Investment Analysis & Exposure of Financial market through financial prodcut ULIP V Mtual Fund in

8/7/2019 Investment Analysis & Exposure of Financial market through financial prodcut ULIP V Mtual Fund in

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RESEARCH TRAINING A RESEARCH REPORT

ON

INVESTMENT ANALYSIS & EXPOSURE OF FINANCIAL MARKETTHROUGH FINANCIAL PRODUCT ULIP Vs MUTUAL FUND

INHDFC STANDARD LIFE INSURANCE COMPANY.

Submitted to :

Gautam Buddha Technical University, LucknowIn partial fulfillment for the award of the degree of

MASTERS OF BUSINESS ADMINISTRATION Session 2009 2011

SUBMITTED BY :

ANKIT SHAHMBA III Semester

Roll No. : 0933270007

MAHARAJA AGARSAIN INSTITUTE OFTECHNOLOGY

NH- 24, PILKHUWA, GHAZIABAD


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RESEARCH REPORT

INVESTMENT ANALYSIS & EXPOSURE OF FINANCIALMARKET

THROUGH FINANCIAL PRODUCT ULIP Vs MUTUAL

FUND

AT

HDFC STANDARD LIFE INSURANCE COMPANY

BY

MOHIT SARASWAT

GAUTAM BUDDHA TECHNICAL UNIVERSITY, LUCKNOW

2009-2011


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PREFACE

The RESEARCH titled TO DESIGN MARKETING STRATEGY FOR ULIP

(INSURANCE)

PRODUCT OF HDFC STANDARD LIFE INSURANCE COMPANY & IDENTIFY

RELATIVE MERITS & DEMERITS OF ULIP Vs MUTUAL FUND being carried out

for HDFC SLIC.

HDFC SLIC operates in financial products and services like, Insurance. The

evaluation of financial planning has been increased through decades, which is best seen in

customer rise. Now a days investment of saving has assumed great importance.

According to the study of the markets, it is being observed that markets are doing well

in Insurance (ULIP) or Mutual fund. In near future a proper financial planning is required to

invest money in all type of financial product because there is good potential in market to

invest.

In this RESEARCH the great emphasis is given to the investors mind in respect to

investment in Insurance (ULIP) or Mutual Fund .The needs and wants of the client is taken

into consideration. I hope HDFC SLIC, Bokaro will recognize this as well as take more

references from this RESEARCH report. The main objective of this RESEARCH is to know

the Awareness of Insurance (ULIP) or Mutual Fund among investors and also to know the

investing pattern of people in different Financial RESEARCH.


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IT sector has been given more emphasis for the study of the RESEARCH because it is

the only sector where all type of Age group, Income class and different level of people are

represented. After analyzing the feedback the conclusion has been made that the Indian

financial market is having lots of potential customer the only thing is to give a proper

guidance to the prospective customers.


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ACKNOWLEDGEMENT

A successful RESEARCH can never be prepared by the single effort of the person to

whom

RESEARCH is assigned, but it also demand the help and guardianship of some conversantperson

who helped the undersigned actively or passively in the completion of successfulRESEARCH.

In this context as a student ofGautam Buddha Technical University, Lucknow I would

first of all like to express my gratitude to Mr. Nikesh Sinha (Brnach Manager) for

assigning me such a worthwhile topic INVESTMENT ANALYSIS & EXPOSURE OF

FINANCIAL MARKET THROUGH FINANCIAL PRODUCTS ULIP (INSURANCE)

Vs MUTUAL FUNDS.

I am also like to thankMr. L.K.VERMA (H.O.D. MBA) for there invaluable

guidance, keen interest cooperation inspiration, and of course moral support through myRESEARCH session.

(MOHIT SARASWAT)


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CONTENTS

1. Executive Summary

2. Introduction

3. About Company

4. Objective of the Study

5. Research Methodology

6. Insurance

7. Mutual Fund

8. ULIP Vs. Mutual Fund

9. Graphical Representation of Questionnaire

10. Limitations

11. Recommendations

12. Conclusion

13. Questionnaire

14. Bibliography


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EXECUTIVE SUMMARY

OBJECTIVE

Savings form an important part of the economy of any nation. With the

savings invested in various options available to the people, the money acts as

the driver for growth of the country. Indian financial scene too presents a

plethora of avenues to the investors. Though certainly not the best or deepest of

markets in the world, it has reasonable options for an ordinary man to invest his

savings.

When it comes to creating lasting wealth for the future most people miss

the boat simply because they put off doing the essentials to get started. They

procrastinate, usually because they think that creating lasting wealth really isnt

possible for them and/or because theyre intimidated by the financial world.

After youve made the decision to actively pursue creating lasting wealth

for your future, you need to stop any spending leaks you have in your budget

and start using that money for investments. The time to start creating wealth is

right now, not next week or next year or after that vacation. The time is now if

you truly wish to create lasting wealth for the future.

So for fulfillment of the saving I have done this study, because now a

days mutual fund and ulip are hot investment products. But without analyzing

its feature & returns it is not easy to say which one is better.


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INTRODUCTION

FORMATION OF COMPANY

HDFC Standard Life Insurance Company Ltd. is one of Indias leading private life

insurance

companies, which offers a range of individual and group insurance solutions. It is a joint

venture between HDFC Ltd., India's largest housing finance institution and Standard Life

Assurance Company, Europe's largest mutual life company. It was the first life insurance

company to be granted a certificate of registration by the IRDA on the 23rd of October 2000.

HDFC

Incorporated in 1977 with a share capital of Rs. 10 crores, HDFC has since emerged

as the largest residential mortgage finance institution in the country. The corporation has had

a series of share issues raising its capital to Rs. 119 crores. The net worth of the corporation

as on March 31, 2000 stood at Rs. 2,096 crores. HDFC operates through 75 locations

throughout the country with its Corporate Headquarters in Mumbai, India. HDFC also has an

international office in Dubai, U.A.E., with service associates in Kuwait, Oman and Qatar.

STANDARD LIFE

Standard Life is Europe's largest mutual life assurance company. Standard Life, which

has been in the life insurance business for the past 175 years, is a modern company surviving

quite a few changes since selling its first policy in 1825. The company expanded in the 19th

century from its original Edinburgh premises, opening offices in other towns and acquiring

other similar businesses.Standard Life currently has assets exceeding over 70 billion under


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its management and has the distinction of being accorded "AAA" rating consequently for the

past six years by Standard & Poor.

THE JOINT VENTURE

HDFC Standard Life Insurance Company Limited was one of the first companies to be

granted licence by the IRDA to operate in life insurance sector. Each of the JV player is

highly rated and been conferred with many awards. HDFC is rated 'AAA' by both CRISIL

and ICRA. Similarly, Standard Life is rated 'AAA' both by Moody's and Standard and

Poors. These reflect the efficiency with which HDFC and Standard Life manage their asset

base of Rs. 15,000 Cr and Rs. 600,000 Cr respectively.HDFC Standard Life Insurance

Company Ltd was incorporated on 14th August 2000. HDFC is the majority stakeholder in

the insurance JV with 81.4 % stake and Standard Life has a stake of 18.6%. Mr. Deepak

Satwalekar is the MD and CEO of the venture.

HDFC GROUP


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ABOUT COMPANY

HDFC STANDARD LIFE INSURANCE ( New business)

The first year premium income increased by over 58% from Rs. 1,026.18 crores in the

previous year to Rs.1, 624.23 crores in the current year. The cumulative Sum Assured in

respect of policies issued increased fromRs.47,730.40 crores as at 31st March, 2006 to

Rs.67,192.97 crores as at 31st March, 2007.During the year, the company introduced a

revised version of the Group as well as Individual Unit Linked Plans to conform to the new

guidelines issued by the IRDA. The company now has a portfolio of 21 retail and 6group

products, along with five optional rider benefits catering to the savings, investment,

protection and retirement needs of the customer. Most retail products are offered on both, the

conventional and unit linked platforms.

The Endeavour of the sales force is to help customers assess their financial and

insurance needs and then offer them an appropriately customized solution through the

combination of one or more riders together with the basic plan. As the age profile of our

customers is relatively young, the company has made a conscious effort to offer them long

term policies, with adequate life cover. We believe that in most cases a regular premium

paying policy would be in the interest of the policyholder- 80% of the policies written this

year are regular premium policies.

The company has significantly leveraged the barbell shaped demographic profile of the

population and is one of the biggest providers of

i) Retirement solutions for the individual market segment,

ii) Solutions for planning

Childrens financial futures. The market for company retirement plans is yet evolving and is

currently very pricing sensitive. The company is a key player in the group business market.

During the year, the company issued over 5,23,000 policies and has covered more

than8,77,000 lives. Distribution


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OFFICES

In its drive to deepen and widen the penetration in the market, the company opened an

Additional 107 offices during the year, taking the total to 276 across 28 regions. In addition

the company also adopted the Hub and Spoke model and opened 162 spokes during the year.

Through the network of these offices the Companys Financial Consultants, Corporate

Agents and Brokers are able to service Customers in almost 700 cities and towns across the

country.

FINANCIAL CONSULTANTS

The Companys distribution strategy continues to lay strong emphasis on the

development of the agency channel. The number of licensed Financial Consultants appointed

by the company increased from over 33,000 in the previous year to over 74,000 in the current

year, with a large part of the increase happening in the latter part of the year. This positions

us well to take advantage of a larger trained sales force in the coming year. The company

provides extensive and thorough training, to not only Comply with the regulatory

requirements, but also to equip the financial consultants to Appropriately assess the

customers insurance needs. The needs based analysis approach Adopted by our sales force

has resulted in a significant increase in the average premium,

Even beyond the limits of tax benefits available

CORPORATE AGENTS

Simultaneously the company took advantage of the interest in distributing insurance

Products that was evinced by banks and other corporate agents. This channel has yielded

good results and accounts for over 43% of all first year premia collected during the year.

RURAL & SOCIAL SECTOR OBLIGATIONS

Under the IRDA (Obligations of Insurers to Rural Social Sectors) Regulations, 2000,

an

insurer is required to meet the prescribed obligations pertaining to rural and social sectors.

The company has focused its attention in a few rural areas and has seen gratifying results.

As against a regulatory requirement of writing 18% of all policies in rural areas, the company

has issued over 1,21,000 policies accounting for more than 23% of all policies issued during

the year. Two of our financial consultants operating exclusively in rural areas have also

qualified for the internationally recognized Million Dollar Round Table (MDRT) club. In


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addition, during the current financial year, the company has covered 27,284 lives under the

social sector category, as against the requirement of 25,000 lives.

SERVICING THE CUSTOMER

During the year, the company has established additional touch points for rendering

effective and efficient customer service. The customer can now visit our offices, call the

Service Helpline, send an email, access our service through the web portal or through the

Financial Consultants. Premium payments can be made easily using options like the direct

debit facility (through the Electronic Clearing System) as also through net banking that has

been enabled

CAPITAL

During the year, the company raised the paid-up equity share capital from Rs. 620

crores

To Over Rs. 801 crores. Further the company also enhanced its authorized capital from Rs.

620 Crores to Rs. 1,500 crores. The shares subscribed to by Standard Life Assurance

Companies are yet to be allotted and are awaiting approval from IRDA since Standard

Life Assurance Company had demutualised during the year

INFRASTRUCTURE

During the year, the Company has invested in additional infrastructure capacity and

human

Capital, in terms of offices, technology, staff, financial consultants, in order to be well

Positioned to increase the growth momentum in the year ahead.

The company stepped up the recruitment programme in the latter part of the year in

preparation for the next year. Many of the newly recruited sales employees will become fully

productive over the coming year.

HUMAN RESOURCE

The company had 8,457 employees as of March 31, 2007 as compared to 3,043

Employees as of March 31, 2006. Under the provisions of Section 217 (2A) of the

Companies Act, 1956 and the rules framed there under, the names and other particulars of

employees are set out in the annexed to this Report.


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TECHNOLOGY

The company has been investing in technology to ensure efficient processing of

business and to be in a position to offer value added services to customers. By networking its

branches across the country and setting up a second processing center in Chennai, the

company has taken effective steps towards ensuring Business Continuity. Their investments

in workflow and imaging technology through best of breed solutions have helped it manage

increasing volumes without affecting service standards. As a result, the company, in the last

year, has been awarded the Intelligent Enterprise Award by the Express Computer

Magazine Part of the Indian Express Group. The company has also used the internet

effectively to service both policyholders and its agency force.


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TRAINING

Employee training is an integral part of our business strategy. The company continues

to

invest heavily into the development of its manpower resources. This is an ongoing activity

with investments being made to reap benefits in the years to come. During the year, a large

scale training campaign was carried out covering the

EMPLOYEES

Sales and operations, Financial consultants and alternate channel Partners and their

associates on the Compliance necessitated by the Guidelines on Anti Money Laundering

mandated by the IRDA. Risk Management Policy The company has a Risk Management

policy. This involved risk identification, impact evaluation and mitigant identification

exercise. A review mechanism has also been put in place to track the movement of various

risks, both at the unit level and at the corporate level. Regular updates in this regard will be

placed before the Audit Committee of Directors and the board of directors. Particulars

Regarding Conservation of Energy, Technology Absorption and Foreign Exchange Earnings

and Expenditure Since the company does not carry out any manufacturing activity and has no

dealings in foreign exchange, the particulars in the Companies (Disclosure of Particulars in

the Report of the Board of Directors) Rules, 1988 are not applicable. Dividend As the

company has not earned profits, the directors do not recommend any dividend.


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VISION AND VALUES

The most successful and admired life insurance company, which mean that

we are the most trusted company, the easiest to deal with, offer the best value

for money, and set the standards in the industry. In short,

The most obvious choice for all.

VALUES THAT WILL BE OBSERVED WHILE WE WORK WITH

HDFCSLIC

INTEGRITY

What is it

Honest and Truthful in every action.

Transparency

Stick to principles irrespective of outcome.

Be just and fair to everyone.

Why

Integrity is the bedrock on which the company and the expectations of the customers

and employees are built.

Integrity establishes the credibility of the person defines the character and empowers

one to do justice to the job.

Enables building confidence and trust, achieving transparency and laying a strong

foundation for a binding relationship.


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INNOVATION

What is it

Building a store house of treasures through experiences.

Looking at every product and process through fresh eyes everyday.

Why

To exceed customer expectation and maximise customer retention.

To achieve competitive advantage.

To promote growth and upgrade standards in the industry.

To open a world of new possibilities

CUSTOMER CENTRIC

What is it

Understand his expectations by keeping him as the centre - point

Listen actively

Understand customer needs and deliver solutions.

Customer interest always supreme.

Customer centric

Why

Reinforce brand loyalty by complete transparency.

Customer is the source of revenue for the company.

Customer is the reason for our existence.

Ensure that customer chooses our company to do business with.

Customers goodwill alone can bring more business and more customers.

Will contribute to customer retention


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PEOPLE CARE

What is it

Genuinely understanding the people we work with.

Guiding their development through training and support

Helping them develop requisite skills to reach their true potential.

Know them on a personal front.

Create an environment of trust and openness.

Respect for the time of others.

Why

People are the most valuable assets of the company.

Motivate individual to give his / her best.

Establish a valuable relationship with them to create a joyful working environment.

Job satisfaction

TEAM WORK

One for all and all for one

What is it

Whole team takes the ownership of the deliverables

Consult all involved , understand and arrive at a common objective

Co-operate and support across departmental boundaries

Identify strengths and weaknesses accordingly allocate responsibility to achieve

common objectives.


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BANKING PARTNER OF LIFE INSURANCE COMPANY
http://www.unionbankofindia.com/http://www.bajajcapital.com/http://www.bankofbaroda.com/http://www.hdfcbank.com/http://www.indian-bank.com/http://www.hdfc.com/


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JUSTIFICATION AS TO WHY THIS TOPIC

As an investor you have wide range of investment avenues available for evaluating an

investment avenues the attributes are rate of return & marketability & thus mutual funds &

ULIPs offer various options and value added services to attract and retain customer with

respect to number of schemes mutual funds offer dividends and growth options SIP and also

it helps investor by diversification, professional management, liquidity & assured allotment,

tax saving and transparency.

Also since these days volatility of share market is increasing and risk taking capacity

of individual is very low this topic will bring awareness that investing in mutual fund and

ULIPs is safer and beneficial . Also the lock in period is very short so investment in these

areas will be profitable.


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OBJECTIVES OF THE STUDY

Savings form an important part of the economy of any nation. With the savings

invested in various options available to the people, the money acts as the driver for growth of

the country. Indian financial scene too presents a plethora of avenues to the investors. Though

certainly not the best or deepest of markets in the world, it has reasonable options for an

ordinary man to invest his savings.

When it comes to creating lasting wealth for the future most people miss the boat

simply because they put off doing the essentials to get started. They procrastinate, usually

because they think that creating lasting wealth really isnt possible for them and/or because

theyre intimidated by the financial world.

After youve made the decision to actively pursue creating lasting wealth for your

future, you need to stop any spending leaks you have in your budget and start using that

money for investments. The time to start creating wealth is right now, not next week or next

year or after that vacation. The time is now if you truly wish to create lasting wealth for the

future.

This takes discipline. Wealthy people know this. They know they will have to be

thrifty now in order to be wealthy in the future. And they are willing to make some sacrifices

in instant gratification so that they can have wealth for the future.

You will also need to acquire knowledge of the financial world and the various types

of investments that are out there. To create lasting wealth for the future, you want to invest

your money in investment tools that will successfully create wealth for the future. Good solid

investments that you stick with for the long term are your best bet for creating lasting wealth.

Find out which type of investments fit with your overall goals to create lasting wealth for the

future and start investing as soon as possible. The future is closer than you think.


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RESEARCH METHODOLOGY

The research used here is applied research as all the financial tools and

available schemes in mutual funds helped to solve investment related problems

of individuals.

HYPOTHESIS

Its assumed that irrespective of short term or long term mutual funds and

ULIPs always give consistent returns and is best when risk taking capacity of

individual is very less.

SCOPE OF THE STUDY

GEOGRAPHICAL SCOPE:

The area targeted was IT Professionals in DLF City,Gurgaon.

FUNCTIONAL SCOPE:

The two aspects that have been included in this study are marketing and

finance . The Marketing aspect includes collection of data and interacting

with clients that are IT professionals while the financial aspect includes all

the schemes under mutual funds and ULIPs and details attach to all

investment tools.

DATA SOURCES

Collection of Data:-There was secondary data available for the study and also

Primary data collected by carrying out by the survey which has been carried out

to through personal interviews of the customers. The sample size was 100.

a. Sampling methods: - A sample is the representative of the population

which will predict the behaviour of the whole universe. Area sampling is

done here.

b. The sampling size put under two categories: Probability sampling and

non Probability sampling.

This data is also collected through questionnaire.


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RESEARCH APPROACH

In this study I have applied individual sampling research approach

because this is the directly study of investment so for this it is very necessary to

know the public opinion. And this could be happen only with the help of

individual sampling method

RESEARCH INSTRUMENT:

As far as research instrument is concern I have developed a questionnaire

so that I

can understand the investors opinion.

SAMPLING METHOD:

I have taken a sample of 100 people of different sectors like IT

professional, banks employee, manufacturing units employee etc.

CONTACT METHOD:

It was directly personal interview method.

LIMITATIONS

As far as limitation is concern I have find following problems during my

study of this RESEARCH:

There was time constrain, actually two month is very less time for

analyzing mutual fund and ULIP.

Some time people dont give their proper response for filling the

questionnaire because they think it is not useful for them. And people

provide false data as they were scared about providing actual data such

as net income , premium paid etc.


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Some time people scared about giving their personal investment details

because they dont want to share it with public.

Most of the IT Professionals have the money but they dont have theproper knowledge of this kind of the investment product and I should say

SIP(systematic investment planning), so it is one of the constrain during

the study.

There was a Small size of sample just because of time consideration the

sample size taken small, which effects on the accuracy/ reliability of the

research.

Some of the people misunderstood the researcher as an insurance agent so

they refuse to respond on the background of already getting insured.

Getting appointments with people was difficult as most of the people

were busy and it was difficult to contact them again and again.

KEY FINDING

There is a great potential for investment in Mutual Fund and ULIP as

people wants to save for various future obligation.

Since Rate of Interest on Bank deposit is falling people will be attracted

towards investments in ULIP and Mutual Funds because of high rate of

returns.

Comparatively people of small towns are less aware of other investment

avenues viz Mutual Fund and ULIP.

People of young age group are ready to take risk and they can be targeted

for investment in Mutual Fund (for the short term investment) and ULIP

(for the long term investment).


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INSURANCE: THE INDUSTRY SCENARIO

Insurance is one of the oldest known professions in the world economy. The Indian

counterpart is no younger. Life Insurance in its modern form came to India from England in

the year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the

first life insurance company on Indian Soil. All the insurance companies established during

that period were brought up with the purpose of looking after the needs of European

community and Indian natives were not being insured by these companies. However, later

with the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance

companies started insuring Indian lives. But Indian lives were being treated as sub-standard

lives inviting heavy premiums.

The era of change was ushered in by Bombay Mutual Life Assurance Society, the first

Indian life insurance company in the year 1870 that covered Indian lives at normal rates.

Starting as Indian enterprise with highly patriotic motives, insurance companies came into

existence to carry the message of insurance and social security through insurance to various

sectors of society. Bharat Insurance Company (1896) was also one of such companies

inspired by nationalism. The Swadeshi movement of 1905-1907 gave rise to more insurance

companies. The United India in Madras, National Indian and National Insurance in Calcutta

and the Co-operative Assurance at Lahore were established in 1906. In 1907, Hindustan Co-

operative Insurance Company took its birth in one of the rooms of the Jorasanko, house of the

great poet Rabindranath Tagore, in Calcutta. The Indian Mercantile, General Assurance and

Swadeshi Life (later Bombay Life) were some of the companies established during the same

period.

In 1994, the committee submitted the report and some of the key recommendations included:

Structure

o Government stake in the insurance Companies to be brought down to 50%

o Government should take over the holdings of GIC and its subsidiaries so

that these subsidiaries can act as independent corporations.

o All the insurance companies should be given greater freedom to operate.

Competition

o Private Companies with a minimum paid up capital of Rs.1bn should be

allowed to enter the industry.


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o No Company should deal in both Life and General Insurance through a

single entity.

o Foreign companies may be allowed to enter the industry in collaboration

with the domestic companies.

o Postal Life Insurance should be allowed to operate in the rural market.

o Only one State Level Life Insurance Company should be allowed to

operate in each state.

Regulatory Body

o The Insurance Act should be changed.

o An Insurance Regulatory body should be set up.

o Controller of Insurance (Currently a part from the Finance Ministry)

should be made independent

Investments

o Mandatory Investments of LIC Life Fund in government securities to be

reduced from 75% to 50%

o GIC and its subsidiaries are not to hold more than 5% in any company

(There current holdings to be brought down to this level over a period oftime)

Customer Service

o LIC should pay interest on delays in payments beyond 30 days

o Insurance companies must be encouraged to set up unit linked pension

plans

o Computerisation of operations and updating of technology to be carried

out in the insurance industry

The committee emphasised that in order to improve the customer services and

increase the coverage of the insurance industry should be opened up to competition. But at

the same time, the committee felt the need to exercise caution as any failure on the part of

new players could ruin the public confidence in the industry. Hence, it was decided to allow

competition in a limited way by stipulating the minimum capital requirement of Rs.100

crores. The committee felt the need to provide greater autonomy to insurance companies in

order to improve their performance and enable them to act as independent companies witheconomic motives. For this purpose, it had proposed setting up an independent regulatory

body.


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THE INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in

Parliament in December 1999. The IRDA since its incorporation as a statutory body in April

2000 has fastidiously stuck to its schedule of framing regulations and registering the private

sector insurance companies. The other decisions taken simultaneously to provide the

supporting systems to the insurance sector and in particular the life insurance companies were

the launch of the IRDAs online service for issue and renewal of licenses to agents.

The approval of institutions for imparting training to agents has also ensured that the

insurance companies would have a trained workforce of insurance agents in place to sell their

products. Since being set up as an independent statutory body the IRDA has put in a

framework of globally compatible regulations.

Reforms have marked the entry of many of the global insurance majors into the Indian

market in the form of joint ventures with Indian companies. Some of the key names are AIG,

New York Life, Allianz, Prudential, Standard Life, Sun Life Canada and Old Mutual. The

entry of new players has rejuvenated the erstwhile monopoly player LIC, which has

responded to the competition in an admirable fashion by launching new products and

improving service standards. The following are the key winds of change brought about by

privatisation.

Market Expansion: There has been an overall expansion in the market. This has been

possible due to improved awareness levels thanks to the large number of advertising

campaigns launched by all the players. The scope for expansion is still unlimited as virtually

all the players are concentrating on large cities and towns - except by LIC to an extent there

was no significant attempt to tap the rural markets.

Customer Service: Not unexpectedly, this was one area that witnessed the most

significant change with the entry of new players. There is an attempt to bring in international

best practices in service and operational efficiency through use of latest technologies. Advice

and need based selling is emerging through much better trained sales force and advisors.

There is improvement in response and turnaround times in specific areas such as delivery of


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first policy receipt, policy document, premium notice, final maturity payment, settlement of

claims etc. However, there is a long way to go and various customer surveys indicate that the

standards are still below customer expectation levels.

Channels of Distribution: Till two years back, the only mode of distribution of life

insurance products was through Agents or Insurance Consultants, as we call them. While

agents continue to be the predominant distribution channel, today a number of innovative

alternative channels are being offered to consumers. Some of them are banc assurance,

brokers, the Internet and direct marketing. Though it is too early to predict, the wide reach of

bank branch network in India could lead to banc assurance emerging as a significant

distribution mechanism.

STRATEGIC ALTERNATIVES IN THE INDIAN INSURANCE

MARKET

If one analyses the history of growth of the insurance industry since reforms, it is

marked by all-round growth of all players. More or less all players (including the market

leader LIC) have aggressively recruited and trained advisors, appointed agents, launched new

products, improved customer service standards and revamped/expanded their distribution

networks. If at all there was any major difference between players it was only in time lag in

launching of services. Every player would like the customers to believe that its service

standards are the best or that its agents are the most informed and ethical, but is debatable

whether there are any significant differences. In other words, each company is trying to be

everything to everybody.

Our argument is that the strategy of being everything to everybody is risky. Some

players justify the above strategy on the basis that the Indian market is huge and it can

accommodate everybody. Still, in a market where it is difficult to distinguish oneself

sufficiently on service or any other parameter to be able to charge a premium, it will lead to

unmitigated price competition to the detriment of all players. One may achieve sales

turnover, but margins and profitability will suffer severely. While there is room for a few

scale players with a finger in every pie, it is profitable for other players to focus on different

segments to survive and thrive in a multi-firm open environment. While each company has to

choose its own unique positioning based on its unique strengths some of the generic


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positioning alternatives are mentioned below. Needless to say the positioning choices

discussed here are not mutually exclusive and can be overlapping.

VARIETY-BASED POSITIONING:

This type of positioning is based on varieties in products and services rather than

customer segments. It is a sensible strategy for those companies who have distinctive

advantages or strengths in offering certain products and services.One such example is

Birla Sunlife Insurance, which has been placing particular focus on investment-related

products since its launch in India. Through its superior fund management capabilities, the

insurance company can deliver better returns on its investment-linked products and

thereby carve for itself a leadership position in this segment. Then there is the entire

category of pension products which is widely touted to have immense growth potential in

India due to imminent pension reforms. It is possible to achieve profitable positioning by

focusing and excelling in only pension products.

NEED-BASED POSITIONING:

The insurance needs of customers vary significantly for different groups of customers.

This is the most commonly understood positioning and is based on the differing needs of

different groups of consumers. This can be done successfully if a company has unique

strengths to service a group of customer needs better than others. However, in India most of

the life insurance companies have a wide variety of products tailored for different customer

needs and there is no company focusing on a particular customer need.

An example would be a life insurance company that focuses only on High Net-worth

Individuals (HNIs). The needs of HNIs would be quite different from those of a general

consumer and would require an entirely different marketing mix right from the type of

products offered and the way they are distributed, to the promotion methods employed.

ACCESS-BASED POSITIONING:

Positioning of customers can also be done by the way they are accessible. That is

different groups of customers may be accessible in different ways even though they may have

similar needs. Access is typically a function of customer geography or customer scale. There

is excellent opportunity in the insurance industry to employ access-based positioning by


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targeting the rural insurance sector. The rural market for life insurance is very different from

the urban market in terms of needs, income levels and distribution (seasonality, for example),

penetration of media and so on. So far except for LIC, no other player has paid any attention

or focus on the rural sector. Contrary to common perception it is a big opportunity as

emphasised repeatedly by such eminent strategists like C.K. Prahlad. Rural market can be a

highly profitable position if one is able to carefully plan and tailor an entire set of low-cost

activities of advertising, distribution, and product design etc. to successfully exploit the

potential.

FIVE LIFE INSURANCE MYTHS

People who choose life insurance policies based on myths about insurance could end

up making a costly decision. It is important to understand which kind of life insurance is right

for you or whether you need insurance at all. Life insurance policies use legal language and

have different names in different companies, which can scare you from learning about them.

So, here are five common life insurance myths to help you from making the wrong choice.

Myth 1: I Am Alive, Therefore I Need Life Insurance

Life insurance protects dependents and guarantees a steady source of income after

their breadwinner's death. Single people without dependents or childless couples who earn

enough to lead a good life need not consider buying insurance. Purchase life insurance for a

child only if you depend on her income. As for retired people, unless you are insecure that

your partner would desert you or if you depend on a pension that would disappear upon your

partner's death then you should get life insurance

Myth 2: I Don't Work So I Don't Need Insurance

Even those without jobs need life insurance. A jobless parent with dependent children

need not buy life insurance, as there's no paycheck to replace. However childcare could cost

$10,000 to $30,000 annually. So estimate the amount it would cost for your family and use

that number for your "salary" when calculating life insurance needs.

Myth 3: Odds Are I Won't Need It, So Why Spend The Money?


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Why skip life insurance to save money? The reason why life insurance is cheaper for

younger people to buy is because chances of death low for youths. But life is unsure and the

time of our death is not predetermined therefore do buy life insurance to provide for your

family in case the worst does happen. If right kind of insurance is bought you could provide

enough financial security to your dependents.

Myth 4: If It's More Expensive, It Must Be Worth It

Term insurance is cheaper, better choice for most of us since term life insurance is

"pure" insurance with no investment add-on and guarantees your coverage till the time you

pay your premium. Term insurance is specifically for those who want life insurance for a

stipulated duration of time. Level term insurance is probably the best option since premiums

don't increase while you have it. There are various types of Permanent insurance such as

whole life, universal and variable, and more but is seven to eight times more expensive than

term. A permanent insurance policy combines life insurance with an investment that builds

up cash value which you can exploit by borrowing or surrendering (cashing in) the policy.

Myth 5: It's Such a Hassle to Get Insurance

If you need to change your life insurance, never cancel existing policies until your

new insurance is in place. You should not keep any gaps in your insurance coverage. Most

reputed companies provide online facility to download quotes and application forms on the

Internet. You can easily shop for the best possible rates online and then consult a trusted

agent to purchase the insurance. After contacting an agent or company they themselves will

arrange to collect the medical information they require.

ROLE OF LIFE INSURANCE

Role 1: Life insurance as Investment

Insurance is an attractive option for investment. While most people recognize the risk

hedging and tax saving potential of insurance, many are not aware of its advantages as an

investment option as well. Insurance products yield more compared to regular investment

options, and this is besides the added incentives offered by insurers. INSURANCE is a

unique investment avenue that delivers sound returns in addition to protection.

Role 2: Life insurance as Risk cover


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First and foremost, insurance is about risk cover and protection financial protection,

to be more precise to help outlast lifes unpredictable losses. Designed to safeguard against

losses suffered on account of any unforeseen event, insurance provides you with that unique

sense of security that no other form of investment provides. By buying life insurance, you

buy peace of mind and are prepared to face any financial demand that would hit the family in

case of an untimely demise.

Role 3: Life insurance as Tax planning

Insurance serves as an excellent tax saving mechanism too. The Government of India

has offered tax incentives to life insurance products in order to facilitate the flow of funds

into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to

a rebate of 20 per cent on the annual premium payable on his/her life and life of his/her

children or adult children. The rebate is deductible from tax payable by the individual or a

Hindu Undivided Family. This rebate is can be availed up to a maximum of Rs 12,000 on

payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you can buy anything

upwards of Rs 10 lakh in sum assured. (Depending upon the age of the insured and term of

the policy) This means that you get an Rs 12,000 tax benefit. The rebate is deductible from

the tax payable by an individual or a Hindu Undivided Family.

TYPES OF INSURANCE PLANS

TERM INSURANCE POLICY

A term insurance policy is a pure risk cover for a specified period of time. What this

means is that the sum assured is payable only if the policyholder dies within the policy term.

For instance, if a person buys Rs 2 lakh policy for 15-years, his family is entitled to the

money if he dies within that 15-year period. What if he survives the 15-year period? Well,

then he is not entitled to any payment; the insurance company keeps the entire premium paid

during the 15-year period. So, there is no element of savings or investment in such a policy. It

is a 100 per cent risk cover. It simply means that a person pays a certain premium to protect

his family against his sudden death. He forfeits the amount if he outlives the period of the

policy. This explains why the Term Insurance Policy comes at the lowest cost.

WHOLE LIFE POLICY

As the name suggests, a Whole Life Policy is an insurance cover against death,

irrespective of when it happens. Under this plan, the policyholder pays regular premiums


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until his death, following which the money is handed over to his family. This policy,

however, fails to address the additional needs of the insured during his post-retirement years.

It doesn't take into account a person's increasing needs either. While the insured buys the

policy at a young age, his requirements increase over time. By the time he dies, the value of

the sum assured is too low to meet his family's needs. As a result of these drawbacks,

insurance firms now offer either a modified Whole Life Policy or combine in with another

type of policy.

ENDOWMENT POLICY

Combining risk cover with financial savings, endowment policies is the most popular

In an Endowment Policy, the sum assured is payable even if the insured survives the policy

term.

If the insured dies during the tenure of the policy, the insurance firm has to pay the

sum assured just as any other pure risk cover. A pure endowment policy is also a form of

financial saving, whereby if the person covered remains alive beyond the tenure of the policy,

he gets back the sum assured with some other investment benefits. In addition to the basic

policy, insurers offer various benefits such as double endowment and marriage/ education

MONEY BACK POLICY

These policies are structured to provide sums required as anticipated expenses

(marriage, education, etc) over a stipulated period of time. With inflation becoming a big

issue, companies have realized that sometimes the money value of the policy is eroded. That

is why with-profit policies are also being introduced to offset some of the losses incurred on

account of inflation. A portion of the sum assured is payable at regular intervals. On survival

the remainder of the sum assured is payable. In case of death, the full sum assured is payable

to the insured. The premium is payable for a particular period of time.

ANNUITIES AND PENSION

In an annuity, the insurer agrees to pay the insured a stipulated sum of money

periodically. The purpose of an annuity is to protect against risk as well as provide money in

the form of pension at regular intervals. Over the years, insurers have added various features

to basic insurance policies in order to address specific needs of a cross section of people.


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ULIP(UNIT LINKED INVESTMENT PLANNING)

ULIP is an acronym for Unit Linked Insurance Plan. ULIPs are distinct from the more

familiar with profits policies sold for decades by the Life Insurance Corporation. With

profits policies are called so because investment gains (profits) are distributed to

policyholders in the form of a bonus announced every year. ULIPs also serve the same

function of providing insurance protection against death and provision of long-term savings,

but they are structured differently. In with profits policies, the insurance company credits

the premium to a common pool called the life fund after setting aside funds for the risk

premium on life insurance and management expenses. Every year, the insurer calculates how

much has to be paid to settle death and maturity claims. The surplus in the life fund left after

meeting these liabilities is credited to policyholders accounts in the form of a bonus. In a

ULIP too, the insurer deducts charges towards life insurance (mortality charges),

administration charges and fund management charges. The rest of the premium is used to

invest in a fund that invests money in stocks or bonds. They number of units represents the

policyholders share in the fund.

The value of the unit is determined by the total value of all the investments made by the

fund divided by the number of units. If the insurance company offers a range of funds, the

insured can direct the company to invest in the fund of his choice. Insurers usually offer three

choicesan equity (growth) fund, balanced fund and a fund, which invests in bonds. In both

with profits policies as well as unit-linked policies, a large part of the first year premium

goes towards paying the agents commissions.

ULIP - KEY FEATURES

Premiums paid can be single, regular or variable. The payment period too can be

regular or

variable. The risk cover can be increased or decreased.

As in all insurance policies, the risk charge (mortality rate) varies with age.

The maturity benefit is not typically a fixed amount and the maturity period can be

advanced or extended.

Investments can be made in gilt funds, balanced funds, money market funds, growth

funds or bonds.


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The policyholder can switch between schemes, for instance, balanced to debt or gilt to

equity, etc.

The maturity benefit is the net asset value of the units.

The costs in ULIP are higher because there is a life insurance component in it as well,

in addition to the investment component.

Insurance companies have the discretion to decide on their investment portfolios.

They are simple, clear, and easy to understand.

Being transparent the policyholder gets the entire episode on the performance of his

fund.

Lead to an efficient utilization of capital.

ULIP products are exempted from tax and they provide life insurance.

Provides capital appreciation.

Investor gets an option to choose among debt, balanced and equity funds.

VARIOUS SCHEMES

However, there are some schemes in which the policyholder receives the sum assured

plus the value of the investments. Various schemes have been tailored to suit differentcustomer profiles and, in that sense, offer a great deal of choice. The advantage of ULIP is

that since the investments are made for long periods, the chances of earning a decent return

are high. Just as in the case of mutual funds, buyers who are risk averse can buy debt schemes

while those who have an appetite for risk can opt for balanced or equity schemes.

COVER-PLUS

In a sense, unit-linked plans work like endowment plans-they combine insurance withinvestment. A part of the premium you pay goes towards buying you insurance cover and

what's left of the rest (after deducting a host of charges-from fund management to

administration expenses) is invested in equity and debt instruments. The investment

component of the premium is converted into units-much like mutual fund units, to be bought

and sold at the prevailing Net Asset Value (NAV); your premiums are unitised through the

policy tenure, typically 15 or 20 years. Investment gains will accrue from an appreciation in

the value of your units, and information on this is put out regularly by insurers.

EXPENSES


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One area where unit-linked plans come in for widespread criticism relates to the

expenses that insurers charge under three broad heads: mortality charges (which goes towards

paying for your insurance cover), general expenses (agents' commissions and underwriting

costs), and fund management costs. The second head, general expenses, accounts for the

biggest component-typically, around 40 per cent (of the premium paid) in the first two years,

which goes down sharply in later years. The actual expense structure may vary from one

product to another depending on, among other things, the amount invested, the investment

tenure and the period beyond which withdraws are permitted.

SHOULD INVESTOR OPT FOR ULIP

First and foremost, investors need to understand that a ULIP is a bundled product of

their investment and their insurance proceeds. So if you have a ULIP invest in equities, you

are exposing your life insurance monies as well as your invisible surplus to the vagaries of

equity market. While it is fine and even sensible to let your invisible assets get an equity

flavour, the same cannot be said about your life insurance monies, which to a large extent

should be scared.

A ULIP policyholder has the option to invest in a variety funds, depending on his risk

profile. If one does not have appetite to invest in equity, they can choose a debt or balanced

fund. However, the structure of a ULIP takes care of quite a bit of the uncertainty in the

markets. Insurance companies understand the need to give insurance seekers the flexibility to

rethink their investment strategy in view of market histrionics. It is the investors to make the

right switch they need to track markets actively and be well informed, which is actually the

job of the investment advisor/consultant.

ULIP is suitable for individuals who are already adequately insured and are

reasonably well informed and savvy to take active investment decisions by using the 'switch

option' that is provided to a ULIP policyholder. Also policyholders with regular endowment

plans that are not satisfied with the 4-6 per cent returns can consider taking a ULIP with a

lower equity component.

Market Factoid The growth options of ULIP have recorded annualized returns of over 20 per cent.


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Various charges amounting to approximately 25 per cent in the initial years in all the

schemes.

Most companies normally allow customers to switch, a maximum fixed number of

times annually from one fund to other fund. Later, they charge approximately Rs.100

per switch.

Private insurance companies 50 per cent sales up because of ULIPs today.

Individuals availing tax exemption under section 88 of Income Tax Act.

New Schemes coming into the market, which covers life insurance and accident

insurance.

Unit-linked insurance plans, ULIPs, are distinct from the more familiar with profits

policies sold for decades by the Life Insurance Corporation. With profits policies are called

so because investment gains (profits) are distributed to policyholders in the form of a bonus

announced every year.

ULIPs also serve the same function of providing insurance protection against death

and provision of long-term savings, but they are structured differently. In with profits

policies, the insurance company credits the premium to a common pool called the life fund,

after setting aside funds for the risk premium on life insurance and management expenses.

Every year, the insurer calculates how much has to be paid to settle death and

maturity claims. The surplus in the life fund left after meeting these liabilities is credited to

policyholders accounts in the form of a bonus.

In a ULIP too, the insurer deducts charges towards life insurance (mortality charges),

administration charges and fund management charges. The rest of the premium is used to

invest in a fund that invests money in stocks or bonds. The policyholders share in the fund is

represented by the number of units.

The value of the unit is determined by the total value of all the investments made by the

fund divided by the number of units. If the insurance company offers a range of funds, the

insured can direct the company to invest in the fund of his choice. Insurers usually offer three

choices an equity (growth) fund, balanced fund and a fund which invests in bonds.

In both with profits policies as well as unit-linked policies, a large part of the first year

premium goes towards paying the agents commissions.


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Which is better, unit-linked or with profits?

The two strong arguments in favour of unit-linked plans are that the investor knows

exactly what is happening to his money and two, it allows the investor to choose the assets

into which he wants his funds invested.

A traditional with profits, on the other hand, is a black box and a policyholder has little

knowledge of what is happening. An investor in a ULIP knows how much he is paying

towards mortality, management and administration charges.

He also knows where the insurance company has invested the money. The investor gets

exactly the same returns that the fund earns, but he also bears the investment risk. The

transparency makes the product more competitive. So if you are willing to bear the

investment risks in order to generate a higher return on your retirement funds, ULIPs are for

you. Traditional with profits policies too invest in the market and generate the same returns

prevailing in the market. But here the insurance company evens out returns to ensure that

policyholders do not lose money in a bad year. In that sense they are safer.

ULIPs also offer flexibility. For instance, a policyholder can ask the insurance companyto liquidate units in his account to meet the mortality charges if he is unable to pay any

premium instalment. This eats into his savings, but ensures that the policy will continue to

cover his life.

BENEFITS OF ULIP:

REGULAR investors in tax-saving plans prefer to invest in the Unit Linked Insurance

Plan (ULIP) from the Unit Trust of India. The dividend track record, the steady rise in therepurchase price of units over the past few years, and the insurance cover offered are,

perhaps, the plan's attractions. But with ULIP becoming an open-ended fund with effect from

July 2000, several of its features have changed. The fund skipped dividends in 1999 and

2000, and aligned its sale and repurchase prices with its net asset value (NAV), which is now

disclosed weekly. Further, since sale and repurchase prices are now linked to the scheme's

NAV, they are no longer ``administered'' by the UTI.


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What do these changes mean for existing and new investors? Is ULIP still the best

tax-planning option available in the market? May be not an evaluation of ULIPs pros and

cons.

TRANSPARENCY

One clear advantage of ULIP in its new avatar as an open-ended fund is that one

knows what exactly one is buying. Under ``administered'' pricing, it was difficult to know

what ULIPs assets were worth and if it had the potential to sustain performance. But now,

with the scheme disclosing its portfolio on a monthly basis and the NAV on a weekly basis,

judging this is easy. With purchase and sale prices of units now linked to the NAV, returns

are more directly linked to the fund's portfolio performance. This also means that timing your

investment in ULIP -- important for maximizing returns from any equity-oriented fund -- is

now easier.

NAV-based pricing also has other advantages. After the imposition of a 10-per cent

tax on dividend distributions by debt funds, ULIP skipped dividend payouts over the past two

years. Instead, it promised that these held-back dividends would be reflected through higher

sale and repurchase prices. As long as the fund continued to artificially fix unit prices, it was

difficult to gauge if the surpluses earned by the scheme were, indeed, being reflected in the

unit prices. But with the switch to an NAV-based system of pricing, all surpluses earned by

the scheme will per force be reflected in the NAV. Therefore, as an investor, you do not lose

much if the ULIP skips a payout.

INFLEXIBLE

Under other tax-planning options (including an ELSS mutual fund, NSC and PPF),

you can vary your yearly contributions based on cash flows. You can even refrain from

making investments if you are cash-strapped in any particular year. But with ULIP, once you

opt for a yearly contribution of Rs. 1,000 or Rs. 5,000, you cannot alter the size of this

payment over the remaining 10- or 15-year tenure of the scheme. In the event of default

under ULIP, you stand to forfeit your insurance cover and your participation in the plan

stands terminated.

LIQUIDITY


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Contributions to ULIP are locked in for a minimum of five years. If you withdraw

before this, you forfeit the tax rebate you got at the time of investment. This lock-in period,

though shorter than that on the NSC and PPF (both six years), is higher than that on ELSS

schemes from mutual funds, where it is just three years. For withdrawal after five years,

ULIP deducts 0.5 per cent of the target amount as penalty. Recently, ULIP introduced a new

option allowing holders to partially redeem units after 7/10 years for the 10 and 15 year

schemes respectively, subject to a minimum balance of Rs 5,000.

PERFORMANCE

Under administered pricing, ULIP offered a compounded annual return of around 13

per cent per annum for unit holders who have invested after 1997. However, with the switch

to an NAV-based system of pricing in 2000, this is irrelevant. The performance will now

depend directly on the UTI's fund management skills and on equity and debt market

conditions. Given that ULIPs changeover to a NAV-based system was only in July 2000, it is

early days yet to evaluate the fund's performance. However, several private sector funds boast

of a better track record across varied market conditions than the UTI.

SIZE

When it comes to fund management skills, the fund's large size (Rs 5,032 crore as of

February 2001) could be a major handicap, impeding the maneuverability of the portfolio. As

of end-December 2000, the ULIP had around 46 per cent of its net assets invested in equity.

This means an equity portfolio of around Rs 2204 crore, which makes this among the largest

equity-oriented funds in operation. This means that ULIP could find it quite difficult to

transact on its equity holdings without impacting stock prices. Given the lack of depth in the

debt market, the debt portfolio of Rs 2,679 crore, could prove to be even more of a white

elephant. Moreover, as of December 2000, Insurance cover: What's it worth?


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5 STEPS TO SELECTING THE RIGHT ULIP

Unit Linked Insurance Plans (ULIPs) were always 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. Here is 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 Web sites 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


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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-

year 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.

UNIT-linked insurance plans (ULIPs) are the flavour of the season. Launched a

couple of years ago, these plans have contributed over 50 per cent of the new business of

insurance companies such as ICICI Prudential and Birla Sun Life.

Encouraged by the response, other players, too, are launching variants of savings and

endowment plans in the unit-linked format. A recent addition to the range of insurance

products, ULIPs claim to give an investor the best of both worlds high returns and risk

cover. But look deeper, and you find shortcomings. So do consider the following points

before going in for a ULIP.

It is prudent to make equity-oriented investments based on an established track record

of at least three years over different market cycles. ULIPs do not fulfil this criterion now.

Insurance and savings are two different goals and it is better to address them separately rather


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than bundle them into a single product. A combination of a term plan and a mutual fund

could give better results over the long term.

If investment returns are your priority, you should compare alternative investment

products before locking in your money. Tax advantages do work in favour of ULIPs for debt-

oriented funds. For equity-oriented funds, equity-linked savings products, which enjoy tax

advantages and provide market-linked returns, are comparable.

The expense structure of insurance products does significantly dent returns.

Returns not sustainable...

The core selling points for unit-linked plans are the high returns generated over the past

couple of years. The growth options have recorded annualised returns of over 20 per cent

a distant dream for an insurance product in an era of non-guaranteed returns. Most non-linked

savings plans declare annual bonuses (investment returns) in the 4-5 per cent range.

As insurance companies have the discretion to decide on their investment portfolios,

ULIPs can even have a 100 per cent equity component. But non-linked plans do have an

IRDA-stipulated cap on investment in various asset classes. A minimum of 50 per cent has to

be invested in State and Central Government securities and only 35 per cent can put into

corporate debt or equity. In the long run (say, a 20-year term), the average return from a non-

linked plan might work out to 5-6 per cent. In comparison, a linked plan appears far more

attractive, at least on the face of it.

But one has to remember that..

These high returns (above 20 per cent) are definitely not sustainable over a long term,

as they have been generated during the biggest Bull Run in recent stock market history. The

free hand given to ULIPs might prove risky if the timing of exit happens to coincide with a

bearish market phase, because of the inherently high equity component of these schemes.

While a debt-oriented ULIP scheme might be superior to a debt option in a

conventional mutual fund due to tax concessions that insurance companies enjoy, such tax

incentives may not last.

Look beyond NAVs

The appreciation in the net asset value (NAV) of ULIPs barely indicates the actual

returns earned on your investment. The various charges on your policy are deducted either


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directly from premiums before investing in units or collected on a monthly basis by knocking

off units.

Either way, the charges do not affect the NAV; but the number of units in your

account suffers. You might have access to daily NAVs but your real returns may be

substantially lower.

A rough calculation shows that if your investments earn a 12 per cent annualised

return over a 20-year period in a growth fund, when measured by the change in NAV, the real

pre- tax returns might be only 9 per cent. The shorter the term the lower the real returns.

How charges dent returns

An initial allocation charge is deducted from your premiums for selling, marketing

and broker commissions. These charges could be as high as 65 per cent of the first year

premiums. Premium allocation charges are usually very high (5-65 per cent) in the first

couple of years, but taper off later. The high initial charges mainly go towards funding agent

commissions, which could be as high as 40 per cent of the initial premium as per IRDA

(Insurance Regulatory and Development Authority) regulations.

The charges are higher for a linked plan than a non-linked plan, as the former require

lot more servicing than the latter, such as regular disclosure of investments, switches, re-

direction of premiums, withdrawals, and so on. Insurance companies have the discretion to

structure their expenses structure whereas a mutual fund does not have that luxury. The

expense ratios in their case cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for

a debt plan respectively. The lack of regulation on the expense front works to the detriment of

investors in ULIPs.

The front-loading of charges does have an impact on overall returns as you lose outon the compounding benefit. Insurance companies explain that charges get evened out over a

long term. Thus you are forced to stay with the plan for a longer tenure to even out the effect

of initial charges as the shorter the tenure, the lower your real returns.

If you want to withdraw from the plan, you lose out, as you will have to pay

withdrawal charges up to a certain number of years. In effect, when you lock in your money

in a ULIP, despite the promise of flexibility and liquidity, you are stuck with one fund

management style. This is all the more reason to look for an established track record before

committing your hard-earned money.


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Evaluate alternative options

As an investor you have to evaluate alternative options that give superior returns

before considering ULIPs. Insurance companies argue that comparing ULIPs with mutual

funds is like comparing oranges with apples, as the objectives are different for both the

products. Most ULIPs give you the choice of a minimum investment cover so that you can

direct maximum premiums towards investments.

Thus, both ULIPs and mutual funds target the same customers. If risk cover is your

primary objective, pure insurance plans are less expensive. When you choose a mutual fund,

you look for an established track record of three to five years of consistent returns across

various market cycles to judge a fund's performance. It is early days for insurance companies

on this score; investing substantially in linked plans might not be advisable at this juncture.

Moreover, with the market at a high, if you get your timing wrong, your long-term

returns could be compromised. Linked plans should have minimum allocation in your

portfolio of investments at present. One may consider linked plans favourably about three

years from now, when one can assess their record.

If you already have a ULIP, these tips can help you lower your costs and increase

returns.


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TRY TOP-UPS

Insurance companies allow you to make lump-sum investments in excess of the

regular premiums. These top-ups are charged at a much lower rate usually one to two per

cent. The expenses incurred on a top-up including agent commissions are much lower than

regular premiums.

Some, like Aviva, also give a credit on top-ups. For instance, if you pay in Rs 100 as a

top up, the actual allocation to units will be Rs 101. If you keep the regular premiums to the

minimum and increase your top ups, you can save up on charges, enhancing returns in the

long run.

Reduce life cover

The price of the life cover attached to a ULIP is higher than a normal term plan. Risk

charges are charged on a daily or monthly basis depending on the daily amount at risk. Rates

are not locked and are charged on a one-year renewal basis. Your life cover charges would

depend on the accumulation in your investment account. As accumulation increases, the

amount at risk for the insurance company decreases. However, with increasing age, the cost

per Rs 1,000 sum assured increases, effectively increasing your overall insurance costs. A

lower life cover could yield better returns.

Stay away from riders

Any riders, such as accident rider or critical illness rider, are also charged on a one-

year renewal basis. Opting for these riders with a plain insurance cover could provide better

value for money. A question that is commonly raised is which is better in the short term and

which is better in the long run. For effective planning, one has to understand his current and

future financial goals, risk appetite and portfolio mix. Once this is done, the next step is to

allocate assets across different categories and systematically adhere to an investment pattern.

An investor should understand his risk profile and time horizon, and then invest in a

scheme which suits him most .For good long-term value, investors should look at the

investment product, including its features, flexibility and the charging structure, management

charges, past performance, dividend yield, NAVs etc.

The stock markets are on fire and touching new heights by the day. For the long term,

one should stick to ULIPs. For the short term, mutual funds should be a better alternative.

ULIPs will give good returns only in the long-term, irrespective of market levels.


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The Risks

That sense of empowerment, of course, comes with a set of responsibilities as well:

principally, the need to understand that exposure to equity investments is not without risk

and that risk is being borne by you. People need to understand what they are buying, the risks

involved, the options, and so on. But, he notes, there is a fairly large constituency of investors

who are exposed to equities .Although hes sold on unit-linked plans, Three bad years and

you will see negative returns ,There are risks involved in any equity investment. You could

lose capital. Insurers, in turn, are going that extra mile to educate investors about the risks

inherent in market-linked investments. We sell only to customers to who understand the

product. Not all customers understand the risks, but there is a sizeable section that invests in

mutual funds. Still, since only a low proportion of household savings is directed into the

capital markets, as a measure of abundant caution,

The costs

Another critical factor that you should understand before investing in unit-linked

plans is the cost structure. Your insurer will levy various chargesrisk cover charges, charges

for the option to attach riders, administration fees, fund management charges and so on. And

these are frontloaded, and may seem prohibitive in the early yearsand impact your returns to

that extent. For instance, with HDFC Standard Lifes Unit Linked Endowment Plan, 27 per

cent of the premium amount is deducted for each of the first two years; that comes down to

just 1 per cent thereafter. Besides, there is an administration charge of Rs 15 per month and

fund management fee of 0.8 per cent per annum, both of which are collected by the company

by deducting the appropriate number of units from the policy fund.

The transparency

In fact this "misconception" is in some ways a tribute to the level of transparency that

insurers abide by in respect of unit-linked plans. "There are no hidden charges: customers

know before they buy the policy how much charge they will pay. These charges are applied

even in traditional endowment products, but you never know the details." And since the

NAVs of unit-linked plans are published daily for most companies, a customer knows how

his fund is growing.

"In endowment plans, customers never get to know about the assets or expenses and

claims. But with unit-linked plans, the charge structure is transparent. All charges are listed

separately and the balance premium, after deducting the respective charges, is used to buy

units at the prevailing NAV of the funds chosen by the policyholder."


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The Tax Edge

For now, returns on insurance investments enjoy a tax edge compared to some fund

schemesalthough that may change down the line. For instance, returns from debt funds are

subject to capital gains tax (at 10 per cent over the long term and at slab rates in the short

term). Likewise, returns from equity funds invite short-term capital gains tax at 10 per cent

while long-term gains are tax-exempt. On the other hand, switches between funds in a unit-

linked plan do not invite any capitals gains tax.

Another advantage that unit-linked plans, being a long-term contract, enjoy vis-a-vis

mutual funds is that in the case of the latter, the fund managers are subject to redemption

pressure, which on occasion means that investment decisions are taken for reasons that have

nothing to do with the fundamentals at any point of time.

The Big Decision

If youre committed to investing for the long term, and are comfortable with the risks

that come with unit-linked products, you should begin to look at this class of investments.

True, this category is only four years old, but as weve seen, there are even at this stage

adequate pointers to the players track. Look at the cost structure, and look for consistency

of performance among funds invested in the same asset class. Of course, you have the option

to exit if things arent going too well, but exiting too early can also be a losing proposition

since typically the costs are frontloaded in the early years. Use it like a brahmastara to be

invoked not too early, not too lateand you should well and truly lord it over your

investments.

WORKING OF ULIP

The unit-linked plans work as under: The premium paid

Investment Analysis & Exposure of Financial market through financial prodcut ULIP V Mtual Fund in

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