underlying assets (equities, bonds, government securities etc.) and

computed from the net asset value.

The advantage of Unit linked plans are that they are simple, clear, and easy to understand. Being

transparent the policyholder gets the entire upside on the performance of his fund. Besides all the

advantages they offer to the customers, unit-linked plans also lead to an efficient utilization of capital.

Unit-linked products are exempted from tax and they provide life insurance. Investors welcome

these products as they provide capital appreciation even as the yields on government securities have

fallen below 6 per cent, which has made the insurers slash payouts.

According to the IRDA, a company offering unit linked plans must give the investor an option to

choose among debt, balanced and equity funds. If you opt for a unit-linked endowment policy, you can

choose to invest your premiums in debt, balanced or equity plans. If you choose a debt plan, the

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majority of your premiums will get invested in debt securities like gilts and bonds. If you choose

equity, then a major portion of your premiums will be invested in the equity market. The plan you

choose would depend on your risk profile and your investment need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is

especially so if one also believes that current market values (stock valuations) are relatively low. So if

you are opting for a plan that invests primarily in equity, the buzzing market could lead to windfall

returns. However, should the buzz die down, investors could be left stung.

If one invests in a unit-linked pension plan early on, say 25, one can afford to take the risk

associated with equities, at least in the plan's initial stages. However, as one approaches retirement the

quantum of returns should be subordinated to capital preservation. At this stage, investing in a plan that

has an equity tilt may not be a good idea.

Considering that unit-linked plans are relatively new launches, their short history does not permit an

assessment of how they will perform in different phases of the stock market. Even if one views

insurance as a long-term commitment, investments based on performance over such a short time span

may not be appropriate.

The chart below shows how one product can meet multiple needs at different life stages of

Integrated Financial Planning

17

Starting a

job, Single

individual

Recently

married, no

kids

Married,

with kids

Kids going

to school,

college

Higher studies

for child, marriage

Children

independent,

nearing the

golden years

Your Need Low

protection, high

asset creation and

accumulation

Reasonable

protection, still

high on asset

creation

Higher

protection, still

high on asset

creation but

steadier

options,

increase

savings for

child

Higher

Protection, high

on asset

creation but

steadier options,

liquidity for

education

expenses

Lumpsum

money for

education, marriage.

Facility to stop

premium for 2-3 yrs

for these extra

expenses

Safe

accumulation for

the golden

yrs.Considera-bly

lower life

insurance as the

dependencies

have decreased

Flexibility Choose low

death benefit,

choose

growth/balanced

option for asset

creation

Increase

death benefit,

choose

growth/balance

d option for

asset creation

Increase

death benefit;

choose

balanced option

for asset

creation.

Choose riders

for enhanced

protection. Use

top-ups to

Withdrawal

from the

account for the

education

expenses of the

child

Withdrawal

from the account for

higher

education/marriage

expenses of the

child. Premium

holiday-to stop

premium for a

period without

Decrease the

death benefit-

reduce it to the

minimum

possible. Choose

the income

investment

option. Top-ups

form the

accumulation

18

increase your

accumulation

lapsing the policy(with reduced

expenses) for the

golden yrs cash

accumulation

Unit fund

The allocated(invested) portions of the premiums after deducting for all the charges and premium

for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together

to form a unit fund.

Unit

It is a component of the fund in a unit linked policy.

Types of ULIP offers

Most insurers offer a wide range of funds to suit one’s investment objective, 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 Description Nature of Investment Risk Category

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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 Some times 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

Investment guarantee 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.

1) Premium allocation charge

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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.

2) Morality 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

3) Fund management fees

These are fees levied for management of the fund(s) and are deducted before arriving at

the Net Asset Value (NAV).

4) 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.

5) Surrender charges

A surrender charge may be deducted for premature partial or full encashment of units wherever

applicable, as mentioned in the policy conditions.

6) Fund switching charge

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

subsequent switches, subject to a charge.

7) Service tax deductions

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Before allotment of the units the applicable service 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.

Amount of the premium that is used to purchase units

The full amount of premium paid is not allocated to purchase units. Insurers allot units on the

portion of the premium remaining after providing for various charges, fees and deductions. However

the quantum of premium used to purchase units varies from product to product.

The total monetary value of the units allocated is invariably less than the amount of premium paid

because the charges are first deducted from the premium collected and the remaining amount is used

for allocating units.

Refund of premiums if one is 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 examinations, stamp duty and proportionate risk for the period of cover.

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Net asset value (NAV)

NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on

the website of the respective insurers.

The benefit payable in the event of risk occurring during the terms of the policy

The value of the fund units with bonuses, if any is payable on maturity of the policy.

Possibility to invest additional contribution above the regular premium One can invest

additional contribution over the regular premiums as per their choice subject to the feature being

available in the product. This facility as “TOP UP” facility.

MUTUAL FUND

History of the Indian Mutual Fund Industry

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

initiative of the Government of India and Reserve Bank then the history of mutual funds in India can be

broadly divided into four distinct phases

First Phase – 1964-87

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

Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve

Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India

(IDBI) took over 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 had Rs.6, 700 crores of assets under

management.

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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 Canbank

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.

 

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised

Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)

Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up

funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of

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January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of

India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003

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

two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under

management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US

64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India,

functioning under an administrator and under the rules framed by Government of India and does not

come under the purview of the Mutual Fund Regulations.

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

with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI

which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting

up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers

taking place among different private sector funds, the mutual fund industry has entered its current phase

of consolidation and growth.

The graph indicates the growth of assets over the years.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as shares,

debentures and other securities. The income earned through these investments and the capital

25

appreciation realized is shared by its unit holders in proportion to the number of units owned by them.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to

invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow

chart below describes broadly the working of mutual funds.

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing

funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus

the risk is reduced. Diversification reduces the risk because all stocks may not move in the same

direction in the same proportion at the same time. Mutual fund issues units to the investors in

accordance with quantum of money invested by them. Investors of mutual funds are known as unit

holders.

The investors in proportion to their investments share the profits or losses. The mutual funds

normally come out with a number of schemes with a number of schemes with different investment

objectives that are launched from time to time. A mutual fund is required to be registered with

Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect

funds from the public.

26

Different investment avenues are available to investors. Mutual funds also offer good investment

opportunities to the investors. Like all investments, they also carry certain risks. The investors should

compare the risks and expected yields after adjustment of tax on various instruments while taking

investment decisions.

Mutual fund structure:

Sponsor:

27

Sponsor is the person who acting alone or in combination with another body corporate establishes a

mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and

meet the eligibility criteria prescribed under the securities and Exchange Board of India (mutual Funds)

Regulations, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the

operation of the schemes beyond the initial contribution made by it towards setting up of the Mutual

Fund.

Trust:

Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The

main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure

that the AMC functions in the interest of investors and in accordance with the securities and Exchange

Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer

Documents of the respective schemes. At least 2/3rd directors of the trustee are independent directors

who are not associated with the sponsor in any manner.

Asset Management Company:

The trustee as the Investment manager of the Mutual fund appoints the AMC. The AMC is required

to be approved by the securities and Exchange Board of India (SEBI) to act as an asset management

company of the mutual Fun. At least 50% of the directors of the AMC are independent directors who

are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 cores

at all times.

28

History of Mutual Funds in India and role of SEBI in mutual funds industry:

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s,

government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, securities and exchange Board of India (SEBI) Act was passed. The objectives of

SEBI are to protect the interest of investors in securities and to promote the development of and to

regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to

protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter,

mutual funds sponsored by private sector entities were allowed to enter the capital market. The

regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has

also issued guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including promoted

by foreign entities are governed by the same set of Regulations.

There is no distinction in regulatory requirements for these mutual funds and the entire subject to

monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual

funds sponsored by these entities are of similar type.

Types of Mutual Funds

By structure

Open-Ended schemes

Close-Ended schemes

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Interval-schemes

By Investment objective

Growth schemes

Income schemes

Balanced schemes

Money market schemes

Other schemes

Tax saving schemes

Special saving schemes

Index schemes

Sector specific schemes

Getting a handle on what's under the hood helps you become a better investor and put together a

more successful portfolio. To do this one must know the different types of funds that cater to investor

needs, whatever the age, financial position, risk tolerance and return expectations. The mutual fund

schemes can be classified according to both their investment objective (like income, growth, tax

saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while

if there are limited units then the fund is close-ended).

This section provides descriptions of the characteristics -- such as investment objective and

potential for volatility of your investment -- of various categories of funds. These descriptions are

30

organized by the type of securities purchased by each fund: equities, fixed-income, money market

instruments, or some combination of these.

Open-ended schemes

Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-

related prices from and to the mutual fund on any business day. These schemes have unlimited

capitalization, open-ended schemes do not have a fixed maturity, there is no cap on the amount you can

buy from the fund and the unit capital can keep growing. These funds are not generally listed on any

exchange.

Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any

time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis.

The advantages of open-ended funds over close-ended are as follows:

Any time exit option, the issuing company directly takes the responsibility of providing an entry

and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds,

signature verifications and bad deliveries. Any time entry option, an open-ended fund allows one to

enter the fund at any time and even to invest at regular intervals.

Close ended schemes

Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the

period when these funds are open in the initial issue. After that such scheme cannot issue new units

except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the

31

scheme on the stock exchanges where they are listed. The market price of the units could vary from the

NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors

Classification according to investment objectives

Mutual funds can be further classified based on their specific investment objective such as growth

of capital, safety of principal, current income or tax-exempt income.

In general mutual funds fall into three general categories:

1] Equity Funds are those that invest in shares or equity of companies.

2] Fixed-Income Funds invest in government or corporate securities that offer fixed rates of return

are

3] While funds that invest in a combination of both stocks and bonds are called Balanced Funds.

Growth Funds

Growth funds primarily look for growth of capital with secondary emphasis on dividend. Such

funds invest in shares with a potential for growth and capital appreciation. They invest in well-

established companies where the company itself and the industry in which it operates are thought to

have good long-term growth potential, and hence growth funds provide low current income. Growth

funds generally incur higher risks than income funds in an effort to secure more pronounced growth.

Some growth funds concentrate on one or more industry sectors and also invest in a broad range of

industries. Growth funds are suitable for investors who can afford to assume the risk of potential loss in

32

value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for

investors who must conserve their principal or who must maximize current income.

Growth and Income Funds

Growth and income funds seek long-term growth of capital as well as current income. The

investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio

consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high

dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds

and money market instruments. Others may invest in growth stocks and earn current income by selling

covered call options on their portfolio stocks.

Growth and income funds have low to moderate stability of principal and moderate potential for

current income and growth. They are suitable for investors who can assume some risk to achieve

growth of capital but who also want to maintain a moderate level of current income.

Fixed-Income Funds

Fixed income funds primarily look to provide current income consistent with the preservation of

capital. These funds invest in corporate bonds or government-backed mortgage securities that have a

fixed rate of return. Within the fixed-income category, funds vary greatly in their stability of principal

and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-

33

rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in

higher-rated but lower-yielding securities.

Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely

payment of interest and principal is backed by the full faith and credit of the Indian Government. Fixed-

income funds are suitable for investors who want to maximize current income and who can assume a

degree of capital risk in order to do so.

Balanced

The Balanced fund aims to provide both growth and income. These funds invest in both shares and

fixed income securities in the proportion indicated in their offer documents. Ideal for investors who are

looking for a combination of income and moderate growth.

Money Market Funds/Liquid Funds

For the cautious investor, these funds provide a very high stability of principal while seeking a

moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt

securities of agencies of the Indian Government, banks and corporations and Treasury Bills. Because of

their short-term investments, money market mutual funds are able to keep a virtually constant unit

price; only the yield fluctuates.

Therefore, they are an attractive alternative to bank accounts. With yields that are generally

competitive with - and usually higher than -- yields on bank savings account, they offer several

advantages. Money can be withdrawn any time without penalty. Although not insured, money market

34

funds invest only in highly liquid, short-term, top-rated money market instruments. Money market

funds are suitable for investors who want high stability of principal and current income with immediate

liquidity.

Specialty/Sector Funds

These funds invest in securities of a specific industry or sector of the economy such as health care,

technology, leisure, utilities or precious metals. The funds enable investors to diversify holdings among

many companies within an industry, a more conservative approach than investing directly in one

particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in

favor" but also entail the risk of capital losses when the industry is out of favor. While sector funds

restrict holdings to a particular industry, other specialty funds such as index funds give investors a

broadly diversified portfolio and attempt to mirror the performance of various market averages.

Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty or

other broad stock market indices. They are not suitable for investors who must conserve their principal

or maximize current income.

NET ASSET VALUE:

A unit is a basic measure of investment in a mutual fund. Each scheme or plan will have different

market values depending on the market value of the underlying asset it has invested in. this value is

called net asset value. Similarly market value of underlying asset changes every day, net asset value

also varies on day-to-day basis.

35

NAV is computed using a formula: (total assets-liabilities)/no. of assets.

Advantage of mutual fund:

Lowest per unit investment in almost all the cases start for Rs 10 in INDIA

Your investment will be managed by professional money managers so you need not worry

about your money.

You can merge from one fund to another fund.

Easy earning opportunity in share market.

For long term they will provide good result.

Your investment will be diversified

Disadvantage of mutual fund:

Simply one line show you that mutual fund investment is depend on market risk please read

offer document carefully before investing means market down mutual fund down.

Mutual funds are like many other investments without a guaranteed return so it is not

necessary you will get profit from mutual fund.

36

ULIPS vs. MUTUAL FUNDS

Unit linked Insurance Policies (ULIPs) as an investment avenue is closest to mutual funds in terms

of their structure and functioning. As is the case with mutual funds, investors in ULIPs is 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.

Despite the seemingly comparable structures there are various factors wherein the two differ

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

measure up.

1. Mode of investment/investment amounts

Mutual fund investors have the option of either making lump sum investment 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.

37

This is in stark 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 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 25% 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.

38

Insurance companies have a free hand in levying 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 ‘unwidely’ 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 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 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 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.

39

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.

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

same fund house, he could have to bear an exit load and/or entry load.

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

across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are

allowed free of charge every year and a cost has to be borne for additional switches).

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

convenience in a cost-effective manner.

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

investor's equity component has appreciated, he can book profits by simply transferring the requisite

amount to a debt-oriented plan.

40

5. Tax benefits

ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds

good, irrespective of the nature of the plan chosen by the investor. On the other hand in the mutual

funds domain, only investments in tax-saving funds (also referred to as equity-linked savings schemes)

are eligible for Section 80C benefits.

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

diversified equity funds, balanced funds), if the investments are held for a period over 12 months, the

gains are tax free; conversely investments sold within a 12-month period attract short-term capital gains

tax @ 10%.

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

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

Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique

set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both

offerings and make informed decisions.

41

ULIPS vs. Mutual Funds

Unit linked investment plans (ULIPS) Mutual Funds

What is Protection + investment Investment

Duration for

good returns

Long term only Medium term, long term. Risky for short term

investors.

Flexibility Limited. Correcting mistakes and

moving funds from one ULIP to another

ULIP of a different fund management is

very expensive.

Very flexible. You can correct your mistakes if

you made any wrong investment decisions. You

can easily rearrange your portfolio in MF’s.

Investment

Objective

ULIPS can be used for achieving only

long term objectives and for those who seek

insurance cover.

MF’s can be used as your vehicle for

investments to achieve mid-long term objectives.

Tax

Implementation

Provide tax benefits under section 80C. Investments in ELSS schemes qualify for 80C.

returns on equity MF’s are exempt from long term

capital gains tax.

Liquidity Limited liquidity. Should stay invested

for a minimum number of years before you

can redeem.

Very liquid. You can sell your MF units any

time (except ELSS). Reliance mutual funds even

have introduced redemptions at ATM’s.

Protection Protection + investments. Certain

ULIPS provide capital guarantee. This

Only investment. Better returns than ULIPS

and lower charges than ULIPS.

42

protects individuals from a potential market

slide..

ULIPS vs. Mutual Funds

  ULIPs Mutual Funds

Investment amounts

Determined by the

investor and can be

modified as well

Minimum investment

amounts are determined by

the fund house

Expenses

No upper limits,

expenses determined by

the insurance company

Upper limits for expenses

chargeable to investors have

been set by the regulator

Portfolio disclosure Not mandatory*

Quarterly disclosures are

mandatory

Modifying asset

allocation

Generally permitted

for free or at a nominal

cost

Entry/exit loads have to be

borne by the investor

Tax benefits

Section 80C benefits

are available on all ULIP

investments

Section 80C benefits are

available only on investments

in tax-saving funds

43

CHAPTER-III

INDUSTRY PROFILE

AND

COMPANY PROFILE

44

INDUSTRY PROFILE

INDUSTRY PROFILE

INSURANCE

A state monopoly has little incentive to innovative or offers a wide range of products. It can be seen

by a lack of certain products from LIC’s portfolio and lack of extensive risk categorization in several

GIC products such as health insurance. More competition in this business will spur firms to offer

several new products and more complex and extensive risk categorization.

It would also result in better customer services and help improve the variety and price of insurance

products. The entry of new players would speed up the spread of both life and general insurance.

Spread of insurance will be measured in terms of insurance penetration and measure of density.

With the entry of private players, it is expected that insurance business roughly 400 billion rupees

per year now, more than 20 per cent per year even leaving aside the relatively under developed sectors

of health insurance, pen More importantly, it will also ensure a great mobilization of funds that can be

utilized for purpose of infrastructure development that was a factor considered for globalization of

insurance. More importantly, it will also ensure a great mobilization of funds that can be utilized for

purpose of infrastructure development that was a factor considered for globalization of insurance.

45

With allowing of holding of equity shares by foreign company either itself or through its subsidiary

company or nominee not exceeding 26% of paid up capital of Indian partners will be operated resulting

into supplementing domestic savings and increasing economic progress of nation. Agreements of

various ventures have already been made to be discussed later on in this paper.

It has been estimated that insurance sector growth more than 3 times the growth of economy in

India. So business or domestic firms will attempt to invest in insurance sector. Moreover, growth of

insurance business in India is 13 times the growth insurance in developed countries. So it is natural,

that foreign companies would be fostering a very strong desire to invest something in Indian insurance

business.

Most important not the least tremendous employment opportunities will be created in the field of

insurance which is burning problem of the present day today issues.

GENERAL INSURANCE:

British rule also introduced general insurance in India. Initially, this business was conducted

through British and other foreign insurance companies. The first general insurance company in India

‘TRITAN’ general insurance company limited’ was established at Calcutta in 1950. the first such type

of company was established by Indians in Mumbai in 1907 with the name ‘Indian mercantile insurance

company limited’ at the time of independence, about 40% of the total general insurance business in

India was done buy the British and other foreign insurance companies, but after independence this

percentage continuously declined. In 1971, the government took over the management of all general

insurance companies.

General insurance business in the country was nationalized with effect from 1 January, 1973 by the

general insurance Business (Nationalization) act, 1972.

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More than 100 non-life insurance companies including branches of foreign companies operating

with in the country were amalgamated and grouped into four companies, viz., the national insurance

company limited the new India assurance company limited the oriental insurance company limited and

the united India insurance company limited with head office at Kolkata, Mumbai, New Delhi and

Chennai, respectively. General insurance corporation (GIC) which was the holding company of the four

public sector general insurance companies has since been delinked from the later and has been

approved as the ‘Indian Reinsure’ since 3 November 2000.the share capital of GIC and that of the four

companies are held by the government companies registered under the companies act.

The general insurance business has grown in spread and volume after nationalization. The four

companies have 2,699 branch offices, 1,360 divisional offices and 92 regional offices spread all over

the country. GIC and its subsidiaries have representation either directly through branches or agencies in

16 countries and through associate/locally incorporated subsidiary companies in 14 other countries.

The net profit of the industry during 2001-200 amounted to 12,229 crore, as against Rs.10, 772

crore during 2000-2001 representing a growth of 1352 percent over the premium income of last year.

Before nationalization, insurance business was centralized in urban areas only. GIC with its central

office in Pune and seven zonal offices at Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Kanpur and

Bhopal operates through 100 divisional offices in important cities and 2048 branch offices. As on 31

march, 2003 GIC had 9.88 lakh agents spread over the country. GIC also entered the international

insurance market and opened its offices in England, Mauritius and Fiji.

The corporation has registered a joint venture company-life insurance corporation (Nepal) limited

in Katmandu on 26 December, 2000 in collaboration with a local industrial group. An off-shore

47

company GIC (Mauritius) off-shore limited has also been registered on 19 January, 2001 to tap the

African insurance market.

The total business of GIC during 2002-2003 was Rs 1, 76,088 crore a sum assured under 239.3 lakh

policies. GIC group insurance business during 2002-2003 was Rs.1645 crore providing covers to 18.32

lakh people

LIFE INSURANCE:

The Britishers introduced life insurance to India. A British firm in 1818 established the oriental life

insurance company at Calcutta. In 1823, Bombay Life Insurance Company was established at Mumbai

and in 1829 madras equitable life insurance society was established at madras (Chennai). Till 1871,

these companies collected 15-20 percent more premiums from Indian as they treated Indian’s living

standard below the normal, in 1871, Bombay mutual life assurance society was established which

started life insurance of Indians on general premium rate for the first time. Indian insurance company

act was implemented which aimed at collecting statistical information related to insurances of Indians

and foreigners. In 1938, all previous acts were integrated and insurance act 1938 came into force. After

independence, this act was amended in 1950. Till 1956, 154 Indian, 16 non-Indian insurance companies

and 75 provident committees were working in life insurance business of the country.

On January 19, 1956 central government tool over the charge of all these 245 Indian and foreign

insurance companies and on September 1, 1956 these companies were nationalized. Under an act

passed by the parliament on September 1, 1956 life insurance Corporation of India was established with

the capital of Rs. 5 crores given by the government of India. Malhotra committee, constituted off

making recommendations for insurance sector, in its report submitted in January 1994, recommended

48

to enhancing the capital base of Rs. 5 crore to Rs. 200 crore fro LIC, but the Government did not accept

it.

LIC was established to spread the message of life insurance savings for nation building activities.

Keeping in view the recommendations of administrative Reform commission. Indian life insurance

corporation accepted a few important objectives in 1974, which are as follows: to extend the sphere of

life insurance and to cover every person eligible for insurance under insurance umbrella. Special

attention will be provided to give life insurance cover to economically weaker section of the society on

appropriate and bearable cost secondly, to mobilize maximum savings of the people by making insured

savings more attractive thirdly, to ensure economic use of resources collected from policy holders and

finally, under changing social and economic structure of the country efforts will be made to meet the

life insurance requirements of

Various stratas of the society.

Reforms in insurance sector:

Insurance sector constitutes an important segment to financial market in India and plays a

predominant role in the formation of capital in the country. The reforms in the insurance sector started

with the enactment of insurance regulatory and development authority act 1999. The act paved the way

for the entry of private insurance companies into the insurance market and also constitution of

insurance Regulation and Development Authority (IRDA).

Insurance Regulatory and Development Authority:

The insurance regulatory and development authority was constituted on 19 April 2000 to protect the

interest of the holders of insurance policies and to regulate, promote and ensure orderly growth of the

49

insurance industry. The authority consists of a chairperson, four whole-time members and part-time

members.

For regulations the insurance sector, the authority has been issuing regulations covering almost the

entire segment of insurance industry namely, regulation on insurance agents, solvency margin, re-

insurance, registration of insurers, obligation of insurers to rural and social sector, accounting

procedure, etc.

Insurance (amendment) act, 2002:

The government, functioning of the opened up insurance sector, has enacted insurance act, 2002.

The act relates to introduction of brokers as intermediaries, allowing more flexile in the eligibility

qualification for corporate agents, allowing more flexible mode of payment of premium through credit

cards, smart cards, over interknit, etc. Change in the allocation of surplus between share holders and

policy holders, direct entry of co-operatives in the insurance sector and some other consequential

amendments which are of a technical nature for the smooth functioning of the opened up sector.

General Insurance Business (Nationalization) Amendment Act, 2002:

With the enactment of IRDI act, 1999 it was necessary to nominate Indian re-insurer under

insurance act, 1938. The government decided that general insurance companies should be declared as

Indian Re-insurer. Since under the act, a re-insurer cannot underwrite general insurance business.

Recommendations of Malhotra Committee for improving insurance sector:

The government of India constituted a committee for recommending improvements in insurance

sector under the chairmanship of Dr. R. N. Malhotra, Ex-Governor of RBI, in April 1993. On January

50

7, 1994 the committee submitted its recommendations to the finance minister. Some of the important

recommendations are as follows.

Liberalization of insurance industry:

The committee has recommended for liberalizing insurance industry:

The private sector should also be permitted in insurance sector, but the same company

should not permitted to perform both life insurance and general insurance business.

The minimum paid-up capital for the now company should be Rs. 100 crore included a

minimum subscription of 26% and maximum of 40% from promoters.

No other equity holder, excluding the promoters of private insurance companies, Should be

granted equity share exceeding 1% of total equity.

Co-operative societies at state level should be permitted to perform business with the

minimum paid-up capital of Rs.100 crore

Foreign insurance companies should be permitted to operate in India on selective basis and

they should be granted permission only of they perform business by establishing a joint enterprise with

Indian promoters.

Restructuring of insurance industry:

The committee also put recommendations for restructuring insurance industry:

All the four associate companies of GIC should be granted permission to perform their

business independently and GIC should work only as Reinsurance Company.

The existing share capital of GIC should be increased from Rs. 107.5 crore to Rs.200 crore,

which should included 50% share of the government and the rest shares should be opened for the

51

general public (through a certain percentage of share should be reserved for the employees of the

corporation)

The existing paid-up capital for all associate companies of GIC (which is at present Rs.40

crore for every company and fully financed by GIC) should be increased up to Rs.100 crore. The

capital of all these companies should include the government share of 50% and the remaining share

should be opened for the general public.

The committee also recommended to increase the paid-up capital of LIC form existing level

of Rs.5 crore to Rs.200 crore (again 50% for the government and rest for the public)

Regulation of insurance business:

The committee has put following recommendations for regulation insurance business

All old and new insurance companies should be regulating under insurance act.

Controller of insurance should be given all the responsibilities under insurance act.

Insurance regulatory authority (IRA) should be established in insurance sector on the lines

of SEBI and IRA should be granted complete functional autonomy.

IRA should have a permanent source for financing its activities and for this IRA should be

permitted to charge a levy of 0.5% on annual incomes of insurance companies.

Rural insurance:

New insurance companies entering into insurance industry should perform a minimum

predetermined insurance in rural sector and they should attain this limit compulsorily.

Postal life insurance should be used to promote life insurance business in rural areas.

52

Insurance surveyors:

License system for insurance surveyors should be abolished and insurance companies

should be granted permission to recruit the surveyors of their own

At present, any claim of Rs.20, 000 or above comes under the enquiry of the surveyor. The

committee has recommended extending this minimum limit on Rs.1 lakh.

Insurance companies should be permitted to settle the claims up to Rs.1 lakh on primary

survey basis.

INSURANCE TODAY:

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N.

Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction.

The Malhotra committee was set up with the objective of complementing the reforms initiated in the

financial sector.

With the setup of Insurance Regulatory Development Authority (IRDA) the reforms started in the

Insurance sector. It has became necessary as if we compare our Insurance penetration and per capita

premium we are much behind then the rest of the world. The table above gives the statistics for the year

2000.

With the expected increase in per capita income to 6% for the next 10 year and with the

improvement in the awareness levels the demand for insurance is expected to grow. As per an

independent consultancy company, Monitor Group has estimated a growth form Rs.218 Billion to

Rs.1003 Billion by 2008. The estimations seems achievable as the performance of 13 life Insurance

players in India for the year 2002-2003 (up to October, based on the first year premium) is Rs.66.683

53

million being LIC the biggest contributor with Rs. 59,187 million. As of now LIC has 2050 branches in

7 zones with strong team of 5, 60,000 agents.

IMPACT OF GLOBALISATION:

The introduction of private players in the industry has added colours to the dull industry. The

initiatives taken by the private players are very competitive and have given immense competition to the

on time monopoly of the market LIC. Since the advent of the private players in the market the industry

has seen new and innovative steps taken by the players in the sector. The new players have improved

the service quality of the insurance. As a result LIC down the years have seen the declining in its

career. The market share was distributed among the private players.

Though LIC still holds 75% of the insurance sectors the upcoming nature of these private players

are enough to give more competition to LIC in the near future. LIC market share has decreased from

95% (2002-03) to 81% (2004-05). The following company holds the rest of the market share of the

insurance industry.

CHALLENGES BEFORE THE INDUSTRY:

New age companies have started their business as discussed earlier. Some of these companies have

been able to float 3 or 4 products only and some have targeted to achieve the level of 8 or 10 products.

At present, these companies are not in a position to pose any challenge to LIC and all other four

companies operating in general insurance sector, but if we see the quality and standards of the products

which they issued, they can certainly be a challenge in future. Because the challenge in the entire

environment caused by globalization and liberalization the industry is facing the following challenges.

54

The existing insurer, LIC and GIC, have created a large group of dissatisfied customers due to the

poor quality of service. Hence there will be shift of large number of customers from LIC and GIC to the

private insurers.

LIC may face problem of surrender of a large number of policies, as new insurers will woo

them by offer of innovative products at lower prices.

The corporate clients under group schemes and salary savings schemes may shift their

loyalty from LIC to the private insurers.

There is a likelihood of exit of young dynamic managers from LIC to the private insurer, as

they will get higher package of remuneration.

LIC has overstaffing and with the introduction of full computerization, a large number of

the employees will be surplus. However they cannot be retrenched. Hence the operating costs of LIC

will not be reduced. This will be a disadvantage in the competitive market, as the new insurers will

operate with lean office and high technology to reduce the operating costs.

GIC and its four subsidiary companies are going to face more challenges, because their

management expenses are very high due to surplus staff. They can’t reduce their number due to service

rules.

Management of claims will put strain on the financial resources, GIC and its subsidiaries

since it is not up the mark.

LIC has more than to 60 products and GLC has more than 180 products in their kitty, which

are outdated in the present context as they are not suitable to the changing needs of the customers. Not

only that they are not competent enough to complete with the new products offered by foreign

companies in the market.

55

Reaching the consumer expectations on par with foreign companies such as better yield and

much improved quality of service particularly in the area of settlement of claims, issue of new policies,

transfer of the policies and revival of policies in the liberalized market is very difficult to LIC and GIC.

Intense competition from new insurers in winning the consumers by multi-distribution

channels, which will include agents, brokers, corporate intermediaries, bank branches, affinity groups

and direct marketing through telesales and interest.

The market very soon will be flooded by a large number of products by fairly large number

of insurers operating in the Indian market. The existing level of awareness of the consumers for

insurance products is very low. It is so because only 62% of the Indian population is literate and less

than 10% educated. Even the educated consumers are ignorant about the various products of the

insurance.

The insurers will have to face an acute problem of the redressal of the consumers,

grievances for deficiency in products and services.

Increasing awareness will bring number of legal cases filled by the consumers against

insurers is likely to increase substantially in future.

Major challenges in canalizing the growth of insurance sector are product innovation,

distribution network, investment management, customer service and education.

56

ESSENTIALS TO MEET THE CHALLENGES:

Indian insurance industry needs the following to meet the global challenges

Understanding the customer better will enable insurance companies to design appropriate

products, determine price correctly and increase profitability.

Selection of right type of distribution channel mix along with prudent and efficient FOS

[Fleet on Street] management.

An efficient CRM system, which would eventually create sustainable competitive

advantages and build a long-lasting relationship

Insurers must follow best investment practices and must have a strong asset management

company to maximize returns.

Insurers should increase the customer base in semi urban and rural areas, which offer a huge

potential.

Promoting health insurance and using e-broking to increase the business.

GROUP OF COMPANIES:

The group comprises of 27 companies and was founded in the year 1926. The companies in

the group are:

Bajaj Auto Ltd. Mukand International Ltd.

Mukand Ltd. Mukand Engineers Ltd.

Bajaj Electricals Ltd. Mukand Global Finance Ltd.

Bajaj Hindustan Ltd. Bachhraj Factories Pvt. Ltd.

57

Maharashtra Scooters Ltd. Bajaj Consumer Care Ltd.

Bajaj Auto Finance Ltd. Bajaj Auto Holdings Ltd.

Hercules Hoists Ltd. Jamnalal Sons Pvt. Ltd.

Bajaj Sevashram Pvt Ltd. Bachhraj & Company Pvt. Ltd.

Hind Lamps Ltd. Jeevan Ltd.

Bajaj Ventures Ltd. The Hindustan Housing Co Ltd.

Bajaj International Pvt Ltd. Baroda Industries Pvt Ltd.

Hind Musafir Agency Pvt Ltd. Stainless India Ltd.

Bajaj Allianz General Insurance Company

Ltd.Bombay Forgings Ltd.

Bajaj Allianz Life Insurance Company Ltd. -        

58

COMPANY PROFILE

Company profile

59

State Bank of India (SBI) is that country's largest commercial bank. The government-controlled bank--the Indian government maintains a stake of nearly 60 percent in SBI through the central Reserve Bank of India--also operates the world's largest branch network, with more than 13,500 branch offices throughout India, staffed by nearly 220,000 employees. SBI is also present worldwide, with seven international subsidiaries in the United States, Canada, Nepal, Bhutan, Nigeria, Mauritius, and the United Kingdom, and more than 50 branch offices in 30 countries. Long an arm of the Indian government's infrastructure, agricultural, and industrial development policies, SBI has been forced to revamp its operations since competition was introduced into the country's commercial banking system. As part of that effort, SBI has been rolling out its own network of automated teller machines, as well as developing anytime-anywhere banking services through Internet and other technologies. SBI also has taken advantage of the deregulation of the Indian banking sector to enter the bancassurance, assets management, and securities brokering sectors. In addition, SBI has been working on reigning in its branch network, reducing its payroll, and strengthening its loan portfolio. In 2003, SBI reported revenue of $10.36 billion and total assets of $104.81 billion.

Colonial Banking Origins in the 19th Century

The establishment of the British colonial government in India brought with it calls for the formation of a Western-style banking system, if only to serve the needs and interests of the British imperial government and of the European trading houses doing business there. The creation of a national banking system began at the beginning of the 19th century.

The first component of what was later to become the State Bank of India was created in 1806, in Calcutta. Called the Bank of Calcutta, it was also the country's first joint stock company. Originally established to serve the city's interests, the bank was granted a charter to serve all of Bengal in 1809, becoming the Bank of Bengal. The introduction of Western-style banking instituted deposit savings accounts and, in some cases, investment services. The Bank of Bengal also received the right to issue its own notes, which became legal currency within the Bengali region. This right enabled the bank to establish a solid financial foundation, building an interest-free capital base.

The spread of colonial influence also extended the scope of government and commercial financial influence. Toward the middle of the century, the imperial government created two more regional banks. The Bank of Bombay was created in 1840, and was soon joined by the Bank of Madras in 1843. Together with the Bank of Bengal, they became known as the "presidency" banks.

All three banks were operated as joint stock companies, with the imperial government holding a one-fifth share of each bank. The remaining shares were sold to private subscribers and, typically, were claimed by the Western European trading firms. These firms were represented on each bank's board of directors, which was presided over by a nominee from the government. While the banks performed typical banking functions, for both the Western firms and population

60

and members of Indian society, their main role was to act as a lever for raising loan capital, as well as help stabilize government securities.

The charters backing the establishment of the presidency banks granted them the right to establish branch offices. Into the second half of the century, however, the banks remained single-office concerns. It was only after the passage of the Paper Currency Act in 1861 that the banks began their first expansion effort. That legislation had taken away the presidency banks' authority to issue currency, instead placing the issuing of paper currency under direct control of the British government in India, starting in 1862.

Yet that same legislation included two key features that stimulated the growth of a national banking network. On the one hand, the presidency banks were given the responsibility for the new currency's management and circulation. On the other, the government agreed to transfer treasury capital backing the currency to the banks--and especially to their branch offices. This latter feature encouraged the three banks to begin building the country's first banking network. The three banks then launched an expansion effort, establishing a system of branch offices, agencies, and sub-agencies throughout the most populated regions of the Indian coast, and into the inland areas as well. By the end of the 1870s, the three presidency banks operated nearly 50 branches among them.

Funding National Development in the 20th Century

The rapid growth of the presidency banks came to an abrupt halt in 1876, when a new piece of legislation, the Presidency Banks Act, placed all three banks under a common charter--and a common set of restrictions. As part of the legislation, the British imperial government gave up its ownership stakes in the banks, although they continued to provide a number of services to the government, and retained some of the government's treasury capital. The majority of that, however, was transferred to the three newly created Reserve Treasuries, located in Calcutta, Bombay, and Madras. The Reserve Treasuries continued to lend capital to the presidency banks, but on a more restrictive basis. The minimum balance now guaranteed under the Presidency Banks Act was applicable only to the banks' central offices. With branch offices no longer guaranteed a minimum balance backed by government funds, the banks ended development of their networks. Only the Bank of Madras continued to grow for some time, supplied as it was by the influx of capital from development of trade among the region's port cities.

The loss of the government-backed balances was soon compensated by India's rapid economic development at the end of the 19th century. The building of a national railroad network launched the country into a new era, seeing the rise of cash-crop farming, a mining industry, and widespread industrial development. The three presidency banks took active roles in financing this development. The banks also extended their range of services and operations, although for the time being were excluded from the foreign exchange market.

61

By the beginning of the 20th century, India's banking industry boasted a host of new arrivals, and particularly foreign banks authorized to exchange currency. The growth of the banking sector, and the development of indigenous banks, in turn created a need for a larger "bankers' bank." At the same time, the Indian government had outgrown its colonial background and now required a more centralized banking institution. These factors led to the decision to merge the three presidency banks into a new, single and centralized banking institution, the Imperial Bank of India.

Created in 1921, the Imperial Bank of India appeared to inaugurate a new era in India's history--culminating in its declaration of independence from the British Empire. The Imperial Bank took on the role of central bank for the Indian government, while acting as a bankers' bank for the growing Indian banking sector. At the same time, the Imperial Bank, which, despite its role in the government financial structure remained independent of the government, carried on its own commercial banking operations.

In 1926, a government commission recommended the creation of a true central bank. While some proposed converting the Imperial Bank into a central banking organization for the country, the commission rejected this idea and instead recommended that the Imperial Bank be transformed into a purely commercial banking institution. The government took up the commission's recommendations, drafting a new bill in 1927. Passage of the new legislation did not occur until 1935, however, with the creation of the Reserve Bank of India. That bank took over all central banking functions.

The Imperial Bank then converted to full commercial status, which accordingly allowed it to enter a number of banking areas, such as currency exchange and trustee and estate management, from which it had previously been restricted. Despite the loss of its role as a government banking office, the Imperial Bank continued to provide banking services to the Reserve Bank, particularly in areas where the Reserve Bank had not yet established offices. At the same time, the Imperial Bank retained its position as a bankers' bank.

Into the early 1950s, the Imperial Bank grew steadily, dominating the Indian commercial banking industry. The bank continued to build up its assets and capital base, and also entered a new phase of national expansion. By the middle of the 1950s, the Imperial Bank operated more than 170 branch offices, as well as 200 sub-offices. Yet the bank, like most of the colonial government, focused primarily on the country's urban regions.

By then, India had achieved its independence from Britain. In 1951, the new government launched its first Five Year Plan, targeting in particular the development of the country's rural areas. The lack of a banking infrastructure in these regions led the government to develop a state-owned banking entity to fill the gap. As part of that process, the Imperial

62

Bank was nationalized and then integrated with other existing government-owned banking components. The result was the creation of the State Bank of India, or SBI, in 1955.

The new state-owned bank now controlled more than one-fourth of India's total banking industry. That position was expanded at the end of the decade, when new legislation was passed providing for the takeover by the State Bank of eight regionally based, government-controlled banks. As such the Banks of Bikaner, Jaipur, Idnore, Mysore, Patiala, Hyderabad, Saurashtra, and Travancore became subsidiaries of the State Bank. Following the 1963 merger of the Bikaner and Jaipur banks, their seven remaining subsidiaries were converted into associate banks.

In the early 1960s, the State Bank's network already contained nearly 500 branches and sub-offices, as well as the three original head offices inherited from the presidency bank era. Yet the State Bank now began an era of expansion, acting as a motor for India's industrial and agricultural development, that was to transform it into one of the world's largest financial networks. Indeed, by the early 1990s, the State Bank counted nearly 15,000 branches and offices throughout India, giving it the world's single largest branch network.

SBI played an extremely important role in developing India's rural regions, providing the financing needed to modernize the country's agricultural industry and develop new irrigation methods and cattle breeding techniques, and backing the creation of dairy farming, as well as pork and poultry industries. The bank also provided backing for the development of the country's infrastructure, particularly on a local level, where it provided credit coverage and development assistance to villages. The nationalization of the banking sector itself, an event that occurred in 1969 under the government led by Indira Gandhi, gave SBI new prominence as the country's leading bank.

Even as it played a primary role in the Indian government's industrial and agricultural development policies, SBI continued to develop its commercial banking operations. In 1972, for example, the bank began offering merchant banking services. By the mid-1980s, the bank's merchant banking operations had grown sufficiently to support the creation of a dedicated subsidiary, SBI Capital Markets, in 1986. The following year, the company launched another subsidiary, SBI Home Finance, in a collaboration with the Housing Development Finance Corporation. Then in the early 1990s, SBI added subsidiaries SBI Factors and Commercial Services, and then launched institutional investor services.

Competitor in the 21st Century

SBI was allowed to dominate the Indian banking sector for more than two decades. In the early 1990s, the Indian government kicked off a series of reforms aimed at deregulating the banking and financial industries. SBI was now forced to brace itself for the arrival of a new wave of competitors eager to enter the fast-growing Indian economy's commercial banking sector. Yet years as a government-run institution had left SBI bloated--the civil-servant status of its employees

63

had encouraged its payroll to swell to more than 230,000. The bureaucratic nature of the bank's management left little room for personal initiative, nor incentive for controlling costs.

The bank also had been encouraged to increase its branch network, with little concern for profitability. As former Chairman Dipankar Baku told the Banker in the early 1990s: "In the aftermath of bank nationalisation everyone lost sight of the fact that banks had to be profitable. Banking was more to do with social policy and perhaps that was relevant at the time. For the last two decades the emphasis was on physical expansion."

Under Baku, SBI began retooling for the new competitive environment. In 1994, the bank hired consulting group McKinsey & Co. to help it restructure its operations. McKinsey then led SBI through a massive restructuring effort that lasted through much of the decade and into the beginning of the next, an effort that helped SBI develop a new corporate culture focused more on profitability than on social and political policy. SBI also stepped up its international trade operations, such as foreign exchange trading, as well as corporate finance, export credit, and international banking.

SBI had long been present overseas, operating some 50 offices in 34 countries, including full-fledged subsidiaries in the United Kingdom, the United States, and elsewhere. In 1995 the bank set up a new subsidiary, SBI Commercial and International Bank Ltd., to back its corporate and international banking services. The bank also extended its international network into new markets such as Russia, China, and South Africa.

Back home, in the meantime, SBI began addressing the technology gap that existed between it and its foreign-backed competitors. Into the 1990s, SBI had yet to establish an automated teller network; indeed, it had not even automated its information systems. SBI responded by launching an ambitious technology drive, rolling out its own ATM network, then teaming up with GE Capital to issue its own credit card. In the early 2000s, the bank began cross-linking its banking network with its ATM network and Internet and telephone access, rolling out "anytime, anywhere" banking access. By 2002, the bank had succeeded in networking its 3,000 most profitable branches.

The implementation of new technology helped the bank achieve strong profit gains into the early years of the new century. SBI also adopted new human resources and retirement policies, helping trim its payroll by some 20,000, almost entirely through voluntary retirement in a country where joblessness remained a decided problem.

By the beginning of 2004, SBI appeared to be well on its way to meeting the challenges offered by the deregulated Indian banking sector. In a twist, the bank had become an aggressor into new territories, launching its own line of bancassurance products, and also initiating securities brokering services. In the meantime, SBI continued its technology rollout, boosting the number of networked branches to more than 4,000 at the end of 2003. SBI promised to remain a central figure in the Indian banking sector as it entered its third century.

64

Principal Subsidiaries: Bank of Bhutan (Bhutan); Indo Nigeria Merchant Bank Ltd. (Nigeria); Nepal SBI Bank Ltd. (Nepal); SBI (U.S.A.); SBI (Canada); SBI Capital Market Ltd.; SBI Cards & Payments Services Ltd.; SBI Commercial and International Bank Ltd.; SBI European Bank plc (U.K.); SBI Factors & Commercial Services Ltd.; SBI Funds Management Ltd.; SBI Gilts Ltd.; SBI Home Finance Ltd.; SBI Securities Ltd.; State Bank International Ltd. (Mauritius); State Bank of Bikaner & Jaipur; State Bank of Hyderabad; State Bank of Indore; State Bank of Mysore; State Bank of Patiala; State Bank of Saurastra; State Bank of Travancore.

Principal Competitors: ICICI Bank; Bank of Baroda; Canara Bank; Punjab National Bank; Bank of India; Union Bank of India; Central Bank of India; HDFC Bank; Oriental Bank of Commerce.

Chronology

Key Dates:

1806: The Bank of Calcutta is established as the first Western-type bank.

1809: The bank receives a charter from the imperial government and changes its name to Bank of Bengal.

1840: A sister bank, Bank of Bombay, is formed.

1843: Another sister bank is formed: Bank of Madras, which, together with Bank of Bengal and Bank of Bombay become known as the presidency banks, which had the right to issue currency in their regions.

1861: The Presidency Banks Act takes away currency issuing privileges but offers incentives to begin rapid expansion, and the three banks open nearly 50 branches among them by the mid-1870s.

1876: The creation of Central Treasuries ends the expansion phase of the presidency banks.

1921: The presidency banks are merged to form a single entity, Imperial Bank of India.

1955: The nationalization of Imperial Bank of India results in the formation of the State Bank of India, which then becomes a primary factor behind the country's industrial, agricultural, and rural development.

1969: The Indian government establishes a monopoly over the banking sector.

1972: SBI begins offering merchant banking services.

1986: SBI Capital Markets is created.

1995: SBI Commercial and International Bank Ltd. are launched as part of SBI's stepped-up international banking operations.

1998: SBI launches credit cards in partnership with GE Capital.

2002: SBI networks 3,000 branches in a massive technology implementation.

65

2004: A networking effort reaches 4,000 branches.

Additional Details

Public Company (60% Government-Owned)

Incorporated: 1921 as the Imperial Bank of India

Employees: 220,000

Total Assets: $104.81 billion (2003)

Stock Exchanges: Mumbai Kolkata Chennai Ahmedabad Delhi New York London

Ticker Symbol: SBI

NAIC: 522110 Commercial Banking

Further Reference

Chatterjee, Debojyoti, "The Great SBI Makeover," Business Today, August 4, 2002.

Chowdhury, Neel, "Privatizing in India: Bank's Thorny Path," International Herald Tribune, August 16, 1996, p. 17.

Guha, Krishna, "State Bank of India Faces a Bumpy Ride," Financial Times, January 14, 1998, p. 38.

Merchant, Khozem, "SBI Close to Finding Partner," Financial Times, February 2, 2004, p. 24.

"SBI's Technology Blueprint," India Business Insight, November 30, 2003.

"SBI to Launch 100th ATM in Kerala Today," Asia Africa Intelligence Wire, March 26, 2004.

Thaur, B.S., The Evolution of the State Bank of India, London: Sage Publications, 2003.

Verma, Virenda, "SBI Stays a Star Performer," Business Line, January 10, 2004.

66

CHAPTER-IV

DATA ANALYSIS

AND

INTERPRETATION

SBI ULIPS

DIFFERENT CHARGES FOR SBI ULIPS

Sum assured 500000Annual premium 100000

67

Premium allocation charges

1-2 Years - 10% + service charges3-4 Years - 5% + service chargesThere after – 2% + service charges

Policy administrative charges 60 per month + service chargesOther charges 1.46%+service chargesFund management charges (FMC) 1.5%+service chargesservice charges 12.36%Death benefit Sum assured + growth amountRate of return 10%

SBI ULIPS ILLUSTRATION

Year

Annual premium

premium

allocation charges

Amount available for investment

policy admini- strative charges

other charges

Amount available

Growth FMC

Net growth

Death benefits

1 100000 11236 88764 809 1456 86499 95149 1603 93546593546

2 100000 11236 88764 809 1456 86499198050 3337

194713

694713

3 100000 5618 94382 809 1548 92025315412 5318

310094

810094

4 100000 5618 94382 809 1548 92025442330 7455

434875

934875

5 100000 2247 97753 809 1603 95341583238 9830

573408

1073408

6 100000 2247 97753 809 1603 95341735624

12398

723226

1223226

7 100000 2247 97753 809 1603 95341900424

15175

885249

1385249

8 100000 2247 97753 809 1603 953411078649

18180

1060469

1560469

9 100000 2247 97753 809 1603 953411271391

21427

1249964

1749964

10 100000 2247 97753 809 1603 953411479836

24942

1454894

1954894

11 100000 2247 97753 809 1603 953411705259

28740

1676519

2176519

12 100000 2247 97753 809 1603 953411949046

32850

1916196

2416196

13 100000 2247 97753 809 1603 953412212690

37292

2175398

2675398

14 100000 2247 97753 809 1603 953412497813

42098

2455715

2955715

15 100000 2247 97753 809 1603 95341 28061 4729 27588 32588

68

62 5 67 67

16 100000 2247 97753 809 1603 953413139629

52915

3086714

3586714

17 100000 2247 97753 809 1603 953413500260

58994

3441266

3941266

18 100000 2247 97753 809 1603 953413890268

65567

3824701

4324701

19 100000 2247 97753 809 1603 953414312046

72675

4239371

4739371

20 100000 2247 97753 809 1603 953414768183

80363

4687820

5187820

INTRPRETATION: The annual premium amount for SBI ULIPS is Rs.100000. The term period

is about 20 years. The premium allocation charges different from year to year. The service charges are

around 12.36% on policy administrative charges, other charges and FMC. An additional sum of

Rs.500000 along with growth is assured in case of unexpected death. Rate of return is 10%.

SBI MUTUAL FUND (SBI tax fund)

DIFFERENT CHARGES FOR SBI prudential tax fund

Annual premium 100000

69

Initial charges 2.25%

Fund management charges 2.25%

Rate of return 10%

SBI TAX FUND ILLUSTRATION

YearAnnual

premiumInitial

chargesInvestable amount Growth FMC Net Growth

1 100000 2250 97750 107525 2419 1051062 100000 2250 97750 223141 5021 2181203 100000 2250 97750 347458 7818 3396404 100000 2250 97750 481129 10825 4703045 100000 2250 97750 624859 14059 6108006 100000 2250 97750 779404 17537 7618677 100000 2250 97750 945580 21276 9243048 100000 2250 97750 1124259 25296 10989639 100000 2250 97750 1316385 29619 128676610 100000 2250 97750 1522968 34267 148870111 100000 2250 97750 1745096 39265 170583112 100000 2250 97750 1983940 44639 193930113 100000 2250 97750 2240756 50417 219033914 100000 2250 97750 2516898 56630 246026815 100000 2250 97750 2813820 63311 275050916 100000 2250 97750 3133085 70494 306259117 100000 2250 97750 3476374 78218 339815618 100000 2250 97750 3845496 86524 375897219 100000 2250 97750 4242395 95454 414694120 100000 2250 97750 4669160 105056 4564104

INTRPRETATION: The annual premium amount for SBI tax fund is Rs. 100000. The term period

is about 20 years. The Initial charges are 2.25%. The FMC charges are on the policy amount. Rate of

return is 10%

HDFC ULIPS

DIFFERENT CHARGES FOR HDFC ULIPS

Sum assured 500000Annual premium 100000

70

Premium allocation charges

1-2 Years - 10% + service charges3-4 Years - 5% + service chargesThere after – 2% + service charges

Policy administrative charges 53 per month + service chargesOther charges 1.33%+service chargesFund management charges (FMC) 1.32%+service chargesservice charges 15%Death benefit Sum assured + growth amountRate of return 10%

HDFC ULIPS ILLUSTRATION

yearannual

premium

Amount available to investment

Policy charges

other charges

Amount available

Growth

Growth FMC

Net growth

Death Benefits

1 100000 11500 88500 731 1354 86415 95057 1443 93614 593614

2 100000 11500 88500 731 1354 86415198032 3006

195026 695026

3 100000 5750 94250 731 1442 92077315813 4794

311019 811019

4 100000 5750 94250 731 1442 92077443406 6730

436676 936676

5 100000 2300 97700 731 1494 95475585366 8886

576480

1076480

6 100000 2300 97700 731 1494 95475739150

11220

727930

1227930

7 100000 2300 97700 731 1494 95475905746

13749

891997

1391997

8 100000 2300 97700 731 1494 954751086219

16489

1069730

1569730

9 100000 2300 97700 731 1494 954751281726

19457

1262269

1762269

10 100000 2300 97700 731 1494 954751493518

22671

1470847

1970847

11 100000 2300 97700 731 1494 954751722954

26154

1696800

2196800

12 100000 2300 97700 731 1494 954751971503

29928

1941575

2441575

13 100000 2300 97700 731 1494 954752240755

34015

2206740

2706740

14 100000 2300 97700 731 1494 954752532437

38442

2493995

2993995

15 100000 2300 97700 731 1494 954752848417

43239

2805178

3305178

16 100000 2300 97700 731 1494 95475 31907 4843 31422 364228

71

18 5 83 3

17 100000 2300 97700 731 1494 954753561534

54064

3507470

4007470

18 100000 2300 97700 731 1494 954753963240

60162

3903078

4403078

19 100000 2300 97700 731 1494 954754398408

66768

4331640

4831640

20 100000 2300 97700 731 1494 954754869827

73924

4795903

5295903

INTRPRETATION: The annual premium amount for SBI ULIPS is Rs.100000. The term period

is about 20 years. The premium allocation charges different from year to year. The service charges are

around 15% on policy administrative charges, other charges and FMC. An additional sum of Rs.500000

along with growth is assured in case of unexpected death. Rate of return is 10%.

HDFC MUTUAL FUND (HDFC TAX SAVER FUND)

DIFFERENT CHARGES FOR SBI tax fund

Annual premium 100000

72

Initial charges 2.25%

Fund management charges 2.25%

Rate of return 10%

HDFC TAX SAVER FUND ILLUSTRATION

YearAnnual

premiumInitial

chargesInvestabl

e amount Growth FMC Net Growth1 100000 2250 97750 107525 2419 1051062 100000 2250 97750 223141 5021 2181203 100000 2250 97750 347458 7818 3396404 100000 2250 97750 481129 10825 4703045 100000 2250 97750 624859 14059 6108006 100000 2250 97750 779404 17537 7618677 100000 2250 97750 945580 21276 924304

8 100000 2250 97750112425

9 25296 1098963

9 100000 2250 97750131638

5 29619 1286766

10 100000 2250 97750152296

8 34267 1488701

11 100000 2250 97750174509

6 39265 1705831

12 100000 2250 97750198394

0 44639 1939301

13 100000 2250 97750224075

6 50417 2190339

14 100000 2250 97750251689

8 56630 2460268

15 100000 2250 97750281382

0 63311 2750509

16 100000 2250 97750313308

5 70494 3062591

17 100000 2250 97750347637

4 78218 3398156

18 100000 2250 97750384549

6 86524 3758972

19 100000 2250 97750424239

5 95454 4146941

20 100000 2250 97750466916

0 105056 4564104

73

INTRPRETATION: The annual premium amount for SBI tax fund is Rs. 100000. The term period

is about 20 years. The Initial charges are 2.25%. The FMC charges are on the policy amount. Rate of

return is 10%

SBI ULIPS VS SBI MUTUAL FUND

YEARNet Growth Of SBI ULIPS

Net Growth Of SBI Mutual fund Difference

1 93546 105106 -115602 194713 218120 -234073 310094 339640 -295464 434875 470304 -354295 573408 610800 -373926 723226 761867 -386417 885249 924304 -390558 1060469 1098963 -384949 1249964 1286766 -3680210 1454894 1488701 -3380711 1676519 1705831 -2931212 1916196 1939301 -2310513 2175398 2190339 -1494114 2455715 2460268 -455315 2758867 2750509 835816 3086714 3062591 2412317 3441266 3398156 4311018 3824701 3758972 6572919 4239371 4146941 9243020 4687820 4564104 123716

74

INTERPRETATION: The above table shows the comparative returns of SBI ULIPS and SBI

MUTUAL FUNDS. Up to 14th year, Mutual funds are giving maximum returns. From 15 th year

onwards, the returns from ULIPS are more.

-500000

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

1 3 5 7 9 11 13 15 17 19

YEAR

Net Growth Of SBIULIPS

Net Growth Of SBIMutualfund

Difference

75

HDFC ULIPS VS HDFC MUTUAL FUNDS

YearNet Growth Of

HDFC ULIPSNet Growth Of

HDFC Mutual FundDifferen

ce1 93614 105106 -114922 195026 218120 -230943 311019 339640 -286214 436676 470304 -336285 576480 610800 -343206 727930 761867 -339377 891997 924304 -323078 1069730 1098963 -292339 1262269 1286766 -2449710 1470847 1488701 -1785411 1696800 1705831 -903112 1941575 1939301 227413 2206740 2190339 1640114 2493995 2460268 3372715 2805178 2750509 5466916 3142283 3062591 7969217 3507470 3398156 10931418 3903078 3758972 14410619 4331640 4146941 18469920 4795903 4564104 231799

-500000

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

1 3 5 7 9 11 13 15 17 19

YEAR

Net Growth Of HDFC ULIPS

Net Growth Of HDFC MutualFundDifference

76

INTERPRETATION: The above table shows the comparative returns of SBI ULIPS and SBI

MUTUAL FUNDS. Up to 14th year, Mutual funds are giving maximum returns. From 15 th year

onwards, the returns from ULIPS are more.

77

SBI ULIPS VS SBI MUTUAL FUNDS

ULIPS VS MUTUAL FUND 5 Years 10 Years 15 Years 20 Years

Total investment 500000 1000000 1500000 2000000

Return in ULIPS 573408 1454894 2758867 4687820

Return in mutual fund 610800 1488701 2750509 4564104

Difference -37392 -33807 8358 123716

-5000000

500000100000015000002000000250000030000003500000400000045000005000000

5 Years 10 Years 15 Years 20 Years

Total investmentReturn in ULIPSReturn in mutual fundDifference

INTERPRETATION: If we observe the above table, at 5 & 10 years, the return from Mutual fund

is higher than ULIPS, the difference is around 37392 & 33807. At 15 & 20 years the return from

ULIPS is higher than Mutual fund, the difference is around 8358 & 123716.

78

HDFC ULIPS VS HDFC MUTUAL FUNDS

ULIPS VS MUTUAL FUND 5 Years 10 Years 15 Years 20 Years

Total investment 500000 1000000 1500000 2000000

Return in ULIPS 576480 1470847 2805178 4795903

Return in mutual fund 610800 1488701 2750509 4564104

Difference -34320 -17854 54669 231799

-5000000

500000100000015000002000000250000030000003500000400000045000005000000

5 Years 10 Years 15 Years 20 Years

Total investment

Return in ULIPS

Return in mutual fund

Difference

INTERPRETATION: If we observe the above table, at 5 & 10 years, the return from Mutual fund

is higher than ULIPS, the difference is around 34320 & 17854. At 15 & 20 years the return from

ULIPS is higher than Mutual fund; the difference is around 54669 & 231799.

79

Comparison of returns of SBI ULIPS and HDFC ULIPS Death Benefits:

YEARSBI ULIPS

DEATH BENEFITHDFC ULIPS

DEATH BENEFITDIFFEREN

CE1 593546 593614 -682 694713 695026 -3133 810094 811019 -9254 934875 936676 -18015 1073408 1076480 -30726 1223226 1227930 -47047 1385249 1391997 -67488 1560469 1569730 -92619 1749964 1762269 -1230510 1954894 1970847 -1595311 2176519 2196800 -2028112 2416196 2441575 -2537913 2675398 2706740 -3134214 2955715 2993995 -3828015 3258867 3305178 -4631116 3586714 3642283 -5556917 3941266 4007470 -6620418 4324701 4403078 -7837719 4739371 4831640 -9226920 5187820 5295903 -108083

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

1 3 5 7 9 11 13 15 17 19

YEAR

SBI ULIPS DEATHBENEFITHDFC ULIPS DEATHBENEFITDIFFERENCE

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INTERPRETATION: In both the cases, the sum assured is Rs.500000. But the difference in the

total death benefit is due to the difference in net amount. The net amount or net growth is less in case of

SBI because the fund management charges, other charges are more when compared to HDFC.

81

Comparison of returns of SBI ULIPS VS HDFC ULIPS

SBI ULIPS VS HDFC ULIPS 5 Years 10 Years 15 Years 20 Years

Total investment 500000 1000000 1500000 2000000

Return in SBI ULIPS 1073408 1954894 3258867 5187820

Return in HDFC ULIPS 1076480 1970847 3305178 5295903

Difference -3072 -15953 -46311 -108083

INTERPRETATION: The above table shows the death benefits in different years. Death benefit is

less in case of SBI because the fund management charges, other charges are more when compared to

HDFC.

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

5 Years 10 Years 15 Years 20 Years

Total investmentReturn in SBI ULIPSReturn in HDFC ULIPSDifference

82

CHAPTER-V

FINDINGS

83

Findings of the study:

For the present study, ULIPS and Mutual Fund of SBI and HDFC were taken and a comparative

analysis was made. Also a comparative study was made on ULIPS of SBI with ULIPS of HDFC. The

following were the findings of the study.

1. If the returns from ULIPS and Mutual Fund of SBI are observed, Mutual funds are giving

better returns up to 14 years (2460268>2455715). There after i.e. from 15 years onwards ULIPS is

giving higher returns than SBI tax plan fund (2758867>2750509).

2. If looked at the returns of ULIPS and Mutual Funds of HDFC, Mutual funds i.e. HDFC tax

saver fund is giving maximum returns up to 11 years (1705832>1696800). From 12 th year onwards,

ULIPS is giving higher returns than HDFC tax saver fund (1941575>1939301).

3. If the returns from ULIPS of SBI and ULIPS of HDFC are compared, the returns are more

attractive in the case of ULIPS of HDFC.

4. In the case of ULIPS (both SBI and HDFC),the sum of Rs.500000 is assured and in case of

any unexpected death, the individuals family is going to get a death benefit amount of sum assured plus

net growth.

84

CHATER-VI

SUGGESTIONS

85

Suggestions of the study

1. In case the investor is planning to invest for a short time period, he is advised to go for

mutual funds. But if the investment horizon is long, it is safe to invest in ULIPS

2. If the investor is interest to get maximum return within 15 years, then investing in ULIPS of

HDFC is advisable. Moreover, he/she is going to get a death benefit of sum assured plus net growth.

3. The charges like policy administration charges, risk charges and fund management charges

are less in the case of HDFC. SBI should be competitive enough to attract investors by reducing the

above charges.

4. The insurance cover which is in the form of death benefits is an additional advantage to the

investor in the case of ULIPS. Hence the awareness about ULIPS should be brought to the investors.

86

CHAPTER-VII

CONCLUSIONS

87

Conclusions of the study

There is huge potential market for LIFE INSURANCE companies in India as out of 110 crore

population only 8 crore people are insured. The insurance companies should educate people about

insurance, its importance, different policies and benefits of policies.

The people opt for policy by taking into consideration price of premium of policy, benefits of

policy and least importance is given to brand name. So that life insurance companies should look over

the price of premium, benefits of policy and even flexible payment option from the point of untapped

potential market in India.

The price of premium of a policy must be within the budget of common man and life insurance

companies should provide flexible payment options. By doing so, the private insurance companies can

surely capture the untapped market along with creating brand name.

ULIPS can enhance the individual’s savings through their market investments. The study highlights

ULIPS as a part of tax benefits for an individual. SBI ULIPS products are good when taken as long

term investment plans.

88

BIBLIOGRAPHY

89

BIBLIOGRAPHY

Magazines, journals and books

Principles and Practices of Insurance - M.N.Mishra

Life insurance (IC-33)

IRDA journals

The Insurance Chronicles 2008-2009.

Websites

@ www.Sbi.co.in

@ www.wikipedia.com

@ www.insuranceindustry.com

@ www.hdfc.com

@ www.google.com

@ www.answers.com

@ www.insurerance.com

90

Balance Sheet of State Bank of India ------------------- in Rs. Cr. -------------------

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Capital and Liabilities:

Total Share Capital 684.03 671.04 635.00 634.88 634.88

Equity Share Capital 684.03 671.04 635.00 634.88 634.88

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 98,199.65 83,280.16 64,351.04 65,314.32 57,312.82

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net Worth 98,883.68 83,951.20 64,986.04 65,949.20 57,947.70

Deposits 1,202,739.57 1,043,647.36 933,932.81 804,116.23 742,073.13

Borrowings 169,182.71 127,005.57 119,568.96 103,011.60 53,713.68

Total Debt 1,371,922.28 1,170,652.93 1,053,501.77 907,127.83 795,786.81

Other Liabilities & Provisions 95,455.07 80,915.09 105,248.39 80,336.70 110,697.57

Total Liabilities 1,566,261.03 1,335,519.22 1,223,736.20 1,053,413.73 964,432.08

Mar '13 Mar '12 Mar '11 Mar '10 Mar '09

12 mths 12 mths 12 mths 12 mths 12 mths

Assets

Cash & Balances with RBI 65,830.41 54,075.94 94,395.50 61,290.87 55,546.17

Balance with Banks, Money at Call

48,989.75 43,087.23 28,478.65 34,892.98 48,857.63

Advances 1,045,616.55 867,578.89 756,719.45 631,914.15 542,503.20

Investments 350,927.27 312,197.61 295,600.57 285,790.07 275,953.96

Gross Block 6,595.71 5,133.87 4,764.19 11,831.63 10,403.06

91

Accumulated Depreciation 0.00 0.00 0.00 7,713.90 6,828.65

Net Block 6,595.71 5,133.87 4,764.19 4,117.73 3,574.41

Capital Work In Progress 409.31 332.68 0.00 295.18 263.44

Other Assets 47,892.03 53,113.02 43,777.85 35,112.76 37,733.27

Total Assets 1,566,261.03 1,335,519.24 1,223,736.21 1,053,413.74 964,432.08

Contingent Liabilities 993,018.45 899,565.18 790,389.59 429,917.37 614,603.47

Bills for collection 0.00 0.00 0.00 166,449.04 152,964.06

Book Value (Rs) 1,445.60 1,251.05 1,023.40 1,038.76 912.73

92