Types of Mutual Funds Schemes

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. 

By Structure

• Open – Ended Schemes
• Closed – Ended Schemes
• Interval Schemes

By Investment Objective

• Growth Schemes
• Income Schemes
• Balanced Schemes
• Money Market Schemes

Other Schemes

• Tax Saving Schemes
• Special Schemes
• Index Schemes

· Sector Specific Schemes                            

                           

There are a variety of funds available across categories. There are funds which invest in growth stocks, funds which specializes in stocks of a particular sector, funds which assure returns to the investors, funds which assure returns to investors, funds which invest in debt instruments, and funds which invest aggressively in the stocks. Thus , we have income funds, balanced funds, liquid funds, gilt funds, index funds, Exchange Traded Funds, sectoral funds, and then there are open-ended and closed-ended funds and assured return funds-----there is a fund for every requirement.

MFs can be classified according to their maturity period. A closed – ended fund has a stipulated maturity, the investors have to wait until maturity for redemption. A open-ended fund gives investors an option to redeem and buy units at any time from the fund. These schemes do not have a fixed maturity and can be traded conveniently at NAV prices declared on a daily basis.

Value Advantage

Effective Regulation

Unlike the company fixed deposits, where there is little control with the investment being considered as unsecured debt from the legal point of view, the Mutual Fund industry is very well regulated. All investments have to be accounted for, decisions judiciously taken. SEBI acts as a true watchdog in this case and can impose penalties on the AMCs at fault. The regulations, designed to protect the investors’ interests are also implemented effectively.

Transparency

Being under a regulatory framework, mutual funds have to disclose their holdings, investment pattern and all the information that can be considered as material, before all investors. This means that the investment strategy, outlooks of the market and scheme related details are disclosed with reasonable frequency to ensure that transparency exists in the system. This is unlike any other investment option in India where the investor knows nothing as nothing is disclosed. 

Flexible and Affordable

Mutual Funds offer a relatively less expensive way to invest when compared to other avenues such as capital market operations. The fee in terms of brokerages, custodial fees and other management fees are substantially lower than other options and are directly linked to the performance of the scheme. Investment in mutual funds also offers a lot of flexibility with features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans enabling systematic investment or withdrawal of funds. Even the investors, who could otherwise not enter stock markets with low investible funds, can benefit from a portfolio comprising of high-priced stocks because they are purchased from pooled funds.

Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is an option that allows investor to invest a fixed sum of money at periodic intervals on specific dates.

Why investors should go for SIP

A Systematic Investment Plan works for investors having a lower risk-apetite in three ways:

• It helps to save regularly and thus inculcates a sense of discipline
• It harnesses the power of compounding
• It is the best possible way investors can reign in impulsive buys-and-sells that otherwise he is gripped by in times of market volatility - Rupee cost averaging

Power of compounding

The longer one keeps his money invested, the faster it will grow. When the returns begin to earn money and those returns start to earn... small amounts of money can snowball very quickly. Compounding being the tool that allows making the most of small amounts invested for long periods.

Rupee cost averaging

It tells how effective disciplined investing on specific dates is, as compared to lump sum investing on random dates.

SIPping the Standard Chartered Mutual Fund way

Standard Chartered Mutual fund offers a very convenient way of SIPping.

Advantages-

• No post dated cheques and no specific dates either.
• Investors are required to tell-    Amount he needs to save
• Investors are free to choose any amount (minimum Rs 500 and in multiples of Re 1/-) and any date as per his convenience.
  The bank will intimate the debit instruction 2-3 business days before the actual debit will happen so that investors can be ensured that his account is funded with the requisite amount.

6.3 

Charges                                                                                                           

The Asset Management Companies (AMCs) managing the Mutual Funds levy a load as a percentage of NAV at the time of entry into the Schemes or at the time of exiting from the Schemes.

Entry Load - It is the load charged by the fund when an investor invests into the fund. It increases the price of the units to more than the NAV and is expressed as a percentage of NAV.

Exit Load - It is the load charged by the fund when an investor redeems the units from the fund. It reduces the price of the units to less than the NAV and is expressed as a percentage of NAV.

Cost of Churning/Turnover cost - It refers to the costs associated with the churning (or changes made to the holdings) of the portfolio. Portfolio changes have associated costs of brokerage, custody fees, transaction fees and registration fees, which lower the returns. The quantum depends on the management style of the fund manager.

Expense Ratio - The Expenses of a mutual fund include management fees and all the fees associated with the fund's daily operations. Expense Ratio refers to the annual percentage of fund's assets that is paid out in expenses.

Tax                                                                                                                                  Capital Gains Tax- The profit realizations on sale of securities and certain other capital assets (including units of mutual funds) are called capital gains. The gains can be classified into long-term or short-term depending on the period of holding of the asset and are charged to tax at different rates. Gains on mutual fund units held for a period of 12 months or more are long-term gains. These gains are taxable.

Dividend Distribution Tax – The Mutual Fund schemes distributing dividends on their units to the investors attract a distribution tax as per tax laws.  

Securities Transaction Tax – AMCs managing the portfolio have to pay STT on transaction (buying/selling) of different securities in the stock market. Presently the tax rate is 0.025%.

Four reasons why ULIPs get the thumbs up

Four reasons why ULIPs get the thumbs up

 1. Insurance cover plus savings

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.

2. Multiple investment options
ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple 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 upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. Individuals can opt for a variant based on their risk profile. For example, a 30-Yr old individual looking at buying a life insurance plan that also helps him build a corpus for retirement can consider investing in the Balanced or even the Aggressive ULIP. Likewise, a risk-averse individual who is not comfortable with a high equity allocation can opt for the Conservative ULIP.

3. Flexibility

Individuals 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 capitalise on investment opportunities across the equity and debt markets. 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. For instance, when stock markets were on the brink of 7,000 points (Sensex), the informed investor could have shifted his assets from an Aggressive ULIP to a low-risk Conservative ULIP.

Switching also helps individuals on another front. They can shift from an Aggressive to a Balanced or a Conservative ULIP as they approach retirement. This is a reflection of the change in their risk appetite as they grow older.

4. Works like an SIP

Rupee cost-averaging is another important 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 money 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 realise 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-averaging principle. An added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP either to benefit 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.

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

Put simply, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one’s specific needs. Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match one’s lifestyle, inexplicable returns and an expensive, complicated exit. ULIPs, by separating the two parts within the same product, and managing them independently, offer insurance buyers what no traditional policy had – continuous information about how their policy is working for them. Often, people wonder whether it’s better to purchase separate financial products for their protection and savings needs. Certainly, this is a viable option for those who have the time and skill to manage several products separately. However, for those who want a convenient, economical, one-stop solution, ULIPs are the best bet.

To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, lets take the example of a 35-year-old man with 2 young children. With a premium of, say, Rs 30,000 p.a. he could begin with a sum assured of Rs 5 lakh, for which the life insurer would set aside a nominal amount of the premium to cover this risk. The balance could be invested in a fund of his choice, possibly a balanced or growth option. As the children grow, he might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up. The chart below shows how one product can meet multiple needs at different life stages.

How to Select a right ULIP ?

Unit Linked Insurance Plans (ULIPs) were seen as a “wonder product” that simultaneously fulfilled an individual’s needs for investment and insurance. However the recent downswings in the markets have forced investors to do a rethink. Very often it was poor selection that was responsible for the investors’ woes. We present a 5-step strategy for investing in ULIPs

1.Understand the concept of ULIPs

Try to do as much homework as possible before investing in an ULIP. This way you will know what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our experience suggests that many a time people do not realise what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options available and understand their working. Read the literature available on ULIPs on the websites and brochures circulated by insurance companies. 

2. Focus on your requirement and risk profile

Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should play an important role in the plan you choose. So if you have a high risk appetite, go in for a more aggressive investment option and vice-a-versa. Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently).

3. Compare ULIPs of different insurance companies

Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Check the fund’s performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor. Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy. The companies give you the option to increase the premium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal. Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another. Some insurance companies offer you free switches for a 2-Yr period while others do so only for 1 year. 

4. Go for an experienced insurance advisor

Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered.

Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who will offer you value-added products.

5. Does your ULIP offer a minimum guarantee?

In market linked product if your investment’s downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice.

Insurance Policy - Charges and Expenses

ULIPs work very similar to a mutual fund with an added benefit of life cover and tax deduction. They have a mandate to invest the premiums in varying proportions in gsecs (government securities), bonds, the money markets (call money) and equities. The primary difference between conventional savings-based insurance plans like endowment and ULIPs is the investment mandate- while ULIPs can invest up to 100% of the premium in equities, the percentage is much lower (usually not more than 15%) in case of conventional insurance plans. ULIPs are also available in multiple options like ‘aggressive’ ULIPs (which can invest upto 100% in equities), ‘balanced’ ULIPs (which invest 40-60% in equities) and ‘debt’ ULIPs (which invest only in debt and money market instruments). Broadly speaking, ULIP expenses are classified into three major categories:

1) Mortality charges

Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the age, sum assured and sum-at-risk for the individual. There is a direct relation between the mortality expenses and the above mentioned factors. In a ULIP, the sum-at-risk is an important reference point for the insurance company. The sum-at-risk is the difference between the sum assured and the investment value the individual’s corpus as on a specified date. Usually, the mortality charges are levied on the per thousand sum assured.

2) Sales and Fund Administration expenses

Insurance companies incur these expenses for operational purposes on a regular basis. The expenses are recovered from the premiums that individuals pay towards their insurance policies. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a day-to-day basis are examples of such expenses.

3) Fund management charges (FMC)

These charges are levied by the insurance company to meet the expenses incurred on managing the ULIP investments. A portion of ULIP premiums are invested in equities, bonds, g-secs and money market instruments. Managing these investments incurs a fund management charge, similar to what mutual funds incur on their investments. FMCs differ across investment options like aggressive, balanced and debt ULIPs; usually a higher equity option translates into higher FMC.

Apart from the three expense categories mentioned above, individuals may also have to incur certain expenses, which are primarily ‘optional’ in nature- the expenses will be incurred if certain choices that are made available to individuals are exercised.

a) Switching charges

Individuals are allowed to switch their ULIP options. For example, an individual can switch his fund money from 100% equities to a balanced portfolio, which has say, 60% equities and 40% debt. However, the company may charge him a fee for ‘switching’. While most life insurance companies allow a certain number of free switches annually, a switch made over and above this number is charged.

b) Top-up charges

ULIPs allow individuals to invest a top-up amount. Top-up amount is paid in addition to the premium amount for a particular year. Insurance companies usually deduct a certain percentage from the top-up amount as charges. These charges are usually lower than the regular charges that are deducted from the annual premium.

c) Cancellation charges  

Life insurance companies levy cancellation charges if individuals decide to surrender their policies before the mandated lock-in period which is usually three years. These charges are levied as a percentage of the fund value on a particular date. The Compounded Annual Growth Rate (CAGR) of the fund goes up over a period of time. This is because the ULIP expenses even out over a period of time. The ‘evening out’ occurs because although the expenses are high in the initial years, they fall thereafter. And as the years roll by, the expenses tend to ‘spread themselves’ more evenly over the tenure of the ULIP. Another reason is also because the expenses are levied on the annual premium amount, which stays the same throughout the tenure. Therefore, the expenses do not have any impact on the returns generated by the corpus. Fund management charges also have an effect on the returns. FMC is levied on the corpus, which keeps fluctuating over the tenure.

The returns also depend to a large extent on how well the insurance company manages the investment. Individuals therefore, need to bear in mind that expenses are an important variable while evaluating ULIPs across life insurance companies. They have the potential to make a considerable difference to the returns generated over a period of time.

Unit Linked Insurance Plans (ULIPs)

For the generation of insurance seekers who thrived on insurance policies with assured returns issued by a single public sector enterprise, unit-linked insurance plans are a revelation. Traditionally insurance products have been associated with attractive returns coupled with tax benefits. The returns part was often so compelling that insurance products competed with investment products for a place in the investor's portfolio. Perhaps insurance policies then were symbolic of the times when high interest rates and the absence of a rational risk-return trade-off were the norms. The subsequent softening of interest rates introduced a degree a much-needed rationality to insurance products like endowment plans; attractive returns at low risk became a thing of the past. The same period also coincided with an upturn in equity markets and the emergence of a new breed of market-linked insurance products like ULIPs. While in conventional insurance products the insurance component takes precedence over the savings component, the opposite holds true for ULIPs. More importantly ULIPs (powered by the presence of a large number of variants) offer investors the opportunity to select a product which matches their risk profile; for example an individual with a high risk appetite can shun traditional endowment plans (which invest about 85% of their funds in the debt instruments) in favour of a ULIP which invests most of its corpus in equities.

In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component. ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same. Investors have the choice of enhancing stheir insurance cover, modifying premium payments and even opting for a distinct asset allocation than the one they originally opted for. This calls for enhanced flexibility in ULIPs. Also if an unforeseen eventuality were to occur, in case of traditional products, the sum assured is paid along with accumulated bonuses; conversely in ULIPs, the insured is paid either the sum assured or corpus amount whichever is higher. Insurance seekers have never been exposed to this kind of flexibility in traditional insurance products and it would be fair to say that ULIPs represent the new face of insurance. While few would dispute the value-add that ULIPs can provide to one's insurance portfolio and financial planning; the same is not without its flipside. For the uninitiated, understanding the functioning of ULIPs can be quite a handful! The presence of what seem to be relatively higher expenses, rigidly defined insurance and investment components and the impact of markets on the corpus clearly make ULIPs a complex proposition. Traditionally the insurance seeker's role was a passive one restricted to making premium payments; ULIPs require greater participation from the insured.