II. Insurance Sector NBFIs – LIC & GIC
Both Covered here.
III. UTI
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India (UTI). The regulator of mutual funds in India is SEBI. The UTI is an investment institution which offers the small investor a share in India’s industrial growth and productive investment with minimum risk and reasonable returns.
The UTI was established as a Statutory Corporation in February 1964 under the UTI Act 1963. It commenced its operations from 1 July, 1964. It was set up by the Reserve Bank of India and functioned under the regulatory and administrative control of the Reserve Bank of India. UTI launched its first mutual fund scheme, Unit Scheme 1964 (US-64) in 1964 itself. 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. 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. LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. 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. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
Also, 1993 was the year in which the first Mutual Fund Regulations (SEBI (Mutual Fund) Regulations) came into being, under which all mutual funds, except UTI were to be registered and governed.The industry now functions under the SEBI (Mutual Fund) Regulations 1996. In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate entities which were the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC and and the Specified Undertaking of the Unit Trust of India (SU-UTI).
UTI maintained its pre-eminent place till 2001, when a massive decline in the market indices and negative investor sentiments after the Ketan Parekh scam created doubts about the capacity of UTI to meet its obligations to the investors. This was further compounded by the US 64 controversy* – in which its flagship and largest scheme US 64 was sold and re-purchased not at intrinsic NAV* (Net Asset Value) but at artificial price while its assured return schemes also failed which had earlier promised returns as high as 18% over a period going up to two decades. Currently UTI Mutual Fund is India’s fifth largest fund house while the largest fund house is ICICI Prudential Mutual Fund.
Confusion clarified: UTI Bank was rechristened as Axis Bank in 2007. Although UTI Bank was a private bank from the start it had been using the words “UTI” from its main promoter and was allowed to do for some time to cash in on the popular UTI name for start-up and immediate good business in banking. UTI Bank (estb. 1993) began its operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted in 1993 jointly by the Administrator of the Unit Trust of India (UTI-I), LIC, GIC, and 4 other insurance companies. The UTI brand is owned by UTI Asset Management Company.
*Comment: GoI specially appointed Deepak Parikh Committee to look into the US-64 controversy. Also note that NAV or Net Asset Value on a particular day reflects the realisable value that the investor will get for each unit if the scheme is liquidated on that date
Any more details about UTI?
The UTI was established with the objective of mobilizing the savings of the community and channeling them into productive investment. Its objective is to encourage widespread and diffused ownership of industry by affording investors particularly the small investors, a means of acquiring shares assured of a reasonable return with minimum risk. The UTI is managed by a board of trustees. It consists of a chairman and 9 other trustees. Leo Puri is its current MD. The head office of UTI is in Mumbai.
IV. Mutual Funds
In India, the mutual fund industry started with the setting up of Unit Trust of India in 1964. Public sector banks and financial institutions began to establish mutual funds in 1987. The private sector and financial institutions were allowed to set up mutual funds in 1993.
So what is a Mutual Fund?
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. You can make money from a mutual fund in three ways:
- Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
- If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
- If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a cheque for distributions or to reinvest the earnings and get more shares. The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios.
A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Also by owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you. And because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. Besides just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. So its liquidity is high.
So what are the different types of mutual funds?
Each fund has a predetermined investment objective that tailors the fund’s assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds:
- Equity funds (stocks)
- Fixed-income funds (bonds)
- Money market funds
All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.
Let’s go over the many different flavors of funds. We’ll start with the safest and then work through to the more risky.
Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills*. This is a safe place to park your money. You won’t get great returns, but you won’t have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).
Gilt Fund – These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Bond / Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms “fixed-income,” “bond,” and “income” are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren’t without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.
Balanced Funds – The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.
A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.
Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is below.
The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle.
*Comment: P/E is short for the ratio of a company’s share price to its per-share earnings. It is calculated by dividing the current market price of the stock by its earning per share (EPS). Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock (available to us common people). Earnings per share serves as an indicator of a company’s profitability. We’re not going into depth here. Thus, If the PE is high, it warns of an over-priced stock.
For example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth).
Global/International Funds
An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country. It’s tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world’s economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.
Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don’t necessarily belong to the categories we’ve described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.
Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank.
Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession.
Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Most socially responsible funds don’t invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience.
Index Funds
The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the S&P NSE 50 (NIFTY) or BSE Sensitive Index (SENSEX). An investor in an index fund figures that most managers can’t beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees.
What is a Fund of Funds (FoF) scheme?
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unit holder’s irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.
What is a Load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit.
The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.
What is the difference between Mutual Funds and Hedge Funds ?
Hedge Funds are the investment portfolios which are aggressively managed and use advanced investment strategies, such as leverages, long, short and derivative positions in both domestic and international markets with a goal of generating high returns.
In case of Hedged Funds, the number of investors is usually small and minimum investment required is large. Moreover, they are more risky and generally the investor is not allowed to withdraw funds before a fixed tenure.
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders.
Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least 2/3 of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
Can non-resident Indians (NRIs) invest in mutual funds?
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.
Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price (i.e, the price at which investors buy the bonds when they are first issued) depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
So what’s the status in India?
Mutual funds are still an under tapped market in India. Deposit being available in the market, a very low percentage of Indian households have invested in mutual funds. Investors are holding back from putting their money into mutual funds due to their perceived high risk and a lack of information on how mutual funds work. The Association of Mutual Funds in India (AMFI), 1995 is a industry standards organisation in India in the mutual funds sector.
V. Provident Funds
These funds represent the most significant form of long-term contractual saving of the household sector. The provident funds scheme practically started in the post-independence period. Under the legalization, provident funds have been made compulsory in the organized sector of industry, coal mining, plantation and services (such as government, banking, insurance, teaching, etc).
There is a separate P.F. Legislation for coal mining, industries and Assam tea plantations. With the growth of the organized sector of the economy and in wage employment, savings mobilizations through PFs will growth further. The wage- earners are encouraged to join, P.F. schemes and make contributions to them, because thereby alone they are able to earn employers’ matching contribution to the fund.
What’s EPF?
The Employee Provident Fund (EPF), administered by EPFO (Employee Provident Fund Organization, a statutory body under the labor ministry, ministry of finance), helps employees save a small fraction of their remuneration every month and thereby, build a corpus which is tax exempt for use in the fag end of their lives or retirement. Albeit, EPFO is a long-term savings tool, primarily aimed for a stress-free retirement, salaried employees may choose to withdraw their money in their EPF account to cater to different financial requirements or at the time of any major life events such as weddings, home renovation/alteration and medical treatment among others.
All organisations which have employed more than 20 employees should compulsorily register with EPFO. It is important to note that 12% of the basic pay of a salaried employee (in addition to dearness allowance and cash value of food allowances, if any) is deducted from his or her remuneration on a monthly basis as contribution towards an EPF account. However, from the employer’s contribution, 8.33% is deposited in the Employee Pension Scheme (EPS) while only 3.67% is deposited in the EPF account.
The current rate of interest (for financial year 2015-16) for an EPF account is 8.7% p.a. The rate of interest is subject to change every year, as announced every year by EPFO.
Any History?
The Employees’ Provident Fund and Miscellaneous Provisions Act (EPF & MP Act), 1952 was enacted by Parliament and came into force with effect from 4th March,1952. A series of legislative interventions were made in this direction in the coming years. Presently, the following three schemes are in operation under the Acts:
- Employees’ Provident Fund Scheme, (EPF) 1952
- Employees’ Deposit Linked Insurance Scheme, (EDILS) 1976
- Employees’ Pension Scheme, 1995 (replacing the Employees’ Family Pension Scheme, 1971) (EPS)
So what’s EPFO?
The Employees’ Provident Fund Organisation (EPFO), a statutory body formed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 and under the administrative control of the Ministry of Labour and Employment, Government of India, assists in administering a compulsory contributory Provident Fund Scheme, a Pension Scheme and an Insurance Scheme for the workforce engaged in the organized sector in India. It is also the nodal agency for implementing Bilateral Social Security Agreements with other countries on a reciprocal basis. The schemes cover Indian workers as well as International workers (for countries with which bilateral agreements have been signed. As of now 15 Social Security Agreements are operational).
Thus EPFO has the dual role of being the enforcement agency to oversee the implementation of the EPF & MP Act and as a service provider for the covered beneficiaries throughout the country. It is one of the largest social security organisations in India in terms of the number of covered beneficiaries and the volume of financial transactions undertaken.
The EPFO’s apex decision making body is the Central Board of Trustees (CBT). The Board is composed of representatives of the Government of India, State governments, Employers and Employees. The board is chaired by the Union Labour Minister of India. The Chief Executive of the EPFO, the Central Provident Fund Commissioner, reports to the Union Labour Minister through the Secretary of Labour and Employment in the ministry. The headquarters of the organisation is in New Delhi.
The total assets under management are more than ₹8.5 lakh crore (US$128 billion) as of 18 March 2016. All cumbersome paperwork related to withdrawal of EPF account may be a thing of the past. EPFO aims to launch an online facility for PF withdrawal in late 2016. EPFO, which currently has over five crore members, is planning to settle PF claims in three hours after receipt of a withdrawal application (online application will be transferred to the bank accounts of subscribers). To the end, EPFO has become UIDAI’s registrar.
As many as 6.15 crore UANs were issued by EPFO out of which 2.34 crore were activated by the subscribers so far.
Any grievance redressal systems?
Yup. The Consumer Protection Act encompasses a detailed procedure to resolve various grievances of EPF account holders. An individual or member can log on to the official website of EPFO at http://www.epfigms.gov.in and click the tab ‘register grievance’. A member can register all kinds of grievances vis-a-vis withdrawal of EPF account, insurance benefit (payment), scheme certificate, transfer of the account, cheque misplacement and PF balance issuance among others.
The orders of the Department can be appealed to Employees’ Provident Fund Appellate Tribunal at New Delhi or at Bangalore if the employer is situated in states of Karnataka, Tamilnadu, Kerala, Andhra Pradesh, Telangana, Goa and Union Territories of Andaman and Nicobar Islands and Puducherry.
The member who is unable to withdraw PF for any reason can withdraw without consent of employer. They can submit FORM 19 for EPF (Employees Provident Fund) and FORM 10C for EPS (Employees’ Pension Scheme) with any of the officials attestation to EPFO office in which their EPF account is maintained.
It is important to note that withdrawal of the EPF account by a salaried employee between switching jobs his or her jobs is illegal. As per PF withdrawal rules, a salaried employee can withdraw a provident fund account on two counts; first, if he or she has no job and second, if two months have elapsed since his or her last employment (not attached to any organization or unemployed for 2 months). Nevertheless, there are cases wherein employees – assuming a cumbersome claims process- may withdraw their EPF account at the time of leaving an organisation.
However, apart from the legal angle, experts do not recommend following the aforementioned practice from the perspective of financial management as well in that a salaried employee cannot avail of several benefits of maintaining a provident fund account including tax-free interest, annual compounding and compulsory long-term savings among others.
What is UAN?
UAN is Universal Account Number and was launched in 2014. The UAN is a 12-digit number allotted to employee who is contributing to EPF. The UAN acts as an umbrella for the multiple Member Ids allotted to an individual by different establishments and also remains same through the lifetime of an employee. It does not change with the change in jobs.
The idea is to link multiple Member Identification Numbers (Member Id) allotted to a single member under single Universal Account Number. This helps the member to view details of all the Member Identification Numbers (Member Id) linked to it. EPFO has now started to provide refund of Administrative charges if all the KYC details are updated for all employees. This incentive program is announced for the Year 2016-2017.
So what are the EPF withdrawal rules?
Salaried employees may withdraw money from their EPF accounts for various purposes, subject to certain conditions. Individuals have to furnish several documents in addition to meeting the eligibility criteria as per epf withdrawal rules. The current 2016 norms would set the retirement age for provident fund purposes to 58 years against the earlier 55.
The new norms make it easier for women It stipulates that woman who quit their job for getting married, pregnancy or childbirth will not have to wait for two months to withdraw. They can do so immediately.The list of purposes and quantum of contribution which can be withdrawn are listed below:
- Marriage – A salaried person can withdraw for self, siblings and children. He or she should, however, have completed a minimum of seven years of service to withdraw 50% of contribution (thrice in a career).
- Medical treatment – A salaried person can withdraw up to either six times of his or her monthly salary or total corpus towards medical treatment of self, parents, spouse and children.
- Construction/Purchase of plot – If a salaried person wishes to withdraw from an EPF account for the purpose of either construction or purchase of a plot, the property must be registered in his or her name, spouse or be jointly held. A minimum of five years of service is required to withdraw an amount which is 24 times the salary of the account holder. For construction of a house, 36 times of the salary of an account holder can be withdrawn. It is important to note that withdrawal for said purpose can be done only once during the service of an account holder.
- Home Loan Repayment – If a salaried person wishes to withdraw from an EPF account for the purpose of home loan repayment, the house should be registered in his or her name, spouse or be held jointly. A minimum of 10 years of service is required to withdraw up to 36 times of the salary of an account holder.
- House renovation/alteration – If a salaried person wishes to withdraw from an EPF account for the purpose of house renovation or alteration, the house should be registered in his or her name, spouse or be held jointly. A minimum of 5 years of service is required to withdraw about 12 times of the monthly remuneration of an account holder.
- Retirement – An individual must be 57 years old to withdraw 100% of the corpus of his or her provident fund account.
- Miscellaneous – Individuals can choose to withdraw from their EPF account for various other reasons such as premature retirement as a result of any physical or mental disability, migrating abroad for the sake of better employment or settling down in a foreign country.
If a salaried employee opts for withdrawal after continuous service of five years or above, there will be no TDS deduction on the amount. However, as earlier, if he/she withdraws the PF money within 5 years of joining as a subscriber, his/her withdrawal would be subject to Tax Deduction at Source (TDS) if the amount is above Rs 30,000.
More in the part 4….
IASBakra 