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A mutual fund is a type of professionally managed investment fund that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies". Hedge funds are not mutual funds, primarily because they cannot be sold to the general public.
In the United States, mutual funds must be registered with the U.S. Securities and Exchange Commission, overseen by a board of directors or board of trustees, and managed by a Registered Investment Advisor. Mutual funds are also subject to an extensive and detailed regulatory regime set forth in the Investment Company Act of 1940. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. Today they play an important role in household finances, most notably in retirement planning.
ULIP’S
A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan.The first ULIP was launched in India in 1971 by Unit Trust of India (UTI). With the Government of India opening up the insurance sector to foreign investors in 2001 and the subsequent issue of major guidelines for ULIPs by the Insurance Regulatory and Development Authority (IRDA), now Insurance Regulatory and Development Authority of India (IRDAI), in 2005, several insurance companies forayed into the ULIP business leading to an over abundance of ULIP schemes being launched to serve the investment needs of those looking to invest in an investment cum insurance product.
ELSS
ELSS is a type of mutual fund. Going by its name ELSS invests a majority of its corpus in equity and equity related products. An investment in ELSS comes with a lock in period and has tax benefits attached to it. It is suitable for investors having a high risk profile as returns in ELSS fluctuate depending upon the equity market and there are no fixed returns. ELSS schemes are open ended, that is, investors can subscribe to the fund at any day. NAV or the price of the fund is declared on every business day.
NEED FOR THE STUDY
Investing in ULIP’S & Mutual Funds is considered to be one of the most avenues of the investment. The need for the study is to analyze comparision between the ULIP’S & Mutual Funds and it will suggest the investor Pro’s & Con’s involved in it.
Tax Savings is a very important part of financial planning. Post tax return is what really matters to the end of the day as the real income from investments comes from what you earn after paying all taxes. Equity Linked Savings Schemes (ELSS) is an ideal way to save on tax as well as staying invested in equity mutual funds. ELSS schemes have been introduced in India to promote investments in quity markets by giving tax concessions to the investors.
OBJECTIVES
To study the tax savings scheme on mutual funds, its performance in the market, and its exposure to stock.
To know how these investment instruments can help the investor to attain maximum benefit from the investment made by the investor.
To study the potential of Equity Linked Saving Scheme and Unit Linked Insurance Plan.
To analyse the performance of various mutual funds schemes and suggests the best one.
To find out risk associated with this plans.
SCOPE OF THE STUDY
The study is limited to the analysis of tax saving instruments offered by four AMC’s.
The project mainly focuses on tax saving instruments such as ULIPS & ELSS
The study includes calculating the Risk, Return & Sharpe Ratio of the fund for a period of 2 years
RESEARCH METHODOLOGY
Data Collection (Secondary Data)
The data is collected from secondary source such as company websites, Journals, Articles, Newspapers & other websites like MoneyControl.com and through suggestions from the project guide and from the faculty members of our college
TOOLS & TECHNIQUES
The tools used for the study are
Charts (Line)
Tables
The Techniques used for calculation to measure the performance of tax saving instruments.
Returns = Closing price-Opening price/Opening price*100
Variance = (∑▒〖(x-x ̅)2〗)/((n-1))
Standard Deviation = √((∑(x-x ̅)2)/((n-1)))
Sharpe’s Ratio = (Rp-Rf)/σp
Treynor’ s Ratio = (Rp-Rf)/βp
Jensen’ s Ratio = α+β(Rm-Rf)
LIMITATIONS
The sources of data are purely based on secondary data.
Area of the study is restricted to ULIP’S & Mutual Funds.
Due to limited time the 6 schemes are selected for the study 3 from ULIP’S & from Mutual Funds (ELSS).
This data analysis collected only 2 years of data
WHAT ARE MUTUAL FUNDS:-
The popularity of MUTUAL FUNDS over the past few years has soared. The reasons MUTUAL FUNDS make it easy and less costly for investors to satisfy their needs for capital growth, income and/or income preservation. And a mutual fund brings the benefit of diversification and money management to the individual investors, providing an opportunity for financial success that was once available only to the very rich.
A MUTUAL FUND is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual/ corporate investors and invests the same on behalf of the investors / unit holders in equity shares, govt. securities, Bonds call money market etc. and distributes the profits. In other words a mutual fund allows an investor to indirectly take a position in a basket of asset.
UNIT TRUST OF INDIA is the first mutual fund set up under a separate Act, UTI Act in 1963 and started its operation in 1964 with the issue of unit under the scheme US-64.
Currently public sector banks like SBI, Canara bank, Bank of India, and Institution like IDBI, GIC, and LIC HDFC Foreign institution like Alliance Morgan Stanley, Templeton, Principle HSBC and private financial Co. like first India mutual fund DSP Merrill Lynch, Sundaram, Kotak etc. Have floated their own mutual funds.
Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.
ADVANTAGES OF MUTUAL FUND
1. Portfolio Diversification Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small).
2. Professional Management Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own.
3. Less Risk Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities.
4. Low Transaction Costs Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors.
5. Liquidity An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid.
6. Choice of Schemes Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options.
DISADVANTAGES OF MUTUAL FUND
1.Costs Control Not in the Hands of an Investor Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund.
2. No Customized Portfolios The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives.
3. Difficulty in Selecting a Suitable Fund Scheme Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives.
TYPES OF MUTUAL FUNDS
General Classification of Mutual Funds
Open-end Funds / Closed-end Funds
Open-end Funds
Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.
Closed-end Funds
Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions:
1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday).
2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed.
Load Funds/no-load funds
Load Funds
Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund manager’s salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors:
• Entry Load – Also known as Front-end load, it refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investor’s contribution amount to the fund.
• Exit Load – Also known as Back-end load, these charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor.
• Deferred Load – Deferred load is charged to the scheme over a period of time.
• Contingent Deferred Sales Charge (CDSS) – In some schemes, the percentage of exit load reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.
No-load Funds
All those funds that do not charge any of the above mentioned loads are known as No-load Funds.
Tax-exempt Funds/ Non-Tax-exempt Funds
Tax-exempt Funds
Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free.
Non-Tax-exempt Funds
Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor